PUBLIC ADMINISTRATION AND DEVELOPMENT, Vol. 1 I , 5 7 6 5 (1991)

Large scale public projects-the personal connection

TZVIKA Y. GOLDENBERG Universify of Minnesofa

and

BARUCH MEVORACH Tel Aviv University

SUMMARY The paper expands on an interesting phenomenon accompanying large-scale projects, namely, the parallel inflation in costs and deflation in benefits from initiation to implementation and final evaluation or elimination altogether. Historically, three explanations have been provided for the above phenomenon: the deterministic effects of uncertainty; self-interest evaluators; and the ‘vision’ factor. We claim that on face value one cannot accept as scientifically sound evidence the above three explanations of the constant decline in actual benefits. The ‘accep- tance-avoidance’ model which we bring to bear predicts a constant deterioration in actual benefits as the project develops. This psychological factor results in the use of the three above- mentioned explanations as a ‘cover-up’ for real underlying human doubts regarding the chances of success of crucial decisions taken by individuals.

INTRODUCTION

The analyses of large scale public projects, both successes and failures, lead to the conclusion that the following rule, u la Parkinson (1957), Peter and Hull (1968), etc., can be applied to their initiation, implementation, and final evaluation:

1. Projected costs in the initiation stage, in constant terms, equal about half the actual costs in the implementation and final evaluation stages.

2. Projected benefits in the initiation stage, in constant terms, equal about twice the actual benefits in the implementation and final evaluation stages.

3. The ratio of projected costs to benefits is less than one in the initiation stage (favouring the benefits’ side); the same ratio will later, during the implementation and final evaluation stages, exceed one, rendering the actual costs a predomi- nance over the actual benefits.

Most of the explanations provided to the above rule resort to arguments with inherent negative connotations: initiators’ self-interests; negative impact of future uncertainties on large scale projects; or political ideologies which ignore the true

Tzvika Y. Goldenberg, is a Research Associate in the Department of Educational Psychology, University of Minnesota, 178 Pillsbury Drive, Minneapolis, Minnesota 55455, U S A . Baruch Mevorach is a lecturer in the Political Science Department and on the masters’ programme in Public Policy at Tel Aviv University, Ramat Aviv, 69978, Israel.

0271-2075/91/0 1005749$05.00 0 1991 by John Wiley & Sons, Ltd.

58 T. Y. Goldenberg and B. Mevorach

underlying costs in favour of ‘soft’ and unmeasurable benefits such as the ‘vision’ held by the project for a given nation at a given point in time.

This short paper suggests a different approach altogether, arguing that the above rule, in its three components, is, among other factors, a product of human complexi- ties of the individuals involved in the initiation, implementation and final evaluation stages of the public project. More specifically, we present the relevance of the ‘accep- tance-avoidance’ model as presented in the following sections of the paper, to the actual behaviour of individuals participating in the process.

Our explanation, unlike the others provided so far, is different in the sense that it provides a more general and ‘human’ interpretation of the understanding of com- plexities which cut across political ideologies, one-sided self interests, etc. The expla- nation is by no means the only one applicable to large-scale disasters. It complements the more negative explanations, some of which were mentioned above. A full appre- ciation of its applicability would enable policy-makers, we believe, to better cope with such dead-end situations and inaccuracies which frequently accompany cost- benefit analyses of large scale public projects.

To start with we present the scientific origins of our suggested rule and illustrate its realization in the Israeli context via the example of the ‘Lavi’ aircraft large-scale public project. We then go to the introduction of the ‘acceptance-avoidance’ model in the psychological domain, and finally we examine the rule’s applicability to the understanding of the dynamic structure of cost-benefit analyses on large-scale public projects.

THE LARGE SCALE PUBLIC PROJECT RULE

Various researchers have already identified the interesting phenomenon accompany- ing large scale projects, namely, the parallel inflation in costs and deflation in benefits, from initiation to implementation and final evaluation. Baker and Dalmer (1974) noted that final actual costs due to a given project exceeding the initial planned budget by a factor of two, are a common phenomenon. Similarly, Goff (1975) reports on governmental projects which ended up costing three times the proposed initial budget .

The recent ‘Lavi’ aircraft project in Israel exemplifies such under-estimation of costs for a large scale public project by a factor of two to three in comparison with the initiation, and the final evaluation and elimination of the project. Israel’s State Comptroller, in his 37th Annual Report (1987, 1291-1325), presents the follow- ing data regarding the dynamic development of the costs’ evaluation for the ‘Lavi’ project:

December 1980- $1,060 million; October 1981- $1,270 million; November 1981-$1,240 million; October 1982- $1,770 million; January 1983- $1,375 million; November 1984- $2,200 million; July 1 9 8 6 $2,570 million.

Large scale projects 59

All the above estimations were translated into 1984 U.S. dollars. The difference between the initial estimation, on December 1980, and the final estimation, on July 1986, is 150 per cent in favour of the latter.

An interesting and similar underestimation of costs was found in the foreign alter- native that was considered, the F-16. In December 1980 the State Comptroller reported that it was estimated that the ‘Lavi’ would be 70 per cent cheaper than the F-16. In November 1981 the ‘Lavi’ was still evaluated as cheaper than the F-16- the price edge at this time was reduced to 4 per cent only. In October 1982 it was first argued that the ‘Lavi’ might be more expensive than the F-16. By August 1985 the deputy to the American Under-Secretary of Defense had stated that the ‘Lavi’ was 41 per cent more expensive than its F-16 opponent. Here again, as time went by, a dynamic change in evaluations, favouring the F-16 alternative, was developed.

Likewise, some dynamic changes on the benefits side were also experienced. In the initial stage of the project, 400 ‘Lavi’ aircraft were supposed to defend Israel’s skies. The numbers later on decreased to 300, and towards the elimination of the project to 210. It should be noted, however, that the initially suggested ‘Lavi’ was smaller in size and expense than the eventual larger ‘Lavi’ with a more powerful engine capacity. It seems that the benefits side, much like the costs side of the cost- benefit equation, had changed with time, yet, in contrast with the costs side, it declined as time went by. The combined changes in both the cost and benefit sides of the equation accumulated to a degree of total increase in costs per unit of benefit, by a factor of five!

Consequently, the parallel changes in costs and benefits due to a given project might result in a reversal of the cost-benefit equation from an initial victory regarding the benefits side to a victory of the costs side, and the eventual elimination of the project altogether, or its operation under loss-making circumstances.

The proposed rule, on its three components, is graphically illustrated in Figure 1.

Fixed Prices

Costs

Benefits

1 - Time

Figure 1 . Dynamic changes in costs and benefits

60 T. Y. Goldenberg and B. Mevorach

The graph illustrates the gradual dynamic increase in costs as well as the gradual dynamic decay in benefits. At point 1 in time, the ratio of costs to benefits favours the benefits, whereas at point 2, it proves the project as economically unworthy. There are a number of explanations to the reversal in the cost-benefit structure between the point of initiation and the point of implementation and summative evaluation (or elimination).

The most frequent explanation is probably the one resorting to consequences of uncertainty which lead to a parallel increase in costs and a decrease in benefits due to the project. Behind this common explanation stands a most problematic assumption, claiming that the uncertainty contributes to the detriment of the project as it clears itself. The assumption, for some reason, ignores situations in which the clearing of the uncertainties might lend support to the project. For example, the development of a new technology might as well lead to a substantial decrease in costs due to the saving of resources resulting from its application in the project. As a result of this, why should we accept the idea that new revelations are necessarily costly to our projects? After all, surprises can work both to the detriment and the benefit of our lives.

Even if we are willing to accept the possibility that unforseen contingencies contri- bute more to the detriment than to the benefit of a given project, we should still be asking why is this information neutral to our planning and cost-benefit analysis? If past experience clearly indicates an effect of that kind, we should take this infor- mation into consideration when first assessing the cost-benefit structure. Apparently this is not done.

Moreover, there exists a second popular explanation which resorts to the self- interests of the evaluators themselves. It appears that initial evaluations and evalu- ators differ significantly from later analyses and analysts. In the ‘Lavi’ project, for example, the first cost-benefit analysis was provided for political decision-makers by the Israeli Aviation Industry (IAI). What should we expect such an assessment to suggest? ‘Kill’ the ‘Lavi’? No. The very same industry had an interest in preparing for the job and gaining the profitable opportunities that the ‘Lavi’ was about to provide. Similarly, by whom was the final and eliminating analysis provided? This time it was a hostile participant who was brought to bear, the deputy to the American Under-Secretary of Defense. What should we expect such an assessment to suggest? Continue developing the ‘Lavi’? Here again, the answer is of course, No. The question to be asked is a very simple one, namely, why is this bias present? Why do policy- makers refrain from utilizing this finding, and fail to resort simultaneously to both hostile and supportive forces in their search for a more ‘objective’ cost-benefit analysis of a given national project? We feel our ‘acceptance-avoidance’ model provides an explanation to the self-interest evaluator problem.

Yet a third explanation resorts to the ‘soft’, ‘vision’ factor. How can one objectively assess the relative weight of the ‘vision’ factor, and its eventual impact upon an otherwise clearly defined set of economic costs and benefits? Consequently, what weight should one give to pride in the frequently mentioned ‘First Israeli Aircraft’, in the cost-benefit equation? It appears that during the initiation stage of the project, the ‘vision’ factor, such as the ‘First Israeli Aircraft’ in the ‘Lavi’ case, is assigned a large positive benefit multiplier; as the project moves to the implementation and final evaluation stages, the ‘vision’ factor is constantly shrinking as a positive multi-

Large scale projects 6 1

plier, up to a point where a ‘First Israeli Aircraft’ idea is referred to as an economic disaster for the state of Israel.

The above explanations to the reversal in the cost-benefit structure are most prob- lematic. The suggested deterministic effects of uncertainty, self-interest and the ‘vision’ factor are far from being substantiated. On face value, one cannot accept the above factors as objective and scientifically sound evidence of the constant shrink- ing in benefits.

We argue that our psychological explanation actually accounts for a significant portion of the above mentioned deteriorating benefits, otherwise supposedly due to uncertainty, self-interest and the ‘vision’. The ‘acceptance-avoidance’ model which we bring to bear predicts a constant deterioration in benefits as the project develops. Our psychological explanation sees the use of the above mentioned three explanations as a ‘cover-up’ for real underlying human doubts, regarding a most crucial decision taken by individuals. Let us now turn to the presentation of the ‘acceptance- avoidance’ model, and its applicability to national projects and the observed phenom- enon of shrinking benefits as projects develop.

THE ‘ACCEPTANCE-AVOIDANCE’ MODEL

The ‘acceptance-avoidance’ model attempts to describe the psychology of an indivi- dual on the verge of a crucial decision concerning his or her future life.

The model can be seen in Figure 2.

csources

, v r i y I dvuui auir

I I To ta l y ReJectlng/opposlng iaiircrence poiiir L- - l

L 2 Time I \ 1

r - - - I 1 . 1

I l o 1 Figure 2. The personal dynamic equilibrium of ‘acceptance-avoidance’

We shall use the example of a marriage decision. Assume Mr X forms an attachment with Ms Z, whom he holds profoundly dear, and to whom he intends to propose. At the time of the proposal, our friend Mr X perceives the marriage as a wonderful

62 T. Y. Goldenberg and B. Mevorach

highly coloured picture. At time 1, which is the time of proposal, he is not aware of any difficulties and/or barriers to a happy and prosperous life with his beloved, Ms Z. This state of affairs will be represented at a point on the Acceptance Line on the graph.

Time passes, and the date of the marriage approaches. Mr X and Ms Z have yet to decide upon the location of the wedding, the number of guests, the kind of food to be served, and-most important-who will pay the expenses, and how will they be divided (assuming they would share the expenses).

Mr X’s parents are better off than Ms Z’s, but more reluctant to spend money. This leads to a slight argument resulting in a recognition of some darker sides in each one’s personality, which formerly were suppressed.

At a certain point, Mr X becomes aware of the possible costs of his marriage decision. The ideal picture he had in mind begins to lose its attractiveness and some- where along the line the Avoidance graph is revealed.

Mr X, being perplexed, reflects on the necessity of the futile endless arguments concerning the location of the wedding, the people invited, the food served, and most important-who will pay the expenses. Up to now he has been peacefully living with Ms Z in their comfortable rented apartment. He begins imagining the days after the wedding, when the issue of purchasing a new house will have to be discussed.

The avoidance line in its starting point is lower than the acceptance line, but its slope is deeper. As time passes by and the wedding day approaches, the negative effect of the avoidance line will be more powerful than the effects of the acceptance, and feelings of regret would increasingly interfere with Mr X’s peaceful state of mind.

At point 2, the absolute value of the avoidance line might be greater than that of the acceptance. Our friend Mr X, having nightmares, is thinking of the near future. Would the situation deteriorate and, if so, should he cancel the wedding altogether?

The average individual would not change his mind at this point. Too many costs have already been invested in wedding preparations. Cancelling the wedding would cost much, including the possible ‘charge of breaking the engagement’ (a technical feature of Israeli law). At this stage, the inertia process is more powerful and over- comes the desperate condition due to the ‘acceptance-avoidance’ ratio. It thus contri- butes to the initial decision-making process.

Rationalization as a powerful psychological phenomenon has an opposite effect on the thinking process, and it helps to achieve the wedding decision. In simple words, it suggests that regret would indicate a defective thinking process. We thus hold to our conventions and do not accept part of the information we receive. The rejection of information reinforces the acceptance of the marriage decision.

Not every individual reaches the point on their marriage day of having the avoid- ance line overshadow the acceptance one. Some of us are fortunate enough to reach a point where the acceptance overshadows the avoidance.

The ‘acceptance-avoidance’ model is illustrated by the most elemental, crucial, and relevant experience in our life. Let us now present the model at a group level, which is more applicable to large-scale public projects, and then put in perspective the ‘acceptance-avoidance’ model and its relevance to the dynamic changes in costs and benefits of a large scale project, which were previously presented in Figure 1.

Large scale projects 63

THE MULTIPLEPLAYERS DYNAMIC EQUILIBRIUM OF ‘ACCEPTANCEAVOIDANCE’

Large scale projects are comprised of the large number of individuals involved. These individuals bring to bear individual psychological and political characteristics which are beyond the scope of this paper. A few of the variables involved are:

- political interests and commitments (coalitions); - personal charisma; - past experience in public and political decision-making; - emotional make-up; - degrees of exposure to relevant information.

Figure 3, illustrates the power which exists in large scale projects. All the variables mentioned above contribute to the decision-making process and result in a final decision per individual participant, for or against.

Psychological Resources

5 - ’ Very favourable

i-’ Totaly Re]ectlng/opposlng

L - - I

L--l

rG-’ Some what lndl l ferent L--l

_ _ _ _ _ - .

The size of the circle represents the player’s power and/or motivation Figure 3. The multiple-players dynamic equilibrium of ‘acceptance-avoidance’

The same applies to the group as a whole. Individual members in the group repre- sent individual variables operating on the individual level. The final decision on the group level is a result of the power play by all the individual members.

THE MANAGEMENT OF NATIONAL PROJECTS-A PERSONAL PERSPECTIVE

The ‘acceptance-avoidance’ model presented above, much like the general rule pre- sented in the beginning of the paper, results in a situation where benefits are deterior-

64 T. Y. Goldenberg and B. Mevorach

ating, while costs are on the increase as time goes by. The similarities between the two reported phenomena are presented in the following paragraphs.

National projects are initiated, planned, supported, and implemented by individual players: politicians, professional planners, high-ranking public officials, etc. The initiation phase of a national project resembles the crucial decision-making phase, the proposal, on the individual level. At this stage, the initiative, on both the individual and the national level, is perceived as a ‘vision’ in the sense that it significantly departs from past habitual behaviours, consequently leading the individual (person and/or nation-state) to a profoundly different future. It is at this stage that the individual initiators of the visionary decision look for supportive evidence for their somewhat revolutionary step. Opposing evidence will most probably be rejected, and supporting cost-benefit analyses looked for. Similarly, uncertainty factors will be blown out of proportion if they are expected to benefit the decision; otherwise, they will be simply ignored. This is the stage where the individual decision-maker ‘sees’ (or believes he sees), only the ‘approach’ values attached to his crucial decision.

As time goes by, doubts translated as ‘costs’ resulting from the initial decision begin to appear. The ‘costs’ result primarily from developing doubts on the part of the initiating individuals regarding the chances of the final implementation of their decision and the long-term implications of their decision for them and for other individuals. This was apparently the case with the heads of the Israel Defense Forces (IDF), top air force generals, and leading Israeli politicians, all of whom initially were most supportive of the ‘Lavi’ project. Thus they were willing to accept, even at advanced stages of implementation, hostile information regarding the chances of a successful completion of the project. Even the most interested body, the IAI, seemed to lose some of its enthusiasm in the project as the implementation phase advanced.

One major difference between the individual and the national level is worthy of further elaboration. It seems that on the national level, unlike the individual level, a physical-administrative separation, between the initiator and the implementor, is possible. The initiator, after being rewarded for hisher visionary decision, might be able to escape the negative consequences of a disastrous implementation process. The initiator might even blame the implementor for failing to implement a theoreti- cally correct and plausible idea, while keeping the glory of the visionary idea.

The identification of successful versus failing projects on the national level leads to an additional observation, whose consequences might be interesting on the indivi- dual level as well. It seems that the larger the ‘vision’ factor, the better the chances of failure or elimination of the project altogether. The ‘vision’ factor is culturally conditioned; it varies between nation-states and between different points in time. The factor is hypothesized to play a relatively major role in small, economically less capable societies like Israel. The analysis of successful national projects in Israel leads to an intuitive conclusion that those strong on the ‘must’ side and weaker on the ‘vision’ side, stood better chances of succeeding. Both the ‘National Water Pipeline’ and the ‘Merkava’ tank grew out of objective necessities, namely, water to the ‘Negev’ desert, and better protection for tank crews from the ‘Sager’ missiles as a result of the ‘Yom Kippur’ war. The ‘Seas Canal’, as well as the ‘Lavi’ project, had no national objective problem to which to respond. The ‘Seas Canal’ was expected to provide, at the most, about 8 per cent of Israel’s electrical capacity while the ‘Lavi’ had to compete with an excellent, most capable, and relatively inexpensive

Large scale projects 65

American fighter in the form of the F-16. The latter two projects were, however, strong on the ‘vision’ side-the ‘First Israeli Aircraft’ as well as the ‘First Israeli Panama or Suez canal’. Both were ‘luxury’ projects in the sense that they did not grow out of any immediate shortage in electrical capability, and no immediate threat of an American embargo on military supply, of any kind, to Israel.

The conclusion from the above is thus two-fold. First, national projects have to respond to real necessities, objectively defined as national problems. Second, the acknowledgement of the existence of the ‘acceptance-avoidance’ model, on all its implications, warrants the invitation of hostile cost-benefit analyses early in the initi- ation stage. The hostile analyses will then be compared against the supportive ones, consequently clarifying uncertainties, deflating benefits, and inflating costs.

REFERENCES

Baker, B. and Dalmer, F. (1974). ‘Cost control: can it be controlled?’, Project Management Quarterly, 5 , (2-3), (adapted from: Globerson, A. and Globerson, S, (1990), Control and Evaluation in Organizations-Management by Measurement, Ramot Publishing House, Tel Aviv University, p. 131 (in Hebrew)).

Goff, N. S. (1975). ‘Development project costs’, Journal of Systems Management, 46, (3), (adapted from: Globerson, A. and Globerson, S, (1990), op. cit.).

Israel’s State Comptroller, Annual Report, Jerusalem, 1987, pp. 1291-1325. Parkinson, C. N. (1957). Parkinson’s Law and other Studies in Administration, Houghton

Peter, J. and Hull, L. R. (1968). The Peter Principle, Souvenir Press, London. Mifflin Co., Boston.