How Transport Infrastructure Cost Evaluation Is Affected by choice of inflation index

Abstract

Transport infrastructure projects typically take a number of years to complete and there is a strong case for adjusting ‘nominal costs’ incurred in different years to ‘real costs’ in base year prices by using an inflation index. The literature on the funding and financing of transport infrastructure projects and investment in public works addresses the choice of inflation index as a metaphorical footnote on the treatment of costs incurred in different years. This article gives deeper consideration to this issue and identifies the substantial effect the choice of inflation index has on ex-post cost evaluation. ‘Inflation shopping’ can occur when there are alternative inflation indices to choose between, and where the choice of inflation index has a substantive effect on the outcome of ex-post cost evaluation and the allocation of inflation risk between parties. Data from Crossrail, a large rail scheme in London, is used to illustrate the effect of the choice of alternative inflation indices on ex-post cost evaluation outcomes.