You may be interested in some confirmation for our concern regarding understated, low-ball, development costs of the California high speed train. Identified below are other projects that experienced what we have been projecting for the state HSR project. The point here is that we are not inventing problems where they won't exist.

The High speed train is supposed to cost $40 billion. We don't know what that price includes; the link between SF and LA and nothing else? Will Sacramento and San Diego cost extra? What about Altamont/East Bay extensions?

And, can the principles identified in these articles be applied to other, more local developments, such as Caltrain's electrification, grade separations, corridor widening, and Dumbarton's rail costs? I believe they can.

Martin

The Public Purpose
WENDELL COX CONSULTANCY
Number 51 - 21 July 2002

International Research:
Lying About Project Costs:
Implications for Florida High-Speed Rail

Two years ago the voters of Florida approved a constitutional amendment that requires a high-speed rail network to be built throughout the state. Like the various previous unsuccessful attempts to build high-speed rail in Florida, a prerequisite to this one seems certain to be a substantial infusion of taxpayer funding.

Earlier this year, the James Madison Institute (JMI) published Local System, Statewide Obligation, which suggested that the eventual network could cost as much as $40 billion, a cost so onerous that only the core of the system would be built, perhaps Miami to Orlando and Tampa-St. Petersburg, or even simply Orlando to Tampa-St. Petersburg. The result would be a severely truncated system, serving only the state's largest urban areas, which would, however, be paid by taxpayers from Key West to Pensacola.

A new comprehensive, international study confirms the concerns raised by JMI. Danish university Professors Bent Flyvbjerg, Mette Skamris Holm and Soren Buhl have published research covering more than 250 transportation infrastructure projects from around the world over the last 90 years. The results should give pause to Florida public officials and voters. They found that there was a general tendency to underestimate project costs, and that the principal cause of this
underestimation was Š lying.

The use of deception and lying as tactics in power struggles aimed at getting projects started and at making a profit appear to best explain why costs are highly and systematically
underestimated in transportation infrastructure projects.[1]

There is a very simple incentive for large contractors to lie. It is profitable. The reward is more money. And, there is an incentive for public officials to believe the lie. The "Edifice Complex," which drives so many elected officials to build virtual monuments and to seek "legacy" is served by underestimating costs, since less costly projects are simpler to sell to governing bodies and the electorate than more costly projects.

In the United States, they found that rail projects tend to escalate in costs a rate five times that of road projects. While the authors do not attempt to explain why such a great difference exists, the composition of the supplier market may give a clue. The large rail projects tend to be built by a very small market of international contractors. The size of such projects makes a truly competitive market problematic, since smaller companies do not have the resources to overcome the substantial financial barriers to entry. On the other hand, road projects tend to be broken up into much smaller components, with healthy competition from small, medium and large companies. A company that developed a reputation for driving up costs would soon find itself disqualified from many competitions. But where there are just a few international competitors, as is the case with the very large projects, governments are more subject to contractor abuse, such as has been identified by the study's authors.

Independent evidence supports this thesis. Some of the most severe cost escalation has occurred on a road project, the so-called "Big Dig," which is placing freeways in tunnels in downtown Boston. This now $15 billion project was to have cost $5 billion. Unlike most road projects, this project was a single procurement. As a result, the short list of competitors were the same companies that have developed such a dismal (but profit-serving) record in project cost escalation --- the companies that build rail systems.

What seems clear is that the taxpayers of Florida are at risk. The Florida High Speed Rail Commission has published a report that would barely begin the promised system. In so doing, it has done the international rail promoters one better. As Local System, Statewide Obligation notes, the Commission's cost estimates are below even those produced by the international consortium behind the now defunct Florida Overland Express (FOX) high-speed rail line. A previous JMI report provided showed that the cost of the FOX project was much underestimated, and contributed to the decision to give it the burial it deserved.

As it stands, the state of Florida is poised to undertake a project that seems sure to cost much more than the taxpayers are being told, and a project that will deliver much less. The message of the Danish researchers is that this has been going on for nearly a century. If Florida proceeds, it will continue at least another 20 years.

[1] Bent Flyvbjerg, Mette Skamris Holm and Soren Buhl, :Understimating Costs in Public Works Projects: Error or Lie? APA Journal, Summer 2002.

Here is another article from four years earlier (1998), which lists a number of infrastructure projects that experienced huge price jumps when they were under way. We have identified several of these projects before as cautionary tales about what California should expect, and how we are being, shall I say, misled:

Number 20 January 1998
Infrastructure Project Forecasts:
Major Inaccuracies

UDATE ON THE CENTRAL ARTERY PROJECT According to the Massachusetts Inspector General, the cost of the Central Artery project has now reached approximately $14 Billion (2001.03)

Forecasting the costs and performance of major infrastructure projects with a reasonable degree of approximation is very difficult. Despite relying upon the finest technology, the most adept computer models and the sharpest minds, projections for many major infrastructure projects have been exceedingly inaccurate.

*The new Denver International Airport was
to have cost $1.7 billion when it was approved for construction. Eight months into construction, costs had increased 60 percent. After opening 16 months late, the cost had escalated to $4.8 billion (each month of delay cost nearly $20 million), a construction related cost overrun of $3.1 billion. The higher levels of bonded debt would require approximately $2 billion in additional interest payments, raising the cost overrun alone to $5.1 billion --- a more than 300 percent increase over the cost estimate on which the decision to proceed was made (all figures in 1996$).(1)

*The Channel Tunnel between England and
France was to have been built for $7.8 billion. Costs escalated to $18.6 billion --- an increase of nearly 140 percent (not including the higher cost of interest due to larger borrowing requirements than projected).(2) After opening a year late, its first year of operation produced a loss of $1.5 billion. The competitive response of cross-channel ferry operators reduced tunnel traffic to below expectations. After failing to pay interest on its debt for more than a year, a financial bail-out was negotiated with creditors converting half of their loans to equity. This project was privately financed as both the British and French government were unwilling to provide either public subsidies or debt guarantees.

*The cost of Boston's Central

Artery/Tunnel expressway project has nearly doubled from a projected $5.5 billion to $10.4 billion (1996$). The project is scheduled to open six years late in 2004.(3) [Ed: Boston, Big Dig. It ended up costing over $15 billion.]

*Amtrak, which was created to salvage the
U.S. passenger rail system, was intended to achieve profitability shortly after its establishment in 1971. Yet Amtrak continues to post significant losses and taxpayers subsidies have exceeded $15 billion. Amtrak claims that fares and other commercial revenues will eventually exceed its operating, but not capital costs. The United States Government Accounting Office has found that Amtrak's financial condition is deteriorating and that it is unlikely to earn commercial revenues that exceed its operating costs, much less its capital costs.(4) Amtrak is now seeking a new federal tax.

*Large urban rail projects have

consistently cost more to build, cost more to operate, attracted fewer passengers and generated less passenger revenue than projected. During the 1980s, federally financed urban rail projects cost 46 percent more to build, and 78 percent more to operate than projected. Ridership averaged 59 percent below projections. So few new passengers were attracted that the annual cost per new passenger exceeded the cost of leasing a car in virtually all new systems.(5) In response to ridership shortfalls, transit agencies have begun to issue radically reduced ridership estimates shortly before system openings.

*The more recently completed Los

Angeles-Long Beach light rail project was to have cost $210 million when the Los Angeles County Transportation Commission(6) decided to proceed with the project (1981). Costs rose to $500 million by the time final plans had been formalized and nearly $900 million when completed, a cost escalation of more than 300 percent. Annual operating costs were 150 percent above projection.(7)

*Miami's Metrorail cost 33 percent more
to build and 42 percent more to operate than projected. Daily ridership was to have been 239,900 by 1988 but by 1995 was only 47,800, 80 percent below projection.(8) As a result, the cost per rail passenger was nearly nine times the projection.(9) Miami's Metro mover (people mover) cost 106 percent more to build and 84 percent more to operate than projected. Daily ridership was to have been 41,800 by 1988, but was under 13,300 in 1995, 68 percent below projection despite a more than doubling of the route's length.(10) As a result, the cost per rail passenger was nearly seven times the
projection.(11) These two infrastructure projects were to have substantially increased transit ridership in Miami. By 1995 ridership was 65 percent lower than the level predicted for 1988.(12)

An Inexact Science

Inaccuracy in highway usage forecasts illustrates the difficultly inherent in projections even where there is a wealth of experience. A recently released National Research Council study of the international experience notes that rail projections are "more problematic" than road projections. The study finds:

... the main lessons are that cost overruns of 50 to 100 percent are common for large
transportation infrastructure projects: overruns above 100 percent are not unusual. Traffic forecasts that are off by 20 to 60 percent are also common ... The result is that decisions based on misleading forecasts --- often presented to parliaments, to other decision makers, and to the general public --- may lead to a
mis-allocation of funds and to under-performing projects during construction and operation.(14)

There are valid reasons why ridership and revenue projections are often high and cost projections are low. The planners and administrators who oversaw each of the projects above can supply a litany of reasons why forecasts were not met. Unforeseen circumstances, such as additional environmental mitigation requirements, changes to project scope and construction delays can add to costs. Usage projections can be high because projected demographic trends or market conditions do not materialize. But there are additional reasons for the unreliability of forecasts. Infrastructure decisions are often made without regard to the historic inaccuracy of forecasts. Forecasts can also be influenced by political factors.

... forecasts that underscore a priority which is out of political favor are likely to be ignored, whereas forecasts that support politically favorable positions are likely to be embraced.(15)

Projections can also be manipulated to achieve pre-determined results.

... most of the forecasts used in the planning of America's rail transit systems are statements of advocacy, rather than unbiased estimates.(16)

It has been noted that government infrastructure decisions can be based upon "myth," to the virtual exclusion of overwhelming evidence that a particular approach cannot achieve the stated public purpose. A pre-occupation with particular technological solutions can occur:(17)

Major infrastructure projects can take on a "life of their own." The experience demonstrates that, once authorized, even cost escalation that double or triples the cost of a project will not result in its cancellation.

There will always be detailed explanations for cost escalation and failure to attract projected ridership and revenue --- some are more valid than others. But in publicly financed projects the "bottom line" is the same --- the cost of unreliable forecasts is paid by users. Or, if public subsidy is involved, the excess cost is paid by the taxpayers.

Footnotes:

1. Calculated from data in Denver International Airport: Information on Selected Financial Issues (Washington, DC: US Government Accounting Office, September 20, 1995).
2. "Eurotunnel: Au Revoir Alastair," The Sunday Times (London), October 6, 1997. Figures converted to US$ at 1.5938 (exchange rate at March 20, 1997).
3. Calculated from data in David Luberoff and Alan Altshuler, Mega-Project: A Political History of Boston's Multi-billion Dollar Artery/Tunnel Project (Cambridge, MA: John F. Kennedy School of Government, Harvard University, April 1996) and Transportation Infrastructure: Managing the Costs of Large-Dollar Highway Projects (Washington, DC: US Government Accounting Office, February 28, 1997).
4. "Intercity Passenger Rail: Amtrak's Financial Viability Continues to be Threatened," US Government Accounting Office testimony before the Committee on Transportation and Infrastructure, US House of Representatives, March 12, 1997.
5. Don Pickrell, Urban Rail l Transit Projects: Forecast Versus Actual Ridership and Costs (Washington, DC: Urban Mass Transportation Administration, US Department of Transportation, October 1989).
6. The author was a policy board member of the Los Angeles County Transportation Commission from 1977 to 1985, which included this project's planning period.
7. Analysis board meeting documents and Final Environmental Impact Report: The Long Beach-Los Angeles Rail Transit Project, Los Angeles County Transportation Commission, March 1985.
8. Metro-Dade Transit: Annual Performance Report Fiscal Year 1994-1995.
9. Urban Mass Transportation Administration
10. Metro-Dade Transit
11. Urban Mass Transportation Administration
12. Urban Mass Transportation Administration
13. The New York-Washington market has a strong history of ridership. The airlines entered the rail market, not the other way around.
14. Mette K. Skamris and Bent Flyvbjerg, "Accuracy of Traffic Forecasts and Cost Estimates on Large Transportation Projects," Transportation Research Record 1518, 1996.
15. William Ahser quoted in Edward A. Mierzejewski, "Recognizing Uncertainly in the Transportation Planning Process: A Strategic Planning Approach," paper presented to the 76th Annual Meeting of the Transportation Research Board (Washington, DC, January 1997).
16. Martin Wachs quoted in Mierzejewski.
17. Jonathan E. D. Richmond, "The Mythical Conception of Rail Transit in Los Angeles," (Sydney, Australia: Institute of Transport Studies, University of Sydney, 1997).

(c) 2001 www.publicpurpose.com --- Wendell Cox Consultancy --- Permission granted to use with attribution.

-- 






**********************
Martin Engel
1621 Stone Pine Lane
Menlo Park, CA 94025
650:323-1670
martinengel@earthlink.net
**********************