Survival of the Unfittest: Why the Worst Infrastructure Gets Built, And What We Can Do about It

TL;DR

This paper examines why poorly planned infrastructure projects often succeed on paper but fail in reality, highlighting incentives for misrepresentation, and proposes solutions for more effective and democratic infrastructure development.

Contribution

It uncovers the causes of cost overruns and benefit shortfalls in infrastructure projects, emphasizing the role of incentives and proposing reforms for better project outcomes.

Findings

Projects with the best initial estimates often have the highest overruns

Cost-benefit analysis is unreliable for major infrastructure projects

Incentive structures encourage underestimation of costs and overestimation of benefits

Abstract

The article first describes characteristics of major infrastructure projects. Second, it documents a much neglected topic in economics: that ex ante estimates of costs and benefits are often very different from actual ex post costs and benefits. For large infrastructure projects the consequence is cost overruns, benefit shortfalls, and the systematic underestimation of risks. Third, implications for cost-benefit analysis are described, including that such analysis is not to be trusted for major infrastructure projects. Fourth, the article uncovers the causes of this state of affairs in terms of perverse incentives that encourage promoters to underestimate costs and overestimate benefits in the business cases for their projects. But the projects that are made to look best on paper are the projects that amass the highest cost overruns and benefit shortfalls in reality. The article depicts this situation as "survival of the un-fittest." Fifth, the article sets out to explain how the problem may be solved, with a view to arriving at more efficient and more democratic projects, and avoiding the scandals that often accompany major infrastructure investments. Finally, the article identifies current trends in major infrastructure development. It is argued that a rapid increase in stimulus spending combined with more investments in emerging economies combined with more spending on information technology is catapulting infrastructure investment from the frying pan into the fire.