Practitioner's Guide to Cost Benefit Analysis

This unit breaks down, in detail, the structure of a CBA. The unit includes all the necessary steps required to be able to conduct a complete CBA. This unit also sets the stage for the rest of the units in Section 2.

Identifying and defining the problem is typically the first step in a CBA. This unit describes the process of problem identification. It compares the differences between problems and symptoms as well as private and public problems.

This unit focuses on how projects need to be outcome rather than output focused. The unit explains the differences between outcomes, outputs, and benefits.

Every initiative/project affects several groups of people. The groups of people identified as being affected by an initiative/project are referred to as the referent group. This unit explains what the term ‘referent group’ means and why referent group selection is important.

In order to calculate costs and benefits, there needs to be a reference for comparison or a yardstick. For CBA, this yardstick of comparison is the base case. This unit explains what a base case is and why it is important to a CBA. The unit also explains how to go about defining the base case and what needs to be included in it.

There are normally many possible approaches to achieving particular outcomes. This unit describes and explains how a CBA practitioner can offer input into identifying different project options.

A CBA can have several different project cases if there are several possible options. This unit explains what a project case is and why it is necessary in order to conduct a CBA.

A strategic merits test (SMT) is used to shorten the list of possible options based on strategic fit. This unit explains when to use an SMT and why it is beneficial to CBA.

In most cases, there are several ways of achieving an outcome. An options analysis can help determine, which options are best suited to achieving that outcome. This unit explains how a CBA options analysis can be conducted and whether this analysis should be rapid or in more detail.

Before an analysis can be conducted, costs, benefits, and any other impacts of a project need to be identified. This unit defines benefits, disbenefits, cost savings and costs. The unit explains how to identify them and to determine if they can be quantified and/or monetised.

Methodology covers the entire CBA from selecting inputs, analysing inputs, and the presentation of outputs in the form of meaningful results. This unit defines and explains the importance of methodology to CBA.

Unit values are necessary to convert costs and benefits into monetary values so that they can be used in a CBA. This unit explains how to convert quantified costs and benefits into monetary values as well as some of the problems we may face in doing so.

All CBAs require data in order to calculate results. This unit explains how data can be collected and what the best sources of data are likely to be.

Complete information to conduct a CBA is never available. In order to fill the gaps, assumptions are necessary. This unit explains how to make assumptions as well as increase their reliability.

Data is rarely complete for the present but it is entirely incomplete in regards to the future. Forecasts and projections can be used to inform analysts about the future. These can be extrapolations of existing and historical data or they could be modelled using parameters. This unit focuses on extrapolation and interpolation methods and the potential problems analysts might face.

Not all benefits and costs can be assigned a monetary value. Some might be quantifiable and others not even that. This unit explains the types of benefits and costs that cannot be monetised and how they can be handled in CBA or with other approaches.

The evaluation period is typically the estimated duration that a project affects society. It includes implementation and the life of the project. This unit defines the evaluation period and explains its relevance to the CBA.

Discounting converts future values into present values. This is done so that future streams of benefits and costs can be compared. This unit explains how discounting works and how discount rates are used.

CBA calculations can be complex and tedious. CBA models can make the task of calculating benefits and costs much easier. This unit explains how CBA models are used and when best to use them.

There are various levels of detail that can be applied to a CBA. Basic forms of CBA are sometimes referred to as rapid CBAs. This unit explains what is meant by rapid CBA and when rapid CBAs are more practical than standard or detail CBAs.

This unit provides a quick presentation of several types of models used in CBA. These models include models for modelling inputs, models for conducting rapid CBA, and specialised models for particular project types.

Once methodology has been determined, data has been collected, and CBA models have been selected, it is time to calculate benefits. This unit explains how benefits and costs savings can be calculated manually across the CBA evaluation period.

Estimating costs is as important as estimating benefits. This unit provides information on how capital costs are estimated as well as how risk is included in these estimates.

Whenever there is uncertainty there is risk. Risk can be either negative (threats) or positive (opportunities). This unit explains the different types of risks and how these risks can be mitigated.

The base case and projects case/s are likely to have different levels of demand. The project case/s are likely to stimulate demand as the project provides benefits that will attract more users. This unit explains induced demand, how it is calculated, and the impact it is expected to have on the results of a CBA.

After all benefits and costs have been monetised; summated; and compared, they need to be converted into useful indicators of viability. This unit explores economic measures such as Net Present Value, Benefit Cost Ratio, and Net Benefit Investment Ratio.

There ae many factors that influence the results of a CBA. Different treatment of these factors can lead to very different results. Sensitivity analysis can be used to calculate results when assumptions change or key drivers are adjusted. This unit describes areas that should be considered in a sensitivity analysis.

This unit continues from the previous unit. In this unit, the technical aspects of sensitivity analysis are explored. The unit explains the different levels of depth that can explored using sensitivity analysis.

CBA is a very useful input into decision-making but it is also important to understand the limitations to using CBA. This unit outlines some of the key limitations of CBA as well as highlighting how other practices can be used to compensate for these limitations.

CBA can be quite complicated and demanding. It is quite easy to make mistakes that could cause inaccurate results. This unit discusses some of the more common mistakes by practitioners when conducting CBAs.

CBA can be a great tool for providing input into decision-making. Unfortunately, CBA can be manipulated to arrive at predetermined answers. This unit explains the motivations for manipulating CBA and describes the areas most commonly targeted.

This unit continues from the previous unit by explaining more areas that can be manipulated to produce desired results.

Conference paper in resource section.

So far, CBA has been discussed in the context of individual projects and initiatives. However, to achieve desired outcomes, we often require several projects or initiatives. CBAs can be conducted for whole programs of work. This unit discusses the relationships between projects within a program as well as how these relationships can shape a program evaluation.

This unit explains how to conduct program CBAs. The unit considers both a sequential approach and a simultaneous approach to analysing projects within a program.

Two conference papers on program evaluation/CBA in resource section.

As discussed in the limitations unit, CBA does not cover every aspect of a project’s benefits and costs. Wider economic impact analysis can include additional benefits and costs not typically captured in a CBA. Wider economic impact analysis has the advantage of not requiring the same level of detail as general equilibrium modelling. This unit covers the core aspects of wider economic impacts.

General Equilibrium modelling is typically conducted independently to the CBA. It covers the impact initiatives /projects have on the broader economy. This unit explains a little about general equilibrium modelling and when it is likely to be used to supplement the results of a CBA.

A CBA can involve a lot of work. A good CBA report will explain all that has gone into the CBA and how certain things have happened. A CBA report is useful for decision-makers, reviewers (internal and external), other practitioners conducting CBA, and for future reference for another team to conduct an ex-post evaluation or CBA.

An appraisal summary table (AST) is an incredibly useful tool for communicating the economic, social, and environmental analyses of a project. The results and other pertinent information from these three areas are displayed in just one table. This unit describes and explains the various components of the AST.

CBAs are generally thought of as being conducted for public sector initiatives/projects. However, CBAs can be relevant to private sector initiatives/projects. Private companies are generally focused on private returns rather than social returns but many private projects have social impacts. These can be either positive or negative. This unit describes when a CBA might be appropriate for private initiatives/projects.

An ex-ante CBA is conducted prior to the commencement of a project. Whereas, an ex-post evaluation/CBA is conducted sometime after the completion of the project. This unit explains why ex-post CBAs are conducted and how they can be useful.

This unit explains how to conduct an ex-post CBA and how it differs from conducting an ex-ante CBA.

Social Impact Evaluation (SIE) is a recently developed method of exploring social benefits and costs. The SIE works both alongside and supports the CBA. This unit explains what an SIE is and why it has been developed.

This unit is the first of two units explaining how to conduct an SIE. In this unit, the process is introduced and the initial steps such as identifying costs, benefits, and impacts is described. This unit briefly explains how identified impacts can be used in a CBA.

This unit continues to describe how to conduct an SIE. In this unit, impact risk assessment (IRA) is explained. Qualitative and quantitative SIE are explained. The unit also describes how SIE outputs can be entered into an AST.

The resource section contains more information about social impact evaluation.

SIE can be a useful resource for data collection for a CBA as well as a tool to help verify if impacts are expected to be benefits or disbenefits. This unit describes the relationship between SIE and CBA as well as how a practitioner should utilise SIE outputs.

In this unit, I describe a simple case study of a CBA for a health project. The unit focuses on defining the problems and collecting data.

This unit wraps up the healthcare CBA described in the previous unit.

In this unit, I apply CBA to a road/transport project. In this case study, I use a CBA model to analyse the project.

In this unit, I analyse the road/transport project discussed in the previous unit using a rapid CBA model known as CARP. Instead of presenting using slides, I evaluate the project step by step using Microsoft Excel.

Resource section contains more guidelines relating to transport and road projects.

In this unit, course participants have a chance to conduct a CBA by themselves. This CBA is a little more complex than the CBAs described in the case studies. This CBA enables participants to use many of the skills taught in this course.

This unit consists of a very broad summary of the most important aspects of this course.

This is an additional unit provided to discuss a possible approach to the test question. The answer provided in this unit should not be treated as a model answer but as a reasonable answer considering the information given. There are many alternative approaches to analysing the test question. What is most important is that the approach taken is logical and that some provision is given to alternative assumptions that could produce different results.