You've read the name of Bent Flyvbjerg in this blog many times. He's the academic scholar who used to teach in Denmark and migrated to Oxford in the UK. His work has focused on mega-infrastructure projects, including railroad development.
Guess what; his research demonstrates that it is standard practice to lie. That is, the project developers always inflate their productivity; their ridership and their revenue projections. It turns out that they NEVER have anywhere near the number of riders that they promise. And, these projects never generate the surplus revenue that they predict; to the contrary. They invariably end up costing their governments massive subsidies.
And, they will always low-ball the construction costs. Often by several multiples. We are watching this process right now. It's like watching an automobile accident in slow motion. You see it before your eyes and are powerless to stop it.
I'm talking about the California High-Speed Rail Authority Project, which, about five years ago, was projected to cost around $25 billion. That went up to $33 billion and then $43 billion just before the bond ballot election which really got the project started with $10 billion of state bonds. Now it's $ 66 billion and many people think it's sure to go over $100 billion. It could be more.
And we have Flyvbjerg's work to thank for understanding that. So, the question becomes, what are we going to do about this? Let it happen? It's our money, you know. It's money not being spend on other things, like education, and other critical and deteriorating infrastructure.
And, in this case, its money being spent not on something important and useful. It's being spent on an unnecessary high-speed luxury inter-city train that California does not need. It's the very definition of 'boondoggle.'
So, I need to ask again, what are we going to do about this? Let a handful of foreign railroad manufacturers make a lot of money (see Siemens as a good example) at our expense to produce something that only the affluent can afford to ride?
Just how crazy are we?
PS: Flyvbjerg wrote an article for the Oxford Review of Economic Policy in 2009, the title of which is:
Survival of the unfittest: why the worst infrastructure gets built—and what we can do about it
The article is rather technical but here's the Abstract. It's worth reading since it gives you great insight into what the California HSR project is really all about.
Abstract:The article first describes characteristics of major infrastructure projects.
Second, it documents a much neglected topic in economics: that ex ante estimates of costs and benefits are often very different from actual ex post costs and benefits. For large infrastructure projects the consequences are cost overruns, benefit shortfalls, and the systematic underestimation of risks.
Third, implications for cost–benefit analysis are described, including that such analysis is not to be trusted for major infrastructure projects.
Fourth, the article uncovers the causes of this state of affairs in terms of perverse incentives that encourage promoters to underestimate costs and overestimate benefits in the business cases for their projects. But the projects that are made to look best on paper are the projects that amass the highest cost overruns and benefit shortfalls in reality. The article depicts this situation as ‘survival of the unfittest’.
Fifth, the article sets out to explain how the problem may be solved, with a view to arriving at more efficient and more democratic projects, and avoiding the scandals that often accompany major infrastructure investments.
Finally, the article identifies current trends in major infrastructure development. It is argued that a rapid increase in stimulus spending, combined with more investments in emerging economies, combined with more spending on information technology is catapulting infrastructure investment from the frying pan into the fire.
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Too Many Public Works Built on Rosy Scenarios:
Virginia Postrel
Illustration by Adam Hayes
By Virginia Postrel Jul 7, 2011 9:00 PM PT 0 Comments
About Virginia Postrel
Virginia Postrel writes about commerce and culture, innovation, economics and public policy. Shes the author of "The Future and Its Enemies" and "The Substance of Style," and is writing a book on glamour.
“Infrastructure” may be one of the least glamorous words in the English language, but with the right touch the concrete and steel of roads, bridges, tunnels, dams and railroads can look as alluring as a movie star. Witness the sleekly seductive illustrations produced for today’s California High-Speed Rail Authority or the mid-century pictures of effortlessly flowing superhighways, a genre that reached its apotheosis in Walt Disney’s “Magic Highway U.S.A.” in 1958.
This glamorizing extends not just to imagery but also to forecasts. Project promoters routinely overstate benefits and understate costs -- and not just a little bit.
“Cost overruns in the order of 50 percent in real terms are common for major infrastructure, and overruns above 100 percent are not uncommon,” Bent Flyvbjerg, a professor of major program management at the University of Oxford’s Said Business School, writes in the Oxford Review of Economic Policy. “Demand and benefit forecasts that are wrong by 20-70 percent compared with actual development are common.”
To draw these conclusions, Flyvbjerg analyzed results from 258 projects in 20 countries over 70 years, the largest such database ever compiled. Like the “stars without makeup” features in celebrity tabloids, his research provides a disillusioning reality check. “It is not the best projects that get implemented, but the projects that look best on paper,” Flyvbjerg writes. “And the projects that look best on paper are the projects with the largest cost underestimates and benefit overestimates, other things being equal.”
Flyvbjerg got curious about forecasts when, as a young professor in Denmark, he watched the Great Belt rail tunnel, connecting Scandinavia with continental Europe, go “terribly wrong,” with long delays and cost overruns of 120 percent. “I began to wonder not only why that was the case, but also whether it was common or not for that to happen,” he recalls in a telephone conversation. (The tunnel opened in 1997.)
Finding no comprehensive data available, he assembled his own -- and found that the big picture looked very much like the little one. “It’s very common to have cost overruns in big construction projects,” he says. “It’s the norm. It’s not the exception.”
On average, urban and intercity rail projects run over budget by 45 percent, roads by 20 percent, and bridges and tunnels by 34 percent.
And the averages tell only part of the story. Rail projects are especially prone to cost underestimation. Seventy-five percent run at least 24 percent over projections, while 25 percent go over budget by at least 60 percent, Flyvbjerg finds.
By comparison, 75 percent of roads exceed cost estimates by at least 5 percent, and 25 percent do so by at least 32 percent.
California Dreaming
Promoters of rail and toll-road projects also tend to substantially overstate future use, making those projects look more appealing to whoever is footing the bill. Rail projects attract only about half the expected passengers, on average, while in new research still in progress, Flyvbjerg finds that toll roads (including road bridges and tunnels) fall 20 percent short. (Non-toll roads also miss their traffic projections, but their errors go in both directions.)
Rail-ridership predictions are especially over- optimistic in the U.S., where the average gap between expectations and reality is 60 percent, compared with 23 percent in Europe. So a back-of-the-envelope calculation would suggest that California High-Speed Rail can expect to carry only 15.6 million passengers a year by 2035, rather than the 39 million projected.
Using the average cost overrun, California should also expect to spend almost $8 billion, rather than the estimated $5.5 billion, for the project’s first 100-mile (161-kilometer) leg from Borden to Corcoran, the “train to nowhere” in the Central Valley. Raising the estimate by the average overrun, however, means that you still have a 50 percent chance of spending even more.
As the toll roads suggest, overruns aren’t unique to government projects. Even privately built chemical- processing plants suffer from similar, though less drastic, underestimates of cost and overestimates of capacity. As many a Dilbert comic strip has pointed out, salespeople often close a deal by promising more than they can deliver.
So why do these mistakes happen again and again?
Project managers often blame a combination of bad luck, unexpected delays and changes of plan -- the same things that inflate the costs of remodeling your bathroom, only on a grand scale.
It’s true that planners change their minds. “They decide to have higher safety standards,” Flyvbjerg says, “or higher environmental standards, so the cost of the project goes up. Often you will find that the geology of the project was not well covered. So when you start digging, you find things in the ground that you didn’t expect, and the costs go up.”
But a smart project manager should anticipate the unanticipated and adjust the budget accordingly. Professionals, after all, generally have far more experience than the average homeowner. They know the sorts of things that can go wrong.
“It’s nothing new that geology is difficult,” Flyvbjerg says. “We know that geology is difficult. No matter. It’s ignored in project after project. Therefore, the problem is not geology itself but the fact that we disregard geology.”
Bias of Optimism
A charitable explanation is that promoters are starry- eyed and suffer from what psychologists call optimism bias. But it’s suspicious that forecasters rarely seem to learn, even over decades of experience. Alas, contractors, local governments and other advocates have strong incentives to underplay costs and exaggerate benefits to sell their services or attract funding.
“Some forecasts are so grossly misrepresented that we need to consider not only firing the forecasters but suing them, too -- perhaps even having a few serve time,” Flyvbjerg writes in his Oxford Review of Economic Policy article.
Even with his gloomy findings, Flyvbjerg is an optimist. “Things don’t have to be like this,” he says. “It’s not like the weather. It’s a human artifact that we are producing, and hence we can do differently.”
He would like to see better incentives -- punishment for errors, rewards for accuracy -- combined with a requirement that forecasts not only consider the expected characteristics of the specific project but, once that calculation is made, adjust the estimate based on an “outside view,” reflecting the cost overruns of similar projects. That way, the “unexpected” problems that happen over and over again would be taken into consideration.
Such scrutiny would, of course, make some projects look much less appealing -- which is exactly what has happened in the U.K., where “reference-class forecasting” is now required. “The government stopped a number of projects dead in their tracks when they saw the forecasts,” Flyvbjerg says. “This had never happened before.”
Unfortunately, the world’s biggest infrastructure projects, including the recently opened high-speed rail line between Beijing and Shanghai, are subject to no such checks, or even to scholarly examination. Flyvbjerg has been trying for years to get data on project costs in China, to no avail.
“Their data are simply not reliable,” he says. He quotes an unidentified Chinese colleague who said, “If the party says there’s no cost overrun, there’s no cost overrun.”
No wonder promoters look so longingly at China. There, infrastructure glamour is the law.
To contact the author of this column: Virginia Postrel in Los Angeles at vpostrel@bloomberg.net.
To contact the editor responsible for this column: Mary Duenwald mduenwald@bloomberg.net.
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