Topic: Cost Benefit Analysis in Public Project Appraisal This was done as part of my PPAC Course.

1. COST-BENEFIT ANALYSIS
IN PUBLIC PROJECT
APPRAISAL
NEIL MATHEW
B . T E C H + M B A
A 2 3 2 4 7 1 0 0 0 2
P R O J E C T
P L A N N I N G ,
A P P R A I S A L &
C O N T R O L

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PUBLIC PROJECTS
The main problem in most public project
appraisals is
• their uneconomic nature
• impossibility to measure data
like turnover and current costs,
necessary for NPV or IRR
calculation.
Therefore, because of the intangible
nature of pure public projects,
Cost – Benefit Analysis (CBA) is
applied instead.

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COST-BENEFIT ANALYSIS
Cost–Benefit Analysis was
developed by J. Dupoit at the
beginning and lately by J. Hicks.
CBA provides information for
decision making process, but
it does not by itself make
decisions.
The purpose of CBA is to ensure
that the public sector allocates
scarce resources efficiently to
competing public sector
projects.

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COST-BENEFIT ANALYSIS
Often the short-term distributional objectives may come into
conflict with longer-term efficiency and distributional
objectives (often the case with politicians).
CBA estimates and totals up the equivalent money value of
the benefits and costs to the community of projects to
establish whether they are worthwhile.
This means that all benefits and
costs of a project should be
measured in terms of their
equivalent money value and
in particular time.

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STEPS TO COST-BENEFIT ANALYSIS
A comprehensive cost-benefit analysis
consists of main three steps (Samuelson,
Marks, 1998):
1) Identification of all the factors
(favourable and unfavourable) which
can flow into community because of
that project.
2) Financial valuation of costs and
benefits.
3) Choice of the best alternative with net
social benefits, that means a surplus
of total benefits on total costs.

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STEP 1: IDENTIFYING COST & BENEFITS
A common mistake in CBA
is failure to identify all the
relevant costs and
benefits.
The analyst should
consider tangible and
intangible flows.
Some of the costs and
benefits may be easily
quantified and others are
more difficult to quantify.

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STEP 1: IDENTIFYING COSTS
• Investment costs e.g.:
construction costs, materials etc
• IT costs
• Fixed assets
• Equipment
• Overheads
• Operating costs
• Maintenance costs
• Negative externalities (e.g.
water/noise pollution)
Categorizing costs is important
because it gives an insight into
cost behaviour and the drivers of
individual costs.
Fixed costs remain static over a
given level of activity or output e.g.
rent
Variable costs change in line with
changes to the volume of activity or
output e.g. operating costs
Semi variable costs can include a
fixed and a variable component e.g.
maintenance costs

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STEP 1: IDENTIFYING BENEFITS
• Reduction in loss of life
• Reduction in health care costs
• Accident savings
• Travel time savings
• Reduced environmental emissions
• Lower operating and maintenance
costs
• Job creation
• Increased water quality
• Scenic benefits
The benefits of a project can
be more difficult to identify
because these are often not
obvious cashflows but are
outcomes relating to the
objectives of the CBA.
In identifying benefits, the
analyst should have due
regard to the direct and
indirect effects of the
interventions.

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STEP 2: VALUATING COSTS
Market prices normally reflect the best alternative uses to which the goods or
services could be put or the opportunity cost.
Some Cost Estimation issues are:
1. CONTINGENCY COSTS :
Allowance should be made where contingencies are part of the expected costs
of the proposal and included in the CBA. Projects with large initial capital outlays
should include a contingency provision for escalating construction costs or
delays.
2. SUNK AND OPPORTUNITY COSTS :
Sunk costs has already been incurred and cannot be recovered. Sunk costs
could include expenditure on previous feasibility studies. CBA is only concerned
with costs about which decisions can still be made.

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STEP 2: VALUATING BENEFITS
Benefits should always be valued based on willingness to pay.
1. REVEALED PREFERENCE
Inferring a price from observing consumer behaviour
2. STATED PREFERENCE
Estimated by asking people what they would be willing to pay for a particular
benefit: can be willingness to pay or willingness to accept
3. HEDONIC PRICING
Using the different characteristics of a traded good to establish the value of a
non traded good e.g. value of a seafront by comparing prices of houses with and
without the seafront

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STEP 2: VALUATING BENEFITS
4. TRAVEL COST ANALYSIS
Using the value of traded goods and services to estimate the value of non traded
goods and services e.g. value of an amenity using travel costs and time
5. CONTINGENT VALUATION
Asking consumers about value they would place on outputs/benefits through
interviews or questionnaires

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STEP 3: BENEFIT COST RATIO
• The BCR is also a useful measure because it allows a large
number of projects to be ranked. It attempts to summarize the
overall value for money of a project or proposal.
• Accept all projects with a BCR greater than 1, when costs and
benefits are discounted at the opportunity cost of capital.
• (a positive BCR does not automatically mean a proposal is
accepted as other issues are relevant such as affordability
constraints and qualitative factors)

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STEP 3: POLITICAL JUDGEMENT
The final step of using of investment criteria is a selecting a
set of investment projects from a large number, subject to
economic, political, and social constraints
Public sector projects are usually subject to some sort of
political judgement, and public project analysis is often
made only to support political decisions with logic.
Decisions regarding to social investments are strictly bounded
with political problems and pressure

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CASE: CONSTRUCTION OF FOREST ROAD, FUKUI CITY

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CASE – BENEFITS & COSTS
The BENEFITS included cost savings in forestry :
1. Benefits received by producers and consumers due to the
increase in lumber production, which is brought about by the
construction of forest roads
2. Benefits brought by production cost savings in forestry
3. Benefits of the good effect, from the environmental conservation
aspect, due to the active forestry production activity
4. Benefits for community roads
5. Benefits for securing domestic lumber resources
The COSTS for the project included expenses incurred in road
construction, forest clearing, labour, etc

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CASE – CONCLUSION
BCR = 0.38SUSPENDED
Cost per area (in 2001) : 8.11 Million Yen per ha

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RESEARCH PAPERS

18. NEIL MATHEW
B . T E C H + M B A