Until recently, the Irish State did not have to be good at investment. That’s because, before the 1990s, Ireland quietly dwindled. It didn’t have to get good at building homes and transport systems for a growing population because it had a shrinking population.
In the 1990s Ireland got its act together and started creating jobs. The population started to grow again.
After 30 years of growth, one big crash and one recovery, it’s safe to say it isn’t a fluke: Ireland really does have a strong economy. Ireland has found a formula that works.
Making money is great. It’s the hardest thing for a country to get right. But money is no good if you’re not good at spending it.
Having figured out the money-making side of things, Ireland has to figure out the money-spending side. It is projected by Eurostat to have the second-highest rate of population growth in Europe between 2020 and 2060. Its population is expected to grow more than five per cent per decade. Ireland needs much more infrastructure. It needs more investment.
Private investors think differently to companies, which think differently to states. Each of them is trying to maximise future benefits relative to current costs. But the specifics are different.
State investment is the least well-understood and hardest to quantify. States tend to just figure it out as they go. That’s why Ireland’s slow 20th century is a big disadvantage today. Ireland doesn’t have the muscle memory. Unlike most other European countries it hasn’t spent the last 100 years building things, fixing mistakes, adjusting course, and gradually getting more efficient at building infrastructure.
The pressure is on to get good at building infrastructure and to do so quickly. Ireland’s population has already outgrown its existing infrastructure in housing, transport, water and health, to name a few. And as we’ve seen the population is not expected to stop growing.
That’s why the final report of the Transit Costs Project is worth paying attention to. The Transit Costs Project is a team of interdisciplinary researchers based at New York University which has spent the last five years trying to understand why some countries are so bad at building — mainly metro systems — and others are so good at it. I’ve previously interviewed one of the team, Marco Chitti, for The Currency’s podcast.
Metros are a useful stand-in for state investment generally because they’re like for like: a metro is a metro, wherever it’s built. They’re also big enough that there’s good data on them.
Metro costs are worth studying in their own right — Ireland is about to build one after all. But the report is best read as a blueprint for efficient state-led investment. Most of the lessons are just as applicable to children’s hospitals as they are to underground tunnels.
The gap between countries
The first thing to know about building metros is that there’s a huge disparity in costs between the most efficient and the least efficient. The least efficient metro builders spend about ten times as much per kilometre as the most efficient.
The second thing to know is that the cheapest metro builders aren’t in poor, low-cost countries. The cheapest metro builders are relatively rich: Portugal, South Korea and Spain. Three of the most expensive metro builders are the USA, New Zealand and the UK (it’s not a coincidence that these countries are all former British colonies — more on this later).
There is, in fact, zero correlation between metro costs and national GDP. Which is strange if you think about it – you’d imagine poor countries would be able to build more cheaply. The thing that makes some countries 10x more expensive than others is not the underlying cost structure of the economy.
Best-practice countries can build tunnelled metro systems for about $100 million per kilometre. Metrolink will be about fifty per cent tunnelled, and it’s currently expected to cost $504 million per kilometre.
So why do some countries build metros more cheaply than others? This is the question the Transit Cost Project team set out to ask.
The Transit Costs project looked at four case studies in detail: Italy, Turkey, Sweden, and New York City’s Second Avenue subway extension.
Italy and Turkey are two low-cost countries that have been good at building subways cheaply. Sweden is a high-cost country that has done the same – below is a picture of a station from the Stockholm metro. New York’s Second Avenue Subway extension is ongoing and will cost between 8 and 12 times as much as a composite of the other three.
The Transit Costs Project broke project costs down into three components: physical structures, procurement and other soft costs, and labour. What they found is that New York was moderately more expensive than the other three in each category and each subcategory.
The cost differences compounded on each other. Relative to the base case of 1.0 for Turkey, Italy and Sweden, New York’s extra-large stations cost 2.06. The designs were bespoke rather than standardised, which multiplied costs by 1.35, for a running total of 2.78 (2.06 times 1.35). US labour multiplied costs by a further 1.5, for a running total of 4.17. US procurement multiplied costs by a further 1.85, for a running total of 7.72. And soft costs like planning, insurance and design multiplied costs by 1.21, for a final total of 9.34 – again relative to the baseline cost of 1.0.
How does a government avoid New York’s fate? The report is more than 400 pages long. But here are some important parts.
The civil service needs in-house expertise. Not everything can be outsourced. Somebody needs to know whether the state is being charged a fair price; whether a feasibility study is really necessary; or whether a simpler design would do the job adequately.
Without in-house expertise, governments lean on consultants, and consultants tend to be associated with expensive projects. The report says: “Our cases show that consultant teams need a client who knows what it wants and is technically competent enough to direct the consultants rather than allowing them to design overly elaborate stations or propose additional studies that don’t advance the project.”
Government agencies need to collaborate and share risk with contractors. In the US and other English-speaking jurisdictions, the fashion is to push as much risk as possible onto contractors. The result is that only the biggest contractors can bid, and “costs grow sharply wherever they are implemented”, according to the report. These practices – weak in-house capacity, reliance on consultants, pushing risk onto contractors – are most common in the English-speaking world.
Governments like contracts that push risk onto contractors because they hate cost overruns, for which they can be held responsible. By pushing risk onto contractors cost overruns go down, but the overall cost of the projects goes up because contractors increase their prices to compensate for the added risk.
In the best-performing countries, governments and contractors collaborate and share risk. It’s a nice idea but, of course, the state needs a certain level of expertise to pull it off.
Labour productivity is more important than wages. In New York, labour added 50 per cent to the baseline cost. This didn’t come mainly from wages. The authors found blue and white-collar jobs were overstaffed and inefficient. Less than a quarter of the difference was found to come from wages.
Well-run projects need just the right amount of political buy-in. In the best projects, the political system gives the go-ahead, and then professional state bodies go about implementing them. When the political system gets involved in implementation, costs go up. And when the political consensus is too strong, it becomes difficult to walk away from. That allows contractors to extract more value and results in mission creep.
The Irish state is evidently thinking about these matters because it has brought in Bengt Flyvbjerg, the megaproject guru, to consult on Metrolink. The Transit Cost project’s report references Flyvbjerg’s “think slow, act fast” idea: that projects should be carefully planned in advance, but that construction should go ahead as quickly as possible.
The likes of Italy, Sweden and Turkey have been building big infrastructure projects for decades. They got better at it by trial and error. Ireland should pay attention to what they’ve learned, and what the English speaking world has not.