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Why governments must look beyond cost-benefit analysis

Governments have historically relied on cost-benefit analysis (CBA) to prioritise major projects. But CBA is limited at best—and misleading at worst. With infrastructure stimulus investing on the rise, it’s time for a new approach. Here, Deloitte and Oxford Global Projects share fresh strategies on how governments can prioritise their infrastructure stimulus investments.

As countries seek to recover from the ongoing COVID-19 pandemic, infrastructure spending is seen as a solution for stimulating economies worldwide. Infrastructure is often called the “backbone” of a healthy economy. Done right, infrastructure stimulus investments can not only hasten economic recovery from the effects of COVID-19, but can also accelerate progress in addressing other issues, such as social needs and the effects of climate change.

As public debt levels have increased dramatically through the COVID-19 crisis, governments must stretch stimulus investments as far as possible. Historically, cost-benefit analysis (CBA) has been used as a basis for sound project appraisal and project prioritisation. However, in a best-case scenario, CBA provides only a limited view on the potential outcome of investments—and in a worst-case scenario, it can be downright misleading.

The inaccuracies associated with CBA have recently been the focal point of discussion and research in both academic and industry sectors. Most of the lesser criticisms of CBA emphasise that such tools are limited as they typically include only easily measurable costs and benefits, while ignoring the wider social impacts of infrastructure solutions, which we believe should feature heavily in infrastructure prioritisation.

Other criticisms are more severe and call for reform while arguing that current CBA is inaccurate since it fails to consider variability and systematic biases that affect project outcomes. The inaccuracy of CBA was recently highlighted by Flyvbjerg and Bester (2022)1, who argue that cost and benefit estimates are inaccurate and biased and thus cannot be used to provide evidence around the worth of project investments.

Government infrastructure investments are significant, but governments often fall prey to prioritising in a flawed manner. This prevents infrastructure from achieving its maximum potential impact, resulting in lost opportunities for the communities these projects are designed to serve. This negative impact is compounded by the opportunity loss of better options that do not proceed or which are allocated fewer resources.

To overcome the weaknesses associated with CBA, this paper explores current approaches to project prioritisation and proposes several alternative strategies organisations can use to enhance the effectiveness of their infrastructure investments. While there is a way to go before all infrastructure investments are properly prioritised, adopting these strategies can position governments to make less biased, more informed resource allocation decisions.

Take meaningful action to incorporate the views of the wider community (and not just the most vocal or privileged) at an early enough stage to shape the project. In addition to mitigating against community action, this will allow project recipients to access the infrastructure that serves them best.

Don’t rely solely on CBA. Get more robust estimates by using data-driven methods, such as reference class forecasting. Similarly, forecast communications should reflect an appropriate level of uncertainty and potential variation (e.g., there is a 40 per cent to 60 per cent chance that this bridge will cost $35-$50 million, rather than saying ‘this bridge will cost $35,131,879’). Combining these measures provides a more realistic forecast against which different infrastructure projects can be compared.

These should not be tacked on as an afterthought but weaved throughout the project, from inception at the portfolio level to the ultimate day-to-day operations. Use the infrastructure project to effect social good and change, as well as physical transformation.

        Andreas Leed, Head of Data Science, Oxford Global Projects
        Karlene Argard, Senior Consultant, Oxford Global Projects

Cited contributors

Bent Flyvbjerg, Executive Chairman and Co-Founder of Oxford Global Projects, Professor and Chair of Major       

Programme Management at Oxford University’s Saïd Business School

Dr. Alexander Budzier, CEO and Co-Founder of Oxford Global Projects, Fellow in Management Practice at Oxford  University’s Saïd Business School

About Oxford Global Projects
"We are the world’s leading experts on megaproject management. Our co-founder, Bent Flyvbjerg, is the most cited scholar on the subject worldwide. And we have 30+ years of experience advising government and business. Our best-in-class data drives award-winning research. To date, we have authored or edited 10 books and 200+ papers that have been translated into 20+ languages. Those writings have been cited over 40,000 times and counting, making us the most-cited scholars on megaprojects worldwide." Learn more.

Source: Oxford Global Projects

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