In what I regard as a victory for common sense, the Ottawa city council has killed a planned light-rail line. Unfortunately, this may be a costly decision as a previous city council had signed a contract to construct the line, and the contractors say they want compensation for the cancellation.
The 18-mile line, which had been approved by the city council last July, was expected to cost CN$778 million, or about CN$43 million per mile. The Province of Ontario had promised to cover about CN$400 million of this cost, leaving the city to find CN$378 million.
Light rail passing high-density housing in Moscow. Photo by Lowell Grattan.
But after having spent CN$65 million on the project, a new city council elected in November decided light rail was a waste of money. In December, they voted 13-11 to cancel just before a contract deadline.
Siemens, which had the contract to build the line, threatened a lawsuit. Earlier this month, the company sent a letter to the city asking for CN$175 mllion for “wrongful termination of the contract.” Of this, CN$25 million was for money already spent and the rest was for “lost opportunities and profits.” Alternatively, the company said it would build the light rail, but due to the delay, it would now cost CN$70 million more — provided the city agreed to it by the end of February.
The city council, however, rejected this offer, a majority saying they did not want the light rail. Siemens may end up suing, but the city probably expects to pay something less than the CN$175 that Siemens requested.
This is a rare counter-example of the Concorde or Sunk-Cost Fallacy, which refers to the tendency of people and, especially, governments to throw good money after bad on ill-considered projects because they don’t want to admit that they wasted the money they already spent. This is named after the Concorde, the British-French supersonic plane, which was a financial failure and would have to be considered a social failure as well unless you think it is appropriate for average taxpayers to subsidize the trans-Atlantic travels of people who can afford $5,000 for a ticket.
The last flight of the Concorde. Photo by Adrian Pingstone.
As one paper on the Sunk-Cost Fallacy says, “decisions are often based on past investments rather than expected future returns. This leads to an unwillingness to abandon something if a great deal has been invested in it, even if future prospects are dim.” In a political context, the cost that is sunk is more than just money: it is the prestige of the politicians advocating for particular projects. This makes it especially hard to learn from mistakes.
Some consider the Concorde to be a technological success particularly in view of the rivalry between Europe and the United States, which decided not to subsdize a supersonic passenger liner. But a paper on the Sunk-Cost Fallacy that appeared in the Journal of Ecology and Society argues that it was just such fallacies that led to the downfall of some past civilizations. Continuing to invest in failed projects leads the societies to eventually collapse.
On one hand, it is pretty amazing that the United States can afford to burn up more than $100 billion (adjusted for inflation) on capital improvements in rail transit over the last fifteen years even though the returns from such investments are zilch. On the other hand, if we want to stay competitive with Europe and, especially, Asia, we are going to have to invest more wisely in the future.