Megaprojects and Capital Hangovers

Introduction

Megaprojects are big, high-profile, long-term capital investments that typically costing over $100B. These projects are high-risk and are often finished over budget. Worse, many fail to make a real contribution to local or national economies. They can waste a community’s time, attention and resources and harm long-term fiscal sustainability. Their popularity is hard for any community to resist. Local leaders concerned about fiscal sustainability can apply lessons learned from mega projects to any large capital project. After all, a relatively modest capital project can be mega for a small city.

Manhattan Bridge

Manhattan Bridge, March 23, 1909. Wikimedia Commons.

Risks and Shortcomings of Megaprojects

According to Bent Flyvbjerg, in a Cato Institute Policy Report, megaprojects are incredibly seductive to designers, engineers, politicians and construction contractors. Their size, economic impact and aesthetic qualities make them a favorite of many. This lure makes it easy for decision makers to overlook or discount the risks. Given our focus here on local leaders who take responsibility for their community’s fiscal and economic health, we recommend much of Flyvbjerg’s assessment, particularly the following:

  • Projects with long planning periods increase the chance of unforeseen changes or complexities. These include price increases or technology changes that undermine the original motive for the project.
  • These projects, as conceived by their champions, are singular or unique. That means there are few existing lessons to apply. They also offer few lessons for future initiatives because of their uniqueness.
  • These projects are hard to oversee which increases the risk of cost overruns and mistakes. A phenomenon called the principal-agent problem applies here where those doing the work are able to conceal their performance from those paying for the work.
  • Mission creep is especially risky with mega projects. Even minor changes can add huge costs.

In addition, we would have a few other concerns with mega projects, or any relatively large capital initiative. Those concerned with local sustainability should also consider the following:

Community influence and control tends to be lower on these projects. They are seldom conceived by the average taxpayer. They will be designed by technocrats. Expert opinion and analysis will usually be given more weight than the perspective of those who will have to live with the results.

Sustainability is enhanced by small, incremental and slow solutions. Projects which are huge, all or nothing and tend to promote haste give too little time to learn and change the approach if they are not working out. Small, community-driven infrastructure projects can deliver more widespread benefits.

Relatively large projects are more likely to be beyond the capabilities of the local community. This means that the contracts and the funding for the project will go to outsiders. Small-scale initiatives can be identified, designed, constructed and evaluated by local talent and local labor. This keeps scarce resources in the community and builds experience for local firms.

These projects can also severely distort decision-making for many years. In the meantime, businesses, households and governments will have made other long-term investment decisions because of the existence of the mega project investment. Megaproject failures will not be replaced and can strand all those other smaller investments.

Beyond these considerations, local leaders should also beware of the large economic impact benefits of mega projects. More careful analysis is needed.

Who vs. How Much?

Since mega projects are big, they will have a big economic impact. Economic impact studies always bring good news since they tally total spending and increase that with some multiplier. What is more important locally, is how the costs and benefits of the project are distributed throughout the community and over time. Project costs and benefits are seldom shared equally in a community. They are often not shared equally by current and future generations. A good cost-benefit analysis can help local communities better understand the real economic consequences of pursuing a large project.

Finally, local leaders need to dramatically increase the level of dialogue in the community if they are considering a big project. The engagement process slows the project, giving more time to consider the real costs and benefits. It also builds community support, especially if the project is complex, hard to understand or poses potential risks. Some mega projects are worthwhile, but they deserve extra scrutiny because their legacy will be with us for a long time.

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