I can’t think of too many major public infrastructure projects that ever came in on budget, much less in line with early stage cost estimates. For whatever reason, they almost always exceed the original figure that got them the go-ahead.
Yet these days early estimates of the cost of building new rail lines are routinely criticised as inflated or excessive, usually by those who feel strongly that a particular project, or class of projects, should proceed. Some believe governments strategically overestimate costs (like the $114 billion cost of east coast high-speed rail) in order to deflate public pressure to build them.
The available evidence, however, overwhelmingly shows the opposite: governments, authorities and technical experts consistently underestimate the cost of projects and overestimate demand. Professor Bent Flyvbjerg from Oxford University’s Said Business School argues that underestimating the cost of major infrastructure projects and overestimating the demand is so chronic that forecasters deserve some harsh medicine:
“Some forecasts are so grossly misrepresented that we need to consider not only firing the forecasters but suing them too — perhaps even having a few serve time.”
Australians have plenty of experience with underperforming infrastructure projects. For starters, just in transport alone, there’s Brisbane’s Clem 7 and Airport Link road tunnels, Sydney’s Lane Cove and Cross City tunnels, the Brisbane and Sydney airport trains, Melbourne’s Myki ticketing fiasco, and the 2250-kilometyre Freightlink rail line connecting Adelaide and Darwin. And they’re just the ones we know about.
Flyvbjerg says cost overruns in the order of 50% in real terms are common for major infrastructure projects, and overruns above 100% are not uncommon. Writing in the Oxford Review of Economic Policy, he argues demand and benefit forecasts that are wrong by 20–70% compared with the actual outcome are also common.
Transport projects are among the worst performers. Flyvbjerg examined 258 transport projects in 20 nations over a 70-year timeframe. He found the average cost overrun for rail projects is 44.7%, measured in constant prices from the build decision. For bridges and tunnels, the equivalent figure is 33.8%, and for roads 20.4%. The difference in cost overrun between the three project types is statistically significant, and the size of the standard deviations shown in the exhibit demonstrates the high degree of uncertainty and risk associated with these sorts of projects.
He also found that nine out of 10 projects have cost overruns, they happen in all nations, they’ve been a constant over the last 70 years, and cost estimates have not improved over time.
And it’s not just underestimation of costs. Errors in forecasts of travel demand for rail and road infrastructure are also endemic. He found that actual passenger traffic for rail projects is on average 51.4% lower than forecast traffic. He says:
“This is equivalent to an average overestimate in rail passenger forecasts of no less than 105.6 per cent. The result is large benefit shortfalls for rail. For roads, actual vehicle traffic is on average 9.5 per cent higher than forecasted traffic. We see that rail passenger forecasts are biased, whereas this is less the case for road traffic forecasts.”
He also found that nine out of 10 rail projects overestimate traffic, 84% are wrong by 20% or more, it occurs in all countries studied, and it has not improved over time. Thus the risk associated with rail projects in particular is extraordinary. They face both an average cost overrun of 44.7% and an average demand shortfall of 51.4%.
Flyvbjerg identifies three possible causes for these errors. One is technical error — this relates to factors like inadequate data and the inherent difficulty of forecasting the future. It is the customary defence when projects fail. Another is psychological error, like optimism bias. Finally, there’re political and economic explanations, where promoters, investors and politicians deliberately underestimate costs and overestimate benefits.