John Kay (Financial Times, August 22, 2012) notes that price increases for big government projects systematically exceed the general inflation rate by enormous orders of magnitude. Most though not all of his examples are British, but the phenomenon itself is world-wide.
The general price level in Britain increased by a factor of 10 between the Victorian era and 1960 and by another factor of 10 in the 50 years that followed.From this perspective let us review two of John Kay’s several examples.
The London Olympics of 1908 cost just 20,000 pounds. The London Olympics of 1948, allowing for price inflation, should have budgeted out at no more than 160,000 pounds, especially as it was supposed to be a post-war austerity event. In fact, it budgeted out at 750,000 pounds. On a similar calculation, from 1908 to 2012, the London Olympics of 2012 should have budgeted out at 2 million pounds. The current estimate for that spectacle is 12 billion pounds!
The earliest underground railway lines in London – and in the world – cost half a million pounds a mile to build. The cost of the Victoria Line , built in the 1960s, rose almost exactly in line with general inflation, coming in at 7 million pounds a mile. A short decade later, the Jubilee Line cost 36 million pounds a mile to build – way above the interceding rate of price inflation. and its extension in the 1990s cost 360 million pounds a mile, many degrees of magnitude above the interceding rate of price inflation. In 2012, the tunnels for Crossrail – the newest underground railway connection in London – are budgeted at 1 billion pounds a mile! Exponential budget increases of this magnitude raise serious questions about the accountability of big public sector projects.
For sure, increases in the number of events scheduled for the Olympic Games and heightened risks of terrorist interventions play some role in justified cost increases for the Games. Equally, changing public views on construction safety and on mitigating adverse environmental consequences, play some role in justified cost increases for underground construction. However, given the magnitude of the budget increases outlined, something else must be in play.
John Kay acknowledges this reality in his column, gently skirting around the real culprit:
Only a few global companies are now perceived as capable of running mega projects, and they are hired by often inept public sector purchasers. These clients change their minds frequently and are prone to insist on idiosyncratic specifications. Perhaps the principal culprit is technological overkill. The argument that we need the best and latest is powerful in political decision making, even among people who would never behave that way in their everyday lives.” John Kay, ‘Why do we need to pay billions of pounds for big projects?’ Financial Times, August 22, 2012
Public choice scholars are a tad more blunt than the gentlemanly Oxford scholar, John Kay. Rent-seeking, we call such behavior. Rent-seeking is the process whereby well-heeled bidders invest in politicians and government agencies, lashing out money in the form of campaign contributions and personal bribes in return for government favors of one kind or another.The objective, of course, is to get back significantly more than what they have outlayed, and to protect those fruits from their less-well-heeled competitors.
The result is a 12 billion pound Olympic games and 1 billion pound per mile for digging holes in the ground. And public debt rising to unsustainable levels.