nep-ppm New Economics Papers
on Project, Program and Portfolio Management
Issue of 2013‒03‒30
seven papers chosen by
Arvi Kuura
Parnu College - Tartu University

  1. Underestimating Costs in Public Works Projects: Error or Lie? By Bent Flyvbjerg; Mette K. Skamris Holm; S{\o}ren L. Buhl
  2. How (In)accurate Are Demand Forecasts in Public Works Projects? The Case of Transportation By Bent Flyvbjerg; Mette Skamris Holm; S{\o}ren L. Buhl
  3. Survival of the Unfittest: Why the Worst Infrastructure Gets Built, And What We Can Do about It By Bent Flyvbjerg
  4. Comparison of Capital Costs per Route-Kilometre in Urban Rail By Bent Flyvbjerg; Nils Bruzelius; Bert van Wee
  5. Integrated Assessment of Natural Hazards and Climate Change Adaptation: I. The KULTURisk Methodological Framework By Carlo Giupponi; Vahid Mojtahed; Animesh K. Gain; Stefano Balbi
  6. Setting reasonable performance targets for public service delivery By Newman, John L.; Azevedo, Joao Pedro
  7. The Long-term Effects of Early Lead Exposure: Evidence from a case of Environmental Negligence By Tomás Rau; Loreto Reyes; Sergio S. Urzúa

  1. By: Bent Flyvbjerg; Mette K. Skamris Holm; S{\o}ren L. Buhl
    Abstract: This article presents results from the first statistically significant study of cost escalation in transportation infrastructure projects. Based on a sample of 258 transportation infrastructure projects worth US$90 billion and representing different project types, geographical regions, and historical periods, it is found with overwhelming statistical significance that the cost estimates used to decide whether such projects should be built are highly and systematically misleading. Underestimation cannot be explained by error and is best explained by strategic misrepresentation, that is, lying. The policy implications are clear: legislators, administrators, investors, media representatives, and members of the public who value honest numbers should not trust cost estimates and cost-benefit analyses produced by project promoters and their analysts.
    Date: 2013–03
  2. By: Bent Flyvbjerg; Mette Skamris Holm; S{\o}ren L. Buhl
    Abstract: This article presents results from the first statistically significant study of traffic forecasts in transportation infrastructure projects. The sample used is the largest of its kind, covering 210 projects in 14 nations worth US$59 billion. The study shows with very high statistical significance that forecasters generally do a poor job of estimating the demand for transportation infrastructure projects. The result is substantial downside financial and economic risks. Such risks are typically ignored or downplayed by planners and decision makers, to the detriment of social and economic welfare. For nine out of ten rail projects passenger forecasts are overestimated; average overestimation is 106 percent. This results in large benefit shortfalls for rail projects. For half of all road projects the difference between actual and forecasted traffic is more than plus/minus 20 percent. Forecasts have not become more accurate over the 30-year period studied. If techniques and skills for arriving at accurate demand forecasts have improved over time, as often claimed by forecasters, this does not show in the data. The causes of inaccuracy in forecasts are different for rail and road projects, with political causes playing a larger role for rail than for road. The cure is transparency, accountability, and new forecasting methods. The challenge is to change the governance structures for forecasting and project development. The article shows how planners may help achieve this.
    Date: 2013–03
  3. By: Bent Flyvbjerg
    Abstract: The article first describes characteristics of major infrastructure projects. Second, it documents a much neglected topic in economics: that ex ante estimates of costs and benefits are often very different from actual ex post costs and benefits. For large infrastructure projects the consequence is cost overruns, benefit shortfalls, and the systematic underestimation of risks. Third, implications for cost-benefit analysis are described, including that such analysis is not to be trusted for major infrastructure projects. Fourth, the article uncovers the causes of this state of affairs in terms of perverse incentives that encourage promoters to underestimate costs and overestimate benefits in the business cases for their projects. But the projects that are made to look best on paper are the projects that amass the highest cost overruns and benefit shortfalls in reality. The article depicts this situation as "survival of the un-fittest." Fifth, the article sets out to explain how the problem may be solved, with a view to arriving at more efficient and more democratic projects, and avoiding the scandals that often accompany major infrastructure investments. Finally, the article identifies current trends in major infrastructure development. It is argued that a rapid increase in stimulus spending combined with more investments in emerging economies combined with more spending on information technology is catapulting infrastructure investment from the frying pan into the fire.
    Date: 2013–03
  4. By: Bent Flyvbjerg; Nils Bruzelius; Bert van Wee
    Abstract: Because of the prominent position of urban rail in reducing urban transport-related problems, such as congestion and air pollution, insights into the costs of possible new urban rail projects is very relevant for those involved with cost estimations, policy makers, cost-benefit analysts, and other target groups. Knowledge of the differences in costs per kilometre, including explanations of differences and their breakdowns is currently lacking in the literature. This paper aims to provide a first stage insight into how cost per kilometre varies across urban rail projects. The methodology applied is a simple cost comparison across projects where the data collected are comparable. We conclude that capital costs per route-kilometre of urban rail vary highly between projects. Looking at European projects and excluding outliers, the total capital costs per route-kilometre (including stations and rolling stock) lie mainly between US$50-100 million (2002 prices). Including US projects, the range is US$50-150 million. The main reasons for the high variation in the route-kilometre costs are differences between projects as regards the ratio of underground to above-ground construction, ground conditions, station spacing, type of rolling stock, environmental and safety constraints and labour costs. We warn, however, that the observations used to reach the conclusions are too few to obtain results with statistical significance. Our results must therefore be seen as a first step towards collecting more data so that a more succinct statistical analysis can be conducted. Another conclusion is therefore that this area has future research potential.
    Date: 2013–03
  5. By: Carlo Giupponi (Department of Economics, University Of Venice Cà Foscari); Vahid Mojtahed (Department of Economics, University Of Venice Cà Foscari); Animesh K. Gain (Department of Economics, University Of Venice Cà Foscari); Stefano Balbi (Basque Centre for Climate Change)
    Abstract: A conceptual framework integrating different disciplines has been developed to comprehensively evaluate the benefits of risk prevention. Three main innovations are proposed with regards to the state of the art: (1) to include the social capacities of reducing risk, (2) to go beyond the estimation of direct tangible costs, and (3) to provide an operational solution to assess risks, impacts and the benefits of plausible risk reduction measures. The traditional risk metric in the physical sciences is the expected damage (direct tangible costs), which is defined as a function of hazard, vulnerability (physical) and exposure. The last element, exposure, provides the information to convert results into monetary terms. In the development of the KULTURisk Framework (KR-FWK), we considered several different pre-existing proposals, and we designed a new one as a conceptual model and also a flow-chart for the elaboration of information. The proposed KR-FWK is thus expected to provide: 1) an operational basis for multidisciplinary integration; 2) a flexible reference to deal with heterogeneous case studies and potentially various types of hazards; and 3) a means to support the assessment of alternative risk prevention measures including consideration of social and cultural dimensions. The project case studies of the process are expected to provide a quite diversified set of situations, allowing to consolidate the framework itself and to develop ad hoc tailored solutions for most common implementation cases.
    Keywords: Natural disasters, Integrated Risk Assessment, Climate change adaptation
    JEL: Q51 Q54 D81
    Date: 2013
  6. By: Newman, John L.; Azevedo, Joao Pedro
    Abstract: Reaching agreement on a reasonable performance target is a challenge, with costs associated with getting it wrong. Attention in the literature has focused on the potential negative effects of gaming or of creaming. However, even if there is no gaming or creaming taking place, there can still be costs associated with setting a level of the performance target that is either too low or too high. On the one hand, if the negotiated performance target is too low, there is a strong risk that the target would be met without any change in behavior or performance from what would have been realized without a performance management system. In that case, there would be no benefit -- only the cost of covering the administrative costs associated with developing the monitoring and management systems. On the other hand, if the negotiated performance target is too high, there could also be significant costs. The exact nature of the costs depends on which one of two unattractive options the principal chooses to follow once it becomes apparent that the performance targets were set unrealistically high. If the principal chooses simply to waive any possible repercussions for the agents for not meeting the performance targets, this can undermine the credibility of the system. If the principal insists on holding agents to meeting the performance targets -- no matter how unrealistic they were -- this can breed resentment and adversely affect future productivity. This paper considers some approaches to target setting that have been used in the literature and proposes an approach based on the use of quantile regressions to construct a Characteristic Adjusted Performance distribution of performance to guide the selection of targets. The paper then presents two concrete examples of applications of this approach related to the setting of targets on School Test Scores and Improvement in Homicide rates in Police Districts in the State of Minas Gerais, Brazil.
    Keywords: E-Business,Tertiary Education,Teaching and Learning,Educational Sciences,Education For All
    Date: 2013–03–01
  7. By: Tomás Rau; Loreto Reyes; Sergio S. Urzúa
    Abstract: This paper estimates the effect of early lead exposure on academic achievement and adult earnings. We analyze longitudinal information from individuals attending primary and secondary schools in the city of Arica (in northern Chile). Between 1984 and 1989, Arica received more than 20,000 tons of toxic chemicals containing high concentrations of lead. Initially, the chemical waste was located several kilometers from the city. However, Arica's rapid expansion, which included the construction of housing projects just meters away from the waste deposit, put a large number of families at risk. Our data include information on residential proximity to the polluted area, levels of lead exposure, comprehensive demographic information, nationally representative academic test scores and administrative data on adult earnings. We document a strong relationship between blood lead levels and student academic performance. We find that an increase of one microgram of lead per deciliter of blood reduces math and language scores by 0.15 and 0.21 standard deviations, respectively. For earnings, we estimate that for each extra microgram of lead, monthly earnings decrease by CLP 11,458 (or USD 22.92). This translates into a reduction of USD 6,000 in lifetime earnings per microgram of lead per deciliter of blood.
    JEL: I15 I18 I25 J17 O1 Q5 Q51 Q53 Q56
    Date: 2013–03

This nep-ppm issue is ©2013 by Arvi Kuura. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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