Newspaper Articles

If a public project isn’t working, we shouldn’t be afraid to pull the plug

Date: 21 August 2017
Publisher: News International
Published in: Times

The headline in last Tuesday’s edition of this newspaper read “Garden bridge killed off at cost of £50m”. The point was rammed home in the first paragraph, which said that the “scheme had finally been scrapped, at a cost of nearly £50 million to taxpayers”.

The intended meaning is clear from the construction of the sentences — it was the decision to scrap the bridge that had cost £50 million. This is a classic error, and an example of one of the most enduring biases in human thought and decision making. Once you have started down a path, once you have started spending money, then the temptation is to keep going. To stop now is to ensure that all the money and effort expended will prove to have been a waste.
As every first year economics student knows, that is the wrong way of looking at it. “Sunk costs” should be irrelevant in making a decision.

As every normal human being knows, one shouldn’t throw good money after bad. The fact that £50 million has already been spent should matter not a jot for the decision as to whether to proceed. That depends on the future costs and benefits. If even after spending £50 million, the future additional costs cannot justify the benefits then the project should be stopped. The fact that I have just spent £1,000 repairing my car ought not to influence my decision over whether or not to spend the next £1,000. That decision should be taken independently.

That’s the rational response. Only it can be difficult to be rational. To stop spending money on a public project, to give up on the car after you have just spent a lot of money on it, is to admit that you made a mistake — that the last £50 million or £1,000 was wasted. None of us finds it easy to admit that we were wrong. The temptation, often overwhelming, is to plough on.

I have not the slightest idea or view as to whether it would have made sense to carry on with the Garden Bridge. I am nevertheless tempted to cheer the bravery of the decision almost irrespective of whether it was the right one. For it is all too easy to be swept along by the tide and to fear the consequences of having wasted money so obviously.

We see this on a much bigger scale with grand infrastructure projects. It costs huge amounts of money, billions, just to do the preliminary work on projects such as Crossrail and HS2. In principle this is supposed to be about feasibility, proof of concept, testing out how much it will cost and what the benefits will be. In practice once hundreds of millions have been spent you can be pretty sure that the momentum will carry the project to completion.
I experienced this at first hand when working at the Treasury in the mid-2000s. The idea of Crossrail had been around for years. A formal decision wasn’t taken and wasn’t taken again, but more and more money was committed to preparatory work. It was obvious what was going to happen. It was probably the right decision and it looks like it will be delivered in an orderly fashion.

It seems inevitable that the same process will bring us HS2. With the high-speed rail route costing several times more even than Crossrail, I’m less sure that approving it will be the right decision. The opportunity cost in not meeting other transport infrastructure needs will be huge.

There is, however, one form of public project that is more likely to be scrapped, even after the expenditure of tens, hundreds or even thousands of millions of pounds. If you enjoy a good horror story I can wholeheartedly recommend the appallingly wonderful The Blunders of Our Governments by Anthony King and Ivor Crewe. In chapter eight they describe the financial catastrophe that was the Millennium Dome, a perfect example of a project that could never be abandoned and into which huge amounts of good money followed a king’s ransom in bad money.

But it’s to chapter 13 that you must turn to get your hair really standing on end. This is the chapter about IT projects. Over the 1990s and 2000s project after project was taken forward, had billions spent on it, and was abandoned only at the very last minute when the fact that it couldn’t deliver became inescapable.

The granddaddy of them all was the proposed IT system for the NHS on which about £20 billion — yes billion — was wasted before it was effectively abandoned in 2011. The Garden Bridge doesn’t compare in scale but it is instructive that both projects were abandoned only when a new administration, not implicated in earlier decisions, took over responsibility.

The description of the NHS project by one official appearing in front of the public accounts committee, as being like a juggernaut travelling up the M1, is instructive. Once a big project is under way its momentum can carry it through almost any amount of evidence that it is not working.

The scale of waste is terrifying and often hidden. The serial inability of governments to define, manage and deliver big projects can only be sobering in the context of the attempt to deliver Brexit — the biggest project of them all.
Of course it would be better for all if project selection and management were better in the first place. But the appropriate response to making a mistake can be to stop.

We should question the original decision and the bad money wasted. But decisions which prevent good money following bad are too rare, not too common.

This article was first published by The Times and is reproduced here in full with permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist