California High-Speed Rail Project to Cost More Than Expected

Great post by Megan McArdle.

"When the California High Speed Rail project was put before voters, its backers estimated that it would cost $33 billion. Fairly quickly thereafter, planners revised that estimate to $43 billion, a 25% increase.

But that seems to have been giddily overoptimistic. According to the Mercury News, the state now expects the first leg of California's high speed rail is to come in over budget. Waaaaaaaay over budget (H/T Reihan Salam):

The California High-Speed Rail Authority's new cost estimates released Tuesday show the initial stretch of construction between Merced and Bakersfield will cost $10 billion to $13.9 billion depending on how it's built. Project planners had previously pegged the sectionat $6.8 billion.

And this is the part that they're building first because it's so cheap--not a lot of expensive real estate (or angry, politically powerful neighbors in the way). The Mercury News says that if the whole project's costs blow up the way the first leg has, the whole project will cost somewhere between $63 and $87 billion. But why expect the increase will be proportional? Of course, it might well be lower--but the later legs are going to be the ones where there's a lot of expensive infrastructure, and time-consuming community resistance--standing between the builders, and completion.

This is not exactly an uncommon problem with government projects. To some extent, it's a problem with all sorts of projects. But I am not under the impression that commercial real estate developments usually miss their targets by hundreds of percentage points.

Why should this be so? It's a curious version of the winner's curse, in which the winner of an auction is usually the person who is most overoptimistic about the asset's value. In politics, the "winning" projects--the ones that get funding--are usually the ones where the people pushing the projects are the most delusionally convinced that they can do it all on the cheap.

Of course, it's not like corporate America doesn't have their wild-eyed schemers who promise to deliver massive benefits for a tenth of the cost of alternatives. And more than a few of these people manage to get the company to come along for a ride on the Fantasy Express. Anyone who has worked in corporate America has a few of those stories (always about someone else): "It's a floor wax, but it's also a doberman pinscher!" "Sure, no one wants to live in the middle of a swamp right now, but wait until you see the new water polo course we're going to put in!" "We're losing money on every unit, but will make it up in volume!"

But in corporate America, there are usually a fair number of people who care a whole lot if your project costs too much, or doesn't work, because if it all blows up, their jobs and salaries will be put at serious risk. Those people will nitpick your cost estimates until you're sitting around a conference table an hour past quitting time arguing about whether you really can buy bulk paperclips for $5 a gross with a Staples discount card.

Who's going to lose their job over this project? It was passed by initiative, so politicians aren't really on the hook. The people in charge of the cost estimates are all civil servants. In theory, the taxpayers should care. But what the hell do they know about how much it costs to build a high speed rail system?

As Reihan says, this is a national embarassment. Not just because it's hard to believe that voters would have passed this particular $80 billion rail initiative (this is about half of California's annual budget--as if the United States had voted to adopt a $2 trillion highway bill). But because this is no way to run a policy process."