How should governments prioritize infrastructure investments?
Summary
Why governments must look beyond cost-benefit analysis.
As public debt levels have increased dramatically through the COVID-19 crisis, governments must stretch stimulus investments as far as possible. Historically, cost-benefit analysis (CBA) has been used as a basis for sound project appraisal and project prioritization. However, in a best-case scenario, CBA provides only a limited view on the potential outcome of investments—and in a worst-case scenario, it can be downright misleading.
The inaccuracies associated with CBA have recently been the focal point of discussion and research in both academic and industry sectors. Most of the lesser criticisms of CBA emphasize that such tools are limited as they typically include only easily measurable costs and benefits, while ignoring the wider social impacts of infrastructure solutions, which we believe should feature heavily in infrastructure prioritization. Other criticisms are more severe and call for reform while arguing that current CBA is inaccurate since it fails to consider variability and systematic biases that affect project outcomes. The inaccuracy of CBA was recently highlighted by Flyvbjerg and Bester (2022) who argue that cost and benefit estimates are inaccurate and biased and thus cannot be used to provide evidence around the worth of project investments.
To overcome the weaknesses associated with CBA, this paper explores current approaches to project prioritization and proposes
several alternative strategies organizations can use to enhance the effectiveness of their infrastructure investments.