Relative optimism bias
In this section we undertake a statistical analysis of the cost dimension, which examines the relative degree of cost over-runs for each stage of the procurement process in Traditional and PPP projects. As noted in Chapter 3, as each stage of the procurement process progresses, more knowledge about the project is obtained with regard to the likely future cost, because each stage represents a step closer to project completion. We should therefore expect that cost and time over-runs will reduce through the stages.
The results in Table 4.1 demonstrate a strong advantage to PPPs in the cost dimension. In each of the four periods identified, sample PPPs were completed with a significantly lower cost over-run compared with Traditional projects. In most cases this favourable differential to PPPs is found to be statistically significant with more than 95 percent confidence.
In Stage 1 the very large observed relative cost differential (50.6 percent) in favour of PPPs was found to be the result of an outlier Traditional project. When this outlier was removed, the differential fell to 13.2 percent in favour of PPPs, but remained statistically significant with 87 percent confidence. In Stage 3, which is most directly controllable by a Traditional contractor or PPP consortium, the 13.8 percent Traditional procurement cost over-run is found to be statistically significantly larger than the 2.4 percent PPP over-run (with 99 percent confidence).
Table 4.1 Cost over-runs: traditional & PPP projects relative to estimate (%)
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Source: ACG/University of Melbourne
| Stage 1 | Stage 1 less outlier | Stage 2 | Stage 3 | |
No. Obs. | 35 | 22 | 21 | 36 | 37 |
Traditional | 44.7% | 62.1% | 24.7% | 24.6% | 13.8% |
13.9% | 11.5% | 11.5% | 3.0% | 2.4% | |
Difference | 30.8% | 50.6% | 13.2% | 21.6% | 11.4% |
Confidence | 96% | 89.6% | 87% | 96% | 99% |
Table 4.2 Total cost of PPP and traditional projects ($m)
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Source: ACG/University of Melbourne Note: A Traditional outlier has been removed from Stage 1, which would otherwise have been a 44% cost over-run.
| Expected Cost | Net Cost Over-run | Final Cost | % Cost Over-run |
|
|
|
| |
Traditional | 3,082.0 | 1,087.6 | 4,169.6 | 35.3% |
4,484.4 | 519.3 | 5,003.7 | 11.6% | |
Stage 1: |
|
|
|
|
Traditional | 3,440.1 | 729.4 | 4,169.6 | 21.2% |
4,543.2 | 460.5 | 5,003.7 | 10.1% | |
Stage 2: |
|
|
|
|
Traditional | 4,132.0 | 994.1 | 5,126.1 | 24.1% |
3,891.4 | 91.3 | 3,982.7 | 2.3% | |
Stage 3: |
|
|
|
|
Traditional | 4,532.6 | 672.5 | 5,205.1 | 14.8% |
4,946.1 | 57.6 | 5,003.7 | 1.2% |
The implications of significant cost over-runs in Traditionally procured projects are displayed in Table 4.2. For the Full Period, which spans the entire the project, and is also influenced by the sponsors, the Traditional project costs increased from $3.08 billion to $4.17 billion (35.3 percent). On the other hand, the PPP projects are seen to have been more tightly controlled, with an expansion from $4.48 billion to $5 billion (expansion of only 11.6 percent).
The most telling statistics, however, are found in the outcomes for Stage 3. During this stage, which is the period from contractual commitment to the actual final outcome, the primary influence on the outcome is the contracting party, whether a Traditional provider or PPP consortium.6 In Stage 3 we find in Table 4.2, that for Traditional projects an expected cost of $4.53 billion was over-run to the extent of $672.5 million, representing a 14.8 percent increase. By contrast, the $4.95 billion in contracted PPP projects had on average over-run their budget by only $576 million, or 1.2%, which is statistically not different from zero.
For the Stage 3 data we undertook a regression analysis and found that for Traditional projects there is a highly statistically significant relationship between size of project and the value of the cost over-run. For PPPs, no statistical relationship was evident.
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6 While state modifications or state retained risk could impact on Stage 3, and result in time and cost overruns, this is less likely to be the case than in stages 1 and 2.