Uncertainties in Cost Benefit Analyses (CBA) of Infrastructure Projects: Do They Matter for Project Rankings?



Uncertainties in Cost Benefit Analyses (CBA) of Infrastructure Projects: Do They Matter for Project Rankings?

Nominated for The Planning for Sustainable Land Use and Transport Award

Authors

Marie Aarestrup Aasness, Norwegian University of Science and Technology and Norwegian Public Roads Administration, James Odeck, Norwegian University of Science and Technology and Norwegian Public Roads Administration

Description

A simple statistical approach to assessing uncertainties in CBA’s is developed and tested on project rankings in Norway. Accounting for uncertainties changes project rankings. Hence, uncertainties are necessary as aid to decision making.

Abstract

This paper reports on further work to assessing uncertainties in CBA`s. It builds on work reported at ETC in 2016. Cost analyses (CBA) is advocated by economists and transportation planner as an appropriate decision making tool. In particular, CBA often plays an important role when ranking individual investment projects against each other, e.g., as in national transport plans. However, critics are many such as that uncertainties if accounted for, may reverse the ranking of projects. Unfortunately, the practices of CBA calculus in Europe and most part of the world do not handle uncertainties. A possible reason for the lack of handling uncertainties in CBA is that the CBA calculus is itself complex and hence, handling uncertainties is even more complex. In this paper, we first account for how uncertainties in CBAs can be accounted for using simple statistical frameworks. We then use the devised framework to test whether accounting for uncertainties impact on project rankings in the case of Norwegian road projects. Additionally, we conduct a simple sensitivity analyses by varying some elements of CBA and then compare the results to the ones derived through the statistical approach mention above. Our results indicate that the project rankings by Net Present Value (NPV) are surprisingly insensitive to uncertainties. This is however, because NPVs are commonly calculated for the first year and then projected with traffic growth rate. We recommend that the result of CBA be presented in intervals as it matters for decision making. However, we discovered in our exercise that our Confidence Intervals and our sensitivity analyses give some consistent results with regards to ranking. For these reasons we suggest the uncertainties should be illustrated with a sensitivity analyse with traffic and costs to find a best and worst case, since CI are difficult to obtain.

Publisher

Association for European Transport