Lock-in and late commitment in large infrastructure projects

Alon Levy at Pedestrian Observations draws attention to the important point about lock-in effect in infrastructure projects. I cannot do any better than his succinct description

The short version is that politically committing to a megaproject too early leads to lock in, which leads to compromised designs and higher costs. The solution, then, is to defer commitment and keep alternatives open as much as possible.

The point is that more than any technical or economic explanations, the real reasons for cost over-runs in many large infrastructure projects are political and psychological.  

Lock-in arises from the nature of large infrastructure projects. They require public debates to generate support. These debates in turn throw up options and the relative merits of the different options are discussed. Then, at some point in time, a political choice is made on an option. A strong interest group coalesces, consisting especially of its direct beneficiaries, around this choice. Also, once this choice is made, a series of technical activities follow, which in turn take up significant time (especially environmental and other clearances and permissions), most often years. In the meantime, things are likely to change - new trends and demands emerge, technologies change, better alternative choices appear, newer financing options become possible, political and government priorities change, and so on - which may necessitate a revisit of the choice and perhaps even choosing from one of the alternatives which were discarded. However, by now the chosen option has become entrenched, with powerful and vocal interest groups supporting it. 

Levy points to this Flybjerg et al paper where they define lock-in as contributing to two effects,

Lock-in can occur both at the decision-making level (before the decision to build) and at the project level (after the decision to build) and can influence the extent of overruns in two ways. The first involves the “methodology” of calculating cost overruns according to the “formal decision to build”. Due to lock-in, however, the “real decision to build” is made much earlier in the decision-making process and the costs estimated at that stage are often much lower than those that are estimated at a later stage in the decision-making process, thus increasing cost overruns. The second way that lock-in can affect cost overruns is through “practice”. Although decisions about the project (design and implementation) need to be made, lock-in can lead to inefficient decisions that involve higher costs. Sunk costs (in terms of both time and money), the need for justification, escalating commitment, and inflexibility and the closure of alternatives are indicators of lock-in... Lock-in also stresses the importance of economic and psychological explanations, with sunk costs in terms of money creating conscious lock-in as various parties are aware of their investments, while the bounded rationality of decision-makers results in unconscious lock-in. Finally, lock-in is a psychological explanation if it arises from behaviour intended to justify decisions, and is a political explanation if it emerges in response to intentional (strategic) behaviour.

The same paper writes a self-reinforcing loop,

Decision-makers show evidence of entrapment whenever they escalate their commitment to ineffective policies, products, services or strategies in order to justify previous allocations of resources to those objectives (Brockner et al, 1986). Escalating commitment and justification are therefore important indicators of lock-in. The need for justification is derived from the theories of self-justification and the theory of dissonance which describe how individuals search for confirmation of their rational behaviour (Staw, 1981; Wilson and Zhang, 1997). This need arises due to social pressures and “face-saving” mechanisms. The involvement of interest groups and organizational pushes and pulls can also introduce pressures into the decision-making process, threatening the position of the decision-makers, who may feel pressure to continue with a (failing) project in order to avoid publicly admitting what they may see as a personal failure (McElhinney, 2005). “People try to rationalize their actions or psychologically defend themselves against an apparent error in judgment” (Whyte, 1986) (“face-saving”). When the support for the decision is sustained despite contradicting information and social pressures, the argumentation for a decision is based on the need for justification.

See also this more recent paper on lock-in examples from Netherlands. 

In addition to political face-saving, another equally important obstacle to pivoting away from the original project choice is bureaucratic risk-aversion. While a new political regime may not carry much baggage or commitment to the project, the bureaucracy which all along made the case on record to justify the original choice will struggle, both individually and collectively, to reverse course and support an alternative option. Further, like with the politicians, vested interests in favour of the project would have developed strong roots with the bureaucracy too. 

Levy makes the case for delaying political commitment as late as possible and making decisions to build at advanced stages of design (where the need for major revisions are unlikely). 

Late commitment is thankfully common in low- and medium-cost countries. Germany does not commit to high-speed rail lines early, and, judging by Berlin’s uncertainty over which U-Bahn extensions to even build, it doesn’t commit to subways early either... overall, Nordic infrastructure projects are developed by the civil service beyond the concept stage and only presented for political negotiation and approval well into the process. Southern European planners come up with their own extension programs and politically commit close to the beginning of construction.

While Levy's post is in the context of major transportation, especially high speed railway, projects in Europe and North America, it has equal relevance to other countries. In India, such lock-in is common with irrigation, urban metro-railway, drinking water, airport, and port projects. There are several irrigation and drinking water projects across states which have become baked into the landscape and accumulated cost over-runs amounting to multiples of the original estimate. In many of those cases, as Levy writes, "Formal cancellation is embarrassing; a forever construction project is less visible a failure."

In the context of developing countries, apart from cost over-runs, lock-in creates a major problem of displacement of scarce fiscal resources away from more important expenditures. I am referring to lock-in manifesting in the form of chasing aspirational trophy projects like metro-railways, unviable and less optimal drinking water projects (including desalination projects), massive river inter-linking projects, unviable airports and ports etc. 

However, the late commitment strategy to mitigate the lock-in problem suggested by Levy is complicated by the lack of control over the manifesto promises of political parties and the general practice of those promises invariably translating into formal project approval. The actual decision to build precedes the formal decision to build. The manifesto promise of the winning party is invariably the formal approval. 

One practical strategy to atleast partially mitigate lock-in (in case of India) is to introduce a legislation (executive directions may not suffice) for approvals of large projects. This would be a procedural commitment strategy. It should mandate the automatic cancellation of any approved project if it has not physically started within three (or five) years of approval. This should be supplemented with a requirement that the project approval again undergo afresh the entire process including evaluation of competing options. Further, the Cabinet Note and other important documents that form the basis of such project approvals should mandatorily include an independently done financial and economic costs-benefits analysis of all competing choices, with the decision to over-ride the results of this analysis to be recorded with justification. The entire process should necessarily be audited by the Comptroller and Auditor General (CAG). Finally, this should also be incorporated into the General Financial Rules of the Government of India for procurement of large projects. 

These procedural requirements would make it more politically and psychologically costly and time consuming for both politicians and bureaucrats to press ahead with large projects whose benefits are questionable. 

Levy takes a swipe at the ideological bias that unwittingly plays into the hands of vested interests,

In conversations with people in the European core as well as the United States, there’s an unspoken assumption that the community is good and the state is bad. If the community demands something, it must represent correction of a real negative externality, rather than antisocial behavior on behalf of self-appointed community leaders who the state can and should ignore. It doesn’t help that the part of Europe with the least community input is the Mediterranean countries, which Northern European planners look down on, believing any success there must be the result of statistical fudging.