Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Public Works Cost So Much More Than Private
Transcript
- Lucas: So, Luna, have you been following this light-rail extension in the Pacific Northwest that's been all over the local news? Luna: I've caught a bit of it — the one that's way over budget, right? I think I saw something about it costing like seven hundred million dollars per mile. Lucas: Exactly. Seven hundred million per mile. And here's the kicker — about two hundred miles south, a private developer just finished a streetcar line for roughly two hundred and fifty million a mile. Luna: Wait, three times cheaper? That's insane. What's going on there? Lucas: That's the question, and it's not just light rail. Across the US, public infrastructure consistently costs two to three times more than private equivalents. Same steel, same concrete, same engineers — but wildly different price tags. Luna: So what's the main driver? Is it just government inefficiency, or is there more nuance? Lucas: There's a lot of nuance, but researchers have zeroed in on three big structural reasons. First: procurement rules. Public agencies are often forced to pick the lowest bidder, not the best value. Luna: Right, so you get a contractor who underbids and then hits you with change orders later. I've heard that story before. Lucas: Exactly. And then you have labor standards — Davis-Bacon Act requires prevailing wages on federal projects, which can add ten to twenty percent on labor costs. States have similar rules. Luna: But that's a deliberate policy choice to keep wages decent. Is it fair to call that 'inefficiency'? Lucas: It's a trade-off, sure. But the third factor is the one researchers say is the real killer: risk aversion. Public projects go through endless reviews, redesigns, and public hearings, and every one of those steps adds time and money. Luna: And time is money, especially when construction inflation is running at five to eight percent a year. Lucas: Exactly. There's a famous study by Bent Flyvbjerg that looked at over two hundred and fifty large public projects worldwide. Nine out of ten went over budget, with an average overrun of twenty-eight percent. Luna: And private projects? Do they have similar overruns? Lucas: Generally, no. Private developers face market discipline — if they overrun, they eat the cost, and their investors punish them. Public agencies don't have that same pressure because they're spending other people's money. Luna: Yeah, and I guess accountability is so diffuse. Like, who loses their job when a transit project goes over? Nobody, really. Lucas: That's the core issue. There's no personal downside to overruns in the public sector. The project manager might get a bonus for finishing at all, even if it's three times the original estimate. Luna: So it's a classic principal-agent problem. The public is the principal, the agency is the agent, and there's no good mechanism to align their incentives. Lucas: Right. And there's another layer — optimism bias. Flyvbjerg calls it 'the planning fallacy.' People systematically underestimate costs and timelines because they want the project to look good on paper. Luna: So the numbers are cooked from the start? That sounds harsh, but I've seen that in private projects too. Lucas: It happens everywhere, but in the public sector there's less consequence for being optimistic. You're not losing your own money if the estimate is low. And politicians have an incentive to put a low number on the press release to get approval. Luna: Speaking of incentives, I wonder if privatizing infrastructure actually helps. Like, if you let a private company build a toll road, does it really come in cheaper? Lucas: It's not a panacea. Private companies still face cost overruns, but they have stronger incentives to control them. There's a good example in Virginia — a public-private partnership for a highway widening that came in under budget and ahead of schedule, partly because the private partner had a financial stake. Luna: Interesting. So maybe the answer isn't just 'private good, public bad,' but rather 'bring some market discipline into the process.' Lucas: Exactly. But even within the public sector, there are smarter ways to do it. Places like Utah's DOT have used 'design-build' contracts, where one firm handles both design and construction, and they've seen significant savings. Luna: It's like the difference between hiring a general contractor versus managing every trade yourself. The integrated approach just works better. Lucas: And this is where I think we can tie in something bigger. When we talk about these cost overruns, it's not just about wasted dollars — it's about the projects we never build because the cost is so high. Luna: Right. If a transit line costs twice as much as it should, that means a city can build half the miles it needs. So the real price is the missed opportunity. Lucas: That's the deepest cost of all. And it's a topic we've been digging into all year on the show — how government spending often fails to deliver what it promises. If you've been finding these conversations useful, and you want to make sure we can keep doing this without ads, you can support us at buy me a coffee dot com slash fexingo. Luna: Yeah, and we're really grateful for those who do. It keeps the show independent and lets us spend more time on research like this. Lucas: So, back to that light-rail project — the real tragedy is that the cost overrun isn't an accident. It's baked into the system. Luna: Meaning what, exactly? Lucas: Meaning that every step of the process — from procurement to review to risk management — adds cost without adding value. And until we change those incentives, we're going to keep seeing these eye-popping price tags. Luna: So what would be the single most impactful reform? If you could wave a magic wand, what would you change? Lucas: I'd start with procurement. Require agencies to evaluate bids on total lifecycle cost, not just the initial price. That alone would weed out the low-ballers and encourage more realistic planning. Luna: That seems doable. And what about the risk aversion? Can you fix that? Lucas: Partially. You can allow for contingency funds that are actually used, rather than being cut in budget negotiations. And you can give project managers more authority to make decisions without going through endless committee approvals. Luna: So it's about empowering the people on the ground, not just tightening the rules. Lucas: Exactly. And there's a great example from the private sector: when Amazon builds a warehouse, they don't have to run it by a city council. They just do it. That speed and decisiveness is what we need more of in the public sphere. Luna: But we also don't want to gut the public process. There are real benefits to having checks and balances. Lucas: Of course. The goal isn't to strip away accountability — it's to make the process more efficient so that we're not paying three times what we should for a train track. Luna: So what can the average citizen do about this? Like, if I'm a voter, how do I push for better cost discipline? Lucas: Start by asking your local representatives hard questions about cost estimates and track records. Demand that they publish full project histories, including overruns, so you can see which projects are consistently over budget. Luna: Transparency is key. If the data is out there, then voters can make informed choices. Lucas: And that's really what this episode is about — shining a light on why these cost overruns happen, so that we can have a more informed conversation about public spending. Because at the end of the day, it's our money that's paying for those seven hundred million dollar miles.