Virginia Postrel on Overstating the Benefits and Understating the Costs of Public Works Projects

Virginia Postrel has written another excellent column for Bloomberg View, this time drawing on the work of Bent Flyvjberg.

On average, urban and intercity rail projects run over budget by 45 percent, roads by 20 percent, and bridges and tunnels by 34 percent.

And the averages tell only part of the story. Rail projects are especially prone to cost underestimation. Seventy-five percent run at least 24 percent over projections, while 25 percent go over budget by at least 60 percent, Flyvbjerg finds.

By comparison, 75 percent of roads exceed cost estimates by at least 5 percent, and 25 percent do so by at least 32 percent.

Postrel delves into the sources of the systematic bias towards overly optimistic projections, and she points to the value of reference-class forecasting and other tools to give policymakers more realistic assessments of likely costs. She concludes on a somewhat pessimistic note:

Unfortunately, the world’s biggest infrastructure projects, including the recently opened high-speed rail line between Beijing and Shanghai, are subject to no such checks, or even to scholarly examination. Flyvbjerg has been trying for years to get data on project costs in China, to no avail. “Their data are simply not reliable,” he says. He quotes an unidentified Chinese colleague who said, “If the party says there’s no cost overrun, there’s no cost overrun.”

No wonder promoters look so longingly at China. There, infrastructure glamour is the law.

Recently, a number of observers pointed to the advent of HSR between Shanghai and Beijing as yet another sign that the United States is not “winning the future.” HSR has apparently led to a sharp reduction of airfare between the two cities, which is hardly surprising. Given the scale of the subsidies involved, and that the fact that travelers between the two cities tend to be more affluent than the modal Chinese, one is tempted to ask what we should really take away from this fact: that the Chinese government engages in egregious forms of upward redistribution? I could have told you that already.