Briefing Report: Big Dig West

How to Avoid Massive Cost Inflation in Mega-Projects
Wednesday, August 24, 2011

As the debate over high-speed rail rages on in California between proponents who advocate the need to transition away from highways to alternative energy efficient transportation options and opponents who believe the cost of the system will outweigh its potential benefit, a broader issue is emerging that Republicans have often raised when it comes to the development of large infrastructure projects. This issue is namely the role of the public sector and private industry in the development of our transportation infrastructure system.

The fact is, California has spent decades enjoying the fruits of major infrastructure investments made by our parents and grandparents. Since the initial development of the freeway system in the 1950s, there has been comparatively little highway development in California. With the dramatic increase in population and vehicle miles traveled (VMT) over the same period, it is small wonder that the system is congested and stretched beyond its capacity. Transportation planners have been seeking multi-modal ( alternate forms of transportation beyond the passenger vehicle ) solutions to this problem with mixed success thus far. Regardless of your position on the political spectrum, most Californians agree that the development of a workable solution to this problem will be one of the biggest challenges facing transportation planners, and that regardless of what the solution is, it will entail monumental infrastructure investments along the lines of the initial development of the highway system.

In order for California to build to meet the growing demands for infrastructure, we must build smarter and make use of the most efficient tools and methods at our disposal. This will mean relying more heavily on the private-sector and public-private partnerships, and better defining the role of the public sector.

Mega-Projects

No matter how you slice it, and no matter whether your preferred solution is transitioning away from cars to a multi-modal system that relies on a high-speed train system that is seamlessly integrated into local and regional transit, or whether it is double-decking the freeways, the only way out of our current transportation infrastructure dilemma is going to be through massive investments in infrastructure. This may give readers pause, as the development of mega-projects historically has been plagued with problems.

In fact, the problems with mega-projects worldwide have been so consistent, that it has become its own area of study for academics. Danish academic Bent Flyvbjerg is a global leader on mega-projects and the risks associated with their development. In a study that covers 258 highway and rail projects ($90 billion worth) in 20 countries, he came to some startling conclusions. Nearly all (90%) of the projects studied suffered significant cost overruns. Flyvbjerg concludes that, "…the cost estimates used in public debates, media coverage, and decision-making for transportation infrastructure are highly, systematically, and significantly deceptive. So are the cost-benefit analyses."1 The study comes to several more conclusions that could have been drawn from a study of the HSRA. "The incentives to produce optimistic estimates of viability are very strong and the disincentives weak… And the reason for that is a lack of accountability of the parties involved, not a lack of technical skills or insufficient data. Another key insight is that risk is simply disregarded in feasibility studies . . . by assuming what the World Bank calls the EGAP principle: Everything Goes According to Plan. But in megaprojects…things seldom go according to plan.2 (emphasis added)

The consistent message from academic study of the development of mega-projects is that the public-sector is particularly unsuited for developing these projects, for delivering them on schedule and for containing the costs. According to Flyvbjerg's study, the conventional approach to project development, in which government is the project promoter and financier and private firms are only too happy to do the best-case feasibility studies, produce the designs, and take on construction contracts fattened by numerous change orders, leads to dramatic cost overruns. The conventional approach puts all the major risks—of cost overruns and of inadequate traffic—onto the shoulders of the taxpayers. If somebody else is picking up the tab, neither government officials nor private contractors have any real incentives to anticipate the kinds of things that will lead to problems. Not only is this inherently undesirable, but a system set up in this way "is likely to increase the total risks and costs of a project.3

Given the fact that California is in the process of embarking on what will be the biggest rail project in its history, these predictions do not bode well. However, they are also not unexpected. The challenge for political leaders will be to find a way to develop the infrastructure we need over the next several decades without making the same mistakes that have plagued these projects in the past. The studies provide some alternative approaches that could yield positive results. The Reason Foundation has done extensive work on case studies that highlight alternative methods that could be of use in California. Of particular interest is a side-by-side analysis of Boston's Central Artery/Tunnel project, known as the Big Dig and Melbourne, Australia's CityLink project.

A Tale of Two Cities: Boston & Melbourne

As an exercise in civil engineering, Boston's Big Dig has been a triumph. The project used the traditional public project delivery methodology to replace an ugly and congested elevated freeway with several tunnels and a new bridge. The completed project has more than delivered on its initial promises of reduced congestion and increased economic investment in the city core. However, as an example of management, the project was a disaster. Initially projected to cost $2.6 billion, the project ended up costing more than $14.8 billion and took over two decades to complete. What is more, the taxpayers were left carrying a huge debt without any revenue to service it. In addition, the project was plagued by quality control issues, including defective concrete work, thousands of leaks and a tunnel collapse. Despite years of pre-construction design, the project became notorious for bids being put out with incomplete designs and sketchy data. Contractors were plagued with hundreds of change orders. The project ultimately consisted of 118 prime contracts. An influx of federal money opened the door for a number of add-ons that had nothing to do with the original design. "Special interest groups, government organizations and individual communities all wanted a piece of the well-funded actions." For example Mayor Raymond Flynn made a splash in 1990, demanding that the Bid Dig fund a rat control program to cover the whole city. Scores of buildings received money for noise control. Indeed, some assessments put "mitigations" of this sort as accounting for one-third of the project's $14.8 billion ultimate cost.4

Certain conclusions can be drawn from Boston's experience and applied in California. The first is that the biggest source of cost increases in mega-projects is project creep. From inception to completion, the scope of a project increases through the addition of new elements and complexities that were never envisioned. In the case of the high-speed rail system for instance, efforts to change the routes from the Altamont Pass to the Pacheco Pass or efforts to bypass the Grapevine or tunnel through it, have faced refusal by private freight rail companies to allow the HSRA to use their right-of-way. All are examples of costly additions to the original plan that increase the scope and the cost of the project. The uncertainty, and the need to plan for each potential alignment have significantly added to costs, and that is before a single foot of track has even been laid. Special interest groups inject new objectives that serve their agendas on the windfall of funding. Groups opposing the project need to be appeased to enlist their support. These problems are already cropping up in the form of project opposition in the Bay Area and the Central Valley.

What is more, it is difficult for politicians to keep the entire breadth of the project and its costs in mind when balanced against the specific interests of their constituents. "Political appointees tend to have very short time horizons. Heads of state departments of transportation and state turnpikes are usually appointed by the governor. They expect to be replaced when the governor's term is up… Politicians do not have to live with the consequences of projects like the Big Dig because most of them have left office long before the project is completed, let alone before its viability as an operational project can be subjected to scrutiny. Voters and the media will have long forgotten them by the time it becomes apparent that traffic forecasts were exaggerated, costs were underestimated, and expensive political perks were added." 5

True Public-Private Partnership

Balanced against the Big Dig is Melbourne's CityLink, an equally daunting feat of civil engineering, which was undertaken as a private concession. CityLink is a tolled mega-project that includes major elevated and tunnel portions through downtown Melbourne, Australia. It was built during the same time as Boston's Big Dig, in a similar urban environment. Both projects had to cope with awful soil conditions: Boston is in bay edge fill, Melbourne is in river and creek beds of deep muck. Both had to go to Herculean lengths to maintain existing rail transit services and underground utilities, and not interfere with traffic during construction. Boston's tunnels were much bigger, but Melbourne's were much deeper, involving enormous water pressures and uplift. Each encountered significant construction problems. Each included a signature bridge. Both projects had smart, competent engineers and managers. Yet Melbourne's was built in one-third the time and at one-third the cost ($27 million per lane-mile vs. $91 million per lane-mile). 6

While a public project places the burden of risk on the taxpayers and leaves the oversight in the hands of politicians and political appointees who have no direct financial stake in the outcome, privately-funded projects allocate the risks and rewards to private companies with individuals who can be held directly accountable to the share-holders. Flyvbjerg goes so far as to say that the decision to go forward with any mega-project should be based on "the willingness of private financiers to participate in the project without a sovereign guarantee." By putting their own capital at risk, such investors will be personally and financially involved in monitoring how the project is done, to mitigate the risk to themselves.7

This procurement approach was put to good use in Melbourne through a long-term concession or build-operate-transfer (BOT) model. In Melbourne, a private consortium, selected by a competitive process, was granted long-term ownership interest in the project, sufficiently long that it has a reasonable likelihood of making a return on the investment. Because of this long period of responsibility, the consortium had a strong incentive to build it right, and to minimize lifecycle costs. The result was a mega-project built with private financing, which came in significantly under-cost and ahead of schedule without costing the taxpayers of Melbourne any money.8

As the Melbourne model highlights, privately developed infrastructure can be far cheaper and more efficient than public mega-projects. Although that is a fact that California must put to good use in future infrastructure development, it is also critical that we remember that there will always be an important role for the public-sector in these developments in areas like the acquisition of right-of-way (ROW) for projects, quality-control and safety inspections. In the case of high-population areas, it is difficult to predict the cost of acquiring ROW, or what the potential risks associated with eminent domain might add to the cost of a project. An effective infrastructure development system will have to harness both the private and public-sector in order to build cost-effective projects.

Conclusion

As California struggles to address the massive backlog of infrastructure investment needs, it will be increasingly important to ensure that mega-projects do not suffer from the kind of cost overruns suffered under the direction of the public sector in projects from the Big Dig to the replacement of the eastern span of the Bay Bridge. There are opportunities to draw on the private sector to build these projects and shelter the taxpayers from the risk and the cost associated with construction. Under this kind of model, the viability of mega-projects like the High-Speed Rail will make more sense and will have the potential to achieve some of the mobility goals that California will need in the future to meet the growing demand of its population.

 

For more information on this report or other Transportation issues , contact Ted Morley, Senate Republican Office of Policy at 916/651-1501.

 

1 Transportation Mega-Projects & Risk, Reason Foundation, February 2011, p 6
2 Ibid
3 Ibid, pp 6-7
4 Ibid pp 2-3
5 Ibid, 4-5
6 Ibid, p 8
7 Ibid, p 7
8 Ibid, p 8