Tag Archives: cost-benefit analysis

Megaprojects and Capital Hangovers

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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.

Better Decisions with Fiscal Impact Analysis

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Introduction

Today we will talk about a tool that cities and towns can use to make more efficient and equitable infrastructure, equipment and economic development investments. That tool is fiscal impact analysis. Most city operating expenses are for personnel: salaries, health care costs and pensions. At the same time, cities and towns spend billions on equipment, infrastructure and one-time special projects like economic development initiatives. According to the Bureau of Economic Analysis, state and local governments spend over $350 billion annually on infrastructure, buildings, equipment and technology systems. Some recent estimates identify another $70 billion in various economic development initiatives. (sources) How can local governments make sure they are getting what they intend and are generating an adequate return on investment?

What is Fiscal Impact Analysis?

Fiscal impact analysis is a process to measure how local-government revenues and service costs will change because of a public or private capital investment or a change in government policy. It subtracts costs associated with the project from the new revenues generated because of the project. Examples can include new commercial or residential developments or infrastructure construction.

How it helps you make better decisions.

Local leaders with a lot of experience in their community often have a good intuitive feel for the consequences of these types of projects. Still, adding fiscal impact analysis to your decision-making process has many benefits. You will have more precise cost and revenue estimates for budget forecasting. You will also be able to compare alternative strategies when deciding how to spend a limited investment budget. More importantly, a transparent fiscal impact process can help recruit constituent support for a chosen strategy and convince elected officials that management is making good use of public resources.

What you need to do to make the most of the tool.

Practically, any community can make use of fiscal impact analysis. Professional experience in economic and budget analysis is necessary to build a custom model for a community, but less experience is needed to run an existing model. The model will use your historic budget and community economic data. This data will need to be collected and organized to go into the model. Beyond the technical requirements, how the model is used is even more important for success. Communities that build an organizational culture that understands and supports the tool is vital. While the analysis is relatively straightforward, if conducted behind the scenes it can breed confusion or distrust among stakeholders. Consistent use and communication of the findings will help stakeholders weigh the technical analysis along with other factors that are important to them. Fiscal impact analysis is just one factor in local development decision making. Equity, in terms of who pays and who benefits, are also important, as are other community values like historic or environmental stewardship.

We are experts at this tool and believe it is an important step to better local government decision making. Take a look at our Local Leader’s Guide to Fiscal Impact Analysis for more information and a handy checklist of questions any consumer of these types of studies should ask to make sure you are getting reliable results. Let us know if you would like to learn more about how fiscal impact analysis can help your community make better decisions.

What’s Next

Next week, as local governments across the country are working up their budgets, we will focus on the largest operating expense for cities and towns – policing. What can policy analysis bring to the discussion, and help communities deliver public safety in fair, transparent and efficient ways?