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THE BIG DIG: A BIG LESSON

May 1993

President Clinton has expressed an intention to spend $80 billion on new government projects in the belief that such projects represent investments in U.S. productivity and competitiveness. Included in his plans are mega projects like data networks, superhighways and high-speed rail lines, as well as less spectacular projects for repairing roads and bridges and renovating airports.

Is this massive government spending the way to rebuild the economy? A dollar taken by the government for an "investment" project or any project is a dollar denied private investors. The question is whether the government project offers a rate of return (measured in benefits to society) at least equal to that offered by the private project it displaces.

Some government projects are no doubt justifiable. There is evidence for example, that projects that keep the current system moving smoothly - fixing pot-hole ridden and dangerous roads for instance- represent a sound investment. The larger and more spectacular mega-projects that are so appealing to politicians are, however, another matter.

Private investors are accountable to creditors, partners or stockholders for producing a competitive return on investment. Not so for government, which is inclined to pork-barrel spending and special-interest pandering. A project that, if privately funded, offers a competitive rate of return can, in the hands of government, easily turn into an expensive, open-ended boondoggle.

For a lesson on the economics of government "investment," consider the great Massachusetts investment project of the 90s- the Big Dig. This government project aims to turn the maze of elevated highways now running through downtown Boston into a smooth-running and environmentally-safe underground highway system. It provides for a third Boston Harbor tunnel that will relieve traffic congestion heading to Logan International Airport and other locations to the north of Boston and the construction of a series of bridges crossing the Charles River that will alleviate congestion in traffic west of Boston.

A History Lesson on "Infrastructure" Spending

The 1987 Federal Highway bill created the Big Dig, more formally known as the Massachusetts Central Artery/ Third Harbor Tunnel (CA/T) project. Shortly after it was approved officials estimated costs at $3.3 billion with a time frame of 11 years until completion. Construction would begin in 1988. The existing surface artery through downtown Boston would be ripped up in 1989, and construction of a third Boston Harbor tunnel would begin in 1990. Construction of the Charles River crossing would be under way in 1993, the new harbor tunnel would open for travel in 1994, a new northbound depressed artery would open in 1995 with a southbound portion following in 1996. Workers would begin dismantling the old elevated highway in 1997 and the whole project would be completed in 1998.

Since 1983, however, cost estimates have risen by 132 percent in actual dollars and by about 65 percent in "constant," inflation-adjusted dollars. Moreover, the schedule is off by more than two years. If costs continue to increase at the current rate, approximately 9 percent annually, the cost of the project at completion in the year 2002 will exceed $12.4 billion.

The cost of the CA/T project will be split approximately 85 percent-15 percent between the federal government and the state. Cost estimates are determined by jointly by the Federal Highway Administration and state officials. The 85-percent federal share of the cost will be funded through the national gasoline tax. Massachusetts expects to pay for its 15-percent share through the state's gasoline tax and through a hefty toll of $2-$3 at the new tunnel. No more than 2 cents of the state's gasoline tax - approximately $50 million annually - is earmarked for artery and tunnel funding. Federal funding is guaranteed only through 1997.
Official estimates of the cost to Massachusetts have grown from $250 million in 1987 to the current estimate of approximately $870 million. (If total project cost ultimately rises to $ 12.4 billion as considered above, the cost to the state will rise to $1.86 billion.)

The following table provides a history of official CA / T project cost estimates from both federal and state officials and CA / T officials. The current CA / T estimate stands at $5.8 billion.

Schedule of Cost Estimates

Date	Estimate	Comment
1 / 83	$2.5 B	Initial estimate developed by federal and state officials.
1 / 87	$2.5 B	Federal approval of funds for CA/ T project.
2 / 87	$3.3 B	Increase in statewide construction costs.
3 / 88	$4.3 B	Increase due to changes in design, inflation and increased real estate values.
9 / 88	$4.4 B	Increase due to design improvements, increased real estate values and statewide inflation in construction costs.
7 / 90	$5.0 B	Increase due to inflation, higher environmental costs, additional materials to protect against earthquakes and design changes.
6 / 92	$5.8 B	Increase due to inflation and unexpected problems
5 / 93	$5.8 B	Current estimate.

 

Current Status

According to the Massachusetts Highway Department, there are currently eight major construction contracts under way in the CA / T project, valued at $800 million. Construction of the third-harbor tunnel has been under way for 14 months with the first section of the tube tunnel put into place on February 3. There are also gas and sewerage utility relocations under way, both of which are preliminary projects for the artery depression segment.
Plans for construction of the Charles River crossing lane have not been finalized. The original construction plan, known as "Scheme Z," is a 16-lane, 11-story-high structure currently estimated to cost $1 billion. At the onset of this project, Scheme Z was estimated at $400 million. Any alternative design Scheme Z, under consideration, will be more expensive and add to the project estimate.

Observation

There are numerous costs involved in the CA / T project besides the ones we have noted above. Among these are disruption to downtown business during construction, revenues lost as a result of decreased access to downtown business establishments and confusion caused by rerouting of traffic.

The record of unanticipated costs and delays described above provides an object lesson on government "investment" spending. The market test of the economic viability of an investment project is that it yield a rate of return higher than that yielded by other projects that compete for the investor's dollar. The higher the cost and the longer the period to completion of any investment project, the lower its rate of return. One must ask, in the light of its history of cost overruns and delays, whether the CA / T project offers a rate of return that is as high as that offered by other private and public projects that are necessarily being sacrificed as investment dollars are diverted from those projects to the CA / T.

Indeed, it might be appropriate to think of certain government mega-projects as "disinvestments": exercises in putting investment dollars into public projects that offer cost overruns and delays and away from private projects that offer competitive rates of return. As for the Big Dig, it will go on and on, taking U.S. and Massachusetts taxpayers for a long and costly ride.

Information for this paper was obtained from various articles in the Boston Globe, 1986-1993, and from material obtained from the Massachusetts Highway Department.