The Delusion and Deception in Megaproject Cost Estimates
Canada’s largest infrastructure project at the moment is the so-called “Eglinton-Scarborough Crosstown,” a 25-km light rail transit line that will traverse much of mid-town Toronto. Unlike most light rail schemes, about three quarters of the Crosstown route will operate underground in twinned tunnels served by 21 below-grade stations. The Ontario government is picking up the C$8.2 billion tab, while Metrolinx, a provincial transit agency, will manage the planning and construction over the next decade.
But in the eight months since Toronto mayor Rob Ford negotiated the Crosstown deal with Ontario premier Dalton McGuinty, local critics have been wondering about the reliability of that very large cost estimate, and whether the final price will be larger, as often happens with such megaprojects.
There’s plenty of room for skepticism, according to mega-project cost expert Bent Flyvbjerg, professor and chair of major program management at Oxford University’s Saïd School of Business. In 2002, Flyvbjerg caused a stir with a study showing that large-scale infrastructure projects routinely exceed initial estimates and timelines, and, in the case of transit schemes, frequently over-estimate anticipated ridership. His inventory of 258 examples, most completed in the late 1980s and 1990s, includes the Chunnel and the Sydney Opera House, both notorious debacles.
In a 2009 article in California Management Review, Flyvbjerg cited data showing that under-estimations and overruns for rail projects are on average twice that for roads. His diagnosis is equal parts engineering and psychology. Flyvbjerg says proponents of infrastructure megaprojects often fall victim to either “delusion” or “deception.” In many cases, the sponsors, typically municipalities or other government agencies, ignore or minimize downside risk to make their project proposals seem more attractive to funding bodies and private sector partners.
To leaven the pessimism, Flyvbjerg, with collaborators Massimo Garbuio and Dan Lovallo, has proposed various techniques for injecting a greater sense of reality in the budgeting process for megaprojects:
- Ensure that lower-tier government agencies have skin in the game. In the U.K., the national government now wants local authorities to provide up to a quarter of rail project costs as well as substantial contingency allowances, as a condition of funding;
- Require private sector partners to commit up to a third of their investment without public sector backing. As the authors write, “Contracts should be written in such a manner that risk allocation is balanced, i.e., the risk to private financiers must be real, with no comfy escape clauses that return risk to the taxpayer when things get difficult”;
- Provide financial and non-financial rewards for planners who provide “realistic” cost estimates.
Flyvbjerg himself has another reality-check mechanism, which he provided for a proposed extension to an Edinburgh tramline initially pegged at $400 million and funded by the U.K. Department of Transportation. The approach involves forecasting true costs by comparing the proposed venture with a so-called “reference class” of similarly scaled completed projects. When U.K. government analysts reviewed comparisons from Flyvbjerg’s database of infrastructure projects, they concluded the tram would likely cost $560 million, with a 50 percent chance of going over budget. The Scottish government put the plan on ice. Edinburgh council approved a shorter, more expensive version earlier this fall, the Guardian reported.
Back in Toronto, Jack Collins, Metrolinx’s vice-president of rapid transit infrastructure, is acutely aware of Flyvbjerg’s warnings, and in fact tackled them head-on at a Canadian Society of Value Analysis conference in November. While he argues that there’s been some improvement in risk assessment over the past decade, transit projects still tend to be thrown off budget by factors that the project team can’t control, including the addition of new stations, route alignment changes and political change. (In the case of the Crosstown, an earlier version of the project called for almost half the route to travel on a surface right-of-way, but Mayor Ford, upon taking office last December, pushed to have most of the line buried, at an additional cost of $2.1 billion.)
Collins says Metrolinx will rigorously monitor Crosstown costs using a “risk and contingency review” process developed by the Federal Transit Administration in recent years as a way of providing guidance for state or local infrastructure projects that relied on federal funding. Before joining Metrolinx two years ago, Collins spent three decades working as a risk consultant on California infrastructure projects, including highway and LRT ventures, some of which came in under budget.
The FTA assessment involves establishing base costs and then gaming out a wide range of risk factors as well as establishing possible contingencies for different scenarios (e.g., underground surprises, strikes, inflation trajectories, etc.). “You do your best to identify and refresh those mitigation strategies,” says Collins. “This is new in Canada. We’re bringing in the Mounties.”
Top rendering of tunnel construction plans courtesy Metrolinx