Adaptive Policies: A way to improve the cost-benefit performance of megaprojects?

Adaptive Policies: A way to improve the cost-benefit performance of megaprojects?

Yzer, J.R.

Marchau, V. (mentor)
Walker, W.E. (mentor)
Kwakkel, J.H. (mentor)

Technology, Policy and Management

Policy Analysis

EPA

2011-05-30

Megaprojects are built as a result of a policy that tries to cope with an expected demand in the future. To assess the financial viability of a megaproject, a Cost-Benefit Analysis (CBA) is performed, which is very much dependent on the accuracy of predictive models that are used to forecast future demand. The outcomes of these models are very vulnerable to unexpected events (Walker, Rahman et al. 2001). As a result, the CBA becomes unreliable and gives an unrealistic presentation of the financial viability of a project. As a consequence megaprojects suffer from huge cost overruns and overestimated benefits. An alternative way of policymaking that tries to take uncertainty into account is the adaptive policymaking approach. The efficacy of this type of policymaking has already been shown by Kwakkel et al. (2010), but whether this leads to a better cost-benefit performance of megaprojects is unknown. At the moment it is not possible to perform a CBA on an adaptive policy since the CBA method is static opposed to the flexible adaptive policymaking approach. This leads us to a two-folded research question: - How to apply CBA to adaptive policymaking approach? - How good is the cost-benefit performance of megaprojects when using the adaptive policymaking approach compared to cost-benefit performance when using the traditional policymaking approach? A framework was developed that enables us to perform a CBA on an adaptive policy, using real options theory. The FASMAPA model of Kwakkel (2011) has been extended with a CBA module for the case of Amsterdam Airport Schiphol, to compare the cost-benefit performance of the traditional policy with the cost-benefit performance of the adaptive policymaking approach. Furthermore, to investigate whether a traditional policy with ad hoc decisionmaking has a better cost-benefit performance than a traditional policy without such decisionmaking, an agent-based model has been developed. The cost-benefit performance of the three policies was investigated for numerous plausible futures using Exploratory Modeling and Analysis (EMA). The results of the simulations showed that the adaptive policymaking approach has a smaller range of plausible Net Present Values, indicating that the adaptive policy can deal better with different futures. In only 5.5% of the simulations did the cost-benefit performance of the traditional policy score better. Concerning the cost-benefit performance of the traditional policy under ad hoc decisionmaking, it turned out that in this case, the performance was slightly worse compared to the cost-benefit performance of a “normal” traditional policy. Overall, it can be concluded that in this case, the cost-benefit performance of the megaproject under the adaptive policymaking approach is better compared to its performance under the traditional policy. This is considered to be a first indication that adaptive policies can improve the cost-benefit performance of megaprojects.

megaprojects
CBA
adaptive policy
traditional policy
real options

http://resolver.tudelft.nl/uuid:4e157be3-7d10-4bfa-8c93-cc05617e59ae

Student theses

master thesis

(c) 2011 Yzer, J.R.