Category: Construction Costs

The Other People’s Money Problem

I did a poll on Patreon about cost issues to write about. This is the winning option, with 12 votes; project- vs. budget-driven plans came second with 11 and I will blog about it soon, whereas neighborhood empowerment got 8.

OPM, or other people’s money, is a big impediment to cost reform. In this context, OPM refers to any external infusion of money, typically from a higher-level government from that controlling an agency. Any municipal or otherwise local agency, not able or willing to raise local taxes to fund itself, will look for external grants, for example in a federal budget. The situation then is that the federal grantor gives money but isn’t involved in the design of where the money goes to, leading to high costs.

OPM at ground level

Local and regional advocates love OPM. Whenever they want something, OPM lets them have it without thinking in terms of tradeoffs. Want a new piece of infrastructure, including everything the local community groups want, with labor-intensive methods that also pay the wages the unions hop for? OPM is for you.

This was a big problem for the Green Line Extension’s first iteration. Somerville made ridiculous demands for signature stations and even a bike path (“Somerville Community Path”) thrown in – and all of these weren’t jut extra scope but also especially expensive, since the funding came from elsewhere. The Community Path, a 3 km bike path, was budgeted at $100 million. The common refrain on this is “we don’t care, it’s federally funded.” Once there’s an outside infusion of money, there is no incentive to spend it prudently.

OPM modifying projects

In capital construction, OPM can furthermore lead to worse projects, designed to maximize OPM rather than benefits. Thus, not only are costs high, but also the results are deficient. In my experience talking to New Englanders, this takes the form of trying to vaguely connect to a politician’s set of petty priorities. If a politician wants something, the groups will try pitching a plan that is related to that something as a sales pitch. The system thus encourages advocates and local agencies to invest in buying politicians rather than in providing good service.

This kind of behavior can persist past the petty politician’s shelf life. To argue their cases, advocates sometimes claim that their pet project is a necessary component of the petty politician’s own priority. Then the petty politician leaves and is replaced by another, but by now, the two projects have been wedded in the public discourse, and woe betide any advocate or civil servant who suggests separating them. With a succession of petty politicians, each expressing interest in something else, an entire ecosystem of extras can develop, compromising design at every step while also raising costs.

The issue of efficiency

In the 1960s, the Toronto Transit Commission backed keeping a law requiring it to fund its operations out of fares. The reason was fear of surplus extraction: if it could receive subsidies, workers could use this as an excuse to demand higher wages and employment levels, and thus the subsidy would not go to more service. As it is, by 1971 this was untenable and the TTC started getting subsidies anyway, as rising market wages required it to keep up.

In New York, the outcome of the cycle of more subsidies and less efficiency is clearer. Kyle Kirschling’s thesis points out on PDF-p. 106 that New York City Transit’s predecessors, the IRT and BMT, had higher productivity measured in revenue car-km per employee in the 1930s than the subway has today. The system’s productivity fell from the late 1930s to 1980, and has risen since 1980 but (as of 2010) not yet to the 1930s peak. The city is one of a handful where subway trains have conductors; maintenance productivity is very low as well.

Instead of demanding efficiency, American transit advocates tend to demand even more OPM. Federal funding only goes to capital construction, not operations – but the people who run advocacy organizations today keep calling for federal funding to operations, indifferent to the impact OPM would have on any effort to increase efficiency and make organizations leaner. A well-meaning but harmful bill to break this dam has been proposed in the Senate; it should be withdrawn as soon as possible.

The difference between nudging and planning

I am soon going to go over this in more details, but, in brief, the disconnect between funding and oversight is not a universal feature of state funding of local priorities. In all unitary states we’ve investigated, there is state funding, and in Sweden it’s normal to mix state, county, and municipal funding. In that way, the US is not unique, despite its federal system (which at any case has far more federal involvement in transportation than Canada has).

Where the US is unique is that the Washington political establishment doesn’t really view itself as doing concrete planning. It instead opts for government by nudge. A federal agency makes some metrics, knowing that local and state bodies will game them, creating a competition for who can game the other side better. Active planning is shunned – the idea that the FTA should have engineers who can help design subways for New York is unthinkable. Federal plans for high-speed rail are created by hiring an external consultant to cobble together local demands rather than the publicly-driven top-down planning necessary for rail.

The same political advocates who want more money and care little for technical details also care little for oversight. They say “regulations are needed” or “we’ll come up with standards,” but never point to anything concrete: “money for bus shelter,” “money for subway accessibility,” “money for subway automation,” etc. Instead, in this mentality the role of federal funding is to be an open tab, in which every leakage and every abnormal cost is justified because it employed inherently-moral $80,000/year tradesmen or build something that organized groups of third-generation homeowners in an expensive city want. The politics is the project.

We Ran a Conference About Rail Modernization (Again)

Modernizing Rail 2021 just happened. Here’s a recording of the Q&A portion (i.e. most) of the keynote, uploaded to YouTube.

As more people send in materials, I’ll upload more. For now, here are the slides I’ve gotten:

A bunch of us tweeted the talks using the hashtag #ModernRail2021, including some that were not recorded.

Do Costs Run Over or Are They Underestimated?

The literature on cost overruns for infrastructure projects is rich, much more so than that for absolute costs. The best-known name in this literature is Bent Flyvbjerg, who in the early 2000s collated a number of datasets from the 1980s and 90s to produce a large enough N for analysis, demonstrating consistent, large cost overruns, especially for urban rail. Subsequently, he’s written papers on the topic, focusing on underestimation and on how agencies can prospectively estimate costs better and give accurate numbers to the public for approval. This parallels an internal trend in the US, where Don Pickrell identified cost overruns in 1990 already, using 1980s data; Pickrell’s dataset was among those analyzed by Flyvbjerg, and subsequent to Pickrell’s paper, American cost overruns decreased to an average of zero for light rail lines.

But a fundamental question remains: are cost overruns really a matter of underestimation, or a true overrun? In other words, if a project, say Grand Paris Express, is estimated to cost 22.6 billion € in 2012 (p. 7) and is up to 35.6 billion € today (p. 13), does it mean the cost was 35.6b€ all along and the 2012 analysis just failed to estimate it right? Or dos it mean the cost was 22.6b€ then, and then the budget ran over due to failures of planning that could have been avoided?

Transit agencies that just want to avoid the embarrassment of media headlines saying “they said it costs X but it costs 2X” care mostly about underestimation. This is also true of both generic project managers and political appointees, two groups that do not care about the details of how to build a subway, and think of everything in abstract terms in which a subway might as well be a box of shampoo bottles.

However, the concrete examples that I have seen or heard of for cost overruns look like overruns rather than underestimation. That is, those projects could have been done at the original cost, but planning mistakes drove the budget up, or otherwise created conditions that would enable other forces to drive the budget up.

The Netherlands: early commitment

Bert van Wee is among the world’s top researchers on cost overruns, even if he’s less well-known to the public than Flyvbjerg. He spoke to me about the problems of early commitment in Dutch planning, in which politicians commit to a project before design is finalized. Once the political decision has been made, it is easy for actors to extract surplus, because the state or city cannot walk away easily, while a 20% cost overrun is much easier to explain to the public. This problem plagued 2000s investments like HSL Zuid. To deter this, after 2009 the Netherlands passed reforms that attempt to tackle this problem, aiming to defer the formal political decision to later in the process.

This factor seems to correlate with absolute costs, if not with overruns. American planning is extremely politicized; Canadian planning is fairly politicized too, with individual subway projects identifiable as the brainchildren of specific politicians or parties; Southern European and Nordic planning is highly bureaucratized, with design driven by the civil service and politicians making yes or no decisions late in the process.

Sweden: changes in rules

According to a senior planner at Nya Tunnelbanan, the project has run over from 22.506 billion kronor in 2013 to 31.813 today, both in 2016 price levels; in US dollars, this is $2.551b/19.6 km to $3.606b/19.6 km, all underground. The reasons for the escalation come largely from tighter regulations as well as litigation:

  • Safety requirements have been tightened midway through the project, requiring a service tunnel in addition to the two track tunnels, raising excavation volume almost 50%
  • An environmental court ruling slowed down excavation further
  • Consensus with stakeholders took longer than expected
  • Excavated rock was reclassified midway through the project from useful building material to waste that must be disposed of

Focusing on underestimation is not really germane to what’s happened in Stockholm. The problem isn’t that early 2010s engineers failed to anticipate regulations that were not in force at the time. It’s that regulations were changed later. The rock removal process today actually increases greenhouse gas emissions, just because of the need to freight it away, let alone the systemwide effects on climate of making it harder to build subways.

California: scope creep and change orders

California High-Speed Rail is such a big project that its cost overruns, in multiple stages, were amply discussed in the media. The original announcements in the early 2010s, for example here, were largely about scope creep. At-grade segments turned into viaducts; above-ground segments, particularly in the Bay Area, were turned into tunnels. The reasons were mostly about agency turf battles.

Only in one case was the problem more about underestimation than overrun: the Central Valley segment had originally been planned to follow railroad rights-of-way, but had to be redesigned to have more viaducts and swerve around unserved small towns. This was bad planning, at two points: first, the original designs assumed trains could go at 350 km/h through unserved towns, which they don’t anywhere; and second, once the redesign happened, it was so rushed that land acquisition was time-consuming and acrimonious. Even then, much of the overdesign as identified by a Deutsche Bahn postmortem could have been prevented.

The second stage is more recent: the Central Valley construction contracts have long busted their budgets due to change orders. Change orders are a common problem in California, and in this case, it involved not only the change order king Tutor-Perini, but also the usually reasonable Dragados. The situation here must be ascribed to overrun rather than underestimation: a transparent process for handling changes, based on itemized costs, is an emerging best practice, known since the early 2000s to people who cared to know, and more recently seen in the economics literature for general infrastructure. That California failed to follow this practice – which, again, was available already in the late 2000s – is the source of malpractice. The original bids could have held if the process were better.

Absolute costs and cost overruns

Cost overruns are not the same as absolute costs. They are not even obviously correlated: witness the way the US eliminated most overruns on surface light rail projects in the 1990s and 2000s, to the point that projects with large overruns like the Green Line Extension are exceptional, while absolute costs have skyrocketed. But if we understand the problem to be about cost overruns from an ambitious but achievable budget rather than about underestimating a final cost that could not be improved on, then the study of the two topics is inherently intertwined.

Problems that recur in postmortems of cost overruns are not just about estimation. They’re about building better and cheaper. A bureaucratized planning process in which politicians retain the right to make yes-or-no decisions on complete design reduces cost overruns by reducing leakage and surplus extraction; the overruns such a process prevents are preventable extra costs, rather than higher initial estimates. The same is true of avoiding overbuilding, of not introducing extraneous regulations, of treating environmental questions as systemic and quantitative rather than as local under a do-no-harm principle. Even the question of change orders is more transparently about reducing absolute costs in the literature, since the overruns prevented tend to be seen in higher risk to the contractor leading to higher profit margin demands.

The upshot is that this makes the study of absolute costs easier, because we can reuse some of the literature for the related problem of cost overruns. But conceptually, it means that agencies need to be more proactive and treat early budgets as standards to be adhered to, rather than just blow up the budgets preemptively so that it’s easier to stick to them.

Quick Note: Do Costs Ever Go Down?

Bad agencies have a ratchet process in costs: they can go up, but not down. If there’s a cost saving, it does not reduce the budget, but only cancels out with unspecified cost increases. Agency heads and politicians trumpet their value engineering while costs never go down, leading to premium-cost, substandard quality projects.

Case in point: the Baltimore and Potomac Tunnel replacement project. The project used to be $750 million, in the 2000s, as a two-track passenger rail tunnel. Over the next decade, this turned into a four-track system with mechanical ventilation for diesel freight trains and enough clearance for double-stacked freight; costs ran over to $4 billion. Well, two months ago Amtrak announced a scope reduction back to two tracks, which it claims would save a billion dollars, cutting cost to… $4 billion.

This is not the first time this happens. Value engineering in California has had the same effect: every attempt to reduce scope – the blended plan for Northern California, plus various design compromises in both the Bay Area and the Central Valley – has failed to reduce costs. At most, they’ve prevented further cost overruns.

And in New York, the removal of the cavern underneath Penn Station in the planning process between the canceled ARC tunnel and the Gateway tunnel did not reduce costs at all. The cost estimate was $10 billion, much of which was the cavern; the cost estimate now is $10 billion for the bare tunnel with less scope than before. ARC was canceled on the grounds of potential cost overruns, and yet as soon as it took over the project, even while descoping the cavern, Amtrak presided over further increases in costs due to extras (Penn South, etc.).

It’s as if once there’s a number circulating out there, it will be spent, no matter what. If there’s a surplus, it will be blown on unspecified extras or on sheer inefficiency. Why spend $3 billion when the political system has already indicated that $4 billion is okay? Thus, 4-1 = 4, and, no doubt, if further value engineering is identified, the cost will stay $4 billion.

At no point does anyone say, okay, if there’s a cost saving, here’s the next slate of projects that the money can be spent on. Nor is there any proactive value engineering. Costs are only a problem insofar as they prevent the political system from saying yes, but even then, if there’s a number out there, even an outlandish one that nobody will say yes to (such as $117 billion for medium-speed rail on the Northeast Corridor), then it is the number. Any cuts from that are against inherently moral workers, communities, etc., in the service of inherently immoral outsiders and experts.

The Leakage Problem

I’ve spent more than ten years talking about the cost of construction of physical infrastructure, starting with subways and then branching on to other things, most.

And yet there’s a problem of comparable size when discussing infrastructure waste, which, lacking any better term for it, I am going to call leakage. The definition of leakage is any project that is bundled into an infrastructure package that is not useful to the project under discussion and is not costed together with it. A package, in turn, is any program that considers multiple projects together, such as a stimulus bill, a regular transport investment budget, or a referendum. The motivation for the term leakage is that money deeded to megaprojects leaks to unrelated or semi-related priorities. This often occurs for political reasons but apolitical examples exist as well.

Before going over some examples, I want to clarify that the distinction between leakage and high costs is not ironclad. Sometimes, high costs come from bundled projects that are costed together with the project at hand; in the US they’re called betterments, for example the $100 million 3 km bike lane called the Somerville Community Path for the first, aborted iteration of the Green Line Extension in Boston. This blur is endemic to general improvement projects, such as rail electrification, and also to Northeast Corridor high-speed rail plans, but elsewhere, the distinction is clearer.

Finally, while normally I focus on construction costs for public transport, leakage is a big problem in the United States for highway investment, for political reasons. As I will explain below, I believe that nearly all highway investment in the US is waste thanks to leakage, even ignoring the elevated costs of urban road tunnels.

State of good repair

A month ago, I uploaded a video about the state of good repair grift in the United States. The grift is that SOGR is maintenance spending funded out of other people’s money – namely, a multiyear capital budget – and therefore the agency can spend it with little public oversight. The construction of an expansion may be overly expensive, but at the end of the day, the line opens and the public can verify that it works, even for a legendarily delayed project like Second Avenue Subway, the Berlin-Brandenburg Airport, or the soon-to-open Tel Aviv Subway. It’s a crude mechanism, since the public can’t verify safety or efficiency, but it’s impossible to fake: if nothing opens, it embarrasses all involved publicly, as is the case for California High-Speed Rail. No such mechanism exists for maintenance, and therefore, incompetent agencies have free reins to spend money with nothing to show for it. I recently gave an example of unusually high track renewal costs in Connecticut.

The connection with leakage is that capital plans include renewal and long-term repairs and not just expansion. Thus, SOGR is leakage, and when its costs go out of control, they displace funding that could be used for expansion. The NEC Commission proposal for high-speed rail on the Northeast Corridor calls for a budget of $117 billion in 2020 dollars, but there is extensive leakage to SOGR in the New York area, especially the aforementioned Connecticut plan, and thus for such a high budget the target average speed is about 140 km/h, in line with the upgraded legacy trains that high-speed lines in Europe replace.

Regionally, too, the monetary bonfire that is SOGR sucks the oxygen out of the room. The vast majority of the funds for MTA capital plans in New York is either normal replacement or SOGR, a neverending program whose backlog never shrinks despite billions of dollars in annual funding. The MTA wants to spend $50 billion in the next 5 years on capital improvements; visible expansion, such as Second Avenue Subway phase 2, moving block signaling on more lines, and wheelchair accessibility upgrades at a few stations, consists of only a few billion dollars of this package.

This is not purely an American issue. Germany’s federal plan for transport investment calls for 269.6 billion euros in project capital funding from 2016 to 2030, including a small proportion for projects planned now to be completed after 2031; as detailed on page 14, about half of the funds for both road and rail are to go to maintenance and renewal and only 40% to expansion. But 40% for expansion is still substantially less leakage than seen in American plans like that for New York.

Betterments and other irrelevant projects

Betterments straddle the boundary between high costs and leakage. They can be bundled with the cost of a project, as is the case for the Somerville Community Path for original GLX (but not the current version, from which it was dropped). Or they can be costed separately. The ideal project breakdown will have an explicit itemization letting us tell how much money leaked to betterments; for example, for the first Nice tramway line, the answer is about 30%, going to streetscaping and other such improvements.

Betterments fall into several categories. Some are pure NIMBYism – a selfish community demands something as a precondition of not publicly opposing the project, and the state caves instead of fighting back. In Israel, Haifa demanded that the state pay for trenching portions of the railroad through the southern part of the city as part of the national rail electrification project, making specious claims about the at-grade railway separating the city from the beach and even saying that high-voltage electrification causes cancer. In Toronto, the electrification project for the RER ran into a similar problem: while rail electrification reduces noise emissions, some suburbs still demanded noise walls, and the province caved to the tune of $1 billion.

Such extortion is surplus extraction – Israel and Toronto are both late to electrification, and thus those projects have very high benefit ratios over base costs, encouraging squeaky wheel behavior, raising costs to match benefits. Keeping the surplus with the state is crucial for enabling further expansion, and requires a combination of the political courage to say no and mechanisms to defer commitment until design is more advanced, in order to disempower local communities and empower planners.

Other betterments have a logical reason to be there, such as the streetscape and drainage improvements for the Nice tramway, or to some extent the Somerville Community Path. The problem with them is that chaining them to a megaproject funded by other people’s money means that they have no sense of cost control. A municipality that has to build a bike path out of its own money will never spend $100 million on 3 km; and yet that was the projected cost in Somerville, where the budget was treated as acceptable because it was second-order by broader GLX standards.

Bad expansion projects

Sometimes, infrastructure packages include bad with good projects. The bad projects are then leakage. This is usually the politically hardest nut to crack, because usually this happens in an environment of explicit political negotiation between actors each wanting something for their own narrow interest.

For example, this can be a regional negotiation between urban and non-urban interests. The urban interests want a high-value urban rail line; the rest want a low-value investment, which could be some low-ridership regional rail or a road project. Germany’s underinvestment in high-speed rail essentially comes from this kind of leakage: people who have a non-urban identity or who feel that people with such identity are inherently more morally deserving of subsidy than Berlin or Munich oppose an intercity high-speed rail network, feeling that trains averaging 120-150 km/h are good enough on specious polycentricity grounds. Such negotiation can even turn violent – the Gilets Jaunes riots were mostly white supremacist, but they were white supremacists with a strong anti-urban identity who felt like the diesel taxes were too urban-focused.

In some cases, like that of a riot, there is an easy solution, but when it goes to referendum, it is harder. Southern California in particular has an extreme problem of leakage in referendums, with no short- or medium-term solution but to fund some bad with the good. California’s New Right passed Prop 13, which among other things requires a 2/3 supermajority for tax hikes. To get around it, the state has to promise somthing explicit to every interest group. This is especially acute in Southern California, where “we’re liberal Democrats, we’re doing this” messaging can get 50-60% but not 67% as in the more left-wing San Francisco area and therefore regional ballot measures for increasing sales taxes for transit have to make explicit promises.

The explicit promises for weak projects, which can be low-ridership suburban light rail extensions, bond money for bus operations, road expansion, or road maintenance, damage the system twice. First, they’re weak on a pure benefit-cost ratio. And second, they commit the county too early to specific projects. Early commitment leads to cost overruns, as the ability of nefarious actors (not just communities but also contractors, political power brokers, planners, etc.) to demand extra scope is high, and the prior political commitment makes it too embarrassing to walk away from an overly bloated project. For an example of early commitment (though not of leakage), witness California High-Speed Rail: even now the state pretends it is not canceling the project, and is trying to pitch it as Bakersfield-Merced high-speed rail instead, to avoid the embarrassment.

The issue of roads

I focus on what I am interested in, which is public transport, but the leakage problem is also extensive for roads. In the United States, road money is disbursed to the tune of several tens of billions of dollars per year in the regular process, even without any stimulus funding. It’s such an important part of the mythos of public works that it has to be spread evenly across the states, so that politicians from a bygone era of non-ideological pork money can say they’ve brought in spending to their local districts. I believe there’s even a rule requiring at least 92% of the fuel tax money generated in each state to be spent within the state.

The result is that road money is wasted on low-growth regions. From my perspective, all road money is bad. But let’s put ourselves for a moment in the mindset of a Texan or Bavarian booster: roads are good, climate change is exaggerated, deficits are immoral (German version) or taxes are (Texan version), the measure of a nation’s wealth is how big its SUVs are. In this mindset, road money should be spent prudently in high-growth regions, like the metropolitan areas of the American Sunbelt or the biggest German cities. It definitely should not be spent in declining regions like the Rust Belt, where due to continued road investment and population decline, there is no longer traffic congestion.

And yet, road money is spent in those no-congestion regions. Politicians get to brag about saving a few seconds’ worth of congestion with three-figure million dollar interchanges and bypasses in small Rust Belt towns, complete with political rhetoric about the moral superiority of regions whose best days lay a hundred years ago to regions whose best days lie ahead.

Leakage and consensus

It is easy to get trapped in a consensus in which every region and every interest group gets something. This makes leakage easier: an infrastructure package will then have something for everyone, regardless of any benefit-cost analysis. Once the budget rather than the outcome becomes the main selling point, black holes like SOGR are easy to include.

It’s critical to resist this trend and fight to oppose leakage. Expansion should go to expansion, where investment is needed, and not where it isn’t. Failure to do so leads to hundreds of billions in investment money most of which is wasted independently for the construction cost problem.

Quick Note: PPP Adjustments

All construction cost figures that I sign my name to adjust currencies for purchasing power parity, or PPP. In other words, I convert currencies across countries in PPP terms, not exchange rate terms. This is not how everyone else does this; the World Bank analysis of global high-speed rail costs converts currencies by exchange rate, and, since the yuan is undervalued, concludes Chinese construction costs are below world average, whereas in fact they are above average.

Why PPP?

Because nearly all of the costs of the construction of infrastructure are local. Labor is almost entirely local, and materials are as well, since concrete is made locally rather than imported. Foreign expertise and machinery are internationally traded; in those cases, currency devaluations can lead to cost overruns, but the proportion of the cost that is traded remains low.

India: an indigenization plan from the 2000s was quoted as reducing costs by 10-15%. The rupee’s exchange rate value is lower than its PPP value by a factor of about 3.3; indigenization reducing costs by 10-15% is compatible with around 20% of the total value of the original contract being imported.

Philippines: I spoke with a DOTR planner, who said that 90% of the value of civil works is local, and only 10% is imported, such as foreign expertise and imported material; the planner said that rolling stock is imported, but our construction cost estimates exclude rolling stock when possible.

Why not wages?

Because while the bulk of costs are domestic, they are not labor in developing countries. In Turkey, which is not much poorer than Southern Europe, costs split as 20% labor (US: 55%), 40% permanent materials, 10% construction materials, 30% construction equipment. The 80% non-labor costs are mostly domestically-produced, at local wages, but also at local productivity. If Turkey could produce everything at the same productivity as a richer country, it would just be a richer country. This goes even more so for actually poor countries like India and the Philippines.

The impact of PPP

With PPP adjustment, GDP per capita ceases to be a significant correlate of construction cost per km, except through the tendency of poor countries to build more elevated and fewer subway lines. This was not the original intention of the adjustment, which was to smooth dollar-euro difference, but it’s suggestive that it’s correct and meaningful.

Hire In-House, Don’t Use Consultants

I recently found two presentations, one from 2017, the other from earlier this week, both underscoring the importance of in-house expertise for efficient construction. This is layered on top of interviews Eric and I did for our Boston case study and a few additional interviews I did in other American and European cities. It is my professional opinion that agencies that engage in major capital projects, even if they involve rolling stock acquisition rather than the construction of new lines, ought to hire in-house, and make sure to have long-term capital programs.

The presentations

Both presentations concern rolling stock. The one from 2017 is by Stadler, regarding the challenges of the American market. On slide 32, it mentions that Caltrain was a demanding customer, with all expertise outsourced and yet managers engaging in micromanagement. The micromanagement is in line with what we’ve heard from contractors for other capital expansions, like Second Avenue Subway, especially contractors with experience in both the US, where this practice is common, and Europe, where it isn’t.

Thanks to the factors mentioned by Stadler as well as the Buy America requirement to set up a new factory with a new supply chain for a midsize order, the cost is $551 million/96 cars, or $5.74 million/car; the typical cost of a KISS is 300 million €/90 cars, and the €:$ ratio is not 1.72, far from it.

The other presentation, from this week, concerns the MBTA’s slow approach to electrifying its commuter rail network. It wishes to begin with a pilot on the already-electrified Providence Line, but is running against the problem of having no in-house expertise, just as Caltrain does not. The presentation on this says, on slide 3, that it takes 6-9 months to onboard consultants, and another 6-9 to develop performance requirements for a kind of vehicle that is completely standard in high-performance regional rail networks in Europe.

Instead of hiring experienced professionals (who must come from Europe or East Asia and not the US), the MBTA plans to piggyback on either the overpriced Caltrain order, or an obsolete-technology order by New Jersey Transit. The Caltrain order, moreover, is stretched for the generous loading gauge of the Western US, but does not fit the catenary height on the East Coast, even though European KISSes would easily and are around 13 cm lower than existing MBTA rolling stock.

Prior Northeastern examples

This combination of political and managerial micromanagement with outsourcing of technical expertise to consultants is common enough in the United States. In the Boston report on the Green Line Extension, we were told by multiple sources that the MBTA only has 5-6 engineers doing design review. Thus, they have the capacity to handle small projects but not large ones.

Small-scale projects like building a new infill station or taking an existing low-platform commuter rail station and converting it to an accessible high-platform one usually have limited cost premium: in Berlin, infill stations are 10 million € outside the Ring, whereas in Boston, infill stations and high-platforming projects (which are very similar in scope) are around $20-25 million – and Boston platforms are longer. This is also the case in Philadelphia, where headline costs are lower because the stations are smaller, but overall the unit costs are comparable to those of Boston.

But large projects are beyond the ability of a 6-person team. The required permanent staffing level is likely in the teens for a team whose job is just to score design and construction contracts. This choked the original Green Line Extension, leading to bottlenecks in design and contributing to the project’s extreme cost. The restarted version is still extremely expensive – it’s getting some good press this week for running slightly under a $2.3 billion/6.3 km budget, but said budget, $360 million/km, is well above the international norm for a subway, let alone trenched light rail. The current project has sunk costs from the previous ones, and a combination of in-house and consultant design about whose efficacy we’ve heard conflicting reports, but the team is much larger now.

In areas that don’t even have the skeletal design review staff of Boston, costs are high even for small projects. Connecticut deserves especial demerit: its department of transportation relies exclusively on consultants for rail design (perhaps also road design but I do not know), and infill stations cost not $20-25 million but $50+ million. The Hartford Line, compromised from the start, even displays this state-by-state difference: the one Massachusetts project, a single high platform in Springfield, cost $10 million/100 meters, a fraction of comparable projects in Connecticut. Larger Connecticut stations, such as those for Metro-North, have seen extreme scope creep, amounting to a $106 million total cost.

Consultants and design

American agencies speak of design-bid-build contracts, in which design and construction are separate, and design-build ones, where they are combined into a single contract. Design-bid-build is superior. But really, contracts in low-cost countries are often neither of those, but just build contracts, with design done mostly in-house. A procurement official in Stockholm explained to me that Swedish contracts tend to be build contracts; design-bid-build can sometimes be used with supplemental consultants helping with design, but it’s not the norm. Moreover, in Oslo, the use of design consultants instead of in-house design has not been good: consultants tend to engage in defensive design because of how Norway structures risk allocation, leading to overbuilding.

In Spain and (I believe) Italy, contracts are design-bid-build. But there’s so much in-house involvement in design that it’s more accurate to call these build contracts. The in-house design teams are not huge but they’re enough to work with private design firms and score proposals for technical merit. In Istanbul, the system is somewhat different: preliminary design at the 60% level is contracted out separately from the combination of final design and construction, which may possibly be called des-bid-ign-build, but the design part is extensively scored on technical merit, at 60-80% of the total weight. The construction contracts in Istanbul are lowest-bid, but contractors can be disqualified, and since Turkey has so much infrastructure construction, contractors know that they need to behave well to get future work.

Unfortunately, American consultants believe the opposite: they believe in the superiority of design-build and are not even aware of pure build, only design-bid-build. Sources from that world that I generally think highly of have told me that directly. But that is because the sort of projects that they are most likely to be involved in are ones that use consultants, which definitionally are not build contracts. The ongoing expansion projects in Stockholm, Madrid, Barcelona, Milan, Rome, and Berlin have no use for international consultants, so international consultants are not familiar with them, and end up knowing only about high-cost examples like London or the occasional medium-cost one like Paris. In effect, to rely on consultants is to ascertain one largely learns worst industry practices, not best ones.

Hire in-house

The alternative to paying consultants is to obtain public-sector expertise. Agencies are obligated to hire sufficient-size teams, and pay them competitively. Engineers in Italy and Spain have a lot of social prestige, much as in France and Germany; even in medium- rather than low-cost countries in Europe, like France, we were told by UITP planners that the people planning metro systems are hired from the engineering elite (in France, this would be Grandes Ecoles graduates), and paid appropriately.

In the US, there is no such prestige. Humanities professors speak of STEM privilege routinely, but by Continental and East Asian standards, the US and UK have no STEM privilege: the elites are generalist and are not expected to know the specific industrial fields they oversee. The public sector thus treats the planner and the engineer as a servant to the political appointee. Senior management routinely ignores the advice of younger planners who are more familiar with present-day research.

The pay, too, is deficient. In absolute numbers, planners at American transit agencies get paid better than their European counterparts – but American white-collar wages are generally higher than European ones. The MBTA pays project managers $106,000 a year as of a few years ago, which is a nice wage, but the Boston private sector pays $140,000 in transportation and more in other fields. The public sector, through budget-cutting officials, sends a clear price signal: we do not want you to work for us.

There is another way, but it requires letting go of the idea that private consultants are better than long-term in-house experts. It is obligatory to hire in-house at competitive wages to grow the design review teams, and listen to them when they say something is desirable, difficult, or impossible. Instead of onboarding consultants, agencies should immediately staff up in-house with plans for long-term investments. Moreover, senior management should back the planners and engineers when they engage in value engineering, even if it annoys politicians and local activists. The role of elected politicians is to review those in-house plans and decide whether there is room in the budget for the megaprojects they recommend, and not to micromanage. This way, and only this way, can the United States shrink its procurement costs to typical Continental European levels.

High-Speed Rail Costs and Presentation

We have a database of high-speed rail construction costs up.

Separately, because of Noah Smith’s opinions about high-speed rail, today there is going to be an event featuring me and him in which we are going to discuss the issue in an American context, alongside a presentation of the database and what lessons can be drawn from it. You can register here; it’s at 13:00 Eastern US Time, or 19:00 Berlin time.

A few notes regarding our database, because I’m being asked on Twitter, and also because it’s relevant for our research:

This is a well-studied topic

Literature on comparative HSR costs already exists, and some of our internal cost references are to studies on the subject. This is not like subway costs, where the biggest databases I know of prior to ours are a Flyvbjerg paper and a Spanish analysis each with a number of items in the teens. This should not in a way be surprising: the costs and impact of megaprojects are analyzed more than those of smaller projects, and subways are megaprojects of greater size than surface transit or street reconstruction but HSR is of yet greater size. Thus, subways are significant enough that we have been able to find largely complete costs from trade and mass media and government reports, which task is far harder for bus lanes or bike lanes, whereas with HSR, not only is it possible to find complete costs, but also there is extensive public debate and analysis.

I believe our contribution to the discussion, then, is not the database itself, but two new points:

  • Contrary to the World Bank report on the subject (see here, starting printed page 39), China does not build HSR especially cheaply. Our findings are not too different from the World Bank’s for lines built up to the publication of the report measured in yuan per km, but we adjust for PPP and therefore the cost in dollars per km is higher, and, moreover, the more recent lines appear to be more expensive. In fact, Chinese costs are higher than European ones. The reason is that China builds its HSR almost entirely on viaduct, whereas in Europe, viaducts are rare, and segments that are not in tunnel are built at-grade or on earthworks.
  • There is positive correlation between a country’s HSR costs per km, net of tunnels, and its subway construction costs. This is not perfect correlation, but one can see Britain, the Netherlands, and Taiwan perform poorly in both areas. France and Germany are in the middle. Spain is very cheap. The exceptions are notable: Italy has cheap subways and expensive HSR, which Paolo Beria, author of one of our source papers, attributes to overbuilding and overdesign, with extensive tunnels and freight-friendly grades.

We only include under-construction or open lines

This contrasts with lines that are only in early design and may not yet have a cost – for example, Frankfurt-Mannheim will only publish its cost estimate next year, in a parliamentary budget setting in order to decide whether to proceed (for which the answer is certainly yes, as the benefits to the network are intensive). This also contrasts with canceled and indefinitely postponed lines, such as California High-Speed Rail and the Portuguese lines killed during the Great Recession’s austerity. Canceled lines are upward-biased: the state is likelier to cancel or choose not to build a line if it is more expensive than the average, as we can readily see with California, and therefore we do not wish to compare built with unbuilt lines.

The above analysis is equally true of our subway construction costs database – if a line is canceled, it is purged, even if design or even physical construction began. Gateway for example is under active design and engineering and is therefore included, even if they are still seeking funding, but if it is canceled it will be purged (but if it is rebooted, as I hope, then the sunk cost will be included, as with the Green Line Extension in Boston).

The difference is that our HSR cost database is more historic. It is close to complete for France, Germany, Italy, Spain, Belgium, and Korea, and complete for single-line Taiwan and the Netherlands and for the UK. This is because it’s just easier to find historic data for HSR than for subways, where I wish I could get a complete historic series for big cities with big systems like Paris, Madrid, and Berlin, but can’t even find 1970s-80s costs for any of them. Conversely, ongoing projects make it surprisingly difficult at times to find tunnel and viaduct percentages, and the escape path of going on Google Earth and OpenStreetMaps and measuring is not available.

What is included?

As far as possible, costs are for civil infrastructure, systems, stations, and overheads, but not rolling stock or financing charges. Austria’s Koralmbahn has two sets of numbers, differing by a factor of 2, with one source claiming that it is about whether financing is included. It is my belief that, owing to the high profitability of HSR if cost of capital is ignored, it is best to think in terms of returns on investment and not try to incorporate debt or finance charges into the actual cost.

The importance of avoiding viaducts and tunnels

The Asian tendency to build on viaduct where the line is not in tunnel leads to high costs. Likewise, the use of shallow grades and low superelevation for mixed lines or even for some dedicated lines (the Shinkansen, without any track sharing, hews to 1.5% grads) raises construction costs.

Netting out tunnels is still useful when trying to figure out itemized costs and cost control that is not about what to build, for example about labor or procurement. It is also useful when comparing lines in the mountainous terrain of Austria, Japan, Korea, and Switzerland to the easier North European Plain. But at some point, it is necessary to treat the tunnel percentage as endogenous to the planning system. The viaduct percentage, moreover, is absolutely endogenous.

France in this context does well by keeping lines at grade as much as possible. The only country with less tunneling than France is Morocco, which builds its urban and high-speed trains as if it were France, and, thanks to France’s extensive presence in the Maghreb, French contractors are intimately familiar with the local situation and build cheaply. France and Germany have similar unit costs, but Germany tunnels a lot more, less because of the terrain and more because of either politics (that is, the Erfurt detour for Berlin-Munich, forcing the line to go through thicker mountains) or a misguided attempt at building mixed lines in the 1980s and 90s.

The United States’ high projected budgets for proposed lines that never go anywhere thanks to their extreme costs come from overbuilding more than high unit prices. For example, in Baltimore, a two-track tunnel project designed for exclusive electric passenger train usage turned into a four-track tunnel with enough room for double-stacked freight with mechanical ventilation for diesel locomotives. The scope creep raised the projected budget from $750 million in the late 2000s to $4 billion in the mid-2010s.

Australian Construction Costs

There’s a report just released by the Grattan Institute called Megabang for Megabucks, talking about high construction costs in Australia. Our transit costs project is quoted as an international comparison, pointing out that Australia is near the global high end. I encourage people to read the report itself, which says interesting things about problems with Australian construction and procurement. I am especially happy to see that the recommendations for the most part accord with what we are learning from other cases – of course, our Boston case is out and the report authors have likely read it, but the recommendations are in line with things we see from yet-unpublished cases, so this is not just me looking at a mirror.

The issue of competition

Australian megaproject contracts have insufficient competition. Only three firms are Tier One, the largest infrastructure contractors in Australia; those get most contracts for the largest infrastructure projects, and when mid-tier firms bid, it’s often in partnership with a Tier One company. Moreover, in the largest size category, higher than $1 billion, even the Tier One firms often partner with one another, leading to monopoly.

International firms do access the Australian market, but it is inconsistent. Australia overweights the importance of local experience, and has some unusual rules, such as requiring firms to engage in more prior design than is typical.

This is consistent with what I’ve seen in Israel. In short, the electrification contract in Israel was won by Spanish contractor SEMI, which had extensive European experience but none in Israel. This was criticized domestically, and some people blamed it for the schedule slips on the electrification project, but such blame is unfair. The bulk of the delays are not the fault of SEMI but come from a lawsuit launched by Alstom, which competed for the contract and lost out on price; Alston employed industrial espionage to create FUD about the bid, and the lawsuit delayed works by three years. Despite this, the costs have not run over much, and the absolute per-km costs remain on the low side, net of extras like Haifa’s demand for a trench. Thus, even in a situation of extensive domestic complaints about the winning bidder’s lack of local experience, said lack did not materially create problems.

This is also consistent with lessons from Turkey. In Turkey, there must be a minimum of three bidders. If there are only one or two, the state or municipal government must rebid. Absolute costs in Turkey are low and so are cost overruns; the extensive competition helps discipline the contractors, as does the political consensus in favor of rapid infrastructure construction, credibly promising firms that there will be more work in the future and if they behave they will get some of it.

Procurement

The study discusses different contracting regimes. It does not talk about the design-build issue; I do not know whether it is as prevalent in Australia as in Canada, and regrettably there is no cost history, thus no way for me to confirm my suspicion that Australia resembles Canada and Singapore in only having had a cost explosion in the last 20 years. However, it does talk about change orders.

Change orders are a notable problem in California. Low bids followed by renegotiation are common there; Tutor Perini is notorious for this behavior. The study goes over strategies to deal with this issue, though it does not talk explicitly about itemization as in Spain and Italy, where the unit prices are public and then if more is needed (e.g. more labor due to slower progress) then the change is already pre-agreed, avoiding litigation. Sweden avoids litigation as well.

Finally, the study talks about rushing. This was an issue in Boston, so this may be me learning from a mirror, but, in brief, American funding for infrastructure encourages agencies to rush the preliminary design to apply for federal funding early. This leads to compromised designs and premature commitment, since there is no ongoing funding for long-term design.

Learning from good examples

I think the one drawback of the study is the list of comparisons. Sourced partly to us and partly to Read-Efron, they say,

The empirical evidence is incomplete, but what there is shows that rail construction costs in Australia are in the top quarter of 27 OECD countries studied. They are higher than in numerous other rich countries: 26 per cent higher than in Canada, 29 per cent higher than in Japan, and more than three times as high as in Spain (Figure 1.2 on the following page). And road and rail tunnels cost more in Australia than elsewhere in the world, according to an international study.

The comparison with Canada has a problem: the Canadian costs in our database go back 15-20 years, and back then, costs were much lower than today. The latest costs do not show an Australian premium over Canada – Toronto is more expensive to build in than Sydney and almost as much as Melbourne. It is critical to understand that high costs are really a pan-Anglosphere phenomenon, and thus Australia should learn from Continental European and East Asian examples (except very high-cost Hong Kong), and not from countries that in the last 10 years have had the same problems as Australia or worse. Spain is always good, as are common features to low-cost Spain, Italy, Turkey, South Korea, and the Nordic countries, and even common features to those and medium-cost countries like France, Germany, China, and Japan.

I Gave a Talk About Canadian Construction Costs

There was a conference I got invited to, consisting of three talks, two about state capacity by me and by Tyler Cowen, and one by a Canadian extramural Conservative politician named Ginny Roth (she’s a columnist but her talk was about how Conservatives could use the insights of state capacity to win elections, hence my appellation). It was run by entrepreneurs named Chris and Matt Spoke, doing a series of online meetings trying to introduce fresh ideas to what they hope will be the next crop of Tory leaders; there’s going to be one on housing in the future, and the YIMBY comments I made seemed popular with the crowd.

Here is a link to my slides. They shouldn’t be too surprising given my usual talk on construction costs and what I said before about the growth in Canadian costs. But I made sure to put the increase in costs in Canada all together in two slides, one about Toronto, sourced to Stephen Wickens, and one about the rest of Canada, sourced to both our database and to a comparison of Calgary’s costs through the 2000s with Calgary’s West LRT costs.

The organizers are in Toronto, so I didn’t talk too much about the situation in Vancouver. I said a few sentences about how I can see there was a real increase in costs from a difference between the half-elevated Canada Line and the 87% underground Broadway subway under construction, but I didn’t go into the history of the Canada Line’s cut-and-cover method or the cost estimates from the early 2010s, which had the Broadway subway costing C$250 million/km. I talked more about Toronto, where the increase in costs is larger; Vancouver, even with the cost increases, remains North America’s lowest-construction-cost city, since the other cities have had even bigger increases, including Toronto, Los Angeles, and Seattle.

I want to highlight, as I brought up 1.5 years ago, that while Canada has American (i.e. bad) mainline rail, and Americanizing construction costs, it is YIMBYer than both the US and Europe. I worry it won’t last for long, because the style of Canadian redevelopment is at fairly small radius from an arterial or a subway station and those will eventually run out, forcing upzoning of large swaths of single-family land for the benefit of everyone except the handful of aggrieved homeowners who dominate municipal politics. (There was not enough time to talk about the importance of high-level decisionmaking, that is at the provincial level and not the municipal one.)