Public Mega-Projects: Our Costs Runneth Over

by Sandy Ikeda
Fri, 1 Feb 2008 at 3:33 PM

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From the New York Times, "Building costs deal blow to local budgets," we learn that

State and local governments in many parts of the country are struggling to pay for roads, bridges and other building projects because of rising construction costs… Experts say high costs are linked to competition from a global development boom.

This includes major construction in China, India, Canada, and the Northeastern United States as well as in post-hurricane Florida and the Gulf Coast.

The impact locally was also reported in the Times, "Higher costs may curtail MTA work":

The rising costs could slow progress on the three so-called mega-projects needed to expand the capacity of the public transportation system, including a Long Island Rail Road link to Grand Central Terminal, a westward extension of the No. 7 subway line and the first leg of the Second Avenue subway…

The news represents another setback for the subway station project, known as the Fulton Street Transit Center, which was envisioned as a central element in the recovery of Lower Manhattan after the terror attack of Sept. 11, 2001.

The cost increase could run to $1 billion, pushing the overall cost of these mega-projects to $12.5 million.

The New York Post puts the matter bluntly in "MTA's $900 million boondoggle," which tells how the MTA "rushed out" 148 small businesses to avoid delays and cost overruns for the Fulton Street project only to be left with a "huge, empty lot." So after wrecking the neighborhood, they're now open to suggestions about what to do with it.

The article continues:

Asked about the possibility of getting private funds to help build an above-ground station, [MTA executive director Elliot] Sander said, "There's some concerns that in terms of the condemnation process that we went through, that might restrict us in terms of a going forward [with a] public-private partnership. But that's one of the things we'll look at very closely."

Curious, because the city government hasn't shied away from using eminent domain to take private property for private development in the past (witness Atlantic Yards in Brooklyn). Why the reservations now, especially since this is part of a public-transit renovation? Is there a glimmer of hope that local authorities have a new-found respect for the Constitution? Not!

Anyway, the main point is that rising costs in these examples are due to a higher-than-expected demand for building materials. So to the extent that the markets for these materials are competitive — i.e., they are allowed to freely adjust without excessive regulation — we should expect prices to fall over time as suppliers produce more in response to higher profits.

But there's a bigger reason for cost overruns.

If you think a $1 billion mistake is big, another MSNBC article, "$400 million deal near on Big Dig design flaws," on the cost of constructing the enormous traffic tunnel that now runs beneath downtown Boston, gives us a pretty good idea of just how big they can get: "The $14.79 billion Big Dig, which had an initial price tag of $2.6 billion, has been plagued by problems and cost overruns throughout the two decades it took to design and build." That's a factor of over five times the original estimate!

Unlike the rising building costs reported in the Times, however, these costs are not only, or even mainly, the result of rising input prices, but rather a consequence of the soft budget constraints that characterize publicly funded mega-projects, resulting in inefficient planning and management. And because competitive markets are not the source of these gross inefficiencies we can't expect them to bring costs down over time.

Something to keep in mind as New York wends its way along the mega-project road.

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