Thursday, May 22, 2014

The upcoming Red and Orange Line subway car order is massively overpriced. What's going on?

Another part in a never-ending series on mismanaged public agencies:


The MBTA is going to order hundreds of new cars for the Red and Orange subway lines, both of which are in desperate need. Some of the current subway cars have been operating since the year Neil Armstrong walked on the Moon, and by quick estimate, may have traveled over ten times as far!

Let's see how the cost of new equipment compares. There isn't really a market for "new subway cars" like there is for "new automobiles" but we can look at some similar agencies to get a general idea:

  • BART has ordered 410 cars at a cost of $ (2012): $2.2m/car
  • CTA ordered 706 cars at a cost of $1.137 billion (2012): $1.61m/car
  • WMATA ordered 428 cars at a cost of $886 million (2010): $2.07m/car
  • TTC ordered 234 cars at a cost of CA $710 million, approx. US $650 million (2006) of which the article claims that CA $211m is "extras", perhaps, so this may be as low as US $460 million for the cars, actually: US $1.97m/car
  • Going back a bit, NYCT ordered 660 cars at a cost of $961 million (2002): $1.46m/car
  • MBTA's most recent heavy rail order was 94 Blue Line cars at a cost of $174 million (2006) but the old CIP claims $234 million through FY10. Not clear if some of that cost included non-vehicle expenses: either $1.85m/car or $2.49m/car
  • And, looking forward, MBTA will order 226 cars for a cost of $1.3 billion (2013): $5.75m/car

Okay, let's break that down further, because the MBTA Capital Investment Program seems to indicate that the $1.3 billion actually includes the cost for things other than subway cars. It says:

  • $539 million for 152 new Orange Line cars: $3.55m/car
  • $262 million for 74 new Red Line cars: $3.54m/car

That's considerably better, but still quite high. Here's a list:
$2.2m, $1.61m, $2.07m, $1.97m, $1.46m, $1.85m, $2.49m, $3.55m, $3.54m
Two of these numbers are not like the others. Why is the Red and Orange Line procurement planned to cost so much more than any other subway car procurement in North America, that I have found so far? This seems like a scandal, a huge waste of money, and yet another weight dragging down the MBTA. The Commonwealth seems to be determined to throw away hundreds of millions of dollars. That additional 30-50% cost per car could have been put towards much desperately needed maintenance. Or additional vehicles to increase service on the overloaded Orange Line. Or on any of many worthy transit projects waiting for funding.

My hypothesis is that this 30-50% escalation in costs is a burden caused, at least in part, by the "Buy Massachusetts" requirement. Such nationalistic requirements are infamous for causing cost escalation. "Buy America" is a scam. The reason is simple: we don't have an established supply chain or industry with experience at producing subway cars. Even if it's just final assembly, we still need to bear the cost of creating the facilities from scratch, and training the workers; who will inevitably make mistakes. Stupid ideas like "Buy America" and "Buy Massachusetts" come from folks who don't understand the nature of economies and industrial policy. They try their hands at Central Planning and try to force an industry to grow when and where it isn't natural. Taxpayers pay the price, transit riders bear the burden of worse equipment (hello, Boeing), and transit systems are stifled by lack of resources. Ultimately we end up hurting the industry with this policy that was supposedly intended to help it. That's the "Buy American" way.

4 comments:

  1. Unless you include a breakdown of the budget and how the money is being spent, your analysis is incomplete. You also conveniently omit how the MBTA is purchasing fewer cars, which will always result in a higher per unit cost. The "Buy Massachusetts" aspect means that people in Massachusetts will get employment over the course of 5 or 6 years (or more) that it takes to assemble the trains.

    I'm not a fan of the way Massachusetts or the US Government spends money in general. But, your post lacks the details to have any real credibility. If you want to make a point, do your homework.

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    1. Hi Joe,

      You seem to be overly defensive about this matter.

      I do not omit anything about how the MBTA is purchasing fewer cars. I have listed exactly the number of cars that they are purchasing: 152 Orange Line, and 74 Red Line cars.

      I have compared their order against several peer agencies and a past order from the MBTA itself. An order, I might add, that was for only 94 Blue Line cars. In all cases, the peer agencies and the past MBTA have managed to purchase cars at a greatly reduced per-unit price compared to the current order.

      That is a red flag. All I am doing is raising the red flag.

      I am not hired or being paid as an inspector general and I am not privy to the internal budget details. I can only work with the information that is publicly provided. Although I am interested in the general problem of why infrastructure projects cost so darn much, I do not have the resources to conduct a large survey or investigation into that matter, nor any institutional backing that professors such as Bent Flyvbjerg have received. And such work in the past has been fraught with difficulty and seem inconclusive except to say that something is wrong.

      I was careful to state that my claim about "Buy Massachusetts" is a merely a hypothesis, for this reason. Take that as you will. The policy, whether or not it is responsible for the cost escalation, is not likely to produce jobs for 5 or 6 years, since the only requirement is for "final assembly" to occur here.

      You seem eager to assign homework. I have a better suggestion. If you can produce the appropriate budget documents, breakdowns and other audit reports that you suggest are necessary, then I will be more than happy to review them. I do not have the time nor energy right now to do more digging right now, and I have a lot of other pressing issues on my plate. For now, I will have to be satisfied with raising the red flag based on the headline numbers.

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  2. Well, did some homework, but Blogger's comment posting code doesn't seem to play well with my Chrome for Mac, so I lost my numbers. Here's a synopsis from Firefox.

    The evidence I see points directly to regulations and unreliable funding as causes of increased costs, with the age and uniqueness of the T system as contributing factors. Once you factor inflation, the size of railcars, and the size of orders, the projected costs in the Capital Investment Plan are in line with the comparisons you cite. Buy America/Buy Massachusetts restrictions definitely increase agency costs without providing a commensurate benefit. But that's evidence of a regulatory and funding system that's "born broke" in all senses of the word. In that context, using a subtitle of "mismanaged public agencies" is a cheap shot at people like Beverly Scott who are pouring their all into managing the T.

    Inflation: The comparison dollars-per-car figures increase when converted to 2014 dollars. Similarly, the projected costs from the CIP (p. 17) are spread from now until "beyond FY19" and should be discounted to present value. When I ran the numbers, I used BLS.gov's CPI calculator for comparison costs and attributed all future Red/Orange costs to the year 2017 in Federal Reserve inflation projections. Result -- the gap narrowed a lot between new Red/Orange cars and 2006 Blue Line, and a fair bit for 2010 WMATA and 2012 CTA.

    Car length: the Blue Line and CTA cars are limited to 48 feet due to track layout decisions made when trolley cars ran over them, while Orange and Red Line cars are between 65 and 70 feet. More steel, more seats, and more motor means more costs per car for the Orange and Red Lines. Put another way, more of the cost for these Orange/Red cars goes to carrying passengers and less is "overhead" (wheels and communication).

    Size of order: this is simply huge. Rail systems are each unique due primarily to accidents of when and where they were designed -- generally not due to boneheaded management (BART's wide track width is a notable exception). MBTA was the first subway, and we pay for this in having four unique rail systems. So Orange and Red Line orders can't be pooled like similar orders in Chicago, NYC, DC, or most other places could.

    I agree that Buy America/Buy Massachusetts drives up the price, precisely on underfunded transit agencies. If you haven't read it, I highly recommend the "Born Broke" report, which details the effects of debt and insufficient funding on maintenance and capital capacity. However, these aren't reasons to believe the T is mismanaged. The solution isn't to get new managers; Beverly Scott is one of the best. The solution is to reform the laws, regulations, and funding streams that apply to the T, so that better investments (which in this case includes more larger orders) can be made.

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    1. Hi Arthur,

      I appreciate the time taken to think about the issues. I just want to clarify up front that I am not "taking a cheap shot" at Bev Scott here. I have interacted with her on a number of occasions and I don't think she is the problem. For one thing, she is relatively new, having only been appointed a little over a 1.5 years ago. As the "Born Broke" report details, the problem of mismanagement is one that comes from the legislature, which inserts political goals into what should be a technical arena. The "Buy Massachusetts" requirement is a political goal, for instance, that does not help the MBTA achieve any performance-related goal but imposes a potential cost of dollars and maintenance headaches.

      You are right that inflation can account for a large chunk of the escalation. I would be cautious when tracking CPI and applying that to something like the purchase of a trainset. Recall that CPI is a measure of prices of consumer goods and trains are not consumer goods. Therefore, CPI is at best an indirect means of evaluating the cost escalation due to inflation, and it assumes that the costs of the component parts and the labor will scale with CPI. This may be a fair assumption. But it is something to think about. I would be willing to accept a 20% escalation in cost over 10 years as a result of estimated inflation, just to pick something to work with.

      Other notes: rail systems have many unique characteristics, this is true. But that has been true for a long time, and it is expected. This is not out of the ordinary for rail car manufacturing. Therefore I do not think it justifies any escalation of cost because all other agencies have to deal with their own idiosyncrasies as well.

      I also do not like it when people cite the 1897 opening of the Tremont Street subway as an excuse. We are not talking about the Green Line, for one thing. For another, the Red Line was constructed in 1910-1912, well after NYC opened its first subway, and uses a modern-style loading gauge. And NYC B Division subway trains are approximately the same size as the Red Line. You are right that CTA and Blue Line cars are smaller, and Orange Line cars are a bit longer, and Red Line cars are large. But many other systems use cars of large dimensions too. Besides NYCT B Division, the WMATA, BART and TTC all use car sizes that are larger than the Red Line. Not to mention BART's weird track gauge, and the 1970s-style loading gauge of both BART and WMATA. I just don't see size of vehicle as a valid excuse for cost escalation.

      That leaves size of order. The new order is a bit on the smaller side. But it's not the smallest one listed. If I take the larger cost of the 94 Blue Line trains and inflate it, I get perhaps $3 million/car. And then the additional half-million might be chalked up to "more steel". However, I am pretty certain that this number includes yard space/maintenance facilities expansion, whereas the $3.5m/car quoted for the new order does not. So that leaves an unexplained $1-2m/car.

      I fully agree with your final paragraph, and to reiterate, I did not intend to lay the blame on Bev Scott, because as I said earlier, these problems go back long before her tenure and are systemic and political in nature.

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