Cost overruns, corruption and correlation

I neither read very widely nor am blinkered. In the interest of full disclosure, let me also say that on both cost overruns and corruption, I am merely aware of things at the qualitative level. I am not going to put a rupee value on cost escalation, but only indicate the levels, and that too in multiples at best.

The cost per unit of any and every defense system of the US military has seen escalation in terms of multiples. This includes its stealth bomber and fighter aircrafts. About Indian military procurement processes, I need say no more.

The cost of nuclear power, reckoned in terms of “overnight” cost (all costs assumed to have been incurred at one go and does not include interest during construction) has nearly doubled. An astounding example of cost escalation: a nuclear plant quoted at $660 m came in at $8.87 b 16 years later. Doing the math, I find that the compounded annual escalation in percentage is 17.63. Isn’t that a good rate of return for the investors, if only it were reckoned as bonds?

The Montreal Olympics went so ballistic on cost that the citizens of the city ended up clearing their debt only over 20 years! Athens took that thing a few steps further with its Olympics – sowed the seeds of the country defaulting on its debt payments! The cost of London Olympics has hit the roof, many times more than the cost indicated at the time of the bid. The Football World Cup in Brazil is bringing in a bill nowhere near what was projected, on the higher side, if you had any doubts. We can safely speculate that the Rio Olympics in 2016 will dwarf the World Cup numbers – same country and only a few years down the road. We do not know how the budget and post-event cost numbers for the South Africa’s hosting of the Football World Cup compare. But, I am sure there were eye-popping escalations.

The cost of high speed rail in California is another runaway train – cost increasing so much, three times the original estimate and the project to take twice as long, the state cannot afford it! In fact, a beautiful metaphor has been coined: “a Vietnam of transportation: easy to begin and difficult and expensive to stop.” This is called the “iron law of infrastructure.” We do not know by how much the expansion of the Panama Canal is going to cost, over and above the original budget cost.

We do not know how the Chinese keep accounts. But, I am sure the Three Gorges Dam cost at least thrice as much as initially projected, even not accounting for environmental costs. We will never know how much Beijing Olympics cost them. But I can give a hint. The apparently disorganized / disheveled form of the main stadium that came to be called the Bird’s Nest (the structure had an in-built and invisible symmetry) arose out of the need to accommodate the rails on which the retractable roof will slide and integrating it invisibly within the overall structural scheme. However, it was later estimated that the roof along with the rails alone would cost one third of the cost of the stadium. They, then, quite intelligently dropped the idea of covering the roof! Is this a valid way of meeting budget limits, I ask. No, this is spurious technological accounting within the budget! An invisible cost escalation, as the structure could have been made much lighter without the roof.

The point to be made through all of the above. How did these cost escalations come about? Exclusively through corruption? If yes, the US is not Simon Pure, as also France, Canada, Greece, Brazil, South Africa, China, the UK, Panama. And, that is a short list. So, if India is corrupt, which it undeniably is, we are in good company! We should celebrate instead of beating our breasts.

If the other countries are not corrupt, then there does exist the possibility that some of our alleged instances of corruptions are not corruptions at all. It is simply a matter of false correlation between corruption and cost escalation.

So, where are we?

Raghuram Ekambaram