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PergamonPII: SO967-07OX(97)00007-3

Transport Policy Vol. 4, No. 3, pp. 141-146, 19971997 Published by Elsevier Science Ltd

All rights reserved. Printed in Great Britain0967-070X/97 $17.00 + 0.00

Inaccuracy of traffic forecasts and costestimates on large transport projectsMette K. Skamris* and Bent FlyvbjergDepartm ent qfD evelopn?ent and Plann ing, Aal borg Uni versity, Fibigerstraede 1 . DK -9220 A albor g East,Denmark

Little research has been carried out on before-and-after studies of traffic and costs in largetransport infrastructure projects. The few studies made all show a tendency for forecasts ofconstruction costs to be underestimated, and for traffic forecasts to be overestimated. Anexamination of construction costs and traffic in seven large Danish bridge and tunnel projectsshows that construction costs have been underestimated and traffic has been overestimated in theinitial phases of planning. This pattern is also found in studies from other countries of largetransport infrastructure projects. When the results of the Danish and the other projects are pooledtogether, the main lesson to be learnt is that cost overruns of 50-100 are common and overrunsabove 100 are not uncommon. Traffic forecasts that are incorrect by 2040 compared withactual development are common in large transport infrastructure projects. The result of thisoveroptimism in the initial phases of planning is that decisions are based on misleading forecaststhat may lead to a misallocation of funds and underperforming projects. 0 1997 Elsevier ScienceLtd. All rights reserved.Keyw ,ords: before-and-after studies, cost overruns, large transport projects, traffic

IntroductionLittle research has been carried out on before-and-afterstudies of traffic and costs in large transportinfrastructure projects. The few studies made all showa tendency for forecasts of construction costs to beunderestimated and for traffic forecasts to be overes-timated.

Within the last two decades it has been decided thatbillions be invested in the Danish transportinfrastructure, divided between a few very largeprojects, such as the Great Belt and the 0resund links.A decision is in the pipeline for the construction of afixed link between Denmark and Germany acrossFehmarn Belt. The Great Belt and the 0resund linksfrom coast-to-coast alone amount to approximatelyDKK 40 billion in 1994 prices (USS6.3 billion). Theconstruction costs of a Fehmarn Belt link is currentlyestimated by the European Commission at DKK 20-35billion (US $3.335.8 billion) for the coast-to-coast linkand DKK 15-30 billion (US $2.555 billion) for theconnecting infrastructure (European Commission,1993, p. 82). Such sums are substantial anywhere in the

*Author for correspondence. Tel: + 45 9815 8522; Fax: +45 9X153537; e-mail: mskamrisiuji4.auc.dk

world and especially in a small country of five millioninhabitants, such as Denmark.

With the large amount of money spent on largetransport infrastructure projects, it is remarkable howlittle data and research is available worldwide thatmight help answer basic questions of whether suchprojects have had the intended effects, and how theactual rate of return on such projects compares withthe projected rate of return.

This paper covers three issues. Firstly, the results arepresented from a study of forecast and actual costs andtraffic in seven large Danish bridge and tunnel projects(Skamris, 1994). Secondly results from other similarstudies are presented (Skamris, 1994; The DanishTransport Council, 1995). Thirdly, percentage distri-butions of cost overruns and traffic development areshown for a number of projects.

Research methodThe examination of Danish projects covers sevenbridges and tunnels. Forecasts of construction costsand traffic, elaborated just before decisions were madeto build, are compared with actual construction costsand actual traffic development. The seven projects are:the Limfjord Tunnel (inaugurated May 1969); the New

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Inuccurac~ of traffi c orecasts: M K Skamr is und B Flyv bjerg

Little Belt Bridge (October 1970); the SallingsundBridge (May 1978); the Vejle Fjord Bridge (July 1980);the Far0 Bridges (June 1985); and the Great Belt andOresund links which are both under construction.

The criteria for choosing the projects was size andgeographical distribution, i.e. the projects are amongthe most expensive transport infrastructure projectsconstructed in Denmark since 1960, and they arelocated in different parts of the country. Theexamination is based on original source material, suchas Construction Laws, background reports, trafficstatistics, and final contractor accounts. For eachproject forecast construction costs for coast-to-coastfacilities as presented to decision makers are comparedwith actual costs. The costs are calculated in fixed pricesexclusive of value-added-tax. Traffic forecasts arecompared with actual traffic in the opening year of theprojects.

Besides the study of the Danish projects, before-and-after studies of large transport infrastructure projects inother countries are examined. Here the delimitation isnot bridge and tunnel projects only; motorways, trunkroads and rail are included, also. The reason for notexcluding such projects is that not enough material existsto allow an examination of just bridges and tunnels.

The examination of projects outside Denmark is notbased on original source material, but on secondarysources. Therefore, it has been important to evaluatewhat kind of sources the studies are based on. Some ofthe studies are based mainly on newspaper articles ofuncertain validity, which is why they were excluded.Other studies had to be excluded because thedescriptions of economic factors were not sufficient,e.g. construction costs were quoted in current prices orno price level was given or no description was stated ofwhat was included in the costs. The studies excludedshowed the same overall trend as the studies includedregarding the accuracy of traffic and cost forecasts.

esultsIn this section results of the examination of Danish andother large transport infrastructure projects arepresented.Danish bridge and tunnel projectsFor the seven Danish projects, except Sallingsund,Great Belt and Oresund, the projects were establishedto relieve traffic on already existing links. In theSallingsund case the bridge substituted ferry services.Because of a clear need for extra capacity, the debatein the Danish Parliament was not focused on the needfor new links, but was concentrated more on rights-of-way and technical solutions. The decision making reportbehind the Far0 Bridges contains a cost-benefitanalysis, but it was only briefly referred to under theparliamentary debate and the results from the analysiswere not taken into consideration. In Table 1 the results

Table 1 Difference between actual development and forecasts ofconstruction costs, construction time and traffic for the Seven DanishBridge and Tunnel Projects (Skamris, 1994. p. 53)Project Difference between actual development and

forecast ( )Construction cost Construction time4 Traffic

Limfjord Tunnel 21 14 xNew Little Belt Bridge -10 57 -32Sallingsund Bridge 33 61 21Vejle Fjord Bridge -3 675 xFars Bridges 27 25 -22Average overrun 14 46 -9Great Belt link 542 h 9Oresund link 11 h 2 ,Notes:The difference is calculated as (actual-forecast)/forecast x 100 = difference in percent.The overrun is calculated from adoption of the Construction Law in1987 till latest forecast from 1992.The overrun is calculated from adoption of the Construction Law in1991 till latest forecast from 1993.4The difference is calculated as (actual-forecast)/forecastx 100 = difference in percent.Construction time is set at 3 years since no estimate of constructiontime is stated in the Construction Law.%Zonstruction of the project is not finished.The difference is calculated as the difference between actual andforecasted traffic for traffic in the opening year of the project:(actual-forecasts)/forecastx 100 = difference in percent.No traffic forecasts available in the Construction Law.The increase in traffic forecasts is from the adoption of theConstruction Law in 1987 till the latest forecasts from August 1994.The traffic forecast has not been raised since adoption of theConstruction Law.

of the examination of the seven Danish projects areshown. The average construction cost overrun for thefive completed projects was 14%, ranging from minus10 to plus 33%. Traffic development could only becalculated for the New Little Belt Bridge, theSallingsund Bridge and the Far0 Bridges, since notraffic forecasts are stated in the Construction Laws forthe Limfjord Tunnel and the Vejle Fjord Bridge. Forthese three projects actual traffic development was onaverage 9% below estimated traffic development,ranging from 27% above to 32% below the estimates.

All causes of the cost overruns cannot be verifiedfrom the final contractor accounts. Three of the budgetswere exceeded, partly due to changes in technicalspecifications and delays. However, in these cases thisexplains only 30% of the cost overruns.

For the Great Belt and 0resund links no comparisonsbetween forecast and actual construction costs andtraffic can be made as yet, since these links are currentlybeing built. Development in forecasts can be traced,however, and are shown in Figure 1. For the 0resundproject, criticism has been raised that traffic forecastswere fabricated in order to show the project profitableand thereby increase the chances of having it approvedin Parliament.

It is too early to compare forecast and actual viabilityfor the 0resund and Great Belt links. All data on viabilityfor these projects still relate to forecast viability. A

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Great Belt.170 Road Traffic160I.50

to

I I I I87 88 89 90 91 92 93 940resund

190

170 t

Construction Cost180 . .

/160I50

Figure 1 Forecasts of traffic and construction costs for the GreatBelt and 0resund Links.

number of observations can be made, however. For theGreat Belt link, being a state-owned enterprise, there areno share prices, and, therefore, no market assessment ofviability of the project. Given the way the project is setup, viability is best described separately for the road andrail links, with viability for the road link expressed byexpected pay-back period, and for the rail link by the sizeof the fixed fee the Danish State railways has to pay forusing the link. In the ratification year, 1987, the pay-backperiod for the road link was estimated at 12years. By1992, when construction was approximately midway, theestimated pay-back period had increased by 38% to16.5years. During the same period forecast road traffic,and with it revenues, had increased by more than 50%.Then, from 1992 to 1993, the estimated pay-back perioddecreased by 15%, mainly due to further increase inestimated traffic and due to assumed lower interest rateson loans. The rail link will be paid over 30years by theDanish State Railways through a fixed annual fee that willbe set to cover construction costs and interests. Theforecast size of the fee has increased 57% 1987-1994. Atthe same time rail traffic may become lower thanexpected. Against this background, the Danish StateRailway has called the pay-back arrangement for the raillink into question.

Construction of the 0resund link was ratified by theDanish Parliament in 1991. As for the Great Belt link,a condition for ratification was that the link would beself-financed, i.e. revenues from user tolls would covercosts and no public funds would be spent on the project.The condition was explicitly spelled out both in thepolitical agreement about the project between the mainparties in the Danish Parliament and in the agreement

between Denmark and Sweden. When the Oresund lawwas proposed to Parliament in May 1991, Parliamentwas told that in terms of forecast viability the projectwould create net revenues of DKK 50 million per year.The Auditor General of Denmark has found, however,that internally in the Ministry of Transport, in themonths prior to proposing the law to Parliament, fourappraisals of viability were carried out that had shownthe project to be non-viable, i.e. revenues did not covercosts over a required 30year period. These appraisals,or information about them, were not made available toParliament when it made its decision regardingIZlresund, a fact which has been criticized by the AuditorGeneral (Rigsrevisionen, 1994, pp. 16-28).Other transport projectsFew studies exist that rigorously compare forecast withactual costs and traffic for larger groups of transportinfrastructure projects. In the British and the Scandi-navian languages four such studies have been identified.The first study was carried out by the Transport andRoad Research Laboratory in the UK and covered 21metro systems in developing countries each at a valueof US $22-165 million at 1987 prices. For 13 of the 21metros capital cost overruns could be estimated, andfor nine metros, forecast and actual ridership could becompared. Table 2 shows that six metros had overrunsabove 50%, two of these in the range from lOO-500%.Three metros had overruns in the 20 to 50% range,and the remaining four in the minus ten to plus 20%range. Regarding traffic, seven of the nine metros hadactual traffic development in the range of 2&90%below estimated traffic, one of these in the range 70-90% and the remaining two in the range from O-20%below estimated traffic development (Fouracre et al.,1990).

The second study was carried out by the AuditorGeneral of Sweden and covered 15 road and railprojects with a total value of SKR 13 billion at 1994prices (approx. US $1.6 billion). The average capitalcost overrun for the eight road projects was 86%,ranging from 2-182%, and the average overrun for theseven rail projects was 17%, ranging from minus 14 toplus 74% (Riksrevisionsverket, 1994). It should benoted regaring the Swedish study, however, that two

Table 2 Difference between actual development and forecasts ofconstruction costs for metro systems in developing countries.(Rigsrevisionen, 1994b, pp. 7. 10)

Difference between actual development and forecasts ( )Construction cost Number of Traffic Number of

projects projects-10 to+ 10 3 As forecast I+10to+20 1 0 to-20 1+20 to+50 3 -20 to-50 2+50t0+100 4 -SO to-60 2+ 100 to + 500 2 -60 to-70 2

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Inaccuracy qf tr ~~fi c,forecam: M K Skamr is and B Fl~vv vg

thirds of the projects were still under construction whenthe study was carried out. Final costs for these projectsmay therefore turn out to be higher than the expectedfinal costs quoted by the Auditor General.

The third study was carried out by the USDepartment of Transportation and covered ten US railtransit projects with a total value of US $15.5 billion at1988 prices. The total capital cost overrun could becalculated for eight of the projects and averaged 61%,ranging from minus 10 to plus 106% for the individualprojects. The actual traffic development were in average65% below forecasts, ranging from 28885% (Pickrell,1990).

The fourth study was carried out by the UK NationalAudit Office. Here traffic forecasts were compared withactual development for 41 UK road projects within theDepartment of Transport and Welsh Office. TheDepartment of Transport are reasonably satisfied iftheir original forecast of traffic flow for the year afteropening a given section of road is within f20% ofactual flow for that year. The Study from the NationalAudit Office shows that 22 of the 41 schemes analyzedwere within this limit. The 19 schemes with widervariation contained examples where differences betweenforecast and actual flow ranged from minus 50 to plus105% (National Audit Office, 1988). In the 41 projectsactual traffic flows were below forecast traffic flow to adegree that the authorities might have adopted lowerdesign standards with possible savings of some &225million. Similarly, actual traffic flows for 27 projectscould justify higher design standards than thoseadopted at an additional cost of approximately & 160million. The National Audit Office notes that theauthorities have not evaluated in the light of actualtraffic flows the consequences of inaccurate forecastsfor individual road schemes, nor have they in practiceattempted to quantify the costs and benefits actuallyachieved (National Audit Office, 1988, p. 4).

Judging from these studies, forecasts for thedevelopment of rail transport seem to be moreproblematic than forecasts of road traffic. The USDepartment of Transportation study mentioned above,found that for virtually every project the divergencebetween forecast and actual ridership was wider thanthe entire range of the critical decision variables(Pickrell, 1992). Actual ridership was 28-85% lowerthan forecast ridership, meaning that forecasts overshotactual development by 388578%. In the Transport andRoad Research Laboratory study mentioned above,forecast ridership overshot actual development by anaverage of more than 100%. Only in two of the ninemetros were forecast ridership approximately achieved(actual ridership less than 20% lower than forecastridership) (Fouracre et al., 1990).

Besides these four studies, single-case studies havebeen carried out which show the same tendency tounderestimate construction costs and overestimatetraffic. For example, studies have been made of the

Channel Tunnel. When the Channel Tunnel Treaty wasratified by the French and the British parliaments inJuly 1987, total construction costs for this privatelyfinanced project were estimated at E2.601 billion at1985 prices (US $3.35 billion). By November 1990 theconstruction costs had increased by 62% in real termsto i4.208 billion (US $5.42 billion) (Major ProjectsAssociation, 1994). In May 1994 total constructioncosts had increased to E4.650 billion in real terms(US $6.00 billion), a cost overrun at 80% (Vickerman,undated, p. 23).

In many studies the authors have tried to find outwhat caused the overruns. Changes in design, delays,and technological innovation can explain some of theoverruns, but still a large part cannot be explained bytechnical causes. One of the authors believes that acause can be found in manipulated forecasts. He hasbeen able to demonstrate that this was in fact the casefor a number of projects by interviewing public andgovernment officials and politicians involved in thoseprojects (Wachs, 1990).

The key variables of financial viability for largetransport infrastructure projects are costs (investment,financing, operations and maintenance) and revenues(mainly from fares and tolls). For each variable,forecast values may be different from actual values asdocumented above. Actual project viability maytherefore be substantially different from forecastviability.

The difference between forecast and actual viabilitymay be so large that had actual viability been knownfor a given project, decision makers may have resolvedeither (i) not to implement the project; (ii) implementthe project in another form; or (iii) implement anotherproject. In other words, non-viable projects, or projectsthat are less viable than foregone projects, may beimplemented not because they are viable but becausetheir viability was inaccurately predicted. The resultwould be an inefficient use of resources.

For the Channel Tunnel, original estimates ofviability have been rendered irrelevant by actualdevelopments which have taken the project on a roller-coaster ride from expected high profitability to whatanalysts have identified as near-bankruptcies. InSeptember 1995, Eurotunnel suspended interestpayments on its loans for an 18 month period. Todayinvestors worry that Eurotunnel has been as optimisticpredicting traffic in the tunnel as it was predicting costsand time-schedules. Sensitivity analyses suggest that ifestimated revenues are off target by 25%, Eurotunnelwill run out of money in 1999; if they are out by 15%,money will last until 2001 (The Economist, 1994; TheEconomist, 1989). Considering that costs were off targetby approximately 80%, investors concerns are veryreal. If, however, the start-up problems of operationare overcome, and if pricing and marketing strategiesare set right, the Channel Tunnel may turn into aprofitable venture in the long-term.

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Inaccuracy of tr affi c forecasts: M K Skamris and B Flyvbj erg

15 IO 10 20 20 50 50 100 100 500Actual - Forecast x loo

ForecastFigure 2 Percentage distribution of construction cost development in41 transport infrastructure projects.

Distribution of overrunCost development in the Danish and other projects aredistributed as shown in Figure 2. In all, 41 Danish,Swedish, British and American projects are included inthe distribution. The actual construction costdevelopment in fixed prices ranged from being 15%below estimated costs to up to 500% above estimatedcosts. In three-quarters of the projects, actualconstruction costs exceeded estimated costs by morethan 10%. Most often, in 32% of the projects, actualconstruction costs were between 50 and 100% abovethe estimated costs.

The distribution of traffic forecasts is shown in Figure3. In all, 20 Danish, Swedish and American areincluded. Actual traffic development ranged from being30% above the forecasts to being 90% below theforecasts. In nine out of ten projects actual trafficdevelopment was below that forecasted, and most often,in 50% of the projects, actual traffic was belowforecasts by 20-60%.

It should be stressed that the distributions shown inFigure 2 and Figure 3 pool together road and railprojects and that the distributions may be different forthe two types of project. For example, the examinationfrom the Auditor General of Sweden indicates that costoverruns in road projects are more pronounced thanoverruns in rail projects. Also, existing data indicatethat over-optimistic traffic forecasts are morepronounced for rail projects than for road projects.

_ -

-

- - n n90 70 70 60 60 50 50 20 20 0 0 30

Actual ~ Forecast x ,ooForecast

Figure 3 Percentage distribution of traffic development in 20transport infrastructure projects.

Therefore, firmer conclusions will have to awaitexamination of a larger number of projects.

ConclusionFrom the projects examined, the main lessons to belearnt are that cost overruns of 50-100% are commonfor large transport infrastructure projects and overrunsabove 100% are not uncommon. Traffic forecasts thatare out by 20-60% compared with actual developmentare common for these projects. Forecasts of projectviability for large transport infrastructure projects areoften over-optimistic to a degree where such forecastscorrespond poorly with actual development.

The result is that decisions based on misleadingforecasts-often presented to parliament, to otherdecision makers and to the general public-may lead toa misallocation of funds, and to underperformingprojects during construction and operation.

The differences between forecast and actual costs andtraffic documented in this paper cannot be explainedprimarily by the inherent difficulty in predicting thefuture. The difference is too consistent and too one-sided for this to be the case.

It goes without saying that this state of affairs doesnot mean that viable projects and projects showinggood practice regarding estimated and actual viabilitydo not exist. Even less does it mean that averagepractices cannot be substantially improved upon inproject appraisal. It does mean, however, that apervasive and consistent problem exists for largetransport infrastructure projects regarding the reliabilityof the information on the basis of which decisions aremade to build or not. This problem cannot becompletely eliminated from large transportinfrastructure projects, but it can be acknowledged andreduced.

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