View
215
Download
2
Category
Tags:
Preview:
Citation preview
Hugh Kelly
Cohesion Policy evaluation –
Cost and time estimates of major projects
Warsaw 30 November
Importance of reliable estimates
Estimates are critical:
• Public policy decisions
• Investment decisions
• Accountability
Cost overruns and benefit shortfalls:
• Lead to an inefficient allocation of resources
• Lead to delays and further cost overruns
• Destabilize policy, planning, implementation and project operation1
1. See Megaproject Policy and Planning: Problems, Causes and Cures, Flyvberg, Department of Development and Planning, Denmark
Estimates and evaluation
Ex post evaluation
• What estimates were used in the ex ante CBA?
• How did the outcome compare to estimates?
• What were reasons for differences?
• How did they impact on the effectiveness of the project?
But major projects can go spectacularly over budget
Denver's International Airport
$1.5bn
$5.0bn
Channel Tunnel
£4.7bn
£9.5bn
Boston’s Central Artery “The Big Dig”
$3.7bn
$14.6bn
Sydney Opera House
A$7.2m
A$102m
http://miller-mccune.com/business_economics/bill-of-goods-the-world-s-biggest-boondoggles-601
And the evidence suggests that the problem is not restricted to flagship projects
ERDF 2000-2006 Evaluation (51 projects):• Average cost overrun• Rail +27%• Road +9%• Urban transport +45%• Water +11%• Energy +21%
Flyvberg: 44 Urban rail projects:Average overrun 45%
Traditional explanations
Source: European Commission DG XVI (1998), “Understanding and Monitoring the Cost-Determining Factors of Infrastructure Projects”, A User’s Guide, Brussels
Numerous studies confirm the reasons for over runs
Source: ECORYS et al. (2005), “Ex post evaluation of a sample of projects co-financed by the Cohesion Fund (1993-2002)”, Synthesis Report, Rotterdam
Recent review of ERDF projects
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Desig
n ch
anges
Legis
latio
n ch
anges
Enviro
nmen
tal i
mpac
t
Autho
rity
delay
s
Work
susp
ensi
ons
Politi
cal
Perm
its/C
onse
nts
Site c
hara
cter
istic
s
Late
com
men
cem
ent
Const
ruct
ion
perio
d
Fundin
g pro
blem
s
Stake
hold
er n
umbe
rs
Techn
ology
Innova
tion d
egre
e
Contra
ctor
spec
ific
Desig
n co
mpl
exity
Contra
ct c
omple
xity
Proje
ct m
anag
emen
t
Infla
tion
Site a
cces
s
Public
rela
tions
Force
maj
ure
Poor p
lanni
ng
Supplie
r dis
putes
Busin
ess
inad
equac
yOth
er
Econom
ic
Exchan
ge ra
tes
Sc
ore
Cost overrun score Time delay score
Traditional approach to dealing with the risk
• Risk management
– PPP
• Contingency funding
• More and more detailed budgets
Traditional solution – better planning and contingency
Source: Flyvbjerg, Bent in association with COWI (2004), “Procedures for dealing with Optimism Bias in Transport Planning: Guidance Document”, The British Department for Transport, London, June.
But if we understand the reasons for overrun why do we keep getting it wrong ?
Original bid cost
£2.3bn
£9.3bn
Current estimate
Alternative approach: Flyvberg: Delusion and Deception in large Capital Projects1
• Delusions Planning fallacy
Human optimism Anchoring and adjustment
Tendency to ‘stick’ to initial estimate Deception
Principal-Agent ProblemSources of strategic deception
Delusions and Deception in Large Infrastructure Projects, Bent Flyvberg, Massimo Garbuio, Dan Lovallo California Management Review Vol 51 No 2 Winter 2009
Principal agent issues
Sources of Strategic Deception
• Actors self interests
• Asymmetric information
• Different risk preferences
– Different time horizons
– Diffuse accountability
Different types of risks for different projects
Solutions – (a) risk sharing
• Pass risk of over runs to:– Member states– Local Governments– Contractors
Solutions – (b) reference class projects
• Select reference class• Assess distribution of outcomes• Make an intuitive prediction of project’s position in the
distribution• Assess the reliability of prediction• Correct intuitive estimates
Recommended