A new report evaluating how the UK appraises infrastructure projects says that the Government must get better at valuing the costs and benefits of infrastructure.
Published by the independent think tank the Institute for Government, the report - How to value infrastructure Improving cost benefit analysis - has a particular focus on the Government’s use of cost benefit analysis.
The UK Government spends tens of billions of pounds every year on economic infrastructure, including energy, transport, water, utilities and digital communication.
Introducing the report, the Institute said that megaprojects are increasingly being used as the preferred delivery model for goods and services across a range of businesses and sectors, like infrastructure, water and energy, information technology and supply chains.
‘Megaprojects’ – those worth more than £1bn – account for a sizeable proportion of total spend in the National Infrastructure and Construction Pipeline, including the £4.2 billion Thames Tideway Tunnel.
The report sets out recommendations on how the Government might improve the way it uses cost benefit analysis to accurately include relevant benefits and costs, assess them consistently and communicate the results clearly to a wide range of stakeholders.
“Cost benefit analysis (CBA)…. .can be misused, inconsistent and poorly communicated. It does not always play a central role in decision making and is too often used to justify decisions that have already been made.” the report says.
However, the report concludes that despite these issues, CBA is still the best tool available for helping government to appraise and prioritise potential investments and that improving its use is therefore crucial.
Problem: unrealistic cost estimations
According to the Institute, cost and time estimates for infrastructure projects are almost always over-optimistic, misleading decision makers and potentially locking ministers into undeliverable targets.
The report is calling for Ministers to be honest about cost uncertainty and potential overruns when making public announcements, particularly for big projects.
It also says the Government must consistently evaluate infrastructure projects and that all projects should systematically collect data on cost outturns against estimates, delivery times against estimates, the size of project teams and project length.
The report is recommending that the Infrastructure and Projects Authority should collate the information centrally and ensure that it is used by departments to enhance reference class forecasting.
The Institute is also calling for thorough postproject evaluations to be undertaken for all major projects. “We rightly expect that large infrastructure projects are subject to thorough economic assessments before securing approval. Yet, comparatively little effort is expended checking whether these assessments were accurate.” the report states.
It flags up lack of consistency between project assessments as a problem and wants the Infrastructure and Projects Authority to independently assess CBAs conducted for major projects, commenting:
“As the Government’s centre of expertise for infrastructure, the Infrastructure and Projects Authority should ensure that thorough post-project evaluations are undertaken for all projects that have appeared on the Government Major Projects Portfolio.”
The report is the second in a series of publications on infrastructure –the first looked at some of the main flaws in recent and controversial UK ‘megaprojects’. There are 89 schemes (where one scheme may include multiple projects) in the pipeline with a value of more than £1bn and their combined value is more than £450bn, representing over 80% of the total pipeline spend.
Future reports will look at:
- the decision-making process that departments follow when deciding how to finance infrastructure projects
- how government can best engage with the capital markets to secure private finance for new infrastructure
- how to reduce national infrastructure policy instability, develop better relationships between central government and various tiers of local government, and increase public engagement in decision making.
A final report in early 2018 will draw together all the evidence the Institute has gathered to make final recommendations on how to improve infrastructure decision making in the UK.
Click here to download How to value infrastructure - Improving cost benefit analysis
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