_6.1.1 Identifying and Quantifying Factors Affecting Infrastructure Investment Decisions_

**A large number of factors could influence investment decisions.** The list of specific factors might change depending upon the nature of infrastructure projects and country’s development plans and priorities. In general, these factors, which are captured by different methodologies, can be classified into four categories: (i) project level factors, (ii) economy-wide impacts, (iii) project related market failures, and (iv) rent capture.

**Direct costs and benefits play an important role in determining infrastructure investment priorities.** In fact, cost/benefit analysis (CBA) is the first step in any investment decision process. While problems of underestimation are not uncommon, assessing the costs of a given project is generally the simplest part of the CBA. Estimation of benefits in many infrastructure projects is significantly more complex as actual benefits are either uncertain or not tangible. Even in projects where CBAs are routinely done (e.g. transport, power, water and sanitation), accounting for external benefits (like improved health, pollution abatement) is rarely undertaken. Another important project level factor affecting investment decisions is financing. The public sector in developing countries is not always capable of undertaking infrastructure projects alone. Participation of the private sector via firms or communities in financing, building, and operating infrastructure investments is often sought. However, the first step should be to determine whether a specific project or portfolio is economically sensible, and then determine the optimal financial structure that makes it feasible.

**Indirect project costs and benefits (also known as economy-wide impacts) –those that spill over to an economy from a project – must also be identified.** They can be further divided into two sub-categories: (i) impacts on economic growth and employment generation, and (ii) distributional impacts (e.g., welfare impacts, poverty alleviation) across different income level and geographical jurisdiction. In some cases, the size of indirect costs and benefits of an infrastructure portfolio might be as high as the corresponding direct costs and benefits. Typically a variety of approaches are used to assess economywide impacts of investment portfolios (including input-output approach, macroeconomic approach, and CGE approach), with the focus often on GDP and employment. If it is feasible to measure economic impacts,<sup>18</sup> this is a powerful factor in prioritizing infrastructure projects or portfolios—most recently, for renewable and clean energy technologies and green growth agendas.

**External costs and benefits – those that are not captured in direct or indirect costs and benefits – also matter but they are not easily quantifiable.** One example is a better quality of life thanks to the access to electricity, telephone lines, clean water and adequate sanitation, or a road network. Another is the loss of forest or biodiversity while constructing a highway or electricity transmission lines. Although a social appraisal of an investment project attempts to assess external costs and benefits of an infrastructure project, such an assessment is qualitative in nature. Alternatively, valuation techniques can be used to appraise where markets fail—notably revealed and stated preference approaches. While different approaches are available to attempt to monetize at least part of the values associated with nonmarket goods and services, these are seldom used in project economic analyses, input-output, macroeconomic, or CGE approaches. Basing decisions solely on any of these approaches can thus skew infrastructure investments toward projects easily valued, while one could argue that public funds should go to those projects that yield the most public goods (e.g. power distribution versus flood protection).

> 18 In many circumstances, measuring economy-wide impacts of a project would not be feasible as necessary data (such as inputoutput table and social accounting matrix of an economy) are not available.

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