Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Figure H.5 Levels of risks in different phases of a given infrastructure projectSource: OECD TI/1, 2007Moreover ‘there is a demonstrated, systematic tendency for project appraisers to be overly optimistic. To reduce thistendency, appraisers should make explicit, empirically-based adjustments to the estimates of a project’s costs,benefits and duration. It is recommended that these adjustments be based on data from past projects or similarprojects elsewhere, and adjusted for the unique characteristics of the project in hand. In the absence of a morespecific evidence base, departments are encouraged to collect data to inform future estimates of optimism, and in themeantime use the best available data’ 131 .According to Flyvbjerg and Cowi (2004) cost overruns and/or benefit shortfalls, i.e. optimism bias, are the results ofa number of different factors:- multi-actor decision-making and planning;- non-standard technologies;- long planning horizons and complex interfaces;- changes in project scope and ambition;- unplanned events.As a result, cost overruns and benefit shortfalls lead to an inefficient allocation of resources, delays and further costoverruns and benefit shortfalls.In addition to carrying out a full risk assessment, which represents a major step ahead in mitigating inaccuracy andbias, other measures recommended in order to reduce optimism are:- better forecasting methods through the use of ‘Reference class’ forecasting;- changed incentives in order to reward better projects;- transparency and public control to improve accountability;- involvement of private risk capital;Table H.2 provides some examples of mitigation measures of identified risks extrapolated from the World BankProject Appraisal Documents (PADs) for different countries.131The Supplementary Green Book Guidance on Optimism Bias (HM Treasury 2003)238