Belated Valentine's Day message: Debunking another spurious correlation........ Dilbert, by Scott Adams

In my last post, I looked at the enormous differences in the cost of subways between some countries and cities. The “take home” 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 Government’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 exercise 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. “It sure seems like we should be able to build this cheaper”, he says. “Think about it, $175K for 12 lightbulbs on a timer. What’s going wrong?”

He advances eight possible explanations or hypotheses (this is my summary – his full explanation is here):

  • Higher standards. “Our obsession with safety, features, environmental protection, and quality drive up the cost……”
  • Accountability. “Public 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 own……..”
  • Lack of competition. “There is no or eBay for public works. I cannot go on Amazon and buy a transit bus or an interchange……..”
  • Limited economies of scale. “When everything is bespoke, there is no opportunity for standardization and economies of scale…..”
  • Inadequate scoping. “We have investments that don’t match actual demands……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.”
  • Asymmetries in benefits and costs. “Benefits 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 expensive…..”
  • Remoteness. “Remote 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.……”
  • Deficiencies in analysis. “No one actually does B/C analysis……”.

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 firetruck 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 hypotheses (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. It’s hard for me to say that these costs aren’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 doesn’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 whopping 38 explanations (although I think there’s a bit of double counting). Here’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, that’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 “This 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 the London Underground 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. See 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:

  • Baumol’s Disease: “It 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 it’s probably more likely to manifest as lack of competition. There’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.

Update 27 Feb 2012: David Levinson has updated his original list, see here. And again – now up to 43 reasons.