Project Appraisal and Long Term Strategic Vision



Project Appraisal and Long Term Strategic Vision

Authors

David MEUNIER, Ecole Des Ponts ParisTech ( LVMT), Emile Quinet, Paris School Of Economics (PSE), Alain QUINET, SciencesPo Paris

Description

We need to define a consistent, long term, strategic vision as a necessary input for correct project appraisal, based on a set of scenarios. We discuss and illustrate concretely the changes that would be induced in investment choice procedures and CBA practice.

Abstract

France is currently reviewing its long-lived socio-economic appraisal of infrastructure projects and has set up a national commission in charge of this update. After a brief presentation of the commission's work, we will focus on some of the numerous methodological themes the commission put under review.

A general feature of the methodological guidelines that were issued for transport projects in France along the last 50 years is that they always considered short- or mid-term issues. Traffic models, based on very sophisticated analyses of current transport conditions, estimate the main quantitative effects of the project at the time it is put into service. They simulate the evolution of these effects based on simple extrapolations using recent trends; such is the case too for the unit values used in cost-benefit analysis (time values, noise externalities and so on). The horizon of the analysis is limited to 30 or at most 50 years.

The purpose of this paper is to show that such practices may no longer continue, that we need to consider longer terms for which simple extrapolation of past trends is not acceptable any more, and that CBA now needs a strategic background for its correct implementation.

Several reasons lay behind this evolution. First, the maximum duration considered in traditional CBA, say 50 years, is much shorter than most transport infrastructures' lifespan which, when correctly maintained and upgraded, may last for centuries.

Besides this physical reality which gives a first reason for considering longer terms, most countries are now using quite low discount rates for project appraisal (many European countries are using 3% to 4%). Part of this evolution is due to the downward trend in economic growth rates, which are linked to discount rates through the (extended) Ramsey rule. But it also has to do with the diminution of the pure time preference rate which reveals increased concern for future generations and for long term issues.

All this would not be a problem, were we in a world of regular growth with no foreseable physical limits. This approach was perfectly appropriate during the strong growth period of the second part of the previous century, and we could still get along with it up to the very beginning of this century.

But in the present world it is not possible any more to use growth assumptions based on attenuated extrapolation of past trends. We are now conscious that the world is not limitless, strong scientific evidence and more and more spread out convictions lead to consider a necessary and dramatic reduction of our CO2 emissions, a pause in land artificialization, and to anticipate the consequences of the scarcity of many natural ressources. Various strategies have been elaborated as a reaction to these necessities and constraints; they have several features in common. First, they have to consider and anticipate the very long term; second, they imply major changes in transport needs, with the possibility of trend reversal in market growth rates and the disappearance of homothetic evolutions; the third feature is that they depend on political decisions, often international ones, and on technological evolutions, both being quite uncertain parameters.

This is the framework of the paper: it will first develop analyses showing that infrastructure projects cannot any more be properly chosen without considering long term strategic visions, based on scenarios which main features will be given. This will be illustrated more concretely by the results of the reference scenarios' working group of the commission presented above. Then it will establish that infrastructure policy is not the most important tool in the implementation of these strategies – it appears more as a consequence than as a key component; we will present here the results of the global appraisal of a draft national transport scheme- .

The influence of the strategies and scenarios will be discussed and their effects on the results of project appraisal will be made more concrete by some indicative numerical examples.
Finally, the paper will explore the new ways which traditional CBA should follow accordingly, and how the usual rules of choice could be adapted for taking account of these strategies and the uncertainties they deal with.

Publisher

Association for European Transport