Quick Note: Waste and Missed Projects

If the state spends money on a bad infrastructure project, or too much money beyond what was necessary for the project, then this is waste of money, and should be avoided. But the opposite situation can occur too: some worthwhile projects are not pursued, and that too is a waste, because society forgoes the benefits coming from such projects. This situation should be avoided equally. Moreover, there is no priority between those two types of error. Planning should treat them symmetrically and aim on balance to avoid both equally.

The reason is that just as infrastructure projects are generally not critical, the money that is spent on them is not critical. The US is spending around $1.5 trillion over the lifetime of the program on the F-35 plane, and the money is buried deep in a defense budget that by the standards I grew up with isn’t even that large – and that program consists of documented waste and suffers from poor planning, including serious cost overruns and delays. None of this is an existential threat; the problems the F-35 is intended to solve are not existential but neither are its costs, and likewise, neither infrastructure problems such as delays, capacity limitations, and congestion nor the costs of the projects that intend to fix them are existential.

And if none of this is existential, then the decision of whether to build is about comparing two finite, bounded quantities: costs and benefits. This is why one does a benefit-cost analysis and respect its conclusions, without spiking. But this is also why the state should not systematically aim to err in one direction. If a project with a BCR of less than 1 is built then there is waste, but if a project with a high BCR is not built then there is waste as well.

Note that this principle of not biasing one’s error in one direction (typically the bias is toward inaction) is separate from the question of what the best estimates for costs and benefits are. There is a real tendency to underestimate costs, which is why the minimum BCR that should be funded is not 1 but slightly more, the typical range in Europe being 1.2-1.4. But subject to that limit, decisions should still be symmetric, i.e. if the limit is 1.4, then building 0.7 is symmetrically bad with failing to build 2.8. Alternatively, some projects, like high-speed rail, have upfront costs and long-term benefits, and so it’s better to think of them in terms of financial and social returns on investment, as is done in France (source, pp. 11-12), rather than a BCR in which the discount rate is hidden in a box. But ROI analysis should still be symmetric around one’s chosen limit.

This becomes relevant especially for projects that can expect benefits to rise over time due to economic growth. It is tempting to have a bias toward inaction and only build something once its benefits are unimpeachable, a large multiple of the cost. But this means that in the interim, society has forgone the smaller-but-still-real benefits. Worse, when the BCR grows too large, surplus extraction might pull it back down through an increase in costs, and thus building later can be very risky.

In essence, what this means is that if there’s infrastructure out there with a very high BCR or ROI – and if you ask me, preliminarily, Northeast Corridor high-speed rail done right has a purely financial ROI of maybe 13% – then something is deeply wrong. There shouldn’t be 13% returns out of anything. If there is one, the first question to ask is “why was this not built 50 years ago?”.

In the opposite direction, what looks like building infrastructure prematurely is in fact the prudent decision. South Korea and Taiwan both opened high-speed rail in the 2000s, both underperforming initial expectations. But both have seen steady growth in ridership; at this point, Taiwan HSR returns 4% without social benefits, which is decently healthy, and KTX has somewhat higher ridership than THSR on only slightly higher total construction costs. In the mid-2000s the projects looked like white elephants, that is they were doing just better than minimum. But the 15 years of benefits since then have been considerable. The 20% of society least interested in paying for things should not have veto power; economics exists on the margin and politics on the median.

24 comments

  1. michaelrjames

    I like your last para. I think back a decade or so and many western economists were complaining that China was way overspending on infrastructure. Ignoring the fact that they have 1.4 billion people and are the fastest urbanising nation in world history etc. Of course some of the criticism was incomprehension of why those so-called ghost cities/buildings were built; funny you don’t hear about those so-called white elephants any more. Wade Shepard explained it a long time ago (see https://en.wikipedia.org/wiki/Under-occupied_developments_in_China) but many still don’t get it.

    But I think you’ve still fallen into the error of believing one can base decision making on such a contrived and manipulatable thing as a BCR. They are regularly used to justify ridiculous things like freeway lane addition or roads/bridges-to-nowhere. In Australia the fave of the investment-construction industry are toll road tunnels that then go bust (because usage/revenue never came close to the assumptions in the BCR), burning billions of investor and government subsidy, before re-emerging in ownership of a single monopoly player.

    I think you point out the failure of this econometric approach to choosing infrastructure projects is over social benefits, ie. their omission or gross underestimation in BCRs. Yet, there is not a single thing in this world that humans do that isn’t driven by social benefit–to themselves, or family, or group or city or nation etc. If a valid BCA could be done–and arguably it was done in 2007 by Nicholas Stern, and again in 2015–we wouldn’t be pissing around doing the minimum. Unlike F35s it is an existential issue.

    • jrb@gmail.com

      Hard to take China seriously when they are covering up millions of corona deaths…

    • michaelrjames

      If a valid BCA could be done–and arguably it was done in 2007 by Nicholas Stern, and again in 2015–we wouldn’t be pissing around doing the minimum. Unlike F35s it is an existential issue.

      Oops, reading this again and I see I omitted that this comment referred to global warming.

      • Alon Levy

        I understood, but still, it’s not correct. Climate is existential, but HSR is small enough a component that it is not, and can be judged alongside either on such factors as cost per t-CO2e.

        • michaelrjames

          @Alon

          I must have phrased it even more poorly because I only meant that climate change was existential.

  2. Benjamin Turon

    The Taiwan Shinkansen is indeed a good example of a project that after initial use (ridership & revenue) being below estimates in a few short years more than makes up for it — not that the CATO Institute will acknowledge as they cite initial ridership of the Taiwan project as an example of HSR failure.

  3. Eric2

    “But subject to that limit, decisions should still be symmetric, i.e. if the limit is 1.4, then building 0.7 is symmetrically bad with failing to build 2.8”

    This is true from a naive perspective, but from a game theory perspective, needs to take into account the problem of “leakage” (as you discuss elsewhere). If a project’s BCR is 10, its planners will have a strong incentive to add random crud to the project scope, reducing its BCR to 3 or 4, which still passes your limit of 2.8. We probably need to reject a few such projects to ensure that future projects with a BCR 10 actually get built as such.

    • Alon Levy

      Yes, that’s true provided the reason for the reduced BCR is unusually high costs (e.g. HS2) and not a process of economic growth (e.g. KTX, THSR).

    • Tom M

      Some might be but not all. For example, taxes to pay for police, courts etc to enforce property rights thus allowing large scale economic activity based on trust between parties who don’t know each other is a large and significant economic multiplier.

  4. Tiercelet

    This is generally a really good point, but I think it’s understating (or at least not directly enough stating, though the last paragraph hints at it) the extent to which supply creates demand. New rapid transit lines can accomplish the miraculous feat of creating more land within a certain travel time of a central business district–resulting in growth that breaks prior trend. It’s all too easy for a trend-based BCR/ROI calculation to grossly underestimate the benefits of this development (particularly when the political order already has a strong bias against it or an inclination toward the status quo).

  5. Matthew Hutton

    The flaw with this article is that sometimes projects with a low return on investment can be worthwhile. For example improving the roads in the highlands of Scotland so there is 1 lane in each direction and so they are straighter for overtaking makes the places there viable as settlements and for tourism.

    The other flaw is that to some degree we have to work with the local power structures as they are not hope they will go away. Transport projects will need some extra money to make the project a win-win for as many people as possible – probably though it’d be better to give communities hard cash for their desired long term project rather than forcing (potentially very expensive) mitigation’s to the project itself.

    And the local “great and good” who you dislike often work very hard for their communities so are often respected a lot – even if as you identify they aren’t as in touch as they’d like to thing they are.

    • Nilo

      I mean your example is poor you can add, “makes the places there viable as settlements and for tourism.” into your cost benefit calculation.

      • Matthew Hutton

        That’s very true. But that doesn’t generally happen when I’ve seen them looking at road improvement projects on those roads.

      • Sassy

        The more things you try and factor in, the more uncertainty there is in your estimate. Being viable for settlements and tourism doesn’t mean the settlements and tourism are necessarily going to happen, and if they do, it isn’t necessarily even a good thing since it’s taking people and business away from somewhere else.

    • Tiercelet

      “Transport projects will need some extra money to make the project a win-win for as many people as possible – probably though it’d be better to give communities hard cash for their desired long term project rather than forcing (potentially very expensive) mitigation’s to the project itself.”

      I wonder if part of the reason transit (& large projects generally) get larded with irrelevant add-ons is because our system has essentially no other avenue through which local communities can fund local projects. Maybe if there were a more generous system of block grants for local causes, you wouldn’t see communities holding housing/transit/etc development hostage.

      …or maybe I’m being grossly optimistic about human nature, and they’d always just demand more using whatever leverage was possible…

      • Eric2

        Often what they want is really expensive, they could never afford it themselves, but only by taking a larger project hostage.

        • Alon Levy

          Yeah, this. American municipalities have money, they just waste it and then demand outside money to cover the waste. (For example, NYCT has somewhat fewer car-km annually per subway worker than the IRT and BMT had in 1935.)

          • adirondacker12800

            How many hours a year were they working? 8 hour day, five days a week is relatively new phenomena. It’s why old railroad timetables have “Weekdays” and “Sunday” but no “Saturday” schedule. Saturday was just another weekday.

        • Frederick

          On the other hand, that means the municipalities favour their local projects more than transit.

          I know it is easy to beat a dead horse over and over again, but Alon should realise that nobody in America sincerely cares about transit, and should instead advocate better transit for other people who might actually listen, like Londoners, for example.

      • michaelrjames

        @Tiercelet: “… our system has essentially no other avenue through which local communities can fund local projects. Maybe if there were a more generous system of block grants for local causes, you wouldn’t see communities holding housing/transit/etc development hostage.”

        Good point. However, for it to have a hope of working, such a grant system would have to be totally transparent and freed from political interference. Can anyone imagine such a system being introduced in the current political climate? Almost by definition, why would politicians bother with a system that didn’t bring them partisan control and advantage? Such a system does exist, for scientific research and it has worked wonders–not least in producing a bunch of vaccines in less than 12 months, though that relied upon fast-tracking and short-circuiting some normally cumbersome deliberative processes. En passant, let me recommend Sarah Gilbert’s book Vaxxers for an insider’s view on how progressing such projects through the huge bureaucracy involved; btw, I’m not complaining because in general it works very well. Indeed, as a frequent complainant about the Anglosphere, let me say that this is one area in which they excel, with both the UK & USA really showing their strengths (though let’s not ignore Germany–via its Turkish immigrant scientists!–the Pfizer-Bio-NTech vaccine is the first to obtain full, not emergency, licensure in the USA, or anywhere in the west I believe).

        In today’s environment I don’t believe such research funding systems would be created anew as it is simply too tempting for politicians to interfere, and the moral compunction against flagrant partisan interference has weakened too much. We saw it in the Bush era when Elizabeth Blackburn (Nobel laureate for telomeres in 2006) was effectively sacked from an NIH panel examining stem-cells because of her public criticisms of certain positions. The system largely escaped Trump but you can be sure he would have sacked Anthony Fauci if it was easy for him to do (his position is not one requiring Senate approval), and at some point it would be surprising if he didn’t interfere worse than Bush for the same reason: chasing votes of the loony Christian Right.

  6. adirondacker12800

    the first question to ask is “why was this not built 50 years ago?”.
    56 years ago plain Americans decided it was a good idea but the money dried up.
    Real Americans(tm) drive everywhere. And spending tax money on the people who pay them, some who don’t even know how to drive, would cut into the pork spread around among Real Americans(tm).

  7. Jim

    The F-35 1.5 trillion dollar cost is over the lifetime, including several decades of service, it has not all been spent yet.

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