Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Government Infrastructure Costs 50 Percent More Than Private
Transcript
- Lucas: Let me start with a number that stopped me cold. California's high-speed rail project has spent roughly six billion dollars so far to build about 119 miles of track in the Central Valley. That works out to around fifty million dollars per mile. Luna: Fifty million per mile — for a single track of train line through farmland? Lucas: Correct. No tunnels, no major bridges, just flat agricultural land. For comparison, Spain's high-speed rail network — which is world-class — costs about fifteen million dollars per mile. And Italy's is around twenty. So we're talking three to four times the benchmark. Luna: And this isn't just a California problem, is it? I've seen that mega-projects across the US and other countries routinely blow past initial estimates. Lucas: Exactly right. There's a well-known 2018 study from Oxford's Bent Flyvbjerg that looked at over 1,500 large infrastructure projects globally — roads, bridges, tunnels, rail. It found that nine out of ten projects go over budget. On average, rail projects overrun by 45 percent, bridges by 34 percent, roads by 20 percent. And importantly, the study compared public-sector projects to private ones and found that public projects are roughly 50 percent more likely to experience serious cost overruns. Luna: So what gives? Why can't governments build things at the same cost as private companies? They're both pouring concrete and laying steel. Lucas: That's the core question of this episode. And the answer is a tangle of procurement rules, labor regulations, environmental review processes, and — maybe most importantly — political incentives that reward underestimation. Let's unpack each one. Lucas: Start with procurement. Most government agencies are legally required to award contracts to the lowest responsible bidder. That sounds sensible — it's supposed to prevent corruption and favoritism. But in practice, it creates a race to the bottom. Contractors submit unrealistically low bids to win the job, then rely on change orders and claims to recover their margins later. Luna: So the initial low bid looks good to the public and politicians, but the final bill ends up much higher. And the contractor still makes money. Lucas: Right. Private developers avoid this by using what's called design-build or integrated project delivery. Instead of hiring a separate designer and then putting the construction out to bid, you hire one team that does both design and construction from the start. That team has a strong incentive to keep costs down because they're on the hook for the whole thing. Public agencies are slowly adopting design-build, but the shift has been very uneven. Luna: Let's talk about labor costs. A lot of public projects require paying prevailing wages — essentially union-scale wages — even in states without strong unions. That can add 15 to 30 percent to labor costs compared to private work. Lucas: That's a big one. The Congressional Budget Office estimated that the Davis-Bacon Act, which sets prevailing wages for federal construction, increases project costs by about 10 percent. And many states have their own 'little Davis-Bacon' laws. Supporters say it ensures quality and protects local wages, but there's debate over whether those benefits justify the premium. Lucas: Then there's environmental review. The National Environmental Policy Act, NEPA, requires federal agencies to study the environmental impacts of major projects. That process can take years — for a big highway or rail project, it's not uncommon to spend three to five years on environmental impact statements alone. And litigation can add more years. All that delay translates directly into higher costs. Luna: And while that review is happening, land prices may rise, material costs go up, and financing costs accumulate. The project that was estimated at X dollars five years ago now costs X plus 30 percent. Lucas: Precisely. The Government Accountability Office found that for major transit projects, the average time from project initiation to construction start is ten years. Ten years. In that time, the estimate is often obsolete. By contrast, private developers can often break ground within a year or two on similar projects, because they're not subject to NEPA — though they do have to comply with local zoning and permits. Lucas: Now, here's where the political incentive angle really matters. When a governor or mayor announces a big infrastructure project, they want to give a low-ball cost estimate to make it sound affordable. The actual cost is higher, but by the time that's revealed, the project is already underway and hard to stop. This is what Flyvbjerg calls 'strategic misrepresentation'. Luna: So the politician gets credit for announcing the project, and the overrun happens under their successor or further down the line. Lucas: Exactly. There's almost no penalty for underestimating — in fact, there's a reward. If you gave a realistic estimate upfront, the project might never get approved. So the system incentivizes optimism bias. Luna: That reminds me of something I read about the Big Dig in Boston. The original estimate in 1985 was two-point-six billion dollars. Final cost: over fourteen billion. And that was in nominal dollars. Lucas: Classic example. Same pattern: political leaders wanted a transformative project, low-balled the cost, and when the true price became clear, it was too late to turn back. Now, not all the news is bad. There are some bright spots where governments have successfully reined in costs. Lucas: Utah's Department of Transportation is a standout. In the 2000s, they adopted a systematic design-build approach for highway projects. They also used something called 'construction manager/general contractor' or CMGC, where the contractor is brought in during the design phase to provide real-time cost feedback. The result: their projects have averaged cost overruns of just 10 percent, compared to a national average of 30 to 40 percent. Luna: And Utah isn't a low-cost state — they have a strong economy and similar labor markets. It's really about process. Lucas: Right. Another example is the U.S. Army Corps of Engineers, which has started using 'real options' analysis to build flexibility into large water projects. Instead of committing to a single massive design upfront, they plan in phases, leaving room to adjust scope as costs and needs evolve. That reduces the risk of getting locked into a megaproject that becomes uneconomical. Luna: There's also the growing use of public-private partnerships, or P3s. In a P3, a private consortium finances, builds, and often operates the infrastructure for a set period, and the government pays them back over time — often with performance incentives. The private sector's capital is at risk, so they have a strong incentive to control costs. Lucas: Well, if today's deep dive into why government infrastructure costs more gave you something to chew on, the way we keep this show free and independent is listener support. People like you who find value in the conversation can help at buy me a coffee dot com slash fexingo. It's a simple way to say this kind of content matters. Luna: Yeah, and no ads means no pressure to dumb anything down. If it's useful, that's the only ask. Lucas: So back to the cost gap. One thing I find promising is that some states are starting to require that cost estimates include a specific risk contingency — say, 20 percent above the baseline — and that this contingency is made public. That way, voters see a more honest range from the start. Luna: Which reduces the incentive for strategic misrepresentation. If you have to disclose a realistic range, you can't lowball as easily. Lucas: Exactly. Colorado passed a law in 2023 requiring that all major transportation projects publish a cost estimate with a clearly stated confidence level. It's a transparency measure that should help over time. And several other states are looking at similar legislation. Luna: But transparency alone won't fix the labor and procurement issues. Design-build adoption is still pretty low in many states, and prevailing wage laws are politically difficult to change. Lucas: True. The political economy is tough. But if we look at the math, the gap is enormous. If the US could close even half the cost premium on infrastructure — getting public costs down to, say, 25 percent above private benchmarks instead of 50 percent — that would save tens of billions of dollars a year. That's money that could go to more projects or lower taxes. Luna: So the reform agenda is clear: wider use of design-build, better risk disclosure, streamlined environmental reviews, and maybe more P3s. But each of those runs into entrenched interests. Lucas: They do. But the Utah example shows it's possible. And there's also an interesting trend from Canada, where provinces like British Columbia have created a public infrastructure agency that acts like a developer — it uses private-sector project management methods but retains public ownership. Their project costs have come down significantly. Luna: Is there any evidence that these reforms lead to better outcomes beyond cost? I'm thinking about quality and safety. Lucas: Good question. The data so far suggests that design-build projects actually have fewer defects and change orders than traditional design-bid-build, because the team is more integrated. And safety records are comparable. So it's not a trade-off — it's a win-win if done right. Luna: That's encouraging. So the infrastructure cost problem isn't an iron law — it's a set of policy choices. Lucas: Exactly. And that means we can choose differently. The key is making sure voters and policymakers understand the true cost of the status quo. When you realize that fifty-million-per-mile train track could have been built for fifteen, it's hard not to ask — what are we getting for that extra thirty-five million? Luna: And that's a question worth asking before the next ribbon-cutting.