Their costs are astronomical and benefits questionable, yet megaprojects have never been so popular. What's going on?

(Image: Andrzej Krauze)

AS BRAZIL prepares to host the 2014 football World Cup and the 2016 Olympics, money has become a key issue. Infrastructure work is expected to cost a budget-busting $14.5 billion for each. Outraged by the cost and scandals of these megaprojects, among other things, Brazilians protested.

Across the world in Russia, the bill for hosting the 2014 winter Olympics in Sochi is claimed by some to have spiralled to $50 billion. The vitriol is flying. Meanwhile, the UK’s plan to build its second high-speed rail link has seen cost estimates rise from £33 billion to £43 billion and a war of words over its worth. Then there are the many IT and defence projects with vast overspends and dysfunctional outcomes. Waste from failed and underperforming IT projects in the US alone is estimated at $55 billion annually.

Despite this, megaprojects have never been more popular with politicians. Global spending on them is $6 to 9 trillion a year.


What drives this enthusiasm in the face of repeated failure? There is the rapture engineers and technologists get from building large and innovative projects, pushing the boundaries of what they can do. Similarly politicians love constructing monuments to themselves and their causes. Grand schemes are media magnets; politicians seem to enjoy few things better than the exposure they get from starting megaprojects, except maybe cutting the ribbon of one in the company of royals or presidents.

Equally there is the delight of business people and trade unions in making lots of money or seeing jobs created by megaprojects. Contractors, engineers, architects, consultants, construction and transportation workers, bankers, investors, landowners, lawyers and developers lap up the rewards while the financial risks frequently fall on the taxpayer. Finally, there is aesthetic delight in iconic sites. Sydney Opera House, anyone?

All these factors ensure that those who benefit as described are plentiful in number and want more of the same.

Of course a sceptical public needs to be persuaded. The sell is usually on the grounds of job creation, economic gain, better public services and environmental benefits. But there is a big if – such benefits only truly follow if the project is done right. Only when this caveat is disregarded, as it often is, can megaprojects be seen as an effective way to deliver infrastructure. In fact, conventional megaproject delivery has a dismal record in terms of costs and benefits.

In reality, many psychological factors are at work to maintain this situation. They include uniqueness bias in terms of technology and design. That is, the tendency of planners and managers to see their projects as firsts, which impedes learning from other projects. And frequently there is over-commitment at an early stage, resulting in a “lock-in” mentality. Former California State Assembly member Willie Brown, discussing a cost overrun on the San Francisco Transbay Terminal megaproject this year, put it well: “The idea is to get going. Start digging a hole and make it so big there’s no alternative to coming up with the money to fill it in.”

A false sense of control is also common and ignores “black swans” – unexpected, extreme events with massively negative outcomes to which megaprojects are overexposed. Managers tend to treat projects as if they exist in a deterministic universe of cause, effect and control. Last but far from least is the optimism bias which plagues cost estimates.

Some say this doesn’t matter, because while optimism bias rules cost estimates, pessimism rules benefit estimates, so it all balances out in the end. They say we need such biases and that nothing grand would ever get built if we let all the things that could go wrong put us off, that human creativity will always get us through. Economists such as Albert Hirschman pioneered such views and they took root deeply.

Today we have much better data and theories. We know that while there may be elements of truth in such thinking, the samples and conclusions of Hirschman are unrepresentative. In particular, the assumption that optimism would apply to cost estimates but pessimism to benefit estimates has been disproved. Optimism bias applies to both. It leads to costs outstripping projections and far fewer users than forecast for, say, your new transport link.

Worse still, what we often have is an inverted Darwinism: the survival of the unfittest. It is not the best projects that get chosen, but those that look best on paper. And these are the ones with the largest cost underestimates and benefit overestimates. They are disasters waiting to happen.

It is not the best megaprojects that get chosen, but those that look best on paper

It has become increasingly clear that when megaprojects go wrong they are like the bull in the china shop: they can damage national economies. It has become similarly clear to many involved that something needs to be done.

Fortunately in some cases it is. For example, the UK Treasury now requires all government ministries to develop and use procedures for megaprojects that curb optimism bias. Switzerland and Denmark followed that lead. Australia held an inquiry into how to secure better delivery of major projects. The Netherlands works to limit misinformation about large infrastructure endeavours. In Boston, cost overruns in the notorious “Big Dig” road tunnel proved a catalyst for change there.

Finally, research on how to reform megaproject management is having an impact. Great strides have been made in understanding what causes failures. And with a better understanding comes a better grasp of cures.

The truly optimistic might even say that one day the word megaproject will no longer be synonymous with unexpected costs and questionable benefits.

This article appeared in print under the headline “Throw me the money”