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Hugh Kelly

Cohesion Policy evaluation – Cost and time estimates of major projects Warsaw 30 November. Hugh Kelly. Importance of reliable estimates. Estimates are critical: Public policy decisions Investment decisions Accountability Cost overruns and benefit shortfalls:

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Hugh Kelly

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  1. Cohesion Policy evaluation – Cost and time estimates of major projects Warsaw 30 November Hugh Kelly

  2. 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 operation1 1. See Megaproject Policy and Planning: Problems, Causes and Cures, Flyvberg, Department of Development and Planning, Denmark

  3. 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?

  4. But major projects can go spectacularly over budget A$102m $5.0bn A$7.2m Sydney Opera House $1.5bn £9.5bn Denver's International Airport $14.6bn £4.7bn $3.7bn Boston’s Central Artery “The Big Dig” Channel Tunnel http://miller-mccune.com/business_economics/bill-of-goods-the-world-s-biggest-boondoggles-601

  5. And the evidence suggests that the problem is not restricted to flagship projects • ERDF 2000-2006 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%

  6. Traditional explanations Source: European Commission DG XVI (1998), “Understanding and Monitoring the Cost-Determining Factors of Infrastructure Projects”, A User’s Guide, Brussels

  7. 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 (1993-2002)”, Synthesis Report, Rotterdam

  8. Recent review of ERDF projects

  9. Traditional approach to dealing with the risk • Risk management • PPP • Contingency funding • More and more detailed budgets

  10. 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.

  11. But if we understand the reasons for overrun why do we keep getting it wrong ? £9.3bn £2.3bn Original bid cost Current estimate

  12. Alternative approach: Flyvberg: Delusion and Deception in large Capital Projects1 • 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

  13. Principal agent issues

  14. Sources of Strategic Deception • Actors self interests • Asymmetric information • Different risk preferences • Different time horizons • Diffuse accountability

  15. Different types of risks for different projects

  16. Solutions – (a) risk sharing • Pass risk of over runs to: • Member states • Local Governments • Contractors

  17. Solutions – (b) reference class projects • Select reference class • Assess distribution of outcomes • Make an intuitive prediction of project’s position in the distribution • Assess the reliability of prediction • Correct intuitive estimates

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