Cost-Benefit Analysis of Infrastructure Projects in an Enlarged European Union: an Incentive-Oriented Approach

Cost-benefit analysis of infrastructure projects in an enlarged European Union: an incentive-oriented approach.

May 2003

Draft-comments are welcome

Keywords: Cost-benefit analysis, Project Evaluation, Structural Funds, European Regional Policy

JEL Numbers: D61, H43, R58

ABSTRACT

The purpose of the paper is to analyse some results of cost-benefit analysis in a sample of ISPA (Structural Instrument for pre-accession countries) projects. The focus is particularly on the variability of financial and economic rates of return and how to integrate this information in the EU co-financing mechanism. We investigate, through the analysis of variance of co-financing rate, to which extent variability of rates is due to structural characteristics (sectors, countries) or to the existence of a residual variance due both to specificity of the project and discretional element of the appraisal method, which may constitute an information noise. We find that the variance of co-financing rate across countries is poorly explained by different composition of sectors of investment. This suggests the need to reinforce a more consistent approach to evaluation and co-financing. We suggest some possible solutions.

ACKNOWLEDGEMENTS

The authors are particularly grateful for lively discussions with A.Bougas, A. Mairate, J.C. Blain, Evaluation Unit, DG Regional Policy, European Commission. However any view expressed here is the sole responsibility of the authors and do not involve the EC or any other third party. A previous related paper has been presented at the conference 'Evaluation and EU Regional Policy: New Questions and New Challenges', Aix-en-Provence, France 31st May and 1st June 2002.

INTRODUCTION

With the new programming period 2000-2006 for EU Structural Funds, evaluation becomes an integral part of the planning activity. New methodological approaches and innovative ways of improving evaluation strategies for regional policy has been developed and need to be discussed and tested.

The purpose of the paper is to analyse some results of financial and economic analysis in a sample of ISPA (Structural Instrument for pre-accession countries) projects. The focus is on the variability of financial and economic rates of return and how to integrate this information in the EU co-financing mechanism. The main aim is to investigate, through statistical distribution of co-financing rate, to which extent variability of rates is due to structural characteristics (sectors, countries) or to the existence of a residual variance due both to specificity of the project and discretional element of the appraisal method, which may constitute an information noise. The basic idea, derived from a previous paper presented in Edinburgh Evaluation Conference , is to consider project rates of return as signals for decision making, determined by unknown variables, including true structural parameters and measurement errors. We apply this idea to ISPA projects and show how to use our approach for a better incentive structure of co-financing.

The paper developes an approach based on an empirical analysis of a database of about 240 projects. This empirical approach is based on a statistical analysis of expected project returns, and observation of average values and variance of the distribution of co-financing rate.

The main result of the paper shows that the variation among co-financing rate is probably excessive and not justified by variations of expected returns among sectors or EU countries or ISPA countries. Some recommendations about improvements in the co-financing decision will be given.

The paper has the following structure. First we briefly cite the context of EU Regional Policy through the Structural Funds and the debate on its impact. Second, we mention some issues in cost benefit analysis in this framework. Third, we present the specific aims and regulations of ISPA projects, and the co-financing mechanism. Fourth, we present our database on ISPA projects approved in 2000-2002. Fifth, we test our data by simple statistical techinques in order to see the possible origins of observed variance in some ex ante evaluation results. The paper is concluded by suggestions for improvements of the Commission approach to project appraisal and co-financing.

1. BACKGROUND

The “Agenda 2000” of the European Union commits substantial financial resources to Regional Policy for the programming period 2000-2006. Structural convergence is an ambitious objective and