Cost-Benefit Analysis of Infrastructure Projects in an Enlarged European Union: An Incentive-Oriented Approach

Abstract

The purpose of the paper is to analyse some results of cost-benefit analysis in a sample of ISPA (Structural Instrument for pre-accession countries) projects. The focus is particularly on the variability of financial and economic rates of return and how to integrate this information in the EU co-financing mechanism. We investigate, through the analysis of variance of co-financing rate, to which extent variability of rates is due to structural characteristics (sectors, countries) or to the existence of a residual variance due both to specificity of the project and discretional element of the appraisal method, which may constitute an information noise. We find that the variance of co-financing rate across countries is poorly explained by different composition of sectors of investment. This suggests the need to reinforce a more consistent approach to evaluation and co-financing. We suggest some possible solutions. ACKNOWLEDGEMENTS

The use of ex post cost-benefit analysis to assess the long-term effects of major infrastructure projects

“…The problems described above may be mitigated or exacerbated by specific features of the institutional setting or the funding mechanism. For example, Florio and Vignetti (2005) and Florio (2007) show the incentives at play to strategic misrepresentation in the EU Cohesion Policy framework, characterized by a multi-level governance setting with information asymmetries and potentially not aligned strategic objectives of the different institutional layers as well as a funding mechanism designed in order to co-funding the financial gap in investment costs rather than rewarding the best performing projects in terms of expected development effects. In this setting there may be incentives for national and regional authorities to maximizing the absorption of funds and promote ready to implement, low risk and consensus-driven investment projects.…”

Cost-Effectiveness Analysis in the Coastal Water Quality Sector: A Priority in the Frame of the ICZM

“…The lifetime of a measure, based on the nature of the investment (Bystrom, 1998;Ribaudo et al, 2001) or on its legal-administrative nature (E.C. 2001b;Florio and Vignetti, 2003) and the financial discount rate used should be identified. It should also be noted that all costs should be expressed in the same year prices.…”

“…Data for the control of polluted land use activities, which influence these sectors, is included in PA-1 data base Another difference between these evaluation methods, in addition to their different results and cost variables, is the discount rate. In the CBA the social discount rate is used, while in CEA the financial discount rate is appropriate (Florio and Vignetti, 2003). Moreover, in the MCA a simultaneous consideration of multiple, often conflicting, objectives is realized.…”

The rationale for economic evaluation in Europe: the case of EU Regional Policy

“…This proposal has raised several issues relating to the choice of the financial discount rate as well as the need to differentiate social discount rates according to different target regions 10 (Florio, 2006a). For public-private partnerships projects, the Commission's working document suggests that the financial discount rate may be increased to reflect a higher opportunity cost of capital to the private investor 11 .…”

“…In times of crisis, uncertainty prevails in economic decisions. Policy makers should avoid non economic and 'bureaucratic' evaluations to justify their demands for EU funding and should provide the right incentives for sound evaluation (Florio, Vignetti, 2003). Given the scarcity of public resources for investment, their decisions should be guided not only by economic rationality, but also by social choice (Sen, 2000).…”