Cost benefit analysis, development planning and the EU cohesion fund: learning from experience

In this paper we consider the experience of transport and environmental evaluation in the framework of the Cohesion Fund, established by the EU in 1993 to co-finance through grants infrastructure projects in Spain, Portugal, Ireland and Greece, and more recently in the new Member States. We focus on the regulatory requirement to provide the Commission a cost-benefit analysis of the investment projects. We assess some recurrent conceptual issues in project appraisal for the Cohesion Fund. In particular we discuss typical omissions and errors we have observed in our reading of large samples of project applications and ex-post evaluations. We propose theoretically consistent and feasible solutions in the most critical areas for the CBA of Cohesion Funds projects: The choice of time horizon and the calculation of the residual value, the adoption of financial versus social discount rates, shadow pricing and the shadow wage, sensitivity and risk analysis.