Saturday, September 01, 2012

Survival of the unfittest

 


by Bent Flyvbjerg

As a case in point, consider the Channel tunnel, the longest underwater rail tunnel in Europe, connecting France and the UK. This project was sold as highly beneficial both financially and economically. At the initial public offering, Eurotunnel, the private owner of the tunnel, lured investors by telling them that 10 per cent "would be a reasonable allowance for the possible impact of unforeseen circumstances on construction costs." In fact, costs went 80 per cent over budget for construction and 140 per cent for financing, measured in real terms from the decision date. Revenues have been half of those forecasted. As a consequence the project has proved non-viable, with an internal rate of return on the investment that is negative, at –14.5 per cent. However convenient for the users of the service---who are heavily subsidized---the Channel tunnel detracts from the economy instead of adding to it. An economic and financial ex post evaluation of the project, which systematically compared actual with forecasted costs and benefits, concluded that "the British Economy would have been better off had the tunnel never been constructed."
 
Thanks to New Geography for the link.

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