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Report finds that faulty cost-benefit analysis too often contribute to significant government investments

March 4, 2013

Some food for thought for local lawmakers currently considering those cost-benefit analyses for government-owned broadband networks …

A January report from McKinsey & Company took a broad look at the world’s current infrastructure spending and its needs over the next several decades. A key finding was that too often government makes significant investments in infrastructure based on faulty cost-benefit analysis.

McKinsey notes the importance of infrastructure – including telecommunications and broadband infrastructure – to economic development and human welfare. In the introduction to the report the authors write, “Across the world, inadequate or poorly performing infrastructure presents major economic and social challenges that governments and businesses need to address. Without the necessary infrastructure … economies cannot meet their full growth potential and economic and human development suffers.”

McKinsey estimates that government and the private sector must spend $57 trillion over the next 18 years (2013 to 2030) on infrastructure to keep pace with world economic growth. This gap – the gap between current infrastructure and what is needed – is more than the value of all the infrastructure that currently exists today.

The task is enormous, to say the least. Especially, as the authors note, “at a time when many governments are highly indebted and face competing calls on their scarce resources.” The report outlines several recommendations to guide infrastructure investments in this resource-constrained environment. McKinsey says following the report’s advice will allow investors to “get more, better-quality infrastructure for less.”

One of McKinsey’s chief suggestions for closing the infrastructure gap is to improve the productivity of current infrastructure projects. It is here the report focuses on a problem that CNE has repeatedly pointed out as one of the chief issues with government-owned networks: poor planning. McKinsey says, “Many poorly conceived projects have been approved ‘because benefit-cost ratios presented to investors and legislators were hugely inflated, deliberately or not,’ according to Bent Flyvbjerg, professor and chair of major programme management at Oxford University.”

Inflated cost-benefit analyses lead to the approval and construction of projects that don’t actually address or serve consumers’ needs, or that duplicate investments already made. (While the McKinsey report doesn’t focus on GONs it illustrates how duplication harms national infrastructure goals, noting the “type of waste that has been exemplified by the redundant bridges to Shikoku, Japan, and excess power generation capacity across Spain.”)

McKinsey argues eliminating unnecessary projects or implementing better reporting and cost-benefit analyses for potential ones would save serious money. The report says, “The optimization of infrastructure portfolios, through the elimination of poorly conceived projects and selection of better alternatives, would free up an estimated 15 to 35 percent of new capital spending.”