Completion Risks
While completion insurance for construction projects is not a new business, for certain high-profile projects I wonder if it wouldn’t make sense to open up the risk pricing to a wider audience…
The recently unveiled plans for the London 2012 Olympic stadium got me thinking about this (from London Metro:)
The £496m structure, which has jumped in price from the £280m estimated in 2004 when London was bidding for the Games, will stand at the heart of the Olympic Park. It is being billed as a design representing a new era for Olympic stadium design.
Building work on the stadium is set to begin up to three months ahead of schedule in April or May, with completion in 2011 to allow for test events, the Olympic Delivery Authority (ODA) said.
I suspect that if you had a market in construction cost and completion date, both would go bid very quickly at £496mn and May 2011…and it would be a good bet. As Mr Taleb drives home in Black Swans, the people responsible for making these forecasts at best include all the normal – ‘expected’ – factors that contribute to the cost and delivery date of the development. It is unlikely that they have accounted for things outside those which have historically contributed to delays and cost overruns. Indeed, there is no way of “scientifically” accounting for these possibilities, and I further suspect if they were to add an arbitrary 50% or more haircut to at least provision for some unknown eventuality, they would never be allowed to do so (by the customer, the accountants, the insurers, etc.) However if there was a traded market price any interested party would be able to hedge this risk. This is not to say “the crowd is wise” and can know the unknowable (as is the often mistaken cry of prediction market evangelists) but that with a traded market the risk is better syndicated (distributed) to those best able to bear it at any given price. And the price signals – while not omniscient – would be useful to both the customer (London 2012) and the construction companies. For unlike the Syndey Opera house, the deadline is hard. (Well there is always Wembley I guess if it all goes completely pear-shaped…)
So I guess I should send a request over to Betfair to get these markets up and running! Only problem is (and this is why the future lies is data – robust, clean, reproduceable data) you would need to have a clear and robust settlement mechanism. Probably easier for delivery date (esp. if market settles on a week, fortnight or month to avoid ribbon cutting date shenanigans – ie insider trading) than for cost. That said given that it is a public project there must be some government auditing department that could state the methodology and vouch for the accuracy of the final accounting.
