Sunday, November 10th, 2013
I was surprised to see that last Wednesday’s post on Cincinnati’s culture of self-sabotage received such a huge response. In light of that, I want to circle back and more fully address the idea of cancelling projects.
What I do not want you to take away from that is that once started, projects should never be stopped on account of the money spent. That’s called the sunk cost fallacy. Money that’s been spent has been spent. One needs to look forward to the future expected benefits and costs. There are certainly many cases in which pulling the plug can be a good idea. For example, Indiana Gov. Mitch Daniels reversed the privatization of certain social services functions after he determined it was unlikely the contract would ever work out like originally envisioned. This an example of someone taking a risk, trying to make it work, then acknowledging it didn’t rather than continuing to double down on a mistake.
On the other hand, I do not see the majority of these rail cancellations as having anything to do with benefit/cost analysis. You may notice, it’s only transit projects that ever seem to get the ax. Since the era of the freeway revolts, it’s tough to name any governor or mayor that has ever sent back earmarks on a highway project, or ever cancelled any road project they could actually get money to build on the grounds that it’s a boondoggle. (My hypothesis continues to be that there’s no highway boondoggle big enough that even the most fiscally conservative governor is willing to kill it). Clearly, the cancellations in these cases is based on an ideological animus to transit specifically.
That is, unless it is baser motivations at play. Chris Christie’s cancellation of the ARC tunnel project enabled him to use the funds New Jersey had pledged to the project to bailout the state’s bankrupt highway fund. He’s not demonstrated any hesitancy to push even questionable and expensive transit projects when they involve Somebody Else’s Money. For example, he wants the Port Authority to spend a billion dollars on an extension of PATH service to Newark Airport, which many consider an inappropriate use of funds. Christie’s motivation appears to be bribing United Airlines to add flights to Atlantic City, whose gambling market is imploding. (Read up on the Revel Casino deal if you want to know more about this sordid story).
Meanwhile, many of these cancellations are proving to be costly in their own right. I noted before how Cincinnati had already let $95 million in contracts out the total $133 million cost of the streetcar, how it will have to repay federal grants that were going to pay for a big slug of the project, and likely end up with at best a minor financial win and potentially a loss.
It’s the same in Wisconsin. Gov. Scott Walker trumpeted that he was returning an $810 million stimulus grant for rail upgrades between Madison and Milwaukee. Apparently although the federal government was going to pay 100% of the construction costs through the stimulus bill, he didn’t want the state to have to pick up the estimated $7.5 million in annual operating costs. (How much the state actually would have had to pay incrementally is a an open point. The existing Hiawatha operating costs were being 90% paid for by federal funds. It’s by no means clear that the state would have been on the hook for the full amount anyway). The feds were actually generous enough to reimburse Wisconsin for money it had spent on the rail line it decided not to build. However, that did not prove to be the end of the matter. Train maker Talgo is planning to sue the state of Wisconsin for $66 million for breach of contract. Given that it actually built trainsets for the state, this seems like a strong case. Also, if the state does lose, it might also be forced to immediately repay an additional $70 million in loans. The state could have paid operating costs for a long time for that kind of money – and it would actually having something to show for it other than a hole in its bank account.
So from a financial perspective, it’s not even clear cancelling these projects was a good move – even if you look solely at costs and ignore benefits.
But beyond the financials, these types of things also show communities that have deep internal divides, and which as a result require businesses and residents to apply an additional uncertainty premium into investment business cases there to account for the likelihood that a) promised actions by the government may not actually occur, even if they are in flight and b) that the community may not be able to muster the staying power to make the kind of long term investments that are necessary for any community to retain marketplace relevance. Though hardly immune to infrastructure drama, New York City just put water tunnel #3 into service for Manhattan. This is a project that was started in the 1970s. That’s the type of long term thinking that has kept a place like New York on top. In short, credibility counts for something, and places like Cincinnati and Wisconsin have damaged theirs.
I want to contrast this with one of the legendary stories of Indianapolis. In the late 1980s it embarked on construction of a downtown mall. Maybe that wasn’t the best idea in the world. The city definitely didn’t have its act fully together. Two entire city blocks had been excavated and were literally holes in the ground. No anchor stores had been signed and it wasn’t clear if the project would or even could be finished. A lot of the public suggested scrapping the project. Some suggested turning the empty blocks into ice rinks. Others trying to bring in a Wal-Mart. Instead, city leaders across the board came together to commit to the project, including many of the downtown corporations investing in the project. It got built. While generally successful, the mall has certainly had its share of troubles over the years and may not even survive over the long term given the disfavor of the mall format. However, one thing that project demonstrated is that Indianapolis finishes what it starts. In short, they have credibility and an ability to execute that’s simply better than most places. I suspect that’s one of the reasons metro Indy has so outperformed Cincinnati in population, job, and reputational growth, despite having far, far fewer natural assets to start with. They aren’t constantly shooting themselves in the foot.
This is also why even though there are road projects out there I did not think were a wise use of funds – say I-69 in Indiana, to pick one I’ve criticized – once they are being built I’m all in favor of getting them done as quickly and cheaply as possible. And then letting the communities in question live with the consequences of making that choice, for good or ill. Again, that doesn’t mean no project should ever be cancelled, but you need to pick your battles. Communities are not well served when project debates turn into endless years of scorched earth politics, litigation, etc. in which neither side will ever given an inch on anything.