Capital investment in big public things like infrastructure projects is bound to have many effects. Those who want to understand the project’s value have no choice but to make their way through this conceptual thicket.
We have suggestions on how to make it through to the other side (to the decision), but the help we can offer is only partial. Research into project analysis and especially into external effects is ongoing, and the debates are not going to disappear soon.
For decision making about our bridge, the essential starting point is the internal cost-benefit analysis, calculated repeatedly to assess sensitivi- ties to alternative assumptions. Whatever the additional studies that may eventually be done, this is the first and foremost step and it has to be solid.
Much care must go into cost studies and projections of avoided travel time.
If there is not much trust in data on vehicle costs, driver costs, and accident rates, then cost per avoided travel hour is a good basic indicator, though a full internal NPV study is better.
External factors should indeed be taken into consideration; some will make the project look better while others will make it look worse. So the finding that a project’s internal costs and benefits had a positive NPV makes the project a contender for investment, but does not clinch the matter.
Studies of external effects may yet show it to be a bad idea. Conversely, projects with negative internal NPV under multiple sensitivity studies should be assessed skeptically on whether further study is even called for. A road bridge that does not pass the internal cost-benefit test for its basic func- tion as a traffic carrier will in all likelihood not be rescued by studies of external effects.
Neighborhood effects, economic development effects, environmental effects, and intangible effects are legitimate additional factors in decision.
But they are typically hard to measure; different analysts arrive at different answers. If the bridge causes nuisances at neighborhoods near the landings, that’s a cause for concern, but is not decisive. For those who reside in a city, fluctuations in traffic, air quality, crime, etc. are common—they may occur just because a new office building went up and shifted traffic pat- terns. For neighborhood effects to be decisive, the external effect the project imposes should be substantial, beyond some threshold we can’t estimate here. Project supporters (and opponents) who claim neighborhood effect as their rationale should be able to show that the added benefit (or harm) is indeed substantial.
Neither is it decisive for the project decision to say that is has nega- tive environmental effects. That the bridge will cause added air pollution is no fatal blow, because pollution might increase even more if the project
is not built. This could occur in a place with population growth and an expanding road network. With the bridge unbuilt, the traffic distributes itself differently (than it would have with the bridge built) and leaves many cars idling in traffic jams downtown where the bridge should have been. To be sure, the time will come when the US highway system will stop expand- ing and when new modes of transportation will come to the fore, but that will be a momentous change in society, and present speculation about that future may not do much good now for a local bridge decision. Those who oppose the bridge on environmental grounds should show not just that cars cause pollution in general but that this particular project poses substantial environmental harms.
In one respect, though, the concerns about neighborhood, economic development, environment, and intangible effects coincide. Durable civic infrastructure makes for a predictable urban environment and stable neigh- borhoods. Ample long-lasting infrastructure provides a solid base for both a vibrant economy and a healthier environment. We strongly suspect that a bridge’s greatest environmental disruption comes from being built and demolished too often—when the bridge has turned into a disposable con- sumer good, demolished and rebuilt periodically at great expense. And it is the durable and magnificent bridge that brings the intangible benefits: a lasting legacy and visible identity to a place. Cost-benefit analysis cannot capture this intangible effect. Considering a proposed bridge, deciders should rigorously inspect its internal cost-benefit, but should, thereupon, also reflect on the bridge as an enduring monument.
Further Reading
Richard Hudson Clough, Glenn A. Sears, S. Keoki Sears, Construction Project Management, 4th ed. (Hoboken, NJ: John Wiley, 2000) uses bridge construction as an extended example for explaining the complexities of cost estimating. A number of texts on capital investment introduce cost- benefit—for example Diana Fuguitt and Shanton J. Wilcox’s Cost Benefit Analysis for Public Sector Decision Makers (Westport, CT: Greenwood, 1999).
Anthony Edward Boardman and David H. Greenberg’s “Discounting and the Social Discount Rate” examines some of the technical debates on the proper choice of discount rate for public projects, but a basic background in economics is needed; the article is on pp. 269–210 of Fred Thompson and Mark T. Green’s Handbook of Public Finance (CRC Press, 1998).
Alvin S. Goodman and Makarand Hastak introduce discounted-cost benefit analysis alongside other techniques meant specifically for public works investment—see chapters 8–10 of their Infrastructure Planning Hand- book (New York: ASCE Press and McGraw-Hill, 2006). For a simple intro-
ductory guide to cost-benefit analysis for road projects, along with a cost model for bridges, go to the California Department of Transportation (www.
dot.ca.gov) and look for resources under its Office of Transportation Eco- nomics. The Federal Highway Administration’s Office of Asset Management also has a short general book, Economic Analysis Primer, published in August 2003 and available for free download at the www.fhwa.dot.gov site. The Office of Management and Budget, Executive Office of the President, has on its webpage (www.whitehouse.gov/omb) the updated version of Circular A-94, originally issued in 1992, which has official federal guidelines for conducting cost-benefit analysis. More generally, the kind of analysis we have introduced here falls under the field of urban economics, on which a good text is Arthur O’Sullivan, Urban Economics (McGraw-Hill, in various editions, including 2011).
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