Olympics and cost overruns

Cost overruns are a feature of large projects. Which category of projects have the biggest cost over-run?

Alex Lieberman makes the case for Olympic Games.

Olympics: 172% 

Mega dams: 90% 

Trains: 45% 

Bridge & tunnels: 34% 

Roads: 20%

Though the source is not available, in terms of orders of magnitude, this looks just about right. And the latest illustration is the Tokyo Olympics itself,

2013: bid projected $7.4 billion of costs 

2019: official budget of $14.6 billion 

2020: budget revised to $15.4 billion 

2021: government auditors project total spending will be $28 billion.

Apart from the pure financial cost increases to the original plan, there are some important and unavoidable reasons.

One, this is a classic example of strategic mis-representation. The organisers and governments are desperate to win the Olympics bid. A big internal obstacle to overcome before making the bid is the cost that different agencies have to incur. Large estimate generate opposition from the Finance Departments and can even trigger public outcry. This creates the natural inclination to project a lower cost to get everyone on board and go ahead with the bidding. 

Second, there is the inevitable co-ordination problem. Large projects involve the active engagement of several stakeholders. They include multiple agencies of government, often federal and sub-sovereign agencies. Then there are multiple private partners, including hundreds of contractors for various kinds of works. Finally, the time span from mobilising support to winning the bid to conduct of the games is most likely to involve multiple governments, with their varying perspectives and objectives. And all these co-ordination happens over a relatively short time, thereby opening enough and more opportunities for unforeseen expenses and associated cost escalations. Accountability for cost increases is easily diffused among the several partners in this giant co-ordination exercise. 

Third, there is also the classic hiding hand of Albert Hirschman. In complex projects, there are several uncertainties and daunting obstacles. For example, new stadiums often involve relocation of slums. Or a new rowing facility or shooting range comes with the need for environmental protection measures. All these can appear too daunting to be even listed out ex-ante. But once the project is approved, these are unavoidable realities. Fortunately human creativity kicks in to address these problems. However, they come with their incremental costs. 

Fourth, there is also the mission creep that's inevitable with grandiose projects. You start with an initial plan, and then as work starts, the ambitions rise and the scope of the plan expands. So, for example, the designs of the stadiums become more grandiose or additional features get added to an indoor stadium complex, and so on. You do an Olympics in decades, often the first time ever. So, the argument goes, do it big and grand!

Finally, there is the self-reinforcing dynamic associated with the interaction among the aforementioned four factors. For example, strategic representation is exacerbated (or encouraged) by the multiplicity of actors and the likelihood of hiding hand.