In my last post, I looked at the enormous differences in the cost of subways between some countries and cities. The â€śtake homeâ€ť message is to be careful extrapolating overseas experience to Australia because there is immense variability across projects.
A closely related issue though, is the remarkable cost escalation of what on the surface are the same projects. The cost of the California High Speed Rail (HSR) project has just doubled to $65 billion. In Australia, the capital cost of Sydney-Melbourne HSR went from an estimated $25 billion in 2008 to circa $60 billion in the Federal Governmentâ€™s new study, released in late 2011. Some argue these estimates are so exorbitant they must be a deliberate ploy to sabotage new public transport projects.
Fortunately, Dr David Levinson at the University of Minnesota started an exerciseÂ to collect all the reasons why transport projects in the US have become so expensive. He cites the $175,000 average cost for traffic signalling equipment at intersections in the US. â€śIt sure seems like we should be able to build this cheaperâ€ť, he says. â€śThink about it, $175K for 12 lightbulbs on a timer. What’s going wrong?â€ť
He advances eight possible explanations or hypotheses (this is my summary â€“ his full explanation is here):
- Higher standards. â€śOur obsession with safety, features, environmental protection, and quality drive up the costâ€¦â€¦â€ť
- Accountability. â€śPublic works agencies are spending Other People’s Money, and so are less motivated to get value for the dollar than an individual consumer on their ownâ€¦â€¦..â€ť
- Lack of competition. â€śThere is no Amazon.com or eBay for public works. I cannot go onÂ AmazonÂ and buy a transit bus or an interchangeâ€¦â€¦..â€ť
- Limited economies of scale. â€śWhen everything is bespoke, there is no opportunity for standardization and economies of scaleâ€¦..â€ť
- Inadequate scoping. â€śWe have investments that don’t match actual demandsâ€¦…We have big buses serving few passengers. We have overgrown highways. We have a fear of building too small and having congestion or crowding so we build too big.â€ť
- Asymmetries in benefits and costs. â€śBenefits are concentrated, costs are diffuse. As a result, the known beneficiaries lobby hard for projects, but not just to build it, but to build it in a way that is expensiveâ€¦..â€ť
- Remoteness. â€śRemote actors cannot have precise information about local conditions and in the absence of a free market in transportation (there is generally one buyer, who is generally a government agency), prices are not clear. As a result these remote actors misallocate because they are misinformed.â€¦â€¦â€ť
- Deficiencies in analysis. â€śNo one actually does B/C analysisâ€¦â€¦â€ť.
His comments on higher standards are especially interesting:
Engineering design is often 20% of project costs. If only we would tolerate a few more deaths, a bus without AC, pollution, and frequent breakdowns, our initial costs would be lower. But when do reasonable investments become gold plating? Does the firetruckÂ really need to do a 360 degree turn on the cul-de-sac, or can it back out?
Dr Lisa Schweizer from the University of Southern California, Los Angeles, provides four supplementary hypothesesÂ (this is also a summary – full description here):
- The highest demand areas for maintenance and new stock occur in places that are expensive. “I wonder how much of the costs of, say, intersections have to do with land costs….the Northeast Corridor and California links of the proposed high speed rail make the most sense in terms of service and users, but they are also the most expensive to build”
- Project creep. “Standards have risen……noise walls hither and thither, etc. Itâ€™s hard for me to say that these costs arenâ€™t necessary because the politics of getting something built pretty much requires the outlay”
- Envy is a much bigger problem in public works than in personal life. “Jurisdiction X got a light rail link. I pay taxes for those things, why does Jurisdiction X get it when my neighborhood/district doesnâ€™t?”
- Benefit cost is only as good as the integrity of the data and the analysts. “With nonuser benefits and nonmarket benefits thrown in, the b/c ratio is a politically constructed number”
Based on comments from readers and input from others, Dr Levinson increases his list to a whoppingÂ 38 explanations (although I think thereâ€™s a bit of double counting). Hereâ€™re some of them:
- Starchitecture. The original design for the WTC PATH rail station in New York was $3.3 billion, subsequently scaled back to $2.2 billion. Even so, says Stephen Smith, thatâ€™s more than Paris spent on its entire new 9km Metro Line 14
- The need to build while keeping current operations going. According to Dr Levinson â€śThis reduces construction space, reducing time, increases set-up/break-down costs, and otherwise adds to total costs. Construction is much faster (and thus cheaper) if rebuilding could be done on a closed facility. See theÂ London UndergroundÂ as the classic example of the high cost of doing construction only at night and weekends, but keeping the line in operation”
These two are from reader David King:
- “Public-private partnerships trade additional up front costs for faster construction. SeeÂ this story
- “Open government/costs of democracy. The planning process is required by law to bring in as many stakeholders as possible. This has (potentially) led to transportation investment being sought and justified for non-transportation concerns. Transportation investment is now used for social, moral and economic goals that are not directly related to mobility”.
And there are more from others:
- Baumolâ€™s Disease: â€śIt involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth”
- Experience. One readers says: “I think the reason has to do with experience and competence. We have no high speed rail lines, so any high speed rail line built in the US will be a “one off”. Same applies to subways and light rail. If you don’t do something regularly, you never develop an expertise that will reduce costs because you are constantly reinventing the wheel. The US has become a “stupid” country. We are paying the price for being stupid.”
In Australia, transport projects have to compete for resources with the booming mining industry. As implied in the comments section of my last post on this topic (Why do subways cost more here than elsewhere?), another possible explanation is the small size of the industry in Australia. This gives scope for collusion although itâ€™s probably more likely to manifest as lack of competition. Thereâ€™s also the possibility that public sector clients are unknowingly co-opted by major contractors i.e. they unwittingly take on the same world view as the contractors and suppliers.