There’s no obvious connection between Edinburgh’s tram debacle and the movie business other than the now defunct possibility of hopping on a tram at Edinburgh Airport and getting off a stone’s throw from the multiplex at Ocean Terminal but beneath the surface (cobbles even?) there is an intriguing similarity in the dilemma facing the good burghers of this city and the denizens of Hollywood – it’s called the ‘Angel’s Nightmare’.
Put simply the Angel’s Nightmare is that on a complex, iterative project like a big budget movie (think of Heaven’s Gate for example) or a complex investment project predicated on projected future profits (or cost savings) like Edinburgh’s trams, as each major milestone and the original budget estimate is exceeded, a decision must be made on whether to continue investing further funds or to cut one’s losses and close it down. However as it unfolds this decision is faced by the investors at successive points where increasing sums of money have already been sunk into the project and can’t be recovered, so cost/benefit of continuing is really a question of what the additional investment from this point on will bring in sufficient future returns to recoup the investment from this point on.
In the movie business the problem of when to call it a day or face potentially ever-escalating costs was addressed by the introduction of the completion guarantee or ‘bond’. In effect this is a form of insurance for the films’ financiers which, amongst other possible triggers, kicks in when a film goes a certain % over budget. The completion guarantors then finance the difference between the agreed maximum budget and the true eventual costs, protecting the film’s investors from having to dig even deeper into their pockets and ensuring they will have eventually have something to sell to at least mitigate their losses if not actually make a profit. Completion bonds are expensive and require the film’s producers to comply with a range of conditions such as hiring acceptable i.e. tried and tested production personnel (and if things go wrong, firing anyone up to and including the director). As a form of insurance completion, bonds are predicated on sufficient films proceeding without calling them in to provide the bond company with the funds to cover the occasional movies mishaps that do, and thus to turn a profit on the operation overall.
Back on the rails (or rather off them) the predicted final cost of Edinburgh’s tram project continues its inexorable rise (see figure below) but, like public works generally, isn’t covered by such a convenient arrangement as a completion bond.
So is there any way of predicting what the eventual cost of an escalating project will be? Arguably not, because there is almost infinite variation in the outcomes that can be expected and average or mean figures are, as in film box office, of no value whatsoever in trying to predict the performance of an individual instance. That said, as a project like the trams (or a movie) progresses there is more information on that particular project on which to base predictions of the final outcome. Each week’s box office results make predictions of the eventual box office more reliable and by analogy the same can be said of a major building or Government IT project (notorious cost -over-runners).
So applying some crude arithmetic to Edinburgh’s trams here, for what its worth, is my (current) prediction of the eventual cost assuming the first (and last?!) line is open in October 2014: between £806m and £854m i.e. between 3.3 and 3.5 times the original cost estimate. [SEE FOOTNOTE].
NOTE ON METHODOLOGY: This range is arrived at by projecting forward to October 2014 an average monthly increase in the estimated final cost on the basis of either £4.7m/month derived from the 76 months between the first (£243M in Dec ’03) and latest estimates (£600m Apr ’10 and current) or the 23 months between the penultimate estimate (£512 in May ’08) and now, which projecting forward either gives a historic monthly increase between £4.7m and £3.8m. NB as the figure shows, the rate of increase in the predicted final cost has been almost linear although there has been a slight reduction in the rate of increase between May 2008 and April 2010. It may be that the rate of increase of the predicted final cost will fall – in which case the ultimate cost might be less than £800m. We shall see…