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25/09/2017

Call to improve cost benefit analysis for infrastructure schemes

Words: Huw Morris
Money / iStock-185267728

The government must improve how it analyses the cost benefits of infrastructure projects to avoid expensive mistakes and unnecessary delays.

The Institute for Government says around £250 billion worth of infrastructure investment is expected in the UK in the next five years.

But governments around the world routinely underestimate how much projects cost – nine out of 10 schemes costing more than £1 billion run over budget. The institute cites a 126 per cent increase in Great Western Railway’s electrification costs between 2014-16.

It warns that cost benefit analysis to assess the economic value of schemes is often misused, inconsistently applied and poorly communicated. This leads to the wrong projects being approved while valuable schemes are rejected or delayed.

Ministers sometimes use cost benefit analysis to justify decisions that have already been taken, eroding public trust and harming the UK’s long-term competitiveness.

The institute cites three factors:

  • Strategic misrepresentation, which intentionally understates costs to make a project look a good investment.
  • Optimism bias, or the unconscious tendency to underestimate the costs and risks of a favoured project.
  • Anchoring and adjustment, which fixates on the first number and not adjusting expectations away from it even when that number is flawed.

Instead, the institute backs “reference-class forecasting”, which adjusts forecast costs using data from similar projects in the past. Highways England reduced its average forecasting error from 20 per cent to 2 per cent in nine years using this method.

Improving cost benefit analysis would go a long way to enabling the government to commission projects to help transform the UK economy, adds the institute, while avoiding expensive overruns like the Channel Tunnel or recent U-turns on the rail electrification programme.

Image credit | iStock

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