Robbing Peter to Pay Paul at a Loss

February 8, 2017 Columnists , Leslee Kulba , News Stories 1750 Views
Robbing Peter to Pay Paul at a Loss

by Leslee Kulba- President Donald Trump has a plan to invest trillions of dollars on infrastructure over the next ten years. He wants to build highways, bridges, and airports. Except for the infamous wall, this is nothing new. It continues a worldwide trend of political leaders promising to spend more on huge projects, the next one always larger than the last. The practice has become so predictable, it has a name, megaprojects, and experts writing about the problem.

A megaproject is a complex, multiyear, transformational project that involves multiple public and private partners. One expert, Oxford University professor Bent Flyvbjerg, says the iron law of megaprojects is: over budget, over time, over and over again. It is not unusual for megaprojects to come with a price tag of $50-$100 billion, which is more than the GDP of over half the world’s nations. Some projects cost more than $100 billion, and the number of projects and their costs continue to rise. McKinsey Global Institute estimates infrastructure spending worldwide at $3.4 trillion per year for 2013-2030, or 4 percent of global GDP.

Karen Trapenberg Frick, a transportation analyst working at the University of California, Berkeley, first articulated the role sublime rapture plays in overbuilding. It’s the thrill engineers and technologists get from making large and paradigm-breaking ideas work. Flyvbjerg has since identified three more sublimes. The aesthetic sublime describes the awe designers and other aestheticians derive from building, using, or viewing very large and iconic structures, like the Golden Gate Bridge, the Space Needle, and the Eiffel Tower. The economic sublime excites businesses and trade unions with the prospect of making money, creating jobs, and investing in the community.

Then, there’s the political sublime. It’s the rapture politicians feel when they build monuments to their causes. If they can’t change the world, they can build a tangible structure in the name of something to give them the “air of proactivity.” The monument can attract tourists as well as politicians in higher office whose staff actively seek out opportunities for them to jump ahead of the action at ribbon cuttings. Such photo-ops, showing the interest leaders have in sharing momentous occasions with communities, are known to help re-election efforts.

The problem with megaprojects is they are prone to failure. In what Flyvbjerg refers to as “survival of the unfittest” or “inverse Darwinism,” the projects that look best on paper win. That is, those that overestimate the public benefits and underestimate costs will outperform more economically viable projects when presented to leadership. Alternative analyses are hardly ever part of the decision-making process. Flyvbjerg says in most democracies people who intentionally misrepresent facts are participating in unethical and unlawful behavior: fraud. Megaprojects are thus, “designed as disasters waiting to happen.”

The data show a dismal performance record for megaprojects, which always gets lost as leaders are overwhelmed by the sublimes. Megaprojects are inherently risky due to their long schedules and the number of organizations involved. They are typically led by people who have more political influence than technical expertise, and who are replaced as administrations change. Below this weak management structure, decision-making is often in the hands of an ungainly group of stakeholders, public and private, with conflicting interests. Project scope can change with the level of stakeholder ambition.

Because the designs are big and transformational, their construction involves navigating uncharted territory where engineers can’t learn from others’ mistakes. Despite this “overexposure to black swans,” promoters ignore high risks, underestimate complexities – including human factors like rent-seeking and the principal-agent problem – and move forward with inadequate contingencies. They speak of their projects as if they may be executed according to plan with mechanical precision. When reality meets the whitewash, optimism bias and escalation of commitment are blind, so overruns, delays, shortfalls, and compromised viability result.

Flyvbjerg says about 1 in 10 megaprojects finishes on-budget, 1 in 10 finishes on-schedule, and 1 in 10 delivers promised benefits. Cost overruns over 50 percent are not uncommon. Overruns for Boston’s Big Dig were 220 percent; the Sydney Opera House, 1,400 percent. The Chunnel between France and England had an 80-percent overrun in its construction budget and a 140-percent overrun for financing. Revenues are half those forecast, and it is estimated to have cost the British economy $17.8 billion. It runs competitively, though heavily subsidized; and private investors lost out when Eurotunnel, the builder, became insolvent.

San Francisco Mayor Willie Brown explained the process in a rant in the San Francisco Chronicle. “So get off it. In the world of civic projects, the first budget is really just a down payment. If people knew the real cost from the start, nothing would ever be approved. The idea is to get going. Start digging a hole and make it so big, there’s no alternative to coming up with the money to fill it in.”

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