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8 - Roads and Regional Development

Cost Benefit Analysis

In principle, the planning of transport infrastructure planning has to be built on the same basic rationale as any other investment decision. An investment in new infrastructure destroys value through the associated costs of building, operating and maintaining that infrastructure. It is essential that such an investment does not destroy more value than it creates. In other words, an investment of this nature must yield an internal rate of return that is higher than the current rate of interest once account has been taken of the expected benefits (time savings, greater safety and comfort, etc.) and unavoidable costs. This rate of return would seem to be a selection criteria that enshrines the principle of efficient allocation of resources. It is a filter which ranks projects by order of importance.

The only projects that should be chosen are those which have a high socio-economic rate of return, that is to say a return that at least exceeds the opportunity cost of public funding (in practice, it is a discount rate based on the long-term rate). Here we enter the realm of Cost Benefit Analysis.

Would you like to know more about the EC guidelines on CBA?

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Cost benefit analysis remains central to any investment project. It allows comparison of the socio-economic benefits of new infrastructure in terms of the cost of the latter. The objection frequently heard is that it is not possible to assign a monetary value to all the impacts of new infrastructure. This is only partly true. Most of the factors governing the return on infrastructure can be expressed in monetary terms. Those aspects which cannot be assigned a monetary value, rarely have a decisive role to play in the assessment of the rate of return, although they may be determining in political terms.