Are Governments Worse At Projects Than Businesses?

The L. A. Times notes the latest development in the, er, lack of development on California’s high speed rail program:

The bullet trains from Anaheim and Los Angeles to San Francisco will not cost $34 billion as originally estimated, or $43 billion as the authority insisted just two years ago, but closer to $100 billion….

The original system included Sacramento and San Diego. They are not part of this estimate. They will be added in Phase 2, and the authority does not say what Phase 2 will cost. Critics of the plan estimate the total cost at $180 billion.

It’s not at all surprising to read about a government project that is now projected to cost three times its original budget even after removing some of the original goals. Just a few days ago I was reading about NASA’s latest Mars mission being “24% over budget and… by October 2008 MSL was getting closer to a 30% cost overrun…” The CATO Institute has a dutiful article about the infamous history of government projects (though of course they prefer the more politicized phrase “government schemes”), from the Boston “Big Dig” transportation project that ballooned from $2.6 billion to $14.6 billion to a series of defense vehicles that took millions more dollars and several years longer to arrive than originally estimated.

Now the typical libertarian response may be something like, “Oh, looky there, government just sucks at everything it does, see?” Well, it’s important to note that private projects generally face the same problems, as I learned in my project management class from the Standish Group’s famous Chaos Report(s). Government projects overwhelmingly fail to finish without costing more than originally promised, taking longer than originally promised, or accomplishing less than originally promised – but the same is true for projects from businesses big and small. Boeing has been delaying their Dreamliner jet and losing customers in the process. IT projects are notorious for failing to deliver, and here’s just one list of costly cancelled projects from companies attempting to upgrade their billing systems, payroll systems, supply chain management systems, and more.

Projects are just generally hard, no matter who is in charge of them. People aren’t smart enough to anticipate all of the roadblocks or complications that inevitably arise. Sometimes it’s hard to think through the details of what you’re going to need for something until you delve into it, and there can be uncertainty and communication issues among the people who want the project completed and the people in charge of completing the project and the people actually completing the project.

So I don’t think governments are inherently worse with projects than businesses. But there is an important difference in the capacities of businesses and governments to respond to failed projects:

There’s a critical difference in how much money can potentially be squandered on a poorly managed project in the public sector rather than the private sector. A private company’s ability to spend money on a project is limited by its ability to obtain money. If a company wastes enough money on a major failed project, its stock price will collapse and investors will be unwilling to purchase newly-issued equity…

Government doesn’t face these limits. When the United States federal government mismanages a project, it can raise taxes, or it can issue almost unlimited new debt… Therefore, the potential for wasteful projects is infinitely greater because the threat of bankruptcy doesn’t exist or impose any discipline.

That is an important distinction. Governments don’t have to worry about going out of business if their projects fail.

Now this doesn’t mean that all government projects fail, either. People will point to the Hoover Dam or the Panama Canal or the Manhattan Project as successful examples of projects the government has accomplished. (Libertarians can always respond that the private sector would have done them better or faster or cheaper, but the bottom line is that the government accomplished these things before the private sector ever did, and they worked out fairly well, and “my theory can always beat your reality.”) In fact, it can be argued that specific government projects are much better than general government programs and bureaucracies:

Here’s one thing that many of them have in common: they are designed to innovate technologically to solve relatively narrowly defined problems. That’s true for the Manhattan project, NIH, the internet, DARPA, and to a lesser extent research universities…

In other words, government is generally very bad at running perpetual programs trying to engineer society by paying people to do certain things or fining them for not doing certain things and so on. But when government wants to accomplish something very specific or build something very large and awesome, it can sometimes utilize its enormous resources to knock out the problem in a way that the business sector hasn’t gotten around to yet. After all, we didn’t win World War II with private bodyguards.

Unfortunately, these project successes are far from common. Sure, the government built the Interstate Highway System. But I’m still not sure if it can build a high-speed rail system…

2 thoughts on “Are Governments Worse At Projects Than Businesses?”

  1. For some time now, I’ve been toying with the idea that one house of Congress should be responsible for revenues (both levying taxes and raising debt) and have no say in spending, while the other house would be responsible for spending and would have no say in raising revenue. Although it’s hard to say, I think such a reform might help mitigate the problem with government projects you raise in this entry.

  2. For some time now, I’ve been toying with the idea that one house of Congress should be responsible for revenues (both levying taxes and raising debt) and have no say in spending, while the other house would be responsible for spending and would have no say in raising revenue. Although it’s hard to say, I think such a reform might help mitigate the problem with government projects you raise in this entry.

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