The investment project pipeline: cost escalation, lead time, success, failure and speed

As they involve expectations about the future and long lead times for planning and construction, the evolution of investment projects is usually complex and volatile. This paper analyses an important aspect of this volatility by studying the nature of the investment process, from the initial bright idea to the final construction and operational phase of a project. We refer to this process as the ‘project pipeline’. Using a rich source of information on recent Australian resource development projects, an index-number approach is employed to measure the escalation of costs of projects in the pipeline and the time spent there (the lead time). The determinants of the probability of ultimate success of projects is analysed with a binary choice model. Finally, a Markov chain approach is used to model the transitions of projects from one stage in the pipeline to the next, and to examine the implications of regulatory reform that have the effect of speeding up the flow of projects.