Depiction of Adding value with a portfolio approach to funding reduction

Adding value with a portfolio approach to funding reduction



Budgets for capital projects are coming under pressure as funding is not being maintained in real price terms. The response from portfolio managers has been to cancel or postpone future projects or slow the pace of ongoing projects. If this is undertaken on an individual project level, it could lead to cost increases in the long run. One solution is to consider adjustments to increase the value for money of project expenditure at the project portfolio level.

Hard times

In many European countries, budgets for capital projects are coming under pressure due to the inability to raise funding levels in nominal terms. This is because of low productivity growth, rising public debt, and recent high levels of inflation, which have led to a reduction in the real value of the previously agreed funding. The response is to cancel or postpone future projects or slow the pace of ongoing projects.

This can be seen across several sectors, including transport and flood protection, and can even extend to rationing of capital maintenance with a reliance on short-term ‘fixes’ rather than long-term solutions. To avoid this, it might be beneficial to coordinate investment in new assets and the renewal of investment in existing assets through the use of a whole-life model of the portfolio. A whole-life model would consider new investment planning and asset renewals in tandem.

Even if the trimming of capital and renewal budgets is seen as inevitable, a whole-portfolio approach addresses the issue of prioritisation—namely, which projects should be adjusted, and in what way. If this is done, it may be possible to increase a revised portfolio’s value for money. However, to do so requires a means of estimating the costs arising from counterfactual alternatives, which may include:

  • delayed or avoided benefits;
  • reduced resilience;
  • an increase of some real costs through suboptimal delivery.

Furthermore, there may be consequential costs in projects that are not directly affected because of interdependence within the portfolio.

We begin by identifying the origin of the problem of affordability constraints to avoid repeating such problems in the future, where they can only compound the affordability problems being solved today.

Origins of the problem

In some cases, the insufficiency of funding arises from unforeseen events, e.g. a war or epidemic limiting supplies, material and labour, leading to price inflation of supplies. This is, however, a rarity. More commonly we observe the below.

  • Strategic misrepresentation1 of initial cost estimates in order to obtain project approval.2 This is based on the belief that once a project has started it will be impossible to stop, either because of political embarrassment or because sunk costs will be ignored when considering the forecast benefit compared with the cost to complete.
  • Post-approval scope creep.3 Once approval has been granted in principle for a project, a detailed scoping phase (where stakeholders are invited to participate) can then take place. This can often lead to changes in the specification of either scale, scope or quality to obtain stakeholder support. Alternatively, hidden inter-dependencies emerge, e.g. the need to provide additional transport links to connect to a proposed facility.
  • Optimism bias.4 Early estimates of costs tend to be optimistic, as there are more unforeseen events that are adverse rather than positive. For example, ground conditions or community relations that inflate costs.
  • Levels of risk. There can be a reassessment of the levels of risk affecting a project, including the level of variability of demand for services, insurable or uninsurable costs. Where private finance is involved (this varies by sector), this can affect the cost of capital expected by loan and equity providers. There will be a need to distinguish between idiosyncratic risk, confined to the project only, and systematic risk, affecting the whole market, as these are treated differently in the net present value analysis that supports the appraisal.
  • Lack of ‘off-ramps’ or options. A defensive measure against the unforeseen is to arrange for the project to have stable plateaus, or option selection points. This is because if problems do develop it becomes possible to pause the project and obtain partial benefits, while the remainder of the project is reassessed. This is especially useful in IT implementations to avoid ‘runaway projects’.5

Whatever the reason, the result is a problem for the portfolio manager—namely, the financial commitments now exceed the funds available. If no additional funds are available, either public or private, there will be a need to delay or cancel projects.

Inventory of portfolio

Before any remedies for over-commitment can be applied, it is first necessary to establish the projects within the portfolio. In an ideal world, this will already be known if the portfolio was originally constructed in a systematic manner. In this case, it is simply a matter of updating the original work for the following factors.

  • The stage in the life cycle—for example, ‘approved’, ‘design underway’, ‘procurement of contractors’, ‘construction underway’.
  • Estimated cost to complete, along with phasing of cost by year.
  • The hypothetical cost of cancellation could be significant if contracts are awarded, and construction is underway.
  • Revised estimates of expected benefits.
  • Emerging risks.

In a less-than-ideal world, there is a need to build the current (overburdened) portfolio from scratch, before it can be rationalised. This is a lengthy process, involving identification of projects, and their link to strategic objectives, as well as the items listed above. However, there may be an immediate reward for the effort, if the original portfolio is uncoordinated, by applying a ‘MoSCow’ filter—that is, classifying and prioritising projects as, ‘Must-have’, ‘Should-have’, ‘Could-have’ and ‘Won’t-have’. The last category may have arisen from the unintended duplication of projects or projects with a poor strategic fit or a weak benefits case, and can be removed.

Costs of postponement

In most cases there will not be immediate candidates for cancellation, and there is a desire to retain projects where possible, perhaps in a reduced form. However, it is also recognised that postponement, or working at a slower pace, incurs some cost, and there is a need to choose between rebalancing options when fitting the overall expenditure profile into the budget envelope. The potential costs are outlined below.

Cost of cancelled or postponed benefits

Where benefits have been quantified, the net present value models can be adjusted to show the new expectations of benefits. The effect of discounting will be to lower their net present value, and hence benefit/cost ratios if the quantified benefits can be monetised. Non-quantified benefits will need to be considered qualitatively, noting the impact to particular stakeholder groups. There should be an attempt to grade the impacts by seriousness or sensitivity, so the impact on vulnerable groups would be regarded as more serious. For example, a loss of job creation in deprived areas would rank above a general impact on employment.

Reduced resilience

In many cases an investment is intended to guard against an uncertain adverse event.6 Investments to provide resilience to High Impact Low Probability (HILP) events pose a particular challenge for investment appraisal. Allen et al. (2023) report the most common approaches to be:7

(1) resilience and risk indices/maps that are used for prioritizing different asset interventions; (2) cost benefit analysis (CBA); (3) effectiveness of intervention strategies in terms of expected annual consequences; and (4) multi-criteria decision analysis.

CBA has the advantage of integration with the financial appraisal, but requires estimates of probabilities of the HILP events. One practical example of close integration of resilience is provided by the UK’s National Highways.8 Where integration with CBA has been possible, the impact of postponement can be analysed in the same way as the postponement of other benefits, as discussed above. However, postponement implies prolonged exposure to the HILP event, which carries risks.

Costs arising from changes in pace

Projects have a pace of implementation that minimises costs. If executed faster than this pace (i.e. the project is ‘crashed9’) then costs rise. If executed more slowly, costs also rise. There are time-driven costs that accumulate in proportion to duration, independently of the volume of work undertaken. Examples include supervision costs and interest charges on loans that will eventually be paid from revenue. There may also be a loss of economies of scale in working processes if the rate of work is reduced.

Changes in real supply costs

Real labour costs can be expected to rise with time—therefore postponement will lead to an increase in costs. The trend in real prices of materials is uncertain. In some cases, real prices will fall due to learning curve effects, as has been observed with photovoltaic devices and wind turbines.

Changes in nominal costs

The impact of inflation is a particular issue if the level of funding is fixed in nominal terms, as is often the case. This may lead to a need to reduce project scope or incur the additional expense of applying for additional funds.

Modelling the alternative portfolio schedules

Two levels of modelling will be required. The first is to understand the impact of a scope or schedule change at the project level, in terms of the phased funding requirements. The second is at the portfolio level, to show the impact of the project delay on the portfolio funding needs, after also noting the effect of any project dependencies on other project schedules.

Once the data relating to the proposal of alternative schedules has been collated, the creative process of identifying alternative portfolios can begin—this cannot be easily automated. There is a need to identify the major reasons for exceeding the funding envelope, and then use expert judgement to explore the least damaging ways to adjust the scope and schedule of the projects to fit the phased expenditure within the new funding envelope. Common responses include:

  • delaying the launch of approved projects;
  • pausing projects at the design stage before moving to procurement and construction;
  • phasing projects so non-core aspects are implemented later, while allowing the core aspects to proceed;
  • reducing the spend rates, accepting the slippage on timescales.

If there is a high level of expert consensus, then expert judgement can be applied to choose between the alternatives. If there is less consensus, then forms of multi-criteria decision analysis10 can be used, including analytic hierarchy processing involving a series of pairwise comparisons of alternative options.11

Through a process of iteration, a set of revisions to projects can be developed that will fit the portfolio expenditure within the permitted envelope, but reduce the costs of postponement, especially those relating to lost or delayed benefits. In doing so, the overall value for money of the portfolio may rise, as weaker projects are scaled back and eliminated, with the paradoxical result that the affordability constraint improves the rates of return on the portfolio.

Practical application

Based on personal experience of having rationalised extensive portfolios of infrastructure projects, it was surprising how malleable the original portfolio could become once word gets out that some projects may need to be cancelled. Some examples of responses are given below.

  • Project sponsors may offer to split a project, with two smaller works substituted for a large works, so they can be implemented over time if an option is exercised.
  • Sponsors may offer specification reductions by removing unnecessary aspects or gold-plating.
  • Alternative technical solutions with different CAPEX/OPEX trade-offs can be suggested to lower initial CAPEX funding requirements.
  • Local manufacturing possibilities are highlighted to boost the perceived benefits for a project in terms of local jobs created.
  • Equipment suppliers may volunteer financing packages, enabling repayment over time rather than requiring a single payment upon purchase.
  • Co-funding proposals are made whereby private capital injections are offered in return for development concessions.

The effect of these responses is to expand the possibilities for alternative scenarios and mitigate the costs of postponement, while even enhancing the value of the alternative portfolio that is finally chosen, compared with the original.

Benefits of a portfolio perspective

When faced with funding constraints it is essential to take a portfolio perspective rather than react on a project-by-project basis, an approach that may well lead to unnecessary costs. The portfolio approach will have an initial analytical effort, but it could lead to an optimally rebalanced portfolio.


1 Flyvbjerg, B. (2008), ‘Curbing optimism bias and strategic misrepresentation in planning: Reference class forecasting in practice’, European Planning Studies, 16:1, pp. 3–21.

2 This can also occur during project execution, as the Sunday Times (UK) investigation into HS2 showed. See Calvert, J. and Arbuthnott, G. (2023), ‘The secret files that expose a multibillion-pound cover-up at HS2’, The Sunday Times, 21 October.

3 Welde, M. and Odeck, J. (2017), ‘Cost escalations in the front-end of projects – empirical evidence from Norwegian road projects’, Transport Reviews, 37:5, pp. 612–30.

4 Ika, L. and Feeny, S. (2022), ‘Optimism Bias and World Bank Project Performance’, The Journal of Development Studies, 58:12, pp. 2604–23.

5 Koenig, D. (2005), ‘Rescuing runaway projects: a project governance methodology’, Paper presented at PMI® Global Congress 2005—North America, Toronto, Ontario, Canada, Newtown Square, PA: Project Management Institute.

6 An example is the replacement for the ageing Forth Road Bridge in Scotland with the Queensferry Crossing to avoid the economic consequences of the closure of the original bridge. In this case, the cost of a bridge closure was estimated, but the estimating principles will depend on the potential duration of closure. Estimates of a short closure would focus on diversion costs (time and additional distance), but estimates of an extended closure would include costs of economic disinvestment, and the impact would be far larger and include lost employment.

7 Allen, E., Costello, S.B., Henning, T.F., Chamorro, A. and Echaveguren, T. (2023), ‘Integration of resilience and risk to natural hazards into transportation asset management of road networks: a systematic review’, Structure and Infrastructure Engineering, pp. 1–19.

8 Highways Agency (201), ‘A Risk-based framework for geotechnical asset management’, November.

9 Project crashing refers to speeding up a project through the use of additional resources.

10 Booth, R. (2021), ‘Investment appraisal in the round: why MCA?’, Agenda, February.

11 Vaidya, O.S. and Kumar, S. (2006), ‘Analytic hierarchy process: An overview of applications’, European Journal of Operational Research, 169:1, pp. 1–29.

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