Dissatisfaction guaranteed or your money *not* back: Part 7, A tension point

September 26, 2016 | Bent Flyvbjerg, budgeting, China, Dictators, Housing, Infrastructure, megaprojects, Olympics, Public finance, public works, Speculation | No comments 8 views

 

By: David A.  Smith

 

[Continued from the preceding Part 1, Part 2, Part 3, Part 4, Part 5, and Part 6.]

 

This week’s (somewhat less) plausible apology

For last week’s shoddy blogging

 

That same AHI contract who consumed the week before also consumed the week just completed.  But now, finally, I should have a normal week and service will resume J.

– Your obedient blogger

 

As we’ve see in the previous parts of this seemingly endless post, like many another temptress, the Olympic mystique has lured many a ruler, president, governor, or mayor to promise impetuously, and spend beyond the promise of a transformative experience:

 

goddess_lights_torch

All for the low low price of €9 billion – oh, and loss of your economic sovereignty

 

Given the above results, for a city and nation to decide to stage the Olympic Games is to decide to take on one of the most costly and financially most risky type of megaproject that exists, something that many cities and nations have learned to their peril.

 

Worse still, once the Olympics are over, the venues are often useless, hard to repurpose, and rapidly fall into decay.

 

sarajevo_bobsled_run_today

World War II defenses or Sarajevo bobsled run?

 

 

Sources used in this post

 

Newly published paper (July 1, 2016) by Bent Flyvbjerg, Allison Stewart, and Alexander Budzier (bleeding red ink font)

Wonderfully economist-snarky press release from Oxford’s Said Business School (brown font)

What you should know about megaprojects (Project Management Journal, April/ May 2014; pdf, amber font)

 

 

Put in its simplest terms, it is completely nuts to load up a thirty-year obligation for a thirty-day spectacle – and even ordinary folks are figuring out the high isn’t worth the hangover (Investors Business Times, August 5, 2016; gloomy maroon font):

 

A July opinion poll found that 63% of Brazilians already think that hosting the Olympics will cause more harm than good for Brazil.

 

the_hangover

It only cost ten billion

 

The Lords of Olympus are gradually realizing this, because reality is forcing them to:

 

It is argued that the conventional way of managing megaprojects has reached a ‘tension point’ where tradition is challenged and reform is emerging.

 

Although Professor Flyvbjerg is careful to avoid saying so directly, lest he be accused of opinion-mongering, what he means is They’ve become so expensive they’re country-breakers and even autocrats are figuring this out.

 

boston_olympics_wicked_bad_idea

That last word should actually be spelled Idear, how it’s pronounced

 

So bloated is the golden goose the IOC is actually in danger of killing it.

 

fifa_corruption

 

Fortunately (I suppose), unlike FIFA, which as far as I can tell is rotten to the core, some parts of the International Olympic Committee appear to be, if not aghast, then at least a little embarrassed by what has been done in their name.  [Not so embarrassed as to reform their bidding procedures – Ed.]  So they offer something of a lessons-learned kit for prospective bidders:

 

The Olympic Games Knowledge Management Program appears to be successful in reducing cost risk for the Games.  The difference in cost overrun before (166%) and after (51%) the program began is statistically significant.

 

While it’s always nice to hear that savings are being made, it’s still the coldest of comfort when you realize that post-kit Olympics are still running horribly over budget, but this time only 50% over!

 

fig_2_cost_overrun_real_terms

We now have the problem relatively under control!

 

Throwing a blowout bash is a very human thing to do.  Throughout the world, weddings are usually the most universal form of flamboyant extravaganza:

 

indian_wedding_brooklyn

Investing in memories to fuse two people into a couple

 

And in the developing and poorer parts of the world, coming in second are funerals:

 

Family members gather near a tomb as a man shovels sand onto a coffin during a funeral ceremony at a cemetery in Lagos

Funeral in Nairobi

 

When they involve close family, such displays have genuine meaning – and they’re usually done with the family’s own money, not other people’s, and with equity, not debt.

 

forbes_plane_capitalist_tool

In case you were in any doubt

 

 

AHI blog posts on the Olympics

 

August 13, 2012: Maius, melius, devitius?; The cost to London of the 2012 Olympics

March 18, 2014: Zeno’s public-consultation paradox; 2 parts of Brazil scouring favelas to create the Olympic venue

June 1, 2015: Mega-boon or mega-boondoggle; 6 parts on Boston’s ‘winning’ the USOC’s designation to bid for the 2024 summer games

August 10, 2015: The highbrows’ sports carnival; 4 parts on the collapse of Boston 2024.

 

malcolm_liz_taylor

One way to celebrate reaching seventy

 

Now we can see the Olympics as the conspicuous-consumption event-trophy that enables an egocentric government or its grandiose leader to celebrate himself and his country, so the winners are either aspirational governments wanting to show they’ve arrived (Greece, Brazil, South Africa and Qatar for the World Cup) or kleptocrats of formerly-rich countries (Russia for Sochi and for the 2018 World Cup).

 

At best it’s cargo-cult economics; at worst it’s dictator’s propaganda.

 

berlin_olympic_statues

Celebrating the ubermensch

 

hitler_hess_berlin_1936

For the glory of der Fuhrer

 

jesse_owens_gold_medal

But Jesse Owens disrupted the narrative

 

If the Olympics were a rich-nation’s peccadillo, as museums are theme parks for the upper crust, and funded as such, then I would have no beef with them at all. 

 

But they’re not.  They take money and political capital away from things that matter, and usually in nations that haven’t got the money to spare.

 

why_write_about_olympics_expanded

 

Much though I regret saying so, humanity would be better off if the Olympics vanished tomorrow.

 

vanishing_point

Send the Olympics there

 

 

Dissatisfaction guaranteed or your money *not* back: Part 6, A state of emergency to secure additional funding

September 19, 2016 | Bent Flyvbjerg, budgeting, China, Dictators, Housing, Infrastructure, megaprojects, Olympics, Public finance, public works, Speculation | No comments 76 views

 

By: David A.  Smith

 

[Continued from the preceding Part 1, Part 2, Part 3, Part 4, and Part 5.]

 

This week’s plausible apology

For last week’s blogging absence

 

Just as I was turning back to this blog post, which I have found completely absorbing, a major AHI contract took an unexpected turn that required me to shove everything else off my desk (figuratively and almost-but-not-quite literally), and whose deadline was Saturday night.  As Tony Blair said to the U. S. Congress when referencing British’s 1814 burning of Washington, I know this is, kind of, late, but sorry.

– Your obedient blogger

 

 

As we’ve seen in the previous parts, an Olympic Games is not just an extravagance of rich nations but has in the last couple of decades been a prize that the wannabes have concluded is just the ticket to join the world’s cool-kid club – the OECD, the Davos invitations. 

 

rio_wins_olympics_copa_2009

A lot can happen in the seven years between the win and the games

 

In the manner of starry-eyed parents around the worldwide, they think no price is too high to give their little Sochi or Rio a chance to shine on the global stage:

 

lula_crying_win

“Our hour has arrived.  It has arrived.”

 

The announcement brought tears to Brazilian President Luiz Inacio Lula da Silva, who dabbed his eyes with a handkerchief several times in a news conference afterward.

“Our hour has arrived,” he said. “It has arrived.”

 

From that moment onward, Brazil’’s star has fallen.  Within a year and a half (2011) Lula gave way as president to his long-time chief of staff Dilma Rousseff; within three years (2012), Brazil’s economy was being described as a massive failure best by “High taxes, poor infrastructure, and astonishingly complicated regulation”, then (2015) a “scandalous boom to bust story,” an economy (2016) “not this bad since 1930,”

 

 

Sources used in this post

 

Newly published paper (July 1, 2016) by Bent Flyvbjerg, Allison Stewart, and Alexander Budzier (bleeding red ink font)

Wonderfully economist-snarky press release from Oxford’s Said Business School (brown font)

What you should know about megaproject (Project Management Journal, April/ May 2014; pdf, amber font)

 

 

 

This moves the Olympics from a rich-nations-only peccadillo into a debilitating addictive drug of financial squandering that just might be an insidious tool of regime destabilization.

 

impeachment_ja

Still want those Rio Olympics?

 

 

7.  Olympic Games are so expensive they can destabilize governments

 

Though I’m far from the first observer to note the correlation between hosting a modern Olympics and seeing your country’s finance tank, having less need to be tethered to what I have evidence to prove allows me to make intuitive leaps that suggest how correlation is the result of causation. 

 

We already know that Olympic sponsors underprice their bid, and that once having won the bid they start piling on additional unfunded gewgaws.  We also know that the team delivering on the Olympics commitment has never done it before, that it’s an enormous highly complex challenge, with no do-overs, and with myriad uncontrollable counterparties.

 

“All Games come in over budget,” comments Professor Flyvbjerg. “If you wanted to make it as difficult as possible to deliver a megaproject on budget, you would do exactly what they do at the Games.”

 

jeeves_doing_it_wrong

 

Rio’s Olympics also illustrate another structural weakness of Olympic-game planning – they are ripe for public-choice-theory exploitation, where the official today (Lula da Silva) makes a pledge he knows can be fulfilled only by an official tomorrow (the unhappy Dilma Rousseff), or a junior elected official (Rio de Janeiro governor Francisco Dornelles) to exploit unusual and perishable leverage over a higher-level official (Dilma Rousseff) because they political fates are shackled together.

 

dornelles_dilma

“Francisco, tell me you really needed all that money to build this damned swimming pool?”

“Dilma, I don’t have to listen to you any more, you’re on your way out as it is.”

 

“[1] You would assemble a team that has never delivered this type of project before, in a location that has never seen such a project.”

 

“[2] Then you would enforce a non-transparent and highly questionable bid process that encourages overbidding and places no responsibility for costs with the entity that decides who wins the bid.”

 

“That unfortunately is the reality we see with the Games.”

 

Couple that with Professor Flyvbjerg’s demonstration of the cost overrun acceleration due to the Olympics’ externally committed and thus inflexible starting date, and the result is predictable: a crisis that can be solved only by throwing dollops of new public money at it:

 

In June 2016 – less than two months before the Rio 2016 opening ceremony – Rio de Janeiro’s governor declared a state of emergency to secure additional funding for the Games. 

 

States of emergency, one must recall, are normally reserved for earthquakes, hurricanes, plagues, enemy invasions – in short, the four horsemen of the Apocalypse. 

 

durer_four_horsemen

Is there a relay race we can join?

 

Not for a sporting event.

 

When Rio decided to bid for the Olympics, the Brazilian economy was doing well.  Now, almost a decade later, costs were escalating and the country was in its worst economic crisis since the 1930’s with negative growth and a lack of funds to cover costs. 

 

Then too, we have the classic mistake of mis-timing the cycle – making long-term commitments at the crest because you have convinced yourself there will be no trough, only to have to pay for those commitments when reality has proven you wrong.  Not only do fibbers win so all winners have to fib (and the more you fib, the more likely you are to win), the winning fibber is likely to be the one whose economy is most volatile, and hence whose long-term projections are the least reliable.  So you fib the most at the top of the widest cycle, and you pay the most overruns at its bottom.

 

 

AHI blog posts on the Olympics

 

August 13, 2012: Maius, melius, devitius?; The cost to London of the 2012 Olympics

March 18, 2014: Zeno’s public-consultation paradox; 2 parts of Brazil scouring favelas to create the Olympic venue

June 1, 2015: Mega-boon or mega-boondoggle; 6 parts on Boston’s ‘winning’ the USOC’s designation to bid for the 2024 summer games

August 10, 2015: The highbrows’ sports carnival; 4 parts on the collapse of Boston 2024.

 

 

Dictators can get away with that – for a short while – because after them, the deluge. 

 

putin_sneer

Not if I imprison or kill them all first

 

Democracies, even quasi-democracies, can’t.

 

Until twenty or so years ago, hosting the Olympics was the province of the world’s developed nations, and however much the games went over budget, at least it was happening to nations (or states, or cities) that could afford it – though some of them just barely:

 

Montreal where it took 30 years to pay off the debt incurred by the 720%  cost overrun on the 1976 Summer Games (Vigor, Mean, and Tims 2004: 18).

 

leger_taillibert_drapeau

And when I wave my fingers like this, all the debts will magically vanish – poof!

 

As the Guardian, normally a tolerant observer of public-works projects, wrote recently (raspberry font):

 

Like some medieval castle under a warlock’s curse, the Olympic stadium – visible from dozens of different vantage points in the city, an inescapable reminder of what went wrong – continued to be plagued with problems. In the 1980s, the tower caught fire. In August of 1986, a chunk of it fell on to the baseball field, forcing the Expos to postpone a game.

 

In September of 1991, a bigger 55-tonne concrete slab fell on to an empty walkway. The OIB reassured the public no one was underneath it, prompting one columnist to ask: “How do they know?”

 

montreal_olympic_stadium_expos

It happened when the Expos were playing, so no one was hurt

 

As so often happens with event-based infrastructure, it was neither purpose-built for a popular sport (even CFL football would be a draw, but the Alouettes play at McGill stadium), nor readily reconfigurable for alternate uses. And then there’s the starchitect’s curse of construction complexity:

 

To this day, in a northern Canadian city that averages roughly 50cm of snow a month in winter, the Olympic Stadium cannot be used if the snow load exceeds 3cm.

 

For reference, 50 cm of snow is only twenty inches, which we get here in Boston most winters, and 3 cm is a single inch.

 

boston_one_inch

Good thing they don’t get this much snow in Montreal!

 

But somehow, because rich nations could host the Olympics and not go visibly bankrupt by doing so, emerging ones that should have known better jumped into the bidding, and the IOC was only too happy to let them indenture their future:

 

In Athens 2004, Olympic cost overruns and related debt xacerbated the 2007-16 financial and economic crises.

 

Of course the previous effects – inevitability, one-more-thing, and expansive infrastructure – piled onto Greece’s Olympic bid:

 

Greek taxpayers were on the hook for €7 billion [plus] the cost of extra projects such as a new airport and metro system.

 

That, of course, brings us full circle back to the Eurozone, with its currency whose stability and low rates are maintained at all costs by the faceless ones in Brussels and their paymasters in Berlin:

 

faceless_heads

We can appear to be whoever we need to appear to be

 

[Continued tomorrow in Part 7.]

 

Dissatisfaction guaranteed or your money *not* back: Part 5, Not so much budget as down payment

September 9, 2016 | Bent Flyvbjerg, budgeting, China, Dictators, Housing, Infrastructure, megaprojects, Olympics, Public finance, public works, Speculation | No comments 93 views

 

By: David A.  Smith

 

[Continued from yesterday’s Part 4 and the preceding Part 1, Part 2, and Part 3.]

 

Having established that the Olympics are the worst financial performers of any mega-, giga-, or tera-projects (not that any Olympics has yet reached teraproject size, thank goodness), we have to find some features that are uniquely unfavorable about Olympics. 

 

 

Sources used in this post

 

Newly published paper (July 1, 2016) by Bent Flyvbjerg, Allison Stewart, and Alexander Budzier (bleeding red ink font)

Wonderfully economist-snarky press release from Oxford’s Said Business School (brown font)

What you should know about megaprojects (Project Management Journal, April/ May 2014; pdf, amber font)

 

 

This turns out to be easy to do because, as the French might say, they jump to the eyes.

 

man_in_moon_rocket_ship

It saute aux yeux!

 

 

5.  The Olympics uniquely incur As-long-as-we’re-doing-it surcharges

 

Compared with other megaprojects, where the commissioning entity and the paying entity are legally connected – multiple ministries within the same government, say, or a city commissioning a highway improvement in concert with the state and the Federal government

 

big_dig_25_years_later

Big cost increases – of course, it was a quarter of a century – and costs shared

 

With the Olympics (and with its twin in exploitation, the World Cup), the commissioning entity makes commitments to an external party that first extracts promises it may know the host city cannot keep –

 

wicked_witch_toto_too

I’ll get you, my pretty, and your Olympic mascot, too!

 

Further, even more than in other megaprojects, each budget is established with a legal requirement for the host city and country government to guarantee that they will cover the cost overruns of the Games. 

 

– and then is a constant cheerleader for spending more of the host city’s money, knowing that the IOC is a free-rider beneficiary for as much as 50% of the upside (CFR, July 20, 2016; dollar green font):

 

Much of the revenue doesn’t go to the host—the IOC keeps more than half of all television revenue, which represents the single largest chunk of money generated by the games.

 

Naturally, the person who has 0% of the downside and 50% of the upside will be keen to see more spent to create more upside.

 

Our data suggest the guarantee is akin to writing a blank check for the event, with certainty that the cost will be more than what has been quoted. 

 

In practice, the bid budget is really more of a down payment than it is a budget, with further installments to be paid later.

 

Even worse, it’s more like earnest money, since if the project is abandoned partway through, the earnest money is lost.

 

Instead, what happens is that once the Olympic movement has started, the inevitability effect takes over.

 

inevitability_effect

 

Every legislator from Recife to Porto Alegre wants to add his or her bit of spending to the already large budget, because If we’re doing this much, why not do more?, the same logic that brought America the absurdly unhelpful American Recovery and Reinvestment Act (aka the ‘stimulus bill’).

 

 

AHI blog posts on the Olympics

 

August 13, 2012: Maius, melius, devitius?; The cost to London of the 2012 Olympics

March 18, 2014: Zeno’s public-consultation paradox; 2 parts of Brazil scouring favelas to create the Olympic venue, a special case of the planning fallacy

June 1, 2015: Mega-boon or mega-boondoggle; 6 parts on Boston’s ‘winning’ the USOC’s designation to bid for the 2024 summer games

August 10, 2015: The highbrows’ sports carnival; 4 parts on the collapse of Boston 2024.

 

 

If the IOC were a conventional investment security sponsor or even a subprime lender, then its conduct would be illegal until myriad consumer-protection statutes prohibiting fraud in the inducement – but as it’s the IOC, which claims that it’s “a not-for-profit independent international organization made up of volunteers”, why then everything must be totally on the up-and-up and those billions of dollars the IOC takes in as revenue must flow through to its member national Olympic committee and international federations with no hint of personal enrichment anywhere along the line.  Except, of course, those kickback allegations that led back to Brazilian President Dilma Rousseff, resulting in her impeachment and removal from office.

 

brazil_impeachment_ja

Evidently it was enough money to be worth defrauding your country for

 

Personally, I’d rather have a governing body like the IOC run as a publicly listed for-profit company.  At least then there’d be some governance, and strong external motivation to prevent egregious profit-taking – of which there are plenty in the Olympics.  Not only are the big infrastructure projects ripe opportunities for profit and hidden bribery baked into land prices, construction contracts, materials supplies, and a host of ‘essential professional services,’ there’s also another dynamic that makes such defalcation easy.

 

 

6.  The Olympics incur immovable-deadline surcharges

 

The high cost overrun for the Games may be related to the fixed deadline for project delivery: the opening date cannot be moved. 

 

Couple the planning fallacy with Zeno’s public-consultation paradox and the result is an asymptotic increase in the panic among public officials charged with delivering the Olympics on time

 

zenos_public_consultation_paradox

 

Therefore, when problems arise there can be no trade-off between schedule and cost, as is common for other megaprojects. 

 

Anyone who’s ever had to fly on short notice knows there is no longer any such thing as the price of an airline ticket:

 

airline-pricing

The closer it gets, the more we sock you for

 

It’s all a sophisticated game between you and the electronic pricing algorithm –

 

dynamic_pricing_microwaves

And the pricing can be even more dynamic: one day in the life of online microwave pricing

 

– where the house is trying to gauge your level of urgency, lack of options, and ability to pay.

 

And when it comes to the Olympics, your level of urgency rises to infinity, your options drop to zero, and your ability to pay –

 

All that managers can do at the Olympics is throw more money at problems, which is what happens. 

 

throwing_money

It’s not my money, I just spend it

 

If you’re an elected official, it’s not your money anyhow, it’ll be your successor’s.

 

arthur_oconnell_tomorrow

I’ll just pay for that necessary infrastructure tomorrow, shall I?

 

[Continued tomorrow in Part 6.]

Dissatisfaction guaranteed or your money *not* back: Part 4, Average practice is a disaster

September 8, 2016 | Bent Flyvbjerg, budgeting, China, Dictators, Housing, Infrastructure, megaprojects, Olympics, Public finance, public works, Speculation | No comments 128 views

 

By: David A.  Smith

 

[Continued from yesterday’s Part 3 and the preceding Part 1 and Part 2.]

 

Among the oddest pleasures of blogging is the enforced hobbyist pursuit of curiosity no matter the corners into which it wriggles itself, and then presenting these for the reader’s edification, shock, irritation, or just plain amusement – and so it is with this part of a multi-part post that has already incurred word overruns of Olympian proportions.

 

dog_with_balls

Look at all these facts I found!  Wow!

 

The ending of yesterday’s post with a remarkable statement (that the Olympics set the record for the biggest cost overruns even among megaprojects that are their peer public-sector expenditures) set me off looking for a proof statement, and I should have known where I’d find it.

 

flyvbjerg_on_tv

Well, I am the world’s foremost expert, you know

 

 

Sources used in this post

 

Newly published paper (July 1, 2016) by Bent Flyvbjerg, Allison Stewart, and Alexander Budzier (bleeding red ink font)

Wonderfully economist-snarky press release from Oxford’s Said Business School (brown font)

What you should know about megaprojects (Project Management Journal, April/ May 2014; pdf, amber font)

 

 

 

4. Megaprojects as a class tend to overrun cost estimates

 

broken_arrow_frank_whaley

Mister President, we have a broken budget

 

Giles Prentice: A broken what?

Secretary Baird: Broken Arrow. It’s a Class 4 Strategic Theatre Emergency. It’s what we call it when we lose a nuclear weapon.

Giles Prentice: I don’t know what’s scarier, losing nuclear weapons, or that it happens so often there’s actually a term for it.

 

Not knowing which is scarier, that billion-dollar projects almost always overrun, or that we can now casually call them gigaprojects, by the authority vested in me by this keyboard, I hereby dub Bent Flyvbjerg AHI’s Favorite Gigaproject Economist (pending other entries), for his crisply assertive paper, What you should know about megaprojects (Project Management Journal, April/ May 2014; pdf, amber font), whose abstract lists seven fundamentals of megaprojects:

 

pokemon_pikachu

We’re all fundamental

 

This paper takes stock of megaproject management, an emerging and hugely costly field of study. 

 

[1] It answers the question of how large megaprojects are by measuring them in the units mega, giga, and tera, concluding we are presently entering a new ‘tera era’ of trillion-dollar projects. 

 

Sounds paleontological, doesn’t it?

 

heaviest_dinosaurs

You boys going to run over budget?

 

[2] Total global megaproject spending is assessed, at $6-9 trillion annually, or 8% of total global GDP, which denotes the biggest investment boom in human history. 

 

Somewhere in Cities in Flight, James Blish wrote about the quest for gigantism as being a manifestation of a society in Spenglerian decline, though I don’t think the increasing scale is solely or even predominantly a spasm of a dying society. 

 

[3] Four “sublimes” – political, technological, economic, and aesthetic – are identified to explain the increased size and frequency of megaprojects. 

 

In this context, ‘sublime’ is Mr. Flyvbjerg’s coined expression for the rapture felt by elected officials, engineers, business people and trade unions, and designers and esthetes for the megaproject’s vision. 

 

four_tops

The Four Tops are sublime

 

The rise of teraprojects reflects the increased complexity of both the technological/ engineering aspects of the built environment and the regulatory/ legal aspects.  We can now make things – sophisticated constructions – that do more than could have been imagined even a century ago, and their cost is exponentially greater (though perhaps not greater, in terms of percentage of GDP, than the medieval cathedrals which were the trophy stadia of their time).

 

Blish’s cities in flight were themselves teraprojects, which as his future history chronicled were the salvation of humanity.

 

 

AHI blog posts on the Olympics

 

August 13, 2012: Maius, melius, devitius?; The cost to London of the 2012 Olympics

March 18, 2014: Zeno’s public-consultation paradox; 2 parts of Brazil scouring favelas to create the Olympic venue, a special case of the planning fallacy

June 1, 2015: Mega-boon or mega-boondoggle; 6 parts on Boston’s ‘winning’ the USOC’s designation to bid for the 2024 summer games

August 10, 2015: The highbrows’ sports carnival; 4 parts on the collapse of Boston 2024.

 

 

Thus we need teraprojects – but we need the right ones, and we need them to be priced right – which, usually, they are not.*

 

[4] The “iron law of megaprojects” is laid out and documented: Over budget, over time, over and over again.  Moreover, the “break-fix model” of megaproject management is introduced as an explanation of the iron law. 

 

Doesn’t ‘break-fixit’ sound like it should be shortened to Brexit?

 

theresa_may_pm

We’re going to measure twice, Brexit once

 

Clearly Mr. Flyvbjlerg is a thwarted blogger, since at every opportunity he breaks out an aphorism, witticism, or catchphrase:

 

Overrun is a problem in private as well as public sector projects, and things are not improving; overruns have stayed high and constant for the 70-year period for which comparable data exist.

 

For example, for rail projects, an average cost overrun of 44.7% combines with an average demand shortfall of 51.4%, and for roads, an average cost overrun of 20.4% combines with a 50-50 risk that demand is also incorrect by more than 20%.

 

This serves to illustrate what may be called the “iron law of megaprojects”: Over budget, over time, over and over again (Flyvbjerg, 2011). Best practice is an outlier, average practice a disaster in this interesting and very costly area of management.

 

flyvbjerg_way_out

Well, I could be a blogger, but being an Oxford professor pays way better

 

[5] Albert O.  Hirschman’s theory of the Hiding Hand is revisited and critiqued as unfounded and corrupting for megaproject thinking in both the academy and policy. 

 

As long as we’re here (recursion within recursion), here’s Wikipedia on the Hiding Hand:

 

stalin_and_yezhov_unperson

He wasn’t enough of a Yez man so he was unpersoned

 

The Hiding Hand principle is the idea that when a person decides to take on a project, the ignorance of future obstacles allows the person to rationally choose to undertake the project, and once it is underway the person will creatively overcome the obstacles because it is too late to abandon the project.

 

To me that sounds like Panglossian drivel, but as it’s a digression, we’ll let it stand.

 

dr_pangloss

I’ve recently been hired as head of the National Bureau of Statistics in China

 

[6] It is shown [Note self-abasing  passive voice – Ed.] how megaprojects are systematically subject to “survival of the unfittest,” explaining why the worst projects get built instead of the best. 

 

[7] It is argued that the conventional way of managing megaprojects has reached a “tension point,” where tradition is challenged and reform is emerging.

 

When the post wraps up, I’ll return to Mr. Flyvbjerg’s Point 7 – for now, having indulged in the digression and established the essential point that, even within the realm of overmuscled underbrained megau-capital-fauna, the Olympics are the worst performers.

 

Flyvbjerg et al (2002) found average cost overruns in major transportation projects of 20% for roads, 34% for large bridges and tunnels, and 45% for rail; Ansar et al. (2014) found 90% overrun for megadams; and Budzier and Flyvbjerg (2011) 107% for major IT projects, all in real terms (see Table 4). 

 

So the question is, why?  What makes them worse than their lumbering comparables?

 

[Continued tomorrow in Part 5.]

Dissatisfaction guaranteed or your money *not* back: Part 3, Between spin and outright lying

September 7, 2016 | Bent Flyvbjerg, budgeting, China, Dictators, Housing, Infrastructure, megaprojects, Olympics, Public finance, public works, Speculation | No comments 150 views

 

By: David A.  Smith

 

[Continued from the preceding Part 1 and Part 2.]

 

As we saw yesterday, not only has every Olympic Games since 1960 run over its original budget – by an average of 156%, more than 2½ times – but the certainty of overruns has done little to dissuade starry-eyed organizers from obligating themselves to deliver more than they have the funding to deliver.

 

There’s only one way to do this, and it’s known to all of us from the time we learned to speak.

 

trust_me_im_lying

 

 

3.  Only fibbers win, so winners are the biggest fibbers

 

The principal neurosis of Olympic bidders is the knowledge that they are bidding against other cities, and the fear that the other cities’ municipal leadership will be every bit as neurotic as they, and either richer (ergo able to be better funded) or more desperate (ergo willing to claim to be better funded).

 

 

Sources used in this post

 

Newly published paper (July 1, 2016) by Bent Flyvbjerg, Allison Stewart, and Alexander Budzier (bleeding red ink font)

Wonderfully economist-snarky press release from Oxford’s Said Business School (brown font)

 

 

While the IOC members sit back, gazes condescendingly out the tinted windows of its touring limos, and makes mildly disdainful remarks about the local environment, the worried bid committee gnaws its thumbnails and ponders where a few more ten millions can be found.

 

ioc_board

We have confidence you can do it

 

Having impulsively pledged to do something, on the long flight back home their thinking alternates between euphoria that the bid may be won and terror that they won’t be able to find the money – but somehow that fear is never mentioned in the impromptu tarmac press conference:

 

Unfortunately, Olympics officials and hosts often misinform about the costs and cost overruns of the Games. 

 

Instead, the committee members decide they need a meeting ‘just to go over the figures one more time’, which of course is code for substitute a new higher amount when nobody’s watching.

 

After the Games were awarded, new budgets are typically developed, which are often substantially different to those presented at the bidding stage (Jennings 2012). 

 

ab_fab_morning_after (2)

I always look better before than after

 

Worse still, even before the committee members are back in their offices, in comes an email or telephone call from the IOC asking for further ‘clarification’ of the commitments.

 

For instance, in 2005 London secured the bid for the 2012 Summer Games with a cost estimate that two years later proved inadequate and was revised upwards around 100%.

 

Despite the elected officials’ best efforts to get the information into the public domain unnoticed, somebody always spots it – often the sensationalist press, like the Daily Mail (June 13, 2012):

 

rh_hugh_robertson

The lot before us overpromised; we didn’t

 

Olympics Minister Hugh Robertson said it was a ‘significant achievement’ that spending on the 2012 Games was expected to come in £476million under its £9.3 billion budget.

 

But his boast was declared ‘disingenuous’ by critics, who pointed to the initial estimate of £2.4 billion made by the Labour Government when London won the bid in 2005.

 

Notice the nice bit of political blamesmanship: the Labourites submitted a winning Olympic bid (presumably intended among other things to help them at the polls), which the Tories later revised dramatically upwards, at which point they claimed they knew all along their predecessors were fibbing:

 

pinocchio_jiminy
Hey, everybody does it

 

Mr Robertson added that there was a ‘recognition right from the word go that [the £2.4billion estimate] would have to change dramatically on the basis of delivering the Games’.

 

Why, that’s nearly as much fun as the parties’ housing policy platforms!

 

These new budgets are used as new baselines, rendering measurement of cost overrun inconsistent and misleading both within and between Games. 

 

If only all politicians’ promises were presented with a Surgeon General’s Warning: Consumption of this statement may be hazardous to your sense of reality. 

Using later baselines typically makes cost overruns look smaller, and this is a strong incentive for using them –

 

captain_obvious_exercise

Sometimes it takes an economist to legitimize the obvious

 

– as in the case for London 2012 mentioned above. 

 

Then, when it turned out that the final outturn costs were slightly below the revised budget, the organizers falsely, but very publicly, claimed that the London Games had come in under budget (BBC 2013).  Such deliberate misinformation of the public about cost and cost overrun treads a fine line between spin and outright lying. 

 

A very fine line.

 

nigel_tufnel_clever

And I’m definitely on one side of it

 

It is unethical, no doubt, but very common. 

 

donald_trump hillary_clinton

Fortunately, both spin and outright lying are highly uncommon in American politics

 

In political terms, of course, the best accounting systems are those (say as in Argentina or China) where the accountants themselves are always to look on the bright sideor else:

 

The vigilant reader may be skeptical that the lowest cost overrun of all Games was found for Beijing 2008 at 2%. 

 

China is known for its lack of reliability in economic reporting (Koch-Weser 2013).  However, the total cost of $6.8 billion and the cost per athlete of $622,000 for the Beijing 2008 Games are both higher than for the majority of other Summer Games (see Tables 1 and 2). 

 

beijing_birds_nest_blocked

Yes, it’s a huge success, and no you can’t see the evidence

 

No doubt the Chinese have been able to achieve something that no other government has.

 

The reported costs are therefore deemed adequate for hosting the Beijing Games and we have seen no direct evidence that the official numbers have been manipulated and should be rejected for this reason.  Like other observers of economic data from China we therefore include the numbers, with the caveat that they are possibly less reliable than numbers from other nations, given China’s history of doctoring data. 

 

china_net_outflows (2)

Yes, things are so great in china, that’s why everybody’s getting their money out of the country!

 

Nor is fibbing to win the only reason Olympic Games costs run over so much (China excepted, that is J ), because it’s time to add another fact to the mix:

 

[Since 1960] all Games, without exception, have cost overrun.  For no other type of megaproject is this the case. 

 

robel_habte

It’s not about coming in last, it’s about competing … isn’t it?

 

[Continued tomorrow in Part 4.]