EconPapers    
Economics at your fingertips  
 

Cost benefit analysis to assess modular investment: the case of the New Turin-Lyon Railway

Andrea Debernardi, Raffaele Grimaldi and Paolo Beria

MPRA Paper from University Library of Munich, Germany

Abstract: The assessment of infrastructure investments is often affected by inaccuracy in traffic forecasting, optimism bias and overvaluation of expected benefits. In general, even when such misrepresentation is not strategically introduced by proponents to push their projects, valuators and decision makers must cope with the existence of a risk of demand levels below expectations and consequent problem of overinvestment. In this sense, the concept of option value suggests that flexible or reversible projects may have a higher economic net present value compared with rigid schemes characterised by sunk costs. However, conventionally used cost benefit analysis (CBA) is very seldom used to manage such problem due to the complexity of the issue (for example when introducing a complete risk analysis). Moreover, such CBAs are still conceived as a static tool to decide ex-ante about an investment. In this paper we develop a theoretical framework and a practical application of CBA to formally manage such uncertainty and help the decision makers by postponing some decisions to the following running phase. The idea is to assess the project as split into smaller functional sections and bind the construction of a further section to the compliance of a pre-determined “switching rule”. In practical terms, we adapt a normal CBA procedure to manage also the time dimension of time of investments to reallocate risks already in the early design stage of transport infrastructures. The purpose of the paper is twofold. Firstly, we introduce a way to extend conventional CBA methodology to manage the phasing of projects. Secondly, we demonstrate both theoretically (with a simplified model) and practically (with a more complex case study) the positive effect of phasing under certain conditions (limitedness of sunk-costs due to phasing, predominance of capacity problems). By numerically developing the CBA of the Turin – Lyon high speed rail project, we show how to reduce the risk of overestimation of traffic and its positive effect in terms of NPV of the project: if forecasts are optimistic, only the most effective parts of the scheme will be built. If the traffic forecasts are correct, the new infrastructure will be built as a whole in steps and will generate the highest net benefits.

Keywords: cost benefit analysis; option value; optimism bias; strategic misrepresentation; benefit shortfall; planning fallacy; forecasting (search for similar items in EconPapers)
JEL-codes: H54 L92 R42 D61 (search for similar items in EconPapers)
Date: 2011-03-13
New Economics Papers: this item is included in nep-for and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/30327/1/MPRA_paper_30327.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:30327

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().

 
Page updated 2020-07-30
Handle: RePEc:pra:mprapa:30327