Wednesday June 19, 2024

Delusional development

By Waqas Younas
October 31, 2016

Delays in the completion of mega-projects have become the norm in our country. The Islamabad airport has seen a cost overrun of Rs19.39 billion; the cost of the sewage treatment plant in Karachi jumped nearly five times. Delays and cost overruns in development projects are a concern for a debt-ridden developing country such as ours, because they lead to inefficient allocation of resources and wastage of scarce capital.

According to research conducted by Dr Bent Flyvbjerg of Oxford University, cognitive biases, poor planning, political pressure, strategic misrepresentation and lack of outside expertise best explain delays and cost overruns. These factors lead also to inferior projects. The dream of pro-people development is shattered while the impoverished country has to bear these burdens.

Various studies have suggested that decision-makers (eg politicians) fall prey to cognitive biases, and have a tendency to exaggerate their talents. Overconfidence affects us all. In a 1981 study, Ola Svenson found that 93 percent of American drivers rated themselves as better than the average driver. According to Flyvbjerg, politicians are not immune to this over-optimism bias, or to the illusion of having control. They believe that things that go well are their achievements, while things that don’t go well are others’ failures.

When project promoters become excited about a project, they focus solely on success scenarios and rarely talk about the associated risks. Sadly, we don’t have policies in place that take such biases into account. The Treasury of the UK instituted policies to ensure that funding is available only for projects that factor in cognitive biases. We need to take similar measures.

Poor planning and inaccurate cost-benefit forecasts also cause delays and cost overruns. Properly-planned projects depend on rational and thorough cost-benefit analyses (CBA). The foundation of a good CBA is conservative and thoroughly-vetted forecasts. A CBA can easily be tainted due to improperly analysed-forecasts, making unfit projects look good on paper.

Incorrect forecasts project unrealistic revenue and erroneous payback estimates. Sadly, the issue of incorrect forecasts isn’t currently part of the discussion in our planning and development process. We should discourage and even penalise incorrect forecasts. Further, forecasts should be subject to public scrutiny, peer reviews, and citizen juries.

Political pressure to develop and finish projects within the political term further causes delays and cost overruns. The planners who create forecasts work for powerful politicians and bureaucrats, a group among which the cost of raising dissent is high. Planners actually find incentives for positively accentuating their forecasts since, due to political pressure as well as a lack of independent analysis and the ex post facto evaluation of projects, exaggerated forecasts are never questioned. This creates a culture in which tainted forecasts are considered fine. Eventually, we end up with piles of projects with incorrect estimates.

Additionally, Flyvbjerg notes the phenomenon of strategic misrepresentation, which best explains cost overruns. He cites studies in which planners admitted that they had to ‘cook’ their estimates to make projects look good on paper so that they could secure funding. Due to political pressure and scarce funding, competition is stiff, so project promoters pressure forecasters to underestimate costs and overestimate benefits. More transparency in the planning process can help ease political pressure and prevent strategic misrepresentation.

The problems of cost overruns and delays are also aggravated by the lack of outside view. Getting objective outside feedback, keeping experiences and expectations in check and learning from the outcomes of similar projects in past are part of this outside view. For an outside view, Nobel Laureate Daniel Kahneman has recommended a method called “reference class forecasting”. It is used by governments in the UK, the Netherlands, Denmark, Switzerland and elsewhere, and has been proven to curb cognitive biases and help reduce delays and cost overruns. As Kahneman notes, an outside view becomes even more important when a project has never been attempted before, because that’s when cognitive biases are greatest.

I went through both the Manual for Development Projects and the Handbook of Planning Commission (both are published by the Planning Commission) and didn’t find any mention of ‘reference class forecasting’, or any method that deals with cognitive biases or the other problems in our planning and development process.

This needs to change and it cannot happen without strong political determination and backing as rightly pointed out by Dr.Khalid Ikram in an podcast with Dr Nadeem ul Haque (both are Planning Commission veterans and noted economists). We need to modernise our planning process to protect future public funding and to thwart the paradigm of delusional pro-people development.