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A tale of two debt piles

Zak Garner-Purkis

The news today has been dominated by two stories about borrowing money to stave off a crisis.

First there was Interserve, which confirmed it was in talks with lenders regarding a debt-for-equity deal to help tackle the huge amount of money it owed to lenders.

Then there was Crossrail, which agreed a new financing agreement to fund the final stages of the project, with the cost of the delay now anticipated to be in the region of a further £1.6bn to £2bn.

In both cases there has been much hand-wringing over how it came to this and what measures are required to bring the problems to an end.

Little is said about the burden of expectation, which is at the root of both issues.

The expectation of Interserve to grow more and more, to load up on risk while money was cheap, has left the firm stuck between its large debt pile and miserly lenders.

At a globalised, multi-sector behemoth of a business like Interserve, there will always be emphasis on aiming high, but had expectations been a little more tempered, things surely would have been more manageable.

The decision to embark on the risky world of energy-from-waste deals would possibly have been checked, or at least mitigated.

Meanwhile, the pressure on Crossrail to finish early and under budget led its management team to work manically in the belief that they could devise a solution as the programme seemingly slipped away.

Crossrail was considered a model project for the UK to cherish until, all of a sudden, it wasn’t.

The unseemly mudslinging then began about who knew what, when, and whether and when it should have been made public.

The project’s leaders were obviously terrified about revealing the delays because they would have been trashed for doing so.

However, if a more sober approach had been taken from the start there would have been no need for that.

Take the Queensferry Crossing in Scotland, which came in under budget and early. Why?

Not because they used some ultra-modern methods of construction, it was far simpler: The project team succeeded because they included an ‘optimism bias’ into their projections for the project.

An ‘optimism bias’ factors in the tendency to agree to unrealistic terms and budget for potential setbacks.

Effectively it takes away the natural inclination to say ‘I can do it’, even if you can’t.

It simply keeps expectations at a reasonable level.

It’s not as exhilarating as a silver bullet, but the most effective way to tackle a crisis is just to give yourself enough leeway to avoid one.

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