Construction Costs, Third World Edition

It’s a commonplace that building things is cheap in third-world countries, with low wages, few labor and environmental controls, and lax regulations. The reality is quite different. The difference disappears once one makes sure to do a PPP adjustment; poor countries’ currencies are persistently undervalued relative to their PPP exchange rate, and often also relative to true market value, and this could lead to a distortion in cost structure.

Recall that in Continental Europe, a fully-underground subway line costs anywhere between $110 million and $250 million per km, removing one outlier at each end from my list. Spanish construction costs are generally much lower than the European average, with commuter tunnels coming in well under $100 million/km.

In Delhi, the Metro’s construction costs are very high. The next phase involves 108 km, of which 41 are underground and the rest elevated, and is scheduled to cost 30,000 crores. At current exchange rates this is $6.7 billion, but at the PPP rate it’s $17.6 billion, i.e. $163 million per kilometer. Such a cost is normal by European standards for a fully-underground line; it’s not normal for a line that’s majority-elevated. It is almost as expensive as mostly-above ground extensions of American lines, for example the Silver Line in Washington.

In Beijing, the subway construction costs are also higher than one would expect given low wages, but only about as high as those of Europe. Fully-underground lines are about $150 million per km: these include Line 8 Phase 2 ($2.5 billion/17 km), Line 6 Phase 1 ($4.9 billion/30 km), and Line 14 Phase 1 ($4.5 billion/30 km); the first two are confirmed to be fully underground, and while I can’t find a claim in either direction for the last, all lines it intersects are fully underground. Chinese high-speed rail costs are quite similar to European costs as well: the lines rated at 350 km/h are between $19 and 50 million per km; there’s little tunneling on most lines, but long viaducts, e.g. the $42 million/km Beijing-Shanghai HSR line is 1.2% in tunnel and 86.5% elevated.

In Baghdad, the under-construction above-ground metro line, built by Alstom, is costing $1.5 billion for 22-25 km. With a PPP adjustment, this goes up to $83-94 million/km, depending on whose report of the line’s length one believes. It’s better than India, but not especially good.

Turkey is proving itself to be the Spain of the developing world. Its construction costs are often high per kilometer, but only because Istanbul’s geography is such that lines have to cross under major bodies of water, in seismic terrain. Marmaray, a commuter rail tunnel connecting the European and Asian halves of the city, cost $3.5 billion for 13.6 km of tunnel; while the overall cost, $333 million/km after PPP conversion, is high, it must be weighed against the extreme complexity of the project. The extension of the Istanbul Metro’s M2 line going under the Golden Horn rather than the Bosporus, is $148 million/km, again with PPP conversion. In contrast, the fully underground first phase of M4 is, if I understand the reference, and that’s a big if, $40 million per km (add all three cost amounts, then convert to US dollars); when a line goes underground rather than underwater, Istanbul builds it as cheaply as Madrid. Mainline rail construction in Turkey is also inexpensive: Turkey plans to build 14,000 km of rail, with a substantial portion permitting 250 km/h speeds, for $45 billion; that’s $4 million per km.

Iranian construction costs are low as well. Tehran Metro Line 3, as usual after PPP conversion, is $61 million per km; it is two-thirds underground.

Although there are no third-world lines that have breached $500 million per km, as several first-world lines have, this is probably entirely due to the fact that India, with the highest construction costs, builds its subways mostly above ground. A fully underground Delhi Metro line will probably cost as much as one in Tokyo, despite Delhi’s much less densely built existing network.

The pattern we see here is, first, that the one country on the list following the English legal and political tradition also has English construction costs. And, second, third-world countries do not build rail more cheaply than first-world countries, after adjusting for living costs but not wages; in other words, they spend more of their income on building those lines.

While labor costs in China are lower than in Europe, so is the productivity of labor. If everything in China cost across the board less than in the first world, it would be as rich as the first world; the reason it’s not as rich is precisely that labor doesn’t go as far as in more industrialized countries. China’s rapid growth should be thought of as a process of catching up to what the developed world learned over two hundred years of industrialization that has made it so much more efficient now than it was in 1800.

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16 Responses to Construction Costs, Third World Edition

  1. dejv says:

    Writing from post-communist country, I’d add one observation regarding cost adjustion – wages are indeed way lower than in North America and west-of-iron-curtain Europe (my teammate in USA earns 4-times more than me), but almost *everything* else is at world market prices and mostly somewhat more expensive than that.

  2. Barath says:

    As a resident of Chennai and occasional user of the Delhi, and various European metros, I would have to echo dejv. I found your article interesting and thought provoking, but the use of the PPP unclear. If the delhi metro costs $163 million/km by using PPP, and $62 million/km without, which is right (for the purpose of comparision) ? After all, the PPP rate depends on a basket of goods/services that can be bought, and if building metros requires/uses more ‘internationalization’, then surely, a rate higher than the PPP rate is appropriate (for purpose of comparision).
    eg: http://www.rediff.com/money/2006/apr/03metro.htm
    “The next Metro line in the city will be 10-15 per cent cheaper than the Rs 175 crore per km that it averaged in Phase I (Rs 110 crore per km overground and Rs 280 crore per km underground) through a conscious policy of “indigenisation” being followed by Delhi Metro”.
    Would I be far off stating that adjusted PPP with corrected indigenisation index may be as big a factor as elevated/below ground in benchmarking these costs ?

    • Alon Levy says:

      Hmmm… I could take off the 10-15% indigenization effect, though it wouldn’t change the general observation. It makes sense that indigenization would help: part of the cost of building a subway is the design and engineering, and if those are done by international firms, then the exchange rate is more important than the PPP rate. On the other hand, the actual work of digging the tunnel or building the viaduct is always done locally, so the local PPP is what matters.

      • BruceMcF says:

        However, if the cost of digging the tunnel or building the viaduct includes a substantial element of imported heavy equipment, that portion goes back to relying on the exchange rate. So a further inquiry into the origin of civil engineering capital equipment is needed before applying the PPP adjustment to construction costs across the board.

        • Alon Levy says:

          See my comment further down, responding to dejv. The cost contains almost no capital; the major portion that could potentially be in exchange-rate rupees is the consultancy and professional charges line. And, if I’m interpreting the numbers on foreign-exchange spending right (and that’s a big if), it’s a bit less than 20% of capital cost, which given the factor-of-3 PPP adjustment accords with the statistic that indigenization saves 10-15% of the cost (i.e. 2/3*20%).

  3. dejv says:

    On the other hand, the actual work of digging the tunnel or building the viaduct is always done locally, so the local PPP is what matters.

    It does not, because big part of construction are costs of materials (concrete, steel etc.) and machinery are at world costs or even higher. If you want adjustment that actually tells something, you’d have to find out what part of expenses are actual wages and adjust that for PPP (or GDP per capita, for that matter).

    BTW my country’s Big Mac PPP / US Big Mac PPP is 1.0 but when comparing 2010 GDP(PPP)/GDP(PPP,USA), it’s 0.5 and GDP(nominal)/GDP(nominal,USA) is 0.15. So the only clear conclusion is that counting just PPP without other factors (like percentage of wages on project costs, income inequality and so on) leads to higly misleading numbers.

    • dejv says:

      and GDP(nominal)/GDP(nominal,USA) is 0.15
      Sorry, it’s 0.38 (per capita), but it still tells something.

    • Alon Levy says:

      There is a breakdown of costs, in the annual report, but I’m not sure how to interpret it. On page 28 of the report, you’ll see that the “expenditure during construction” column contains practically no capital, and is split about evenly between “consultancy and professional charges” and local labor and land costs.

      In addition, page 13 of the same report has a breakdown of import costs and foreign currency expended. Total foreign-exchange spending on contracts is 1,297 crore, while the financial highlights on page 7 claim a total capital financing of 6,777 crore.

  4. peterschaeffer says:

    One more data point you might find useful. See “Taiwan High Speed Rail” (http://www.transportcareers.mottmac.com/projects/rail/taiwanhighspeed/). Looks quite cheap to me. However, I don’t have the PPP adjustment handy. The terrain is rough as I understand it.

    Viaduct constructionTaiwan High Speed Rail project is among the world’s largest privately funded transport schemes Plans for a high speed rail line between Taipei and Kaohsiung, Taiwan’s two largest cities, were first drawn up in the early 1990s due to continuing growth in traffic between the big two cities.

    The government drew up a detailed proposal for the project and bids were invited on the basis of building a new 345km route, capable of taking trains running at a maximum of 300km/h – one of the largest construction projects of the late 20th century. Under these criteria, a 90-minute journey time could be achieved between Taipei and Kaohsiung.

    The US$13 billion project was funded by the Taiwan High Speed Rail Corporation under a 35-year concession agreement, signed in July 1998 – one of the world’s largest privately funded transport schemes. Physical work on the project began in early 2000 and revenue service operation commenced in 2006. It has ten new stations along with a large number of new bridges, tunnels and viaducts. No less than 300km of the line’s total 345km length is in tunnels or on viaducts because of the densely populated corridor through which the system passes – a clear indication of the scale of the engineering challenge which the project presents.

    We lead the International Railway Engineering Group auditing and spot-checking all design and construction management activity related to the whole high speed railway system including permanent way, viaducts and tunnels, signalling, power supply and rolling stock plus all stations and depots.

    Additionally, we developed a comprehensive asset management strategy for the civil infrastructure, covering the inspection and maintenance requirements of the high speed rail concession to provide the necessary assurance that the civil infrastructure was maintained in a safe condition for use by the operator.

    • Alon Levy says:

      THSR is $38 million per km before PPP adjustment, $72 million per km after. It’s expensive by HSR standards. It’d be cheap for an urban subway, but subways are naturally more expensive than predominantly elevated lines, and urban lines are naturally more expensive than intercity lines.

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