Dynamic Adaptive Policies: A Way to Improve the Cost—Benefit Performance of Megaprojects?

Jerrel R Yzer, Warren E Walker, Vincent A W J Marchau and Jan H Kwakkel
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Vincent A W J Marchau: Nijmegen School of Management, Radboud University, PO Box 9108, 6500 HK Nijmegen, The Netherlands
Jan H Kwakkel: Faculty of Technology, Policy and Management, Delft University of Technology, PO Box 5015, 2600 GA Delft, The Netherlands

Environment and Planning B, 2014, vol. 41, issue 4, 594-612

Abstract: Megaprojects are large, costly, complex infrastructure projects. To assess the financial viability of a megaproject, a cost—benefit analysis (CBA) is usually performed; the results depend upon the accuracy of the cost estimations and the predictive models used to forecast future demand for the use of the infrastructure. The outcomes of the models are very vulnerable to unexpected events. As a result, the CBA may become unreliable and give an unrealistic picture of the financial viability of a project. An alternative way of policy making that tries to take uncertainty into account is the dynamic adaptive policy (DAP) approach. This approach involves a systematic method for designing and implementing a policy over time that is based on a clear set of constraints and objectives and that involves monitoring the environment, gathering information, and adjusting and readjusting to new circumstances. The efficacy of this type of policy making has already been shown, but whether DAP leads to a better cost—benefit performance of megaprojects is unknown. In this paper we focus on answering two research questions: How can CBA be applied to DAP? How good is the cost—benefit performance of megaprojects when using DAP compared with the cost—benefit performance when using the static policy-making approach? In this paper a framework based on real options theory is specified, enabling a CBA to be performed on a dynamic adaptive policy. This framework is then applied to a case involving Schiphol Airport, Amsterdam, to compare the cost—benefit performance of the static policy with the cost—benefit performance using the DAP approach. For this case, the cost—benefit performance of the megaproject under the DAP approach turns out to be better compared with its performance under the static policy. This result provides a first indication that adaptive policies might be able to improve the cost—benefit performance of megaprojects.

Keywords: cost—benefit analysis; adaptive policies; airport strategic planning; uncertainty; megaprojects (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:sae:envirb:v:41:y:2014:i:4:p:594-612

DOI: 10.1068/b39088

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