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 operation 1 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 Bostons Central Artery The Big Dig $3.7bn $14.6bn Sydney Opera House A$7.2m A$102m

And the evidence suggests that the problem is not restricted to flagship projects ERDF 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 Users 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 ( ), Synthesis Report, Rotterdam

Recent review of ERDF projects

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 Projects 1 Delusions Planning fallacy Human optimism Anchoring and adjustment Tendency to stick to initial estimate Deception Principal-Agent Problem Sources 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 projects position in the distribution Assess the reliability of prediction Correct intuitive estimates