Wednesday, June 07, 2017

Why is infrastructure so expensive? “Our infrastructure incentives are all wrong. Until we fix them ... throwing more money at this system is simply pouring good money after bad.”

Thanks, Clint.

Here in New Albany, the whole fucking city is under construction. Some of the work is necessary. Other bits, not as much. A cynic like me lumps all of it into a Two year Plan (2016 - 2017) meant to coincide with election cycles.

Either Jeff Gahan will run for State Senate in 2018, or he'll seek a third term as mayor in 2019. He might end up doing both if the first effort fails. In any event, he'll campaign on the basis of massive infrastructure changes in New Albany, which wouldn't have occurred absent his divinely-inspired perfection of leadership.

As well as millions upon millions of dollars.

Apart from other pressing matters like transparency and top-down decrees, all we've wanted to know is why these construction projects are so expensive.

In this essay, Strong Towns founder Charles Marohn discusses a few possible answers, beginning with a parallel example in Catastrophic Care: Why Everything We Think We Know about Health Care is Wrong, a book by David Goldhill.

From a brief survey of Goldhill's "Healthcare Island," Marohn shifts the scene to Infrastructure Island. His relentlessly sensible points are something to consider while navigating streets currently being repaved by perennial low bidder MAC Construction, as remunerated with money largely procured from the feds.

I've chosen a few sections to make the overall point, but you'll want to click through and read the entire essay.


 ... Last week, Bloomberg's Noah Smith wrote an article titled "The U.S. Has Forgotten How To Do Infrastructure" that asked a lot of questions that would get us to a Goldhill like analysis of our infrastructure approach. Just like on Healthcare Island, on Infrastructure Island we have our own way of talking about things. And we never talk about prices, only about costs. And as Smith suggests, costs go up and nobody seems to understand why.

He goes through and dismisses all of the usual suspects. Union wages drive up infrastructure costs (yet not true in countries paying equivalent wages). It's expensive to acquire land in the property-rights-obsessed United States (yet countries with weaker eminent domain laws have cheaper land acquisition costs). America's too spread out or our cities are too dense (arguments that cancel each other out). Our environmental review processes are too extensive (yet other advanced countries do extensive environmental reviews with far less delay). I concur with all these points, by the way.

Smith concludes with this:

That suggests that U.S. costs are high due to general inefficiency -- inefficient project management, an inefficient government contracting process, and inefficient regulation. It suggests that construction, like health care or asset management or education, is an area where Americans have simply ponied up more and more cash over the years while ignoring the fact that they were getting less and less for their money. To fix the problems choking U.S. construction, reformers are going to have to go through the system and rip out the inefficiencies root and branch.

Much like health care, our infrastructure incentives are all wrong. Until we fix them -- until we go through the system and rip out the inefficiencies root and branch -- throwing more money at this system is simply pouring good money after bad.

Beak-wetting incentives ... to wet more beaks.

The more lane miles a state has, the more federal transportation dollars that state qualifies for. What is the incentive? It is, of course, to build more lane miles. Add to this the fact that federal transportation programs generally pay 90%+ for new construction, but only ~50% for maintenance, and we have a system that encourages states to build more than they can ever maintain.

That's okay. When we put together our appropriation request, is it better to show a catastrophic level of need or is it better to prudently ask for only what is absolutely necessary? It's an altogether silly question; the more desperate we can make ourselves and the more miserable we can make taxpayers, the more they will demand that governments pay more for infrastructure.

Open checkbook -- open TIF books?

In addition, the longer the project takes, the more everyone gets paid. Change orders -- because of weather, redesign, special requests, etc... -- often add to project costs and, even when they don't, take time ($$) to administer. Once a government commits to a project, they are committing to an open checkbook. That check will be written in a system where nearly everyone involved will be compensated more the longer the project takes and the more expensive it becomes.

Minnesota, meet New Albany: "Incentives for all kinds of shenanigans."

In Minnesota where I live, public contracts are required to always take the lowest bid price. This creates incentives for all kinds of shenanigans. I worked on one state paving project where the low bidder bid most every item far below cost except for bituminous, where they were the highest price by many multiples. The strategy for executing the contract was then clear: Do the least amount necessary to fulfill the contract agreement and overrun the bituminous as much as possible. An extra 1/8 of one inch of pavement over a 40 mile project -- an amount hardly perceptible -- caused a massive cost overrun.

I could go on, but here's the crazy thing: On Infrastructure Island, this all makes sense. Nobody there is really unethical, it's just that the incentives have perverted what, in other realms, would be seen as normal and acceptable. Make the project big. Make it take a long time. Create a lot of overruns. Don't maintain it until it falls apart catastrophically. Few on Infrastructure Island set out to do these things, but they happen and nobody loses a lot of sleep over it. That's because, for the players involved, there is little negative feedback and lots of positive feedback associated with these perverse outcomes.

Marohn's proposed solutions follow, so go to Strong Towns and read them.

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