Unrealistic cost estimates for transport infrastructure distort investment planning in three ways.
First, if governments systematically understate project cost estimates, then benefit cost ratios will be systematically overstated. This leads governments to over-invest in transport infrastructure.
Second, if governments misunderstand the uncertainty in a project's cost at the time they make a commitment, their decision to invest in that project was made on an incorrect basis. Inaccurate cost estimates distort the decision to invest, and which projects to select. The design and scope of a project can change over its life, but this rarely justifies not holding governments to account for the initial cost estimates (Box 2).
Third, because unrealistic cost estimates are more prevalent for larger projects, governments are more likely to over-invest in larger projects. The clearest example of this is multi-billion dollar projects, which have historically had more frequent and larger cost overruns.
As well as distorting investment decisions, unrealistic cost estimates mislead the public. We are led to believe that a particular project is available to us for less than it really is. Yet governments almost never go back and discover how actual costs and benefits compare to the costs and benefits that were promised. If they do go back, they do not share their findings with the public.
Box 2: Our approach to scope changes We think it's usually reasonable to hold governments to account for initial cost estimates on projects. Take Melbourne's North East Link. In 2008 the state government said the link would 'connect the Eastern Freeway and the Metropolitan Ring Road to complete Melbourne's orbital freeway network'.a Several different routes have been considered, each with different costs.b Although the project now involves features that were not reflected in the initial cost estimate, the project's fundamental purpose - to complete the orbital network - remains unchanged? In examples like this, we think it is appropriate to compare final costs to initial estimates. By contrast, consider Sydney's CBD and South East Light Rail. This began life as a proposal for light rail between Circular Quay and Central Station? But over time it became a proposal for light rail all the way to Kingsford and Randwick in the city's south-east. As a fundamentally different project, it does not make sense to compare the final cost to the estimated cost when it was proposed to extend only as far south as Central Station. In this report, we calculate the cost overrun (or underrun, as the case may be) from the earliest cost estimate where the project had the same fundamental purpose. Appendix A explains our methodology in more detail.
a. Victorian Government (2008, p. 12); and Pallas (2008). b. Lucas and Carey (2017). c. North East Link Project (2020). d. Chesterton (2008). |