Various other perspectives on why cost overruns are so pervasive in highway projects have been expressed in the literature. This class of explanations seek primarily to disprove technical explanations, based on suspicions of unethical practices, deception, delusion and attitudinal issues of public officials in highway projects (Wachs, 1987; Flyvbjerg et al., 2002; Cantarelli et al., 2010). The term theoretical explanations, is thus used in this study to tag the schools of thought, which mostly rely on applying existing theories on human behaviour (Optimism bias/delusion, psychological stereotyping, rationality of decision making with the goal of utility maximisation, and politics), to understanding why public projects run over budget (Cantarelli et al., 2010). These perspectives however, are not clearly differentiated, often overlapping in the literature. Nonetheless, two distinct arguments can be discerned: psychological uncertainty/optimism bias and deliberate deception/strategic misrepresentation, which are argued from economic and political realms. Theoretical explanations which focus on the conscious manipulation of power and influence to foster self-interest, adopt the Machiavellian
Circle of Concern Circle of Influence Decision Interface Random Exogenous Ground Related Variables
theory or agency theory of power and influence in decision making (Cantarelli et al., 2010). Psychological explanations on the other hand build on the sub-conscious aspects of human behaviour, via the fundamentals of optimism bias and stereotyping of public projects (Hall, 1980; Kahneman, 1994; Mackie and Preston, 1998; Flyvbjerg et al., 2002; Cantarelli, et al., 2010, 2013).
3.5.1 Psychological Explanations
This school of thought espouses that psychological uncertainty and human decision making, relating to a reliance on heuristics and optimism bias are causing the problem, a finding strongly reinforced by the UK Treasury (2013) who issued supplementary guidance to the Green Book dealing specifically with optimism bias. Psychological explanations are upheld by a limited number of studies who resort to deploying theories of psychological stereotyping of public projects as being inherently poorly managed; planning fallacy and optimism bias. Planning fallacy was described by Cantarelli et al. (2010:15) as: “the tendency to underestimate time, costs and risks of future actions, and at the same time overestimate the benefits of the same actions’. Whereas optimism bias, was defined as: “the systematic tendency to be overly optimistic” Cantarelli et al., 2010:10).
Explanations of inaccurate forecasts and estimates, in terms of optimism bias and appraisal optimism, have been largely developed by Kahneman and Tversky (1979a, 1979b), and later Kahneman (1994), based on experimental psychological research in the field of economics. Based on the outcome of the experiment, with students as participants, Kahneman and Tversky (1979a, 1979b) generated theories on the overly optimistic tendency of human judgment, wherein risk was subconsciously downplayed, while potential benefits were overblown. Such optimism was opined as constituting a hindrance to the need for thorough planning in project preparation. These results by Kahneman (1994) were theoretically applied by Flyvbjerg (2008:18) to explain cost overruns in transportation projects, by asserting that they were key issues in policy and planning: whereby promoters and planners make investment decisions based on highly inaccurate and biased judgements, leading to combination of underestimated costs and overblown demand forecasts. As such cost-benefit analyses, based on which investment decisions were made, were tagged: “the consequence of inaccuracy to the second degree “(Flyvbjerg, 2008:19).
Hall (1980) also articulated that the high element of uncertainty in public works, which are mostly large scale, and challenging to manage, as likely to account for significant disparity in the levels of cost overruns between public and private investments. Hall distinguished between three categories of uncertainties, relating to the planning phase of public projects, which significantly impact on investment outcomes: uncertainty in the planning environment; uncertainty in related decision areas and uncertainty about value judgments. Uncertainty in value judgements was contextualised from the viewpoint of how society perceives the delivery of the output of public and private goods, and how this relates to planning failures. Hall (1980), concluded that psychological reasons accounted for why public projects have often been undertaken on a faulty investment premise, which has typically threatened the viability of a notable number of public projects. This conclusion was drawn, solely based on an empirical study, which identified cost overrun ranges to be significantly higher in public works, as compared to private works. Flyvbjerg et al. (2004) however questioned the validity of this physiological stereotyping, which perceives public proprietorship as inherently challenging, in direct contrast to the assumption of efficiency of private ownership, in curbing cost overruns. This was based on an analysis of variance between a sample of projects subdivided into public, private and state owned enterprises. The result showed that public projects as compared to private projects did not show any significant difference in cost overruns. However, state owned projects, which were subject to closer public scrutiny, regulatory statutes and accountability evidenced lower cost overruns. The authors thus concluded that the roots of cost overruns were more complex than the perceptions of public proprietorship asserted by Hall (1980), further questioning the ethics of public officials. Ganuza (2003) also noted this trend and tries to account for the perception of public agencies, considered as incompetent, from the perspective of the deliberate scant attention often given to design details before contract award, as a form of strategic behaviour calculated to stimulate cost overruns.
Along this continuum in the evolution of interesting psychological explanations, and theories based on the applied logic of optimism bias and planning phallacy, none of which have provided any form empirical evidence to validate their assertions about public infrastructure projects, thus emerged the theories of strategic misrepresentation, as depicted in Figure 3.5. This latter school of thought laid the blame for cost overruns in infrastructure projects on public officials, who were accused of deliberately misrepresenting facts when seeking for funding approval. According to
Flyvbjerg (2008, p 3), “Optimism bias and strategic misrepresentation are both deception, but where the latter is intentional, the first is not, as optimism bias is self-deception”.
Figure 3.5: Explanatory Model of Cost overruns by Flyvbjerg (2008)
Mackie and Preston, (1998) also stated that appraisal optimism by overly optimistic promoters and forecasters, could be unintentional or deliberate. This was opined as accounting for cost overruns, and the authors further listed 21 sources of error and deliberate bias in highway projects, which often led to inaccurate forecasts and inflated benefit-cost ratios.
3.5.2 Strategic Misrepresentation
Wachs (1989), the earliest recognised author of theoretical cost overrun explanations, sought to attribute cost overruns to strategic misrepresentation. Indeed, Wachs opined that so called forecasting errors in the planning of transportation projects, were actually orchestrated and deliberate, in a publication titled “When planners lie with numbers”. Wachs’ (1989:67) argued: ‘the competitive, politically charged environment of transportation forecasting has resulted in the continuous adjustment of cost assumptions until they produce forecasts which support politically attractive outcomes’.
Following the outcome of this earlier study, several authors principally Flyvbjerg set the trail in a line of publications, which sought to disprove technical explanations to cost overruns, on the premise of suspected strategic behaviour of the principal actors in public infrastructure projects. (Flyvbjerg et al., 2002 2003; Flyvbjerg, 2005, 2007, 2008; Flyvbjerg et al., 2010). In these publications Flyvbjerg and his colleagues built upon the earlier arguments offered by Wachs (1989) by similarly questioning the trend of consistent underestimation in public infrastructure projects, as to whether they were ‘error or lies’. Several other scholars, including Bruzelius et al. (2002), Altshuler and Luberoff (2003) and Ubani (2015) have also opined that the non-technical
explanations for cost overruns, are more likely to account for the significant variance between budget estimates and the final project outturn value. Arguing from the perspective of strategic misrepresentation, these studies have emphasized the non-technical dimensions of explanation to cost overruns, principally bordering on deliberate deception on the part of planners and politicians. Bruzelius et al. (2002:146), attributed cost overruns to “the rent seeking behaviour of special interest groups, and the tendency to underestimate tenders in order to get proposals accepted”. Altshuler and Luberoff (2003:34) opined that: “consistent underestimation is an example of the tragedy of the commons.... as it helps advance specific projects”.
From the perspective of Cantarelli et al. (2013), contractors and other parties to a contract may as well be entangled in the complex web of explanations based on deliberate actions, which lead to the build-up of cost overruns in highway projects. The complexity of the interaction was hypothetically explained by Cantarelli et al. (2013) by the use of the concepts of ‘Game signalling theory’, to better theoretically explain the phenomena of cost overruns. The fundamental precepts of game theory are founded on the tenets of strategic behaviour, bounded in the interactive complexity of game signalling between the principal actors in public projects, namely the contractor and client, who are thus labelled ‘Agent’ and ‘Principal’ respectively (Cantarelli et al., 2013). Cantarelli and colleagues, mapped out a hypothetical model of how both parties to a contract, anticipate each other’s behaviour in setting price margins, during contractor selection and contract award phase of infrastructure projects, in an intricately psychological game of political and economic motives.
Ganuza (2003), had prior to the advancement of the theory of Game signalling, forwarded a hypothetical theory of ‘Strategic ignorance under imperfect market conditions’ which also bordered on the dynamics of client-contractor relations, in setting pricing margins in the delivery of public projects. According to Ganuza (2003), changes in the designs and specifications during public procurement, accounts for most cases of cost overruns in public projects. This, led Ganuza (2003), to propose a model whereby most public agencies allocate a fixed amount to initial design, which are often altered and renegotiated after contract award, where imperfect conditions are stimulated, by deficiencies in the specifications. As such where contractors are horizontally differentiated, representing a perfect market supply condition, the sponsor feigns strategic ignorance by under-investing in initial design specification, to trigger homogeneity and intense competition. This reduces the comparative advantage of the more efficient contractors, and obtains lower bid values, which in the long run leads to inefficiency and significant cost overruns.