Centre d'études et d'expertise sur les risques, l'environnement, la mobilité et l'aménagement

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This paper investigates the role of cost-benefit analysis (CBA) in the context of the European Union (EU) Cohesion Policy. After presenting the EU policy framework and the CBA guidelines adopted by the European Commission, we perform an empirical analysis drawing from a dataset of around 1000 major project applications, submitted during the period 2007-2013 by 22 European countries, and representing almost e180 billion of investment. A distinctive feature of the current CBA approach adopted by the European Commission is that applications for funding must provide a forecast of both the project's financial rate of return (FRR) and economic rate of return (ERR). While the former represents the financial profitability of the project from a private investors' perspective, the latter reveals its socio-economic benefits for the whole society. The difference between ERR and FRR mainly depends on the use of shadow prices, the inclusion of externalities and other nonmarket effects in the estimation of ERR, whilst the FRR is based on market prices. We find that, on average, the FRR is slightly negative (−2.9%) and the ERR is positive (16.2%). ERR and FRR are positively correlated on average with differences across sectors. We discuss these findings and suggest further research needs.1 The authors wish to express their gratefulness to three anonymous reviewers and an editor of this journal, to Erich Unterwurzacher (European Commission) and to Chiara Pancotti and Silvia Vignetti (CSIL) for contributing to strengthen the content of this paper with useful and detailed observations. The usual disclaimer applies. The paper does not necessarily reflect the view of any institution.