Mega projects — extremely complex ventures as opposed to major projects or projects — are endeavours that have multi-billion-dollar cost components and take a number of years to build.

They tend to be transformational for economies and their overall impact is felt by millions of people.They tend to transform the structure of a society in their area of impact as opposed to becoming a part of the overall economic scenario.

To take an example from the perennially shortage inflicted electrical sector, the 5400 MW Dasu hydropower project and the 4,500MW Diamer Basha project would be classified as mega projects as they would change the dynamics of the electrical sector, if completed as per schedule. This can be contrasted to a 425MW Nandipur Power Project, or 100MW solar project, which really does nothing to change the dynamics of the power sector apart from plugging in a part of the shortage.

It is estimated that about 8pc of global GDP is contributed by these complex mega projects which could take the form of anything ranging from infrastructure projects, oil and gas, communications, defence aircraft programmes etc. Given the economic footprint of mega projects it is impossible to ignore the fact that more than 90pc of projects run into cost escalations combined with time delays and this is something that has been valid over the last 70 years.

The practice for planning out mega projects has been a deterministic approach whereby managers assume factors for all variables that can impact a project as being static and driven in concrete timelines; commodity price, capital expenditure, interest rate, foreign exchange conversions etc. The implicit assumption is that the assumed base case figures are going to always materialise. Sensitivity analysis is done to define the limits of the variables within which the project will stay on track and within financial constraints.

Given the economic footprint of mega projects, it is impossible to ignore the fact that more than 90pc of projects run into cost escalations combined with time delays

However, the real world experience over several decades tells us otherwise: project delays cost overruns in majority of cases. This is true for both developed and developing countries. One just jneeds to look at state run organisations and projects in Pakistan to appreciate how endemic the problem is.

As Nassim Taleb argues, delivery of any project is a high risk, stochastic activity highly prone to black swans. The most recent example of this black swan is the oil price crash of 2014-15 which has stalled majority of capital expenditure in oil and gas exploration worldwide and put the industry in a survival mode.

The world is realising based on business evidence that the aggressive and subjective commitment to delivery in case of mega projects by executives and boards leads to negative outcomes. The world is not in anyone’s control and cannot be modelled to perfection. So is there a way to improve our planning processes.

Management science suggests the use of Monte Carlo techniques and probabilistic analysis to develop an idea of the scale of uncertainty inherent in a project, and the negative outcomes that can possibly materialise. The application of Monte Carlo analysis to high risk, stochastic processes such as megaproject delivery extending over a number of years can tell us in probabilistic terms various financial and delivery metrics that management is normally interested in.

For example, as opposed to a capital expenditure figure of $2bn for a hypothetical project, a Monte Carlo analysis can tell us that there is 40pc probability that total capital expenditure will exceed $2bn. This alerts the management to be on guard for cost escalation and look proactively at inflation prone areas. Similarly this process can be applied to delivery timelines, revenues, valuation, cash flows, breakdowns, preventive maintenance among others.

Monte Carlo analysis is an extremely powerful tool in the right hands and as opposed to simple sensitivity analysis provides a full range of possibilities and allows the management to consider all events in the stochastic nature of project delivery. This ensures that the management is prepared for all eventualities and has contingency plans in place.

Pakistan is at a stage of further economic development that requires timely provision of infrastructural projects in such areas as power, education, health etc.

Given the state of current infrastructure in major cities and rural areas of Pakistan and the financial constraints, any properly thought out development plan in any mentioned domain would easily classify as a megaproject. Our policymakers need to prioritise among top priority projects.

It is essential that we utilise the latest management science and tools available to ensure that our hydropower and coal power projects based on Thar coal and CPEC are delivered on schedule and within budgeted amount.

mustafa.amjed@gmail.com

Published in Dawn, Business & Finance weekly, June 6th, 2016