A Framework for Investment Decision Making
How can the business case for a major infrastructure investment incorporate sustainability? Should the focus be on applying valuations to a wider range of benefits within the the cost benefit equation? Can social and cultural values, whereby deep and long-term understandings of value are held by local communities and groups, be fully represented in standard economic analysis?
As part of my recently completed PhD research undertaken at Queensland University of Technology (QUT), I have developed a framework for incorporating sustainability in investment analysis. The framework recognises that infrastructure investments provide a public good and that investment decision making should seek to create long term value, whilst recognising the tactical performance measures that are required in analysis. This approach may better support investments in new approaches to infrastructure problems such as integrated urban water management, where wider benefits around urban cooling, liveability and place making and community development may be achieved. The framework is shown below and further articles will provide further detail.
by Angela Reidy
Public infrastructure plays a critical role in shaping urban environments and supporting thriving communities. From nation-defining initiatives such as the Snowy Mountains Scheme in post-war Australia, to the simple drinking fountains placed in local parks, decisions on infrastructure affect communities every day. The prioritisation and shaping of these infrastructure investments may support the transition to a more sustainable society whilst also contributing to global efforts that address the 2015 UN Sustainability Goals (SDGs).
As part of my recently completed PhD research entitled Incorporating Sustainability in Investment Decision Making for Infrastructure Projects, public value provided a key theoretical lens for the research. A framework for decision making developed from the research is shown above.
Public value captures the potential for infrastructure providers to contribute to societal good. The genesis of public value theory is attributed to Mark Moore of Harvard University. His strategic triangle has been become a model for public sector management whereby the public value that an organisations seeks to create needs to be accompanied by considerations of ‘legitimacy and support’ and ‘operational capabilities’ (Moore and Khagram, 2004). Bennington (2009) defined public value as a concept that ‘extends beyond market economic considerations, and also encompasses ecological, political, social, and cultural dimensions of value- all that adds value to the public sphere’. These values are contestable, and there is a need to find ways to seek agreement on what public values are in practice (Bryson et al., 2015). Public value theorists advocate a collective approach for measuring value, taking account of the institutions, processes of politics, public policy and government that exist in democratic processes. Public value presents an alternative to rational theory and may provide an alternative to assessing projects through a reconciliation of costs and exchange value. Public value provides a means to assess the wider value that infrastructure services create.
by Angela Reidy
Benington, J., 2009. Creating the public in order to create public value?Intl Journal of Public Administration 32, 232–249.
Bryson, J.M., Crosby, B.C., Bloomberg, L., 2015. Public Value and Public Administration. Georgetown University Press, Washington, DC.
Moore, M.H., Khagram, S., 2004. On creating public value. What Businesses Might Learn from Government about Strategic Management. Corporate Social Responsibility Initiative Working Paper No. 3.Cambridge MA, John F Kennedy School of Government, Harvard University.
Moore, M.H., 2014. Public value accounting: Establishing the philosophical basis.Public Administration Review 74, 465–477.
Infrastructure decision making and rationality
Rationality underpins the decisions that are made in engineering and the sciences. The design of engineering structures takes account of measured loadings, the configuration of structural elements and supports, materials strength and the use of design guidance based on codes of practice applied by trained and experience practitioners. Much of the design practice is supported by laboratory testing and on-going research into how structures and materials perform.
Do these notions of rationality transfer to decision making for major investments in public infrastructure? A seemingly rational approach that is adopted in public sector decision making is the application of cost benefit analysis as part of the business case for infrastructure investments. And yet economic models are based on imperfect and incomplete data, with difficulties in forecasting long term performance. At the same time, ex-post studies indicate that many projects show both cost over-runs and benefit shortfalls when compared with ex-ante studies (Flyvbjerg, 2009). In recognising ‘strategic misrepresentation’ and ‘optimism bias’ in project analysis, Flyvbjerg (2013)asserted that, even with the use of sophisticated forecasting tools, the viability of projects may not be fully understood through front end estimates of costs and benefits. On the other hand, sustainability benefits across the economic, social and environmental domains, may be difficult to fully quantify, making projects with sustainability outcomes hard to justify.
The theory of bounded rationalism, espoused by Nobel Prize winning economist Herbert Simon, presents an alternative approach to rationality taking account that decision making is based on incomplete information and uncertainty. Simon stated:
“Global rationality, the rationality of neoclassical theory, assumes that the decision maker has a comprehensive, consistent utility function, knows all the alternatives that are available for choice, can compute the expected value of utility associated with each alternative, and chooses the alternative that maximizes expected utility. Bounded rationality, a rationality that is consistent with our knowledge of actual human choice behaviour, assumes that the decision maker must search for alternatives, has egregiously incomplete and inaccurate knowledge about the consequences of actions, and chooses actions that are expected to be satisfactory (attain targets while satisfying constraints)” Simon (1997)
A bounded rationality approach provides a means for decision making to recognise human preferences for goal orientation, incorporate adaptability, deal with uncertainty and recognises the need to make trade-offs (Jones, 2003). Bounded rationality provides a means to consider structured approaches to project appraisal, recognising that infrastructure forms part of wider cross-sectoral systems providing public good.
By Angela Reidy
Flyvbjerg, B., 2009. Survival of the unfittest: why the worst infrastructure gets built—and what we can do about it. Oxford Review of Economic Policy 25, 344–367.
Flyvbjerg, B., 2013. Quality control and due diligence in project management: Getting decisions right by taking the outside view. International Journal of Project Management 31, 760–774.
Jones, B.D., 2003. Bounded rationality and political science: Lessons from public administration and public policy. Journal of Public Administration Research and Theory 13, 395–412.
Simon, H.A., 1979. Rational decision making in business organizations. The American Economic Review 493–513.
Public infrastructure- multiple levels of success
Infrastructure projects contribute to society at multiple levels.
As projects are planned, designed and are finally delivered, measures of success are often solely attributable to meeting forecast budget, time and quality expectations. However these tactical measures of success associated with project outputsneglect the contributions that projects deliver to broader strategies and policies of infrastructure providers and wider government.
Projects also contribute to strategic outcomes with multiple benefits that align with the strategic performance of an investment (Samset & Volden, 2015).
When viewed from a portfolio level, the linkages and interdependencies between individual projects being delivered by various agencies may be identified and overall impact of decisions may be assessed.
The understanding of the multiple levels to which infrastructure contributes (Bryson et al., 2014) is a critical factor in investment appraisal, and forms the basis of a sustainability framework for investment decision making.
By Angela Reidy
Bryson, J., Pike, A., Walsh, C., Foxon, T., Bouch, C., Dawson, R., 2014. Infrastructure Business Models (IBM) Working Paper. iBUILD Briefing Note 2.
Samset, K., Volden, G.H., 2015. Front-end definition of projects: Ten paradoxes and some reflections regarding project management and project governance. International Journal of Project Management 34 (2), 297–313.
Impacts and public infrastructure investments
Public infrastructure investments are the tangible outputs of broader policy directions of governments at all levels. Hence, commitments to making places more liveable, smarter, productive, connected, healthier and climate change resilient should be reflected in decisions on infrastructure priorities. Studies show that where government settings are highly collaborative across departments, where goals are stable, and where there are mechanisms in place to provide oversight of strategic goals, there is greater opportunity for projects to align with these goals. However, studies in Australia also show that these factors are not always in place, so that projects do not systematically contribute to strategic goals (Young & Grant, 2015).
In order for projects to contribute to positive impacts across communities, the challenge is to provide a clear ‘line of sight’ between project outputs and broader strategic objectives. One simple example is where targets are set for reducing greenhouse gas emissions, so that decisions on investment priorities and project scope reflect that goal. Goal setting is critical to investing in the right projects.
The United Nations Sustainable Development Goals (SDGs) provide a network of goals and targets across the economic, social and environmental systems that have been adopted by 193 nations of the UN General Assembly. In Australia, a Senate Committee (link: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Foreign_Affairs_Defence_and_Trade/SDGs/Terms_of_Reference) is looking at ways to ensure an integrated approach to implementing the SDGs at the national, state and local levels, together with considerations of how performance can be monitored and measured.Clearly, the adaptation of the SDGs to an Australian context taking account of the three levels of government and the private sector is extremely complex and it will be interesting to see the findings the committee, with a report due in November 2018.
Looking elsewhere, New Zealand Treasury has developed a national wellbeing framework that includes measures of sustainable development. This framework looks beyond national income accounting using the economic measure of gross domestic product (GDP). (link https://treasury.govt.nz/information-and-services/nz-economy/living-standards) It is intended that this framework would assist decision making around policy options of government. A discussion paper on the development of a living standards dashboard contemplates looking beyond singular measures of value for natural and human capital, and, in the case of natural capital, the paper favours measurement in natural units over monetisation (Smith, 2018). If adopted, this thinking could provide a template for guiding investment appraisal at the project level.
By Angela Reidy
Young, R., Grant, J., 2015. Is strategy implemented by projects? Disturbing evidence in the State of NSW. International Journal of Project Management 33, 15–28. http://dx.doi.org/10.1016/j.ijproman.2014.03.010
Smith, C. 2018. Treasury Living Standards Dashboard: Monitoring Intergenerational Wellbeing. https://treasury.govt.nz/sites/default/files/2018-06/smith-living-standards-dashboard-jun18.pdf
Benefits and infrastructure
What do we mean when we talk about the benefits of infrastructure investments?
More often, understandings of project benefits are based on the benefits within the formula of cost benefit analysis (CBA). In CBA, benefits are defined as increases in human wellbeing or utility (Pearce, 2006). For a project to be worthy of investment, social benefits must exceed the social costs. The focus is on efficiency, and in a public setting, efficiency in decision making is linked to welfare economics.
An alternative frame for benefits arose out of programme and project management in the mid 1990s where benefits are “the measurable improvement resulting from an outcome” (OGC, 2007). The discipline of benefits management shifts the focus from efficiency to effectiveness and an understanding that benefits provide alignment with business objectives in order to create value (Morris, 2011).
In the discipline of benefits management, benefits refer to project-level performance measures that link with organisation strategies or objectives. Benefits management presents an opportunity for investments in public infrastructure to deliver broader policy goals relating to climate change adaptation and resilience. In project management theory, benefits management moves the focus of projects from achieving efficiency in outputs (within the time, cost, quality triangle) to effectiveness in outcomes through addressing business objectives. In order to create a link between an organisation’s business strategy and the projects that support strategy, investment management or benefits realisation management (BRM) has been introduced (Too & Weaver, 2014). Benefits mapping, undertaken as part of BRM, provides a mechanism to provide a clear linkage between organisational strategy and the investment initiative, and subsequently to performance measurement (Jenner, 2010).
For the water sector, examples of benefits that are sought from water infrastructure investments may include: assessing a project’s contribution to meeting greenhouse gas emission and nutrient reduction targets; contributions to urban cooling (and negating the impacts of heat stress associated with climate change); contributions to broader urban planning and liveability objectives; and employment targets for vulnerable groups within the local population. Benefits are performance measures represented by Key Performance Indicators (KPIs) to explicitly link goals to outcomes and outputs. Using this approach, goals should align with best practice in developing indicators using SMART criteria (goals should be specific, measurable, achievable, relevant and have a timeframe for completion (Chih and Zwikael, 2015).
In sustainability practice, benefits should align with broader policy directions and include considerations of benefits to the wider community, beyond the boundaries of the infrastructure provider. Business benefits refer to benefits that infrastructure providers may seek through investments in building legitimacy and trust with customers and stakeholders. For an infrastructure provider, the shaping of infrastructure investments may take account of the wider societal issues that the organisation seeks to support though its operations. As monopoly powers, public sector entities require ‘legitimacy and support’ to create public value (Moore and Khagram, 2004).
A structured approach to formulating target benefits is required through the involvement of relevant stakeholders and the inclusion of benchmarking as part of quality assurance (Chih and Zwikael, 2015). As an extension of benefits assessment, benefits realisation ensures that planned benefits are reviewed and evaluated following execution and that new benefits may be identified in an investment cycle. Benefits realisation is compatible with notions of sustainable development by incorporating a holistic management approach that integrates economic, social and environmental considerations.
By Angela Reidy
Chih, Y.-Y., Zwikael, O., 2015. Project benefit management: A conceptual framework of target benefit formulation. International Journal of Project Management 33, 352–362.
Jenner, S., 2010. Transforming Government and Public Services : Realising Benefits through Project Portfolio Management. Ashgate Publishing Ltd, Farnham.
Moore, M.H., Khagram, S., 2004. On creating public value. What Businesses Might Learn from Government about Strategic Management. Corporate Social Responsibility Initiative Working Paper.
Morris, P.W., 2011. A brief history of project management, in: The Oxford Handbook of Project Management. Oxford University Press.
OGC (Office of Government Commerce), 2007.Managing Successful Programmes. TSO, London.
Pearce, D., Atkinson, G., Mourato, S., 2006. Cost-benefit analysis and the environment: recent developments. OECD Publishing, Paris.
Too, E.G., Weaver, P., 2014. The management of project management: A conceptual framework for project governance. International Journal of Project Management 32, 1382–1394.
The ability to fully represent the value created from public infrastructure continues to be a central challenge of the investment appraisal process. Analysis often neglects the broader values of infrastructure that may be positive (recreational, aesthetic, environmental and community value) or negative (the impacts on amenity or local values). The narrow framing of value in economic analysis does not support sustainability and may preclude innovative project solutions and opportunities to address emerging challenges of climate change. Approaches to assessing and representing value vary. One approach in current practice seeks to better represent value through monetary means across the economic, environmental and social domains as a central platform for CBA practice. Alternative approaches allow a combination of both monetary valuation and qualitative assessments, where qualitative assessment addresses factors that are considered difficult or impractical to measure or monetise.
Recognising that investment appraisal for infrastructure initiatives is critical to optimizing sustainability outcomes, five value dimensions have been adopted as building blocks for infrastructure investments. These are:
- Economic value- the contribution to economic activity associated with an infrastructure investment may be measured through factors such as business activity, increased job opportunities and improved workforce participation;
- Development value- infrastructure investments are often the catalyst for opportunities for creating value both within infrastructure corridors (such as hosting a range of other public or private services), as well as providing a catalyst for urban development and more productive land use ;
- Social value- the assessment of social value may include measureable factors (these may include health and wellbeing impacts), and deeper, underlying social dimensions that apply at a local level (these may include perceptions of amenity and liveability values);
- Cultural value- with no common unit of measurement and multi-dimensional aspects, cultural value includes include spiritual, aesthetic, social, historic, symbolic and authenticity value.
- Environmental value- environmental/ ecological economics provides a framework to assess the value of ecosystem services, however evaluations in areas such as biodiversity value, connectivity value and long term impacts due to climate change are complex and difficult to attribute marginal values at a project level.
Sustainability practice recognises the importance of fully investigating and understanding the range of values attributable to infrastructure investments. In the research, it was noted that:
- Some values, such as indigenous values, are recognised through government priorities and policy, but these are complex and cannot be represented in a singular dimension of monetary impacts;
- A clear understanding of the range of values associated with investments may allow the trade-offs between value dimensions to be fully transparent; and
- The articulation of value created may support the justification of a preferred solution particularly in dialogue with regulators and broader stakeholders.
A challenge for infrastructure provision is to achieve ‘a better balance between quantitative and qualitative appraisal, and enable a balanced, multidimensional assessment of value” (Brown & Robertson, 2014, p.86). Value assessment should avoid the simplistic, but often used, approach of compartmentalising values into the sustainability domains, with each domain having equal weighting (Jackson, 2006). Instead, the evaluation of value must recognise the linkages between value domains, informed by a wide range of stakeholders including local communities. In sustainability appraisal, value assessment should recognise ‘value pluralism’ that looks beyond the use of a singular unit value, but rather recognises the complex and multiple dimensions of value.
By Angela Reidy