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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 ...
2
PUBLIC PROJECTS
The main problem in most public project
appraisals is
• their uneconomic nature
• impossibility to measu...
3
COST-BENEFIT ANALYSIS
Cost–Benefit Analysis was
developed by J. Dupoit at the
beginning and lately by J. Hicks.
CBA prov...
4
COST-BENEFIT ANALYSIS
Often the short-term distributional objectives may come into
conflict with longer-term efficiency ...
5
STEPS TO COST-BENEFIT ANALYSIS
A comprehensive cost-benefit analysis
consists of main three steps (Samuelson,
Marks, 199...
6
STEP 1: IDENTIFYING COST & BENEFITS
A common mistake in CBA
is failure to identify all the
relevant costs and
benefits.
...
7
STEP 1: IDENTIFYING COSTS
• Investment costs e.g.:
construction costs, materials etc
• IT costs
• Fixed assets
• Equipme...
8
STEP 1: IDENTIFYING BENEFITS
• Reduction in loss of life
• Reduction in health care costs
• Accident savings
• Travel ti...
9
STEP 2: VALUATING COSTS
Market prices normally reflect the best alternative uses to which the goods or
services could be...
10
STEP 2: VALUATING BENEFITS
Benefits should always be valued based on willingness to pay.
1. REVEALED PREFERENCE
Inferri...
11
STEP 2: VALUATING BENEFITS
4. TRAVEL COST ANALYSIS
Using the value of traded goods and services to estimate the value o...
12
STEP 3: BENEFIT COST RATIO
• The BCR is also a useful measure because it allows a large
number of projects to be ranked...
13
STEP 3: POLITICAL JUDGEMENT
The final step of using of investment criteria is a selecting a
set of investment projects ...
14
CASE: CONSTRUCTION OF FOREST ROAD, FUKUI CITY
15
CASE – BENEFITS & COSTS
The BENEFITS included cost savings in forestry :
1. Benefits received by producers and consumer...
16
CASE – CONCLUSION
BCR = 0.38SUSPENDED
Cost per area (in 2001) : 8.11 Million Yen per ha
17
RESEARCH PAPERS
NEIL MATHEW
B . T E C H + M B A
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Cost Benefit Analysis in Public Project Appraisal (PPAC)

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Topic: Cost Benefit Analysis in Public Project Appraisal

This was done as part of my PPAC Course.

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Cost Benefit Analysis in Public Project Appraisal (PPAC)

  1. 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
  2. 2. 2 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.
  3. 3. 3 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.
  4. 4. 4 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.
  5. 5. 5 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.
  6. 6. 6 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.
  7. 7. 7 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
  8. 8. 8 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.
  9. 9. 9 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.
  10. 10. 10 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
  11. 11. 11 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
  12. 12. 12 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)
  13. 13. 13 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
  14. 14. 14 CASE: CONSTRUCTION OF FOREST ROAD, FUKUI CITY
  15. 15. 15 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
  16. 16. 16 CASE – CONCLUSION BCR = 0.38SUSPENDED Cost per area (in 2001) : 8.11 Million Yen per ha
  17. 17. 17 RESEARCH PAPERS
  18. 18. NEIL MATHEW B . T E C H + M B A

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