Cost-benefit Analysis of Infrastructure Projects in an Enlarged European Union: Returns and Incentives

Abstract

We consider results of cost-benefit analysis (CBA) in a large sample of ISPA (Structural Instrument for Pre-Accession countries) projects co-financed by the European Union to support investment in transport and environment. The research focus is on the empirical analysis of the variability of financial and economic rates of return and how to integrate this information in the EU co-financing mechanism. We investigate to what extent the variability of expected returns and of EU co-financing rates is due to structural project characteristics (sectors, countries) or to other unexplained factors, including errors in the appraisal. We find that while the absolute level of grants is related to sectors, the EU co-financing rate depends on countries. There is no justification in economic analysis of such a country bias, because the variability of economic rate of returns is unrelated either to sector or country factors. These findings points to the need of a more consistent approach to evaluation and EU co-financing of infrastructure supported by the EU funds. We suggest possible improvements, based on the idea to offer an incentive to projects with high-expected economic␣rates of return relative to a benchmark and showing ex-post the realism of the initial analysis.

Appendices

Statistical Annex

Table A1. ISPA grants (Euro millions) – Breakdown by countries

Table A2. Contingency table, sample of ISPA Grant – Breakdown by countries and sectors

Table A3. FRR without ISPA – Breakdown by countries

Table A4. A4 FRR with ISPA – Breakdown by countries

Table A5. EU Co-financing rate – Breakdown by countries

Table A6. ERR – Breakdown by countries

Table A7. Contingency table, sample of ERR – Breakdown by countries and sectors

Critical χ	χ (10–1)(8–1)	Test result
82	1205	REJ H0

Notes

• 1. On the effects of EU Regional Policy on the its convergence outcome, see in particular Armstrong (1996), Begg (1999), Fayolle and Lecuyer (2000), Lolos (2001), Pereira (1997). On impacts of EU Regional policy and effects of Structural Funds reforms on accession countries see Fayolle (1998), Nicolaides (1999), Swinnen (2001), Welfens (1999).

  Empirical evidence, moreover, would suggest contrasting conclusions: together with clear cases of success, like Ireland (see, for example, Barry, 1999; Barry et al., 2001 and Payne et al., 1997), there are less positive experiences, like the Mezzogiorno in Italy. For other country or region case studies see e.g., Bristow and Blewitt (2001) for Wales, Dauce (1998) for Bourgogne, Lolos and Zonzilos (1994) for Greece.

• 2. See http://europa.eu.int/comm/regional_policy/ sources/docgener/guides/cost/guide02_en.pdf.

• 3. Lifetime of investments is duly considered in the Funds Guidelines. For the CF the Guidelines say: “The lifetime varies according to the nature of the investments: it is longer for civil engineering works (30–40 years) than for technical installations (10–15 years). In the case of a mixed investment comprising civil engineering works and installations, the lifetime of the investment may be fixed on the basis of the lifetime of the principal infrastructure (in this case investment in the renewal of infrastructure with a shorter lifetime must be included in the analysis). The lifetime may also be determined by considerations of a legal or administrative nature: for example the duration of the concession where a concession has been granted”. For the ISPA Fund the Guidelines say: “infrastructure projects are generally appraised over a period of 20–30 years, which represents a rough estimate of their economic life span. Although the physical assets may last significantly longer than this – e.g., a bridge may last for 100 years – it is not generally worthwhile trying to forecast over longer periods. In the case of assets with a very long life, a residual value may be added at the end of the appraisal period to reflect their potential resale value or continuing use value”.

• 4. As for a clause in the Act of Accession, all ongoing projects approved in the new member states under ISPA before 2004 became automatically Cohesion Fund projects. After accession no new ISPA grants were given to these countries in 2004.

• 5. See the website: http://www.inforegio.cec.eu.int/wbpro/ispa/projec_en.htm

• 6. Other required information are: Indication of environmental impact; Information on consistency with antitrust legislation; A financial sheet with clear indication of requested co-funding and other possible public funds (Ebrd, World Bank).

• 7. There is no obligation for the Commission to disburse the maximum rate of co-financing; nevertheless it is necessary to determine a clear methodology to calculate the rate to be applied. CF Guidelines say: “The rate of assistance from the Cohesion Fund to the project will not exceed the ratio between the equity gap and the investment or the rate laid down in the Regulation, whichever is the lowest. The rate will be fixed in the light of the characteristics of the project and with particular attention to the results of the economic analysis, the need to maximise the multiplier effect and the application of the polluter-pays principle. The rate will be fixed so as to maximise the multiplier effect of the resources of the Fund; that means that the contribution of the Cohesion Fund has to be the minimum needed to make the investment materialise”.

  ISPA Guidelines say: “Except in the case of repayable assistance or when there is a substantial Community interest in the project, the rate of assistance shall be modified from the maximum rate mentioned above, taking into account: (i) the availability of co-financing; (ii) the capacity of the project to generate revenues; and – the application of the polluter-pays principle”.

• 8. Source: COM(2004)492.