Nordic Costs and Institutional Knowledge
Institutional knowledge at agencies that build infrastructure shapes up to be an important factor behind how well they handle projects. Good agencies build up a knowledge base over time that lets them see what works and what doesn’t, and this way they’re capable of making in-house planning decisions, and even when they use consultants, they make sure to learn what the consultants have taught them and implement those lessons in the future. In our Italian, Turkish, and (soon to be released) Swedish cases, the agencies have all built up this knowledge over decades.
Denmark provides an interesting test case for this, because Copenhagen opened its metro in 2002 (Helsinki: 1982; Oslo: 1966, Stockholm: 1950), and so it’s possible to compare it with the other Nordic capitals. The construction costs in Copenhagen are notably higher: the City Circle Line (built 2009-19) cost 25,300 DKK for 15.5 km, which in 2022 PPP dollars is around $280 million/km, and the soon-to-open M4 extension to Sydhavn is 9,100 DKK for 4.5 km, or $330 million/km; in contrast, we have the following costs for the other Nordic capitals:
|City||Line||Length||Years||Cost||Cost/km (2022 PPP)|
|Oslo||Løren||1.6||13-16||1.33b NOK||$110 million|
26.4b NOK, ’21
|Stockholm||Nya Tunnelbanan||19||20-30||32b SEK, ’16||$235 million|
|Helsinki||West Metro phase 1||13.5||09-17||1.171b€||$145 million|
|Helsinki||West Metro phase 2||7||14-23||1.159b€||$275 million|
All of these costs are higher than you may have seen in past posts – this is mostly an inflation artifact (and in particular, you should mentally increment all costs by 25% if you remember them in mid-2010s dollars). But it’s notable that in both Oslo and Helsinki, real costs are sharply up; the Fornebu Line is more complex than the Løren Line, but much of its complexity is an engineering choice to deep-mine the stations.
In Stockholm there’s no similar comparison, but Citybanan cost, also in 2022 PPP dollars, $365 million/km, and a factor of 1.5 is an unusually low premium for city center regional rail carrying 250 meter trains over regular metro trains; the RER premium in Paris looks like a factor of 2, and the Munich S-Bahn tunnel was budgeted at a factor of 2 premium over a current U-Bahn extension and has since announced a factor of 2 overrun over that, for which it has been widely mocked in the German press. It’s plausible that when the regional rail premium is netted out properly, Stockholm has in fact seen a large real increase in costs, which matches the history of Nya Tunnelbanan’s cost overrun, from 23 to 32 billion kronor.
Denmark is seeing a real cost increase as well, but a much smaller one. In effect, what’s happening is that Copenhagen started building its metro in the 1990s at higher cost than Nordic norms, and in the generation since then, costs in the other Nordic countries have converged to Danish costs.
So what’s going on?
Some hints can be found in the details of the most recent Danish extension, M4 to Sydhavn. The soft cost multiplier over hard costs is higher than one would find elsewhere, and the contingency is 30% at the contract award, an unusually high figure; 20% is more typical, or even less at contract award (but more during earlier planning). Moreover, the entire project was awarded as a single design-build contract to a joint venture of Vinci and Hochtief, with hard costs worth 460M€.
The entire Nordic world is trying to transition to that style of contracting. This is inspired by British and Dutch models of privatization, which the state, academic, and consultant studies I’ve read while writing the Stockholm report view positively. The procurement strategy for Trafikverket in Sweden calls for transitioning to a so-called “pure client” model for the next big rail investment, Gothenburg’s West Link, like Citybanan not included on the above table as it is a regional rail through-running tunnel. The emerging model in the Nordic countries, which I call globalized in the report since it aims at international competitiveness attracting global contracting firms, can be compared with the traditional model as follows:
|Itemized contracts||Fixed price contracts|
|Smaller contracts (hundreds of millions of kronor)||Larger contracts (billions of kronor)|
|Product procurement (“how to build”)||Functional procurement (“what to build”)|
|Public client risk||Private contractor risk|
The Nordic project I’m most familiar with, Nya Tunnelbanan, does not use the globalized system; it uses elements of both the globalized and the traditional systems, but the trend is to be more globalized. Moreover, the Fornebu Line uses design-bid-build; its problem is partly that the private risk allocation encourages defensive design. If the builder strictly follows the design, all liability is on the designer, otherwise it’s on the builder; thus, the builder strictly follows the design, and because geotechnical surprises are inevitable during tunneling, the designer is overly cautious and tries to anticipate every potential problem rather than seeing what is actually necessary while the tunnel is dug. The traditional system has problems, especially when the risk allocation is improper like this. What’s more, the preference for larger contracts over smaller ones comes from ongoing industry consolidation – there just aren’t enough domestic contractors anymore, and pan-European ones, let alone global ones, are not going to enter an unfamiliar market for a $100 million contract. Unfortunately, the move to privatization of risk under the pure client model does not improve things, and is associated with higher costs.
I am less familiar with the Copenhagen Metro than with the Stockholm Metro, but from reading both how the expansion is done and what Eno is saying about its model (it did a case there but not in Stockholm), Denmark was an early adopter of the globalized system. Eno even pointed out that it uses design-build to showcase that low-construction cost cities use it successfully.
So the Denmark effect is real – this does appear to be a matter of experience. Having never built a metro before – the last urban rail tunnel in Denmark, the S-tog, opened in 1934 – Copenhagen never had the institutional knowledge of how to use the traditional system, so it opted for (elements of) the globalized system, which was not how the other Nordic countries did things but was what British consultants recommended. Note that this does not mean higher costs (that is, around global average, rather than far less) were inevitable in Denmark – it could have adopted the traditional system by leaning on intra-Nordic connections, which are extensive. But perhaps in the 1990s, and certainly in the 2000s, even the other Nordic countries started to come to believe in greater privatization of risk.
The tragedy is that we can see, in real time, how good institutional knowledge is forgotten. Nya Tunnelbanan is, by itself, a pretty straightforward case of cost overrun. But in the context of parallel trends in Helsinki and Oslo, and perhaps an imputation of how much more complex Citybanan was, the situation is different. Real costs increased over time – this was not a mere matter of cost underestimation. Moreover, they increased during a time of ongoing, successful construction of metro projects – the lines that have opened all have healthy ridership, encouraging plans to build even more. And yet, the real problems with the traditional system have led to the adoption of what appears to be a worse procurement system, supported every step of the way by the same agencies that used to compete for world records for low-cost construction.
I think that is a solid analysis, and from Sweden, I broadly share the view that the agencies in charge have lost some control of how things evolve that have moved to companies and consultants.
A part of the problem is partly external society though, in that the more itemized approach, is made harder when different contractors have increasing possibilities to sue or try to overrule contracts. In the past, contractors lacked this possibility and it was also then more necessary for them to maintain good relationships with the public agencies. This has been replaced with more antagonistic relationships, increasingly battled in courts. EU regulations on public tender has reinforced this, where the agencies for example can be forced to give a contract to say an unknown Italian bidder against their will, even if they have their doubts if they can fulfill their contract. In the past, it would have been awarded more on trust, and prior experiences with the company.
Another consequence of this is that the bidding process for tenders itself becomes more defensive, where both parties try to write in defensive clauses and provide no more than necessary information, instead of relying on mutual trust. The final arbiter is some court somewhere, with a very weak understanding of infrastructure and more interest in seeing how exact legal guidelines were followed, rather than if the outcome was a societally beneficial outcome.
All of this drives cost increase in the long run (even though competitive bidding may in the very short run, result in some cheap contracts).
Shouldn’t public tender rules should encourage itemizations and product procurement, given that they are less ambiguous and thus less open to legal dispute?
If you are a public agency, and you have an alternative where you can have one tender where the company organizes everything, or you do 25 separate tenders, where each can result in a multi-year legal conflict, you will probably often go for the former.
Large infrastructure projects consist of many interrelated parts, and even if just a single part is out of schedule due to a poor contractor or year-long legal fight you can be in very big trouble.
If public rules, makes tenders for a public agency more regulated than a company buying a service from someone else (that unlike the public agency has freedom with whom they purchase a service from, for example based on being historically able to deliver), you will end up with governments outsourcing decision making to less constrained (private) actors.
The long-term outcome will also be that the government increasingly lacks the in-house capacity to make good decisions as well (as outlined in the post), making what Alon refers to as the globalized model more likely as well.
I think these broad processes at least explain some of the change we have seen in the Nordic countries.
Martin, +1, this dynamic you’re describing makes a lot of intuitive sense and jives with my observations of my own local infrastructure institutions.
There are plenty of ways for contractors to game itemization, too. They’ll put a lower unit price on items where the quantity is relatively certain (rails) and a higher unit price on items where the quantity is likely to change (excavation volume). That way, they can win the low bid but stand to make a lot of money on change orders.
The itemized costs are public, though – the materials are bought on competitive markets with known prices, and the labor costs are based on sectoral collective bargaining and are therefore public as well.
Excavation volume is also not too uncertain – it’s determined by the size of the station, which is decided in early planning. The bigger question marks concern what materials to use to build the tunnel – Fornebubanen was defensive in using waterproofing everywhere because of the designer risk issue I mentioned in the post, whereas it’s more typical to only grout when you need to as seen during construction. TBMs also break down a lot and extra labor time needs to be budgeted for that possibility – but again, most workers are unionized (and in Norway even the migrant workers are in construction) and the ones who aren’t are still covered by sectoral collective bargaining.
For what it’s worth, the difference between awarding a contract on technical merit and awarding it on a pure price basis is not part of the traditional vs. globalized system. The big contractors like the control they get with large fixed-price design-build contract but they don’t like pure price contracts and prefer the mixed approach (say, 50% cost and 50% technical for Citybanan), because then they get to compete on quality and not on price and they take pride in quality rather than in a race to the bottom. France as I understand it has expanded the use of technical scoring in the last 20 years even while otherwise taking a step back with how it procures Grand Paris Express, for a combo of ideological reasons (=belief in privatizing innovation, same as in Scandinavia) and project-specific ones (GPE is much larger than previous Parisian projects so the existing system was too understaffed to handle it, same thing Boston ran into with GLX except the scale in Paris is much larger).
I think what is needed to keep costs down is mutual trust, and the actors not trying to game each other. As long as that trust exists, I think itemizing everything is resonable, as it makes it possible for many and smaller actors to bid for the contract, and the large number of contracts in themselves are an opportunity for the two actors to build mutual trust.
An increasingly confrontational legally contended environment and little ability for the public agents to themselves award the contacts, break down that trust.
No matter if it is cost or technical merit, it can probably always be gamed, and I think the best outcome will be if the public agency has both the competency and agency to themselves be able to ward the most suitable contractor. Of course, all of this is partly conditioned on a high trust and low corruption environment, but possibly as long as the public agency and the contractor can work out beneficial relationships and have aligned incentives maybe it can also work in very different environments (e.g. China or perhaps southern Europe).
Technical merit is probably still good to have though, as it moves some agency to the transit organization, making them able to add their own judgment and evaluation (which is hard to do with cost, that is also hard to enforce at a later state).
I suspect the prime reason why agencies keep adopting the globalized model is because it reduces fixed costs. Public agency management is under immense pressure to reduce operating costs, which makes it difficult to justify keeping “redundant” boffins on board for a project that might some day get funding. One-off investments, however, are easier to get past treasurers.
The only way out is to set up investments as longer programmes to provide the financial and policy stability necessary to build agency capacity. This also enables the agency to build commitment to the projects, the lack of which is in my experience frequently a major cause of cost overruns due to indecision, infighting, mission creep, gold plating and unnecessary placating of special interests.
In Italy, the PPPs have the opposite effect – they raise operating costs since the concessionaire extracts a profit rate; the interest rate implied in the PPP contracts is high, around 8%, but at least it reduces the on-book Italian debt.
You’re probably right about fixed costs, but aversion to fixed costs is itself a symptom of MBA Brain Worms. You see it all the time in the private sector: firms “reduce fixed costs” by laying off staff or outsourcing some key process, then putting out a contract to have the same work done at lower quality for 120% of the original cost. Then everybody involved gets a promotion because theoretically those outsourced costs could be reduced somehow in the future by Magic.
I think part of this has to be bad accounting; they’re considering the costs of staff, plant, etc. as a liability but not properly valuing the assets of institutional knowledge and better control/reduced counterparty risk.
It’s a real shame to see public sector decision makers–who really ought to have a longer-term decision horizon and less thoroughly gamed reward functions–falling prey to the same fallacious thinking.
That is starting to change to be fair – https://www.theguardian.com/politics/2021/feb/07/rachel-reeves-labour-oversee-radical-insourcing-public-services – for example.
And some people involved have push for more sensible outsourcing – such as https://swardley.medium.com/from-hs2-to-china-and-back-again-6bce5764ea14 for example.
Well the first tunnel in project, before the Metro, in Denmark was Storebaelt…….. much has been written about that project but the main problems that were encountered were a result primarily of two issues. The first was that the geotechnical investigation struggled to identify how the ground was actually going to behave and the second was that the TBM’s delivered for the project were overly complicated and lacked the features that are routinely included on newer TBM’s…..given the impact that project had on the Insurance Market in Denmark its perhaps inevitable that much discussion was held to determine the procurement model to be used for the Metro…..
Not sure what you mean under the Traditional procurement model of “how to build”, its very rare that a client will issue a contract that tells a contractor how to build something, that’s what the contractor is employed to do. I would say its more “what to build” if its been fully designed.
As for design build itself its just a massive risk transfer exercise from clients to contractors, and as contractors get screwed over by clients, who put out crappy reference designs, piss poor and ambiguous performance criteria, and badly thought out projects and then cannot stop meddling during the design process, before saying “it was in the contract,” is it any wonder that prices for DB are increasing? DB should not be used for transit infrastructure, progressive DB or early contractor involvement maybe, or some form of collaborative working , but pure DB, get ready for the sticker shock.
And your comment about ground conditions changes your design, not if your using segments it doesn’t. If your not using segments and your in rock, advance grouting works but not for long term groundwater control. Leaving out waterproofing is the fastest way to reduce the service life of a tunnel if there is water in the ground and your installing the lining using cast in place concrete.
It seems like DB could be cheapest if only we could just give the designers good criteria upfront and let them figure it out.
The problem with DB is it requires trust. You have to give the contract to someone and then pay the costs. That is DB should be a contract to put in a train, with [list of places for stations, and actual requirements]. We pay actual costs including 0.1% profit margin, up to $X (a top fee) on completion, with allowed profit margin increasing by 0.1% for each Y million under budget. In addition to the above we will pay a $Z per day early completion bonus for each week completely early up to. For the next 60 years you will get $x per year, inflation adjusted to maintain the system in good working order, but you need (post a bond? I’m not sure what the right financial term here is) that the system will remain operational for this entire time.
The important part is to ensure the designer gets a lot of flexibility to decide details, and the contract doesn’t allow politicians or the courts to make changes, and the price gives a bonus for low costs (if your final cost is the maximum the profit margin is too low to take the work at all). Maintenance needs to be part of the contract though, otherwise bad quality will ruin the system. I want to make the primary risk the designers take on is if their design can’t run reliably for the next 60 years.
That is more or less the intent of DB, but in practice too many people want to get their fingers in and mess with things, and each round increases costs while reducing the ability of DB to use something that would reduce costs.
> the contract doesn’t allow … the courts to make changes
I think in practice this would be very, very difficult–you just can’t create a situation where an agreement between a government entity and a private party takes precedence over the rest of the legal system. (Supposing Gilroy, CA signed a contract with Tutor-Perini that said the latter would build a transit system using enslaved child labor, or something–obviously that could not be allowed to stand, the good intentions behind having an inviolable contract notwithstanding.) Or we could imagine a contract that was discovered to be awarded through self-dealing. Or what happens if you sign a 60-year design-build-maintain project in 1980, and then 10 years later the ADA passes and you’re required to make the transit system accessible. Etc.
But once the door is open for courts to review contracts, there’s always going to be uncertainty about the full scope of that power–and you’re back to the contracts having to include money as insurance against court-ordered changes.
The scope of what courts can change can be limited by legislation. The scope of what can be legislated is limited by the constitution.
If you design a station that doesn’t meet the ADA, then the courts should stop you – but you should already know that the ADA is required. Most cases though are just NIMBY, and those need to be dismissed by the courts without a hearing. (with respect to Robert Moses – he was right to have the power, legislation should remove him for using it in ways that don’t respect the neighborhood, but once the project is started it is too late)