Why do 99.5% of big projects go wrong?

[MUSIC PLAYING] Our brain is programmed to think fast. That's our spontaneous reaction, to think fast about things. And we don't always come up with good solutions when we do that. [MUSIC PLAYING] Welcome to the Best New Ideas in Money, a podcast for MarketWatch. I'm Stephanie Kelton. I'm an economist and a professor of economics and public policy at Stony Brook University. And I'm Charles Passi, a reporter at MarketWatch. Each week, we explore innovations in economics, finance, technology, and policy that rethink the way we live, work, spend, save, and invest. [MUSIC PLAYING] In today's Book Club episode, we're going to talk about so-called mega projects-- think skyscrapers, bridges, subway train systems, and Olympic stadiums. I'm curious, Stephanie, so how do you define them as mega? Well, I don't. But our guest today defines them that way, because they cost north of $1 billion to build. OK, well, I think I'd agree with that. $1 billion sounds pretty big. Yeah, and they have something else in common, these enormously expensive projects. They almost always go, well, wrong, meaning they go over budget, over schedule, or they don't provide the benefits they were intended to. More often than not, all three of those things apply. At least that's the takeaway from a new book called How Big Things Get Done. It's co-written by Bent Flubia, a professor at Oxford University and the IT University in Copenhagen. By training, I'm an economic geographer, which is a special kind of economist who looks at the economics of cities and regions. So basically, the economics of geography, how we organize ourselves in geographical space. But I haven't worked in a geography department ever. I've been working in planning and management and business schools. Flubia has spent decades studying why mega projects go wrong. He's written several books and hundreds of papers on the topic. And according to Oxford University, he's the most cited scholar in the world on mega projects. It all got started by me observing one specific project in Denmark, which is my home country. Flubia is talking about the Great Belt Mega Project, which dates back to the 1990s. This was a project connecting Denmark with continental Europe, including, at the time, the longest suspension bridge in the world, and the second longest underwater rail tunnel. So a really big project. And it went terribly wrong. The tunnel was flooded. There was fire. And the project was delayed by years. And the budget shut up. It became much larger than expected. So I wondered, is this normal? It looked like such a disaster. So as a scholar, I asked the question, how common is this? And I found that there was no data, simply, in the world, despite the fact that even at that time, we'd already spent trillions of dollars of projects like this around the world. But nobody had sat down and asked, how do these projects actually perform in terms of being delivered on time and being delivered on budget and delivering what they promised in terms of benefits? This is something, if you're a scholar, you love this kind of thing. When you find a wide area on the map that you can fill in-- so I decided, I'm going to fill in that area on the map. And I did, you know. FLUBIAS started filling in that data gap by first studying transit projects, specifically 258 of them, spread across mostly Europe and the United States. That first data set included projects like the Holland Tunnel in New York and the BART rail system in San Francisco. And what we found in that first data set was that nine out of 10 projects had cost overruns. So only one in 10 projects were delivered on budget or better. On average, rails ran 45% over their estimated cost and bridges and tunnels were 34% over budget. And that was a finding that made people sit up a little bit. Actually, that got in the New York Times, which was like, you know, I'm a scholar in Denmark. At that time, I didn't usually get in the New York Times if I did a piece of research, you know. FLUBIAS also found that this phenomenon seemed to be pretty universal. We studied differences in geography. So like asking, is the United States better than Europe or is the Netherlands better than Denmark and things like that? And we found already at that stage that there were no geographical differences. No country was better than other countries. In order to increase the statistical reliability, FLUBIAS and his colleagues started expanding the database to include 25 categories of projects. It spans widely and includes both publicly and privately funded projects, from bridges to nuclear power plants, office towers, airports, telescopes, and major IT projects. Today, that database has 16,000 projects. And according to FLUBIAS, it's the biggest of its kind. And it turned out that the initial conclusion that FLUBIAS and his colleagues had reached years prior pretty much held up. And we've developed something we call the iron law of projects, which is over budget, over time, under benefits, over and over again. And that's statistically a very strong law. So that means if you're doing a project, you're up against the odds that you are very, very likely to be over budgets, over schedule, and under benefits. How likely? Only half a percent are actually delivered on budget, on time, and on benefits are better. Half a percent? Wow, that's really surprising and kind of depressing. Yeah, that means only one in 200 projects pan out the way they're supposed to. We're going to get back to why these mega projects keep going wrong in a moment. But first, I want to share a few examples from the book. California's bullet train connecting San Francisco to Los Angeles appears to still be out of reach financially. Over budget and behind schedule. California's high speed rail project is running out of money. The California High Speed Rail. The initial idea back in 2008 was that in 2020, there'd be a train between Los Angeles and San Francisco built for the price of around $33 billion. The new High Speed Rail Authority's report showed the estimated cost of the entire vision has ballooned to $128 billion. So from $33 billion to the most recent update of $128 billion. Current project, as planned, would cost too much and respectfully take too long. There's been too little oversight and not enough transparency. Right now, there simply isn't a path to get from Sacramento to San Diego, let alone from San Francisco to LA. I wish there were. In 2019, California's newly elected Governor Gavin Newsom announced that he was scaling back the project. And the bullet train would be operating on a much shorter route than first envisioned. Between two smaller cities in the Central Valley, Bakersfield and Merced, estimated time of completion, 2030. And we've got another example from the book. This time, it's from the tiny pool of projects, the one half of 1% that didn't go wrong. I expect quite a few of our listeners have looked up at its towering heights, Charles. I see it every day from my apartment window. Oh, wow, you have a nice view. It's the Empire State Building in New York. It was opened by then-President Herbert Hoover on May 1, 1931, exactly as scheduled. And the building was 17% below budget. So what happened with the Empire State Building? Well, first of all, I mean, there was a bit of a race between the folks building the Empire State Building and the folks building the Chrysler Building. So that might have been a factor. But Flubia, he thinks about it a different way. He thinks this all has to tie into a certain philosophy of how to approach these mega projects. He calls it "think slow, act fast." One cognitive bias we have is that we think fast this is actually the title of the most famous behavioral psychologist of all, Daniel Kahneman. He wrote this book, "Thinking Fast and Slow," and he documents, and like many other behavioral economists and behavioral scientists have documented, that our brain is programmed to think fast. That's our spontaneous reaction to think fast about things. And we don't always come up with good solutions when we do that. Obviously, it's a great thing if you're being chased by a wild animal or something, like in evolutionary terms, we need to be able to think fast. So it's not a surprise that we have the ability. Otherwise, you probably wouldn't be here as a species. But if you're making decisions that are not about surviving here and now, but about investing billions of dollars or buying a new home or whatever it is, it's actually not a good idea to think fast. And this is very well documented. If you do that, you end up with inferior solutions. We have taken that think fast and slow thing and reformulated it a bit. So because we look at actually delivering projects, building products, not just thinking about them, but also doing them. So therefore, we say that the rhythm of a successful project is think slow, act fast. If you think slow, in order to act fast later, you start with a crucial step, taking the time necessary to formulate the idea and then getting everybody on board with the plan. And once you've done that, once you know what it is that you want to deliver, then you've got to think backwards, as it's called. Then you think backwards through the process of delivering it. Like, what are the steps involved? Where do we start and what are the steps after? That will actually deliver the end product that we've set out to do. Flubia says a big part of that is building models, creating simulations and devising test after test in order to experiment with different solutions. Once you've done that, then it's time to act fast. And because you've thought high quality and you've tested and tried your ideas and so on, now you can act fast. And that's how you get successful delivery. - Now, being slow in the beginning might not sound as compelling as acting fast, but if you act fast to start with, you're bound to be slow eventually. It just happens at a later and much more fraught stage. - If you think fast, then you're forced to act slow later because there'll be so many things that you overlooked and they don't disappear. It's like the law of physics still applies. So if you overlook things and if you underestimated your budget or you underestimated your schedule, that's gonna come back and haunt you as budget overruns and scheduled overruns. And that's exactly what we see in the data. - Apart from the basic instinct to get going on projects, Flubia says that huge projects are also impacted by the power plays that surround them. One example, think about how often mega projects involve politics. - So one of the reasons that projects are rushed is that politicians like nothing better than to cut a red ribbon, you know? Because those are great photo opportunities and that gets you in the media. And that's most definitely a central part of the game as a politician, you wanna be in the media. - Another important reason why mega projects go wrong, Flubia says we tend to underestimate, well, a lot of things. The most dominant and the most pervasive cognitive bias according to behavioral scientists is optimism bias. Everybody knows optimism and everybody has been optimistic in their lives and know the consequences. If you're optimistic about how early you can get to a meeting and it turns out to be wrong, hey, that's a bummer, you're late for the meeting. And everybody has tried that and underestimating traffic, how bad the traffic is getting across town. And this also exists in big projects because it exists anywhere. Anywhere where people are making decisions, there's optimism. - But rest assured, an optimistic attitude does have its place in mega projects. - We need a can-do attitude to do projects, otherwise we would never get them done and a can-do attitude builds on optimism. However, what I wanna emphasize just as emphatically is that optimism can be misplaced. If I'm getting on a plane and I hear the pilot say to the second pilot, I'm optimistic about the fuel situation. I don't wanna be on that plane. I want a pilot who's dead certain and realistic about the fuel situation. So that's what I mean by misplaced optimism. So we need to distinguish between where optimism is a positive productive force and where it is a force that trips us up. - Charles, I don't know if you've ever been involved in a mega project, but have you ever underestimated the budget for something like a wedding or a major home renovation project? - Okay, Stephanie, you're hitting a real sore spot. Yes, I had the $10,000 kitchen renovation that turned into the $100,000 full home renovation, because kitchens are connected to living rooms which are connected to bathrooms and suddenly one piece needed to interlock with the other and all of them needed to be done and all of them were done weeks late and I was sleeping in hotels. Not a pretty picture. - Okay, I had a very similar experience without the hotels. We did a kitchen renovation that started in the summertime. We didn't have the kitchen for Thanksgiving or for Christmas and we got it finished just before Easter the following year. - Okay, Stephanie, so we both had similar examples. Flubia's book is actually about smaller projects too, like our home renovation examples. He says most of the things we get wrong about big projects are exactly the same for personal projects. - So in other words, the average person tends to be way too optimistic about the tight wedding budget or how long it'll take to renovate that kitchen. - Exactly, here's Flubia again. - And a good project leader, even if you're your own project leader on your kitchen renovation, will know to distinguish between these two, where you have to watch out for misplaced optimism and where optimism is necessary to get the thing done. There are many more reasons why mega projects go wrong, but we asked Flubia to give us one more key reason. - We say that for projects to be successful, you need experience. You simply cannot have inexperienced people doing things, just like you would never hire somebody to do your kitchen renovation, who had never done a kitchen renovation before, right? But let me tell you something that incredible as it sounds, people are actually hired to deliver mega projects, multi-billion dollar projects that have never tried to build the type of project that they're building. - So why does this happen? - Sometimes it's because it's hard to get the right people. This is a labor market that is under a lot of pressure. We are building an insane amount of projects in the world right now and have been for some decades. So sometimes you need to hire people that have tried something similar, but not exactly this. So one example from Canada, a project that I was an expert witness on, Canada was building this multi-billion dollar hydroelectric dam, one of the most difficult types of projects to build our database shows, and they couldn't find somebody who had built a hydroelectric dam before. So the government reasons, we can get somebody from oil and gas instead, and how difficult can it be? And it turned out to be a disaster because of course, it's not enough to have built oil and gas products if you're going to build a hydroelectric dam. - According to Flubia, there's one type of project that takes the prize when it comes to lacking experienced workers. - For the Olympics, we have named the syndrome. We call it the eternal beginner syndrome because the Olympics are being moved around. So the next city that gets them have never done it before, or it's so many decades ago that it's irrelevant. They've done it before because the people are not there anymore. The experience is not relevant anymore because things have changed, technologies have changed and so on, the sports have changed. And when we look at the numbers, this is like terrible. I mean, the numbers for the Olympics are awful. The average cost overrun is like 170% for all the products that we have dated for since the 1960s. - So whether you're planning a kitchen renovation or building a subway system, you're bound to get it wrong. If we ask Bent Flubia, how the heck do we get it right? That's after the break. - Welcome back to the best new ideas in money. Before the break, we talked to economist Bent Flubia about why less than 1% of all mega projects are delivered on budget, on time, and with the projected benefits. So we asked Flubia, how do we get it right? - When we decided to write this book, we decided we want to write about the successes, even though that there's such a small fraction of the total amount of projects that are being built around the world. We wanted to study these specifically and identify real successes that weren't just luck, but actually people really knowing what they were doing. We were looking for people who could repeat their experience of success over and over, 'cause then statistically we can rule out that it's luck. And that's probably the biggest pleasure of writing this book was to study these peoples and organizations. - And one company Flubia chose to highlight, we'll give you a hint. Toy Story, The Incredibles, Finding Nemo, Coco. That's right, it's-- Pixar, The Movie Studio. - Flubia and his co-author consider Pixar, which is a part of the Walt Disney Company, so good at projects that they even named a term after it, Pixar Planning. - But we're saying that everybody should do projects like that. And anybody who thinks that doing an animated movie is irrelevant to what they're doing if they're doing a project are completely wrong. - Flubia interviewed Pete Doctor for the book. He's the creative director at Pixar. Doctor detailed the long and rigorous process of ideation and testing that the studio's films go through, though it all starts with a seemingly simple step. - You just need a 10 page synopsis, you know, describing what's the idea here and how would we unfold it. Then you get feedback on that from the other people at Pixar who are also doing movies. So your colleagues, they have something called the brain trust there and they give feedback. Then you expand the synopsis, maybe it comes 20, 30 pages. Then in the next stage, you start doing storyboards. You start drawing things so you can visually see. It's going to be a film after all. So it has to be visual, right? First, just a few dozen storyboards and drawings, but then thousands actually. And then you start thinking about what are the figures going to say? And you just using your own voice, you will start saying some of the lines that the figures are going to say. Choose some music, you know, background music that you think will give the right mood for whatever the scene is and so on. So at Pixar, they go through eight rounds like this before they even start shooting. They have simulated the film eight times. And only then do they start bringing out the expensive animation computers. And only then do they start hiring the expensive Hollywood actors that are actually doing the voiceovers on the films, as we know. And only then do they start hiring the expensive composers that will do the score of the music and so on. And because they have already simulated it so many times, they know exactly what they're doing and what they want. So there's not a lot of change at that stage. And they can actually shoot the film pretty quickly. - Flubia mentioned one final thing that he believes can lead to a successful mega project, modularity. Or as he prefers to frame it, building with Legos. And yes, you heard that right. Legos, the plastic building block toys. - Lego is about modularity. So a Lego is a building block that is modular and you can build all sorts of things. So it's a very simple principle that you have these building blocks and out of the building blocks, you can build incredibly complex structures. And because they are building blocks, it's fairly easy. You don't have to do any bespoke design on the individual building block. It's already there, it's a given. And that's why I often ask people, what's your Lego? - Some projects are more modular than others. Like building server or solar farms. You can almost visualize the Lego blocks in that. Or a wind farm, for example. - So the individual wind turbine consists of four Legos. One is the foundation, one is the tower. One is the nest cell. This is the top thing where the turbine itself is. And then you have the wings that you click onto the nest cell. These four elements, foundation, tower, nest cell, wings. You click them together and you're in business. It used to take months to build a big wind turbine. Now it's done in one day. They're not actually not built anymore. They're just assembled, just like Legos. - When you build this way, you benefit from the repetition and the experience you gain along the way. - So because this is very repetitive, you're just doing the same thing over and over. You come very good at it when you're doing it. Because you're not doing something bespoke, something where you really have to make a new design every time you do it. No, you're doing the same thing over and over. And it turns out that that's something we humans are very good at. We do it things once and we learn something. Then we do it twice. We do it better, more efficiently. Then we do it the third time, fourth time. And once we get to the, you know, fifth, 10th, 20th time, we get really good at it. And we can do it very cheaply and very fast. - But wait a minute. A wind turbine seems easier to build with Legos than other projects. We ask Flubia, is modular thinking or building with Legos only an idea you can apply to certain kinds of projects? - No, you can use it on any type of project. So we explore this in the book. We actually set ourselves the task, let us find a project type that is usually considered impossible to do in modular fashion and then find somebody who has actually done it in a modular fashion. - And Flubia did find such a project. - Usually underground subways, like the subway in New York City or the Tube in London are considered very bespoke, you know, they're specially designed for where they are. And very often you'll find the stations are completely different and so on. Madrid decided that they wanted to try to build a huge extension, so 131 kilometers. It's one of the biggest metro extensions outside of China ever built in the world. - To be clear, that's about 81 miles. - And they decided it's too expensive to build underground rail in urban areas. Let's see if we can do it cheaper. So they decided first to do all the stations in the same manner. So they did one Lego, that was the station. So they had this one structure, one design that they would build over and over and over again so that they could learn how to do it effectively and cheaply and fast. Those were the metro stations. The next part, the Tube connecting the stations, would be more difficult because the construction had to be more well bespoke. - Anytime you start digging underground, most people will tell you that's extremely difficult and you always run into unique situations where things can't be done in a standardized manner. Well, what they did in Madrid was they decided, first of all, let's find what is the optimal length that one machine, one tunnel boring machine and one team that is running the tunnel boring machine can build by experimenting. So that's what we talk about in the book. You need to experiment in order to get good at things. And they experimented and they found a certain length, I believe it was like between six and eight kilometers for one tunnel boring team. - When they knew the size of one module and what kind of team it would require to build it, Flubius says they did the math and voila, they knew how many teams it would require for the entire project. They actually got many more teams going than is usual for a metro. And they ended up building the metro twice as fast as your average metro and at half the cost. And precisely because they were able to not make it a hundred percent modular, but still, and this is what I wanna illustrate with this example, it's about modular thinking. This is an idea and you can take it and you can implement it to a certain degree. Sometimes you can implement it a hundred percent like with solar and server farms. Sometimes you can implement it 50% like they did in the Madrid metro, but the idea holds. And if you want to be successful with your projects, it's a really good idea to start by asking, what's my Lego here? Thanks for listening to The Best New Ideas in Money. You can subscribe to the show wherever you listen to podcasts. If you like what you heard, please leave us a rating or review. And if you have ideas for future episodes, drop us a line at [email protected]. Thanks to Bent Flubia, I'm Stephanie Kelton. And I'm Charles Passi. The Best New Ideas in Money is a podcast from MarketWatch. The producers are Michael McDowell, Katie Ferguson, and Meta Lutzhoff, who also mixed this episode. Melissa Haggerty is the executive producer. Stephen Coots was our newsroom editor on this episode. The Best New Ideas in Money theme was composed by Sam Retzer. Stephanie Kelton is an economist and a professor of economics and public policy at Stony Brook University and not part of the MarketWatch newsroom. We'll be back next week with another new idea. (upbeat music)