TCS Daily

Liar, Liar

By Wendell Cox - August 7, 2002 12:00 AM

For many years, there has been considerable concern about cost escalation in government infrastructure projects. Washington's Metro, for example, cost much more than projected, even after accounting for inflation. Portland's new light rail line cost nearly three times to build as was originally projected, while St. Louis was more successful, holding cost escalation to a bit more than one-third. Project developers and public agency sponsors trot out a litany of excuses, from forgotten items as in the present case of the Charlotte rail proposal, to changes in project scope, as in the Los Angeles-Long Beach light rail line to outright forecasting errors, as in Seattle and Dallas. Whatever the reason, it is the taxpayers who pay, not the elected officials or the developers.

A new comprehensive, international study academically quantifies the causes, and the result is not pretty. The American Planning Association (APA Journal) has just published a study by Danish university Professors Bent Flyvbjerg, Mette Skamris Holm and Soren Buhl covering more than 250 transportation infrastructure projects from around the world over the last 90 years. They found that nine out of ten projects cost more than projected, with an average cost escalation of 28 percent. The researchers examined a number of potential causes, and settled upon one as the most responsible, to which they assigned the technical term "lying."

The use of deception and lying as tactics in power struggles aimed at getting projects started and at making a profit appear to best explain why costs are highly and systematically underestimated in transportation infrastructure projects.

There is a very simple incentive for large contractors to lie. It is profitable. The reward is more money. And, there is an incentive for public officials to believe the lie. The "Edifice Complex," which drives so many elected officials to build virtual monuments and to seek "legacy" is served by underestimating costs, since less costly projects are simpler to sell to governing bodies and the electorate than more costly projects.

My personal experience confirms this. In 1981, I was among the members of the Los Angeles County Transportation Commission voting to build the Los Angeles to Long Beach light rail line. We were given an estimated cost of $140 million by the consultants, who were later selected to oversee building of the route. By the time it was all over, the line cost more than four times the original estimate, and that's after inflation. If we had known in 1981 what the true cost would have been, there is simply no way that the project would have been authorized.

And not all cost escalation is equal. In the United States, the Danish researchers found that rail projects tend to escalate in costs a rate five times that of road projects. While the authors do not attempt to explain why such a great difference exists, the composition of the supplier market may give a clue. The large rail projects tend to be built by a very small market of international contractors. The size of such projects makes a truly competitive market problematic, since smaller companies do not have the resources to overcome the substantial financial barriers to entry. On the other hand, road projects tend to be broken up into much smaller components, with healthy competition from small, medium and large companies. But in the less competitive market for mega-projects, governments are more susceptible to the cost-enhancing behaviour of the large firms.

Independent evidence supports this thesis. Some of the most severe cost escalation has occurred on a road project, the so-called "Big Dig," which is placing freeways in tunnels in downtown Boston. This now $15 billion project was to have cost $5 billion. Unlike most road projects, this project was a single procurement. As a result, on the short list of competitors were the same companies that have developed such a dismal (but profit-serving) record in project cost escalation --- the companies that build rail systems.

What all of this suggests is the need to substantially reform procurement of large infrastructure projects. For example, we do not permit an auto dealer to advertise new PT Cruisers at $20,000, and then charge $30,000 at delivery. In should be no different in government.

Wendell Cox is principal of Wendell Cox Consultancy, a transport and demographic consulting firm in the St. Louis, Missouri, area. He is a member of the Amtrak Reform Council, a former member of the Los Angeles County Transportation Commission (1977-1985) and is a visiting professor at the Conservatoire National des Arts et Metiers in Paris.

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