For over a decade the Observatory on The Costs of Not Doing notes the benefits and costs of infrastructure policies in different sectors in our country. We have long stigmatized the fact that adequate tools are too rarely adopted to evaluate and select choices well; and this appears especially true in a situation of scarce public resources and private finance (social security funds, insurance companies, etc.) very interested in long-term investments but equally demanding in the analysis of initiatives.
The reform of the procurement code, which has recently taken off, is an opportunity to relaunch suitable instruments. The Cost-Benefit Analysis (CBA) is the most widespread method all over the world and in large international institutions both at a strategic level (when it is necessary to choose between alternative infrastructures) and at the individual project level (when it is necessary to define the characteristics of an intervention). It measures and compares costs and benefits directly and indirectly related to investments.
Developed in the 30s in the United States, CBA has spread all over the world; it has been (and is) widely used in transportation, healthcare, justice, defense, education and the environment. It is widely used by major international organizations such as the World Bank (Economic Analysis of Projects), the OECD (A Manual of Industrial Project Analysis) the EIB (The Economic Appraisal of Investment Projects at the EIB). The main European countries – such as France, England, Germany – then have real guidelines for correct use.
In Italy we remained at a standstill. Diffusion is very modest, and often the application is distorted and instrumental, distorting its objectives and undermining its credibility. And even the legislation that would impose the appeal has so far been substantially disregarded. How come?
Let's say right away that the CBA has very important objectives: to verify – in absolute terms or in a comparison of several options – the validity of a project for the community. The analysis, through the detection of impacts and their transformation into monetary values, aims to:
• Maximize social welfare (Welfare)
• Optimize the use of scarce resources
• Highlight the multiple impacts of building the infrastructure
• Explain/quantify the most important profiles.
However the CBA, even if perfected over the years, does not lead to impeccable and undisputed truths; the major application problems derive from the fact that:
• It is future-oriented: it therefore imposes questionable estimates, hypotheses and conjectures.
• Impacts are not always (easily) monetisable (eg value of the environment, value of health, value of life, value of time).
• Does not always shed light on who takes damage from the project.
Subjectivity, therefore, is unavoidable. It can lead to evaluations that are not "objective" or even in bad faith. In our experience, the possible solutions lie in: a) using generally accepted parameters (for example, in the choice of the discount rate or the Value of Time-VTR) with the utmost caution to avoid gross errors; b) in reference to quality models (eg: electricity system, traffic flows); c) in choosing evaluators with independence, skills and competences; d) in being strongly anchored to reality ("getting your hands dirty") avoiding abstract approaches; d) in the transparency of assumptions/hypotheses used.
Dealing with numerous cases, typical problems of the sector are also found, exemplified below:
• Mobility (railways, highways, logistics): estimation of GRP, environmental impact, health and life value.
• Environment (waste, water, territory): estimate of the value of emissions avoided, estimate of the value of the water resource, penalties avoided.
• Energy (electricity, gas, renewable sources, energy efficiency): construction of the systemic scenario, assumptions on costs of energy sources, construction of network models and estimation/simulation of technical parameters.
• Ultra broadband (BUL): estimate of the impacts on the various sectors (health, education, industry, etc.); measurement of overall systemic impacts.
The specificities described require modulating the method in relation to the various infrastructural sectors even if the interdependencies must not be underestimated: for example, the development of the BUL will increasingly affect both mobility and the energy sector.
To conclude, we believe that the risk associated with subjectivity in no way undermines the relevance of the CBA. Indeed, the more uncertain the prospects are, the more it is necessary to build alternative scenarios to make the best choices. However, we want to reiterate that the CBA remains a tool of great importance, but still a tool, and the final decision is up to "good politics".
To relaunch the use of the CBA in Italy in the context of the ongoing revision of infrastructure policies, the Observatory promoted a closed-door study seminar entitled: “Financing infrastructure well. Cost-Benefit Analysis and Quality Projects” to be held in Rome on 28 April at the Via Veneto Auditorium (link to request event registration). Very qualified representatives of the EIB, the World Bank, the Ministries of Finance and Infrastructure, Cassa Depositi e Prestiti and Arpinge (the company dedicated to the investments of some social security funds) will take part.
Attachments: Seminar program 28 April 2016
