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TL:DR - the way to combat rising costs is to constrain the supply of capital.

This isn't going to work. Infrastructure contractors will just turtle up and say that it can't be done at the lower price. Lowest-bid mechanisms are intended to harness Adam Smith's invisible hand, but aren't working as intended.

The essay touches upon two distinct points: a) the private developer cared deeply about how his money was spent, but the public developer did not b) general incompetence of public management, by misunderstanding how contractors manipulated costs to reach their estimates and establishing perverse incentives

The way you typically solve this kind of problem, at least in the private sector, is to set up a way for the manager to personally earn a fraction of what he saves the organization - the organization still saves a lot of money overall, even after paying the bonus. But if you bring up the concept of performance-based pay for public employees, you find massive opposition - both from a public worried about corruption and graft, and from public employees themselves, many of whom were drawn to public work in the first place specifically because of the stability and security of a public paycheck.

That's when you understand that what really needs to be talked about is a culture change in public work culture, and when you understand that, you understand just how high the mountain is that needs to be surmounted.




> TL:DR - the way to combat rising costs is to constrain the supply of capital.

I don't think that's a fair summary. He talks a lot about incentives being aligned, not just constraining the amount of cash spent.

To be fair, it's a very difficult thing to design incentives. It's cat-and-mouse game where people will try to find ways to beat the system. There's a good example in the article about the contractor who bids low on everything but the bituminous.

Your proposal, that the manager gets a share, can also be gamed. Once you've won a bid, there's a cost to firing you. Do the job cheaply and shoddily, and hope the adverse effects (eg bridge needs repair in 5 years instead of 10) don't manifest until you're out of town. The suggestion about keeping debt small is partly related to this: one generic way to pay for things is to get future generations to do it.

Generic ways to game the system:

- Time shifting costs. Pay tomorrow using today's credit rating.

- Quality bait-and-switch. We'll use less sturdy concrete, bridge will look the same.

- Selling optionality is another. Tunnel proposal A can be expanded to suit future traffic. During the project, we decide not to do the extra drilling required.

- The sunk-cost game. Bridge is almost done, but not usable until we spend a little bit more.


That's too simple a summary. The bulk of his arguments are about eliminating perverse incentives, such as the one you propose: if a public developer takes a percentage of the savings, the easiest way to inflate that bonus is to inflate the overall cost, especially if the public developer knows the real cost of execution. Rather than incentivizing him to squeeze the suppliers, you're incentivizing him to exaggerate expenses. In the article, the developer cares more about costs, but he's also controlling costs directly with hourly billing instead of fixed bids, giving him transparency.


Want a perverse incentive?

In the US, if a doctor dispenses a drug in-office to someone covered by Medicare, then Medicare pays the doctor the cost of the drug plus 6%.

The usual example trotted out in press coverage is Lucentis vs. Avastin for treating macular degeneration. Research has established little to no difference between them in effectiveness, but Avastin costs $50/dose while Lucentis is $2,000/dose. So if you're treating a Medicare patient with macular degeneration, and give them Avastin, as a doctor you get $50 + 6% back from Medicare, for $3 "profit" on it. But if you prescribe Lucentis, you get $2000 + 6%, for $120 "profit".

Want to guess which drug gets dispensed?

It gets better when you find out both drugs come from the same company, and that company has fought against having Avastin (the cheap one) endorsed for treating macular degeneration.


There's an added complication in the example you give, which is licensing, and that the manufacturer fought hard for years to prevent people prescribing avastin instead of lucentis.

They even restricted the sale of avastin for eye use.

It's not surprising doctors didn't prescribe the cheaper med in that situation.

http://www.allaboutvision.com/conditions/lucentis-vs-avastin...

http://www.bbc.co.uk/news/health-30138097


> That's when you understand that what really needs to be talked about is a culture change in public work culture, and when you understand that, you understand just how high the mountain is that needs to be surmounted.

You do know that the US is not the only country in the world, right? The costs are high not just compared to what the private sector pays for similar services, they are high compared to what the public sector in pretty much all other developed countries pays for similar services. Why on earth is it cheaper to build a tunnel in Switzerland than it is in the US?


>Lowest-bid mechanisms [...] aren't working as intended.

That's true for public projects as well.

Often the client will be happy to get a cheap offer, only to be surprised that the project is delayed, requirements are not met and there are huge follow-up costs.

And then sometimes all sides know that the project can't be done for what the lowest bidder offers and the whole bidding process has to be done again with restrictions that prevent the cheapest bidder from applying again.

Lowest-bid mechanisms sound great in theory, but absolutely don't work out practically and we all pay the price for it by getting a bad return on our tax money. On top of that, the system doesn't even prevent corrupt politicians from funneling government jobs to their friends.

Then again, good luck finding a better system.


Lowest-bid tenders are kind of like democracy - a terrible system, but the best we have invented so far.

If someone is spending their own money, then going with a vendor that feels the most competent is going to deliver a better overall result than lowest-bid. But if someone is spending other people's money, then too much subjective freedom in choosing the vendor greatly simplifies corruption, and it's not obvious whether the end results will be better.

What lowest-bid tenders critically need is competent, motivated people working for the government writing the Request for Proposals. People who know the field, know the risks and complexities, and know the "tricks" used to underbid and overrun. People who write tenders that push an appropriate amount of risk and liability to the vendors - not letting themselves to be taken advantage of, but also not adding too many penalties that make vendors pad their estimates just in case and reach for expensive lawsuits if something happens.

If you have that, then there is a good chance that the bids will work out for all parties. But if not, then shady vendors will steamroll over the customer.


I kid you not that there are such things as "proposal schools" and proposal-preparation companies that teach you how to win as low bidder by being "minimally compliant." Then, when the customer finally understands what they are (not) getting, you can hit them up for "change orders" that have to be negotiated. Bottom line strategy is be the low bidder at all costs, and recover your buy-in costs and and also make profits from change orders.

The real villain is letting CPFF (cost plus fixed fee) contracts rather the fixed-price contracts.


No, the way to fix it is to create incentives that align for everyone. As with healthcare, the way we do infrastructure work in the US creates incentives that are aligned against some party to the process. In healthcare, it's the patient.

Constraining the supply (or at least deliberately shaping the flows) of some capital, in some cases could — probably even would — help align them, but to suggest that "constrain all of the capital!" is the TL;DR of Marohn's thesis reads more to me like you might have had some biases confirmed than it does a summary.

EDIT: Particularly when your comment seems also to assign a hefty chunk of the blame for the state of infrastructure work to the infrastructure worker.

Also, phrasing.


But why do public organizations in developed europe & co have infrastructure projects for cheaper then? Don't they have similar or even stronger public work cultures?


European view: the US in general seems to have a really procedurally-oriented way of doing things. There are good sides to this but it does sometimes break down: in particular the legal system seems to focus a lot more on whether the process was followed rather than taking a step back and asking whether this is the just outcome.

I understand the rationale for low-bid rules. But actually the US has pretty low corruption and a good public work culture; IMO those rules do more harm than good. If you were willing to trust the people evaluating the bids a little more and empower them to use their judgement and pick the overall best bid (and maybe pay them a little more), you'd get better outcomes.


> in particular the legal system seems to focus a lot more on whether the process was followed rather than taking a step back and asking whether this is the just outcome.

The legal system in caselaw countries has a concept called "Equity". Its potency varies from place to place, but it original introduced notions of fairness and good conduct that the Common Law, in and of itself, did not always provide.

You don't hear about it because "Judge makes sensible decision" is not a headline that sells. What sells is "Judge makes decision that we will wildly distort beyond all recognition for the clicks".

Ever notice how badly the mass media represents technology issues? They do it for law too, except worse, because they have an incentive to distort the reporting.


Traditionally, due to Andrew Jackson and the spoils system, the US had a far more corrupt civil service than you'd find in Europe. At the start of the 20th century the old progressives tried to fight this by making a very rule-bound process which doesn't allow civil servants either the ability to engage in graft or use their best judgement. Eventually contractors learned to work the inflexible rule system and here we are.


I remember an interview with the head of building Spain's high speed rail. I can't find it now, but one of the interesting points was that he refused to use contractors. All labor was full time employees so he had complete control of schedule.

Which makes decent sense. We need to do a lot of road building and maintenance. Why not make it a public corps? There's no reason to involve contractors.


> But if you bring up the concept of performance-based pay for public employees, you find massive opposition ... from public employees themselves, many of whom were drawn to public work in the first place specifically because of the stability and security of a public paycheck.

Good luck getting the kind of performance you want from people whose pay depends on a good evaluation from the same people they should detain from inflating the costs.


It's a culture problem.


"general incompetence of public management, by misunderstanding how contractors manipulated costs to reach their estimates and establishing perverse incentives"

1. In the Bay Area, we have a Civil Contractor who's name rhymes with the Italian treat gelato.

2. For years, I wondered how they procure every job.

3. I have seen the jobs go on for years. It's beyond irritating.

4. As a inactive Contractor, I kinda know how the system works.

5. Basically, the county/state/public entity puts up a project to bid upon.

6. They collect at least three bids. I always thought, How is Gilato always winning the bid?

7. I started looking closely at three contenders in the contest. I noticed a Gilato is in all the "competing" companies. (It looked like they sent their kids/grandkids to Sacramento to get their contractor's license. A pretty easy feat. )

8. I have a weird feeling this family is bidding against themselfs, but can't prove it. Even if they are, it might not be illegial? I don't even think it's illegial to share those expensive toys. "Hay dad--I need that loader for Friday!"

9. All I know is it's taking forever to get a project completed.

Even if we have a big infrastructure bill pass through congress, I don't think it's going to put a lot of people back to work; so much of these projects are done by big machines. They will hire a lot of sign holders though.

It's a lot more nuanced than my simple rambling, but throwing a bunch of money at Giloto will scare me--if Trump gets this infrastructure bill passed. I gave no real proof for what I just said, other than noticing familiar names in the competing contracting companies.


They've been around for ever, so yeah their family has hooks into all sorts of things (and yes there are a large number of related companies). They're well known for being racists and felons (look up Patrick sometime). Word on the street when I was a kid was that they'd hire undocumented folks and then refuse to pay -- no idea how true that is/was.




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