Spending Scarce Funds More Efficiently—Including the Pattern of Interdependence in Cost-Benefit Analysis

Abstract

The financial crisis has substantially aggravated shortages of public funds all over the world, particularly in many developed countries. After the expiration of investments made within the framework of public economic recovery plans, the availability of public funds for infrastructure investments will be subject to severe constraints. These conditions require that scarce available funds be spent in an efficient and effective manner. Evaluation methods to select and prioritize infrastructure projects of an investment package often presuppose that infrastructure projects are independent of one another. However, it is inherent in the nature of transport networks that links are interdependent and that changes in one link will affect other parts of the network. Some infrastructure projects might be characterized by substitutive interdependence, while others might interact in a synergistic context. Thus, the cost and benefits of a project are strongly dependent on the realization of other projects. This paper confronts this issue by comprehensively addressing the nature of the problem to derive an optimal set of investment projects. The approach utilizes a dynamic mixed integer algorithm, and the complexity of the combinatorial problem is reduced by elaborating on a heuristic method. Under application of these requisites, this paper develops a framework for integrating the interdependence between infrastructure projects in cost-benefit analysis. Results obtained from an example application related to investments made in the Trans-European Network (TEN-T) emphasize the importance and relevance of considering interdependence for evaluating the investment potential of infrastructure projects.