Uncertainty as a Management Evaluation Tool for Infrastructure Projects

Abstract

Infrastructure policy is implemented through the planning for individual projects. Initial infrastructure planning is based on the simple calculus of rate of return on investment (ROI) or cost benefit (C/B) analysis, while infrastructure capacity expansion is a function of assessing existing capacity and forecasting future demand levels (Manne (1961; 1967), Meier (1977), Smith (1980), Freidenfelds (1981), Liebermann (1989)). However, the parameters of this calculus are embedded in substantial and pervasive uncertainty (Haynes and Li Qiangsheng, 1993). On the supply side, the future costs of existing infrastructure technology are made uncertain by volatility in the capital markets which affects interest rates and assumptions about appropriate discount levels (Haynes and Krmenec (1989), Haynes et al. (1984)). On the demand side, the increased reliance on user charges and their impact on the elasticity of demand increases uncertainty in forecasting usage levels. Further complicating uncertainties in supply and demand is the rapid pace of technological innovation, particularly in the telecommunications and transportation sectors, and the consequent impact on technological obsolescence and substitution. Witness the impact of telefax technology on the overnight letter delivery service and the effect of e-mail on both.