Cost-Benefit analysis a practical Guide Second Edition

Contents

Preface to the first edition ix

Preface to the second edition xi

Introduction xiii

1 Basic : principles of cost-benefit analysis 1

1.1 A set of tools for guiding decisions 1

1.2 A common unit of measurement 2

1.3 Types of cost-benefit analysis 3

1.4 The decision-making context 6

1.5 Value judgements 7

1.6 Analysts, decision-makers and transparency 7

1.7 Risk, uncertainty and pragmatism 8

1.8 Stages of the planning-design-implementation process 8

1.9 The main stages of a cost-benefit analysis 10

Notes 11

2 Quantifying and valuing the costs and benefits 13

2.1 Costs and benefits in the with-project and without-project situations 13

2.2 Costs and benefits that are sometimes not counted 16

2.3 Defining the common unit of measurement 24

2.4 Shadow pricing: practical application 26

2.5 Rationale of shadow pricing 28

2.6 Valuation of particular kinds of costs and benefits 31

2.7 Double-counting 36

Notes 38

3 Resources and time: discounting and indicators 40

3.1 Time preference 40

3.2 Discounting 42

3.3 Indicators and their calculation 46

Cost-benefit analysis – A practical guide

3.4 Length of analysis period 52

3.5 Inflation, depreciation and loans 54

3.6 Choice of indicator for particular purposes 57

3.7 Sensitivity tests 61

3.8 Terminology and reporting 66

3.9 The appropriate discount rate 68

Notes 75

4 Application to particular fields 78

4.1 General 78

4.2 Agriculture 82

4.3 Health projects and programmes 90

4.4 Water supply, sanitation, public health 94

4.5 Education 96

4.6 Flood and coastal protection, environment, recreation 98

4.7 Transport 111

4.8 Energy 115

4.9 Urban and regional planning 117

Notes 117

5 Reporting and presentation 120

5.1 Definition of the project 122

5.2 Methodology and assumptions 123

5.3 Statement of price basis 123

5.4 Probabilistic aspects of benefit estimates 124

5.5 Treatment of sensitive demand forecasts 125

5.6 Optimisation of timing 125

5.7 Financial analysis 127

5.8 Size optimisation and choice of indicator 128

5.9 Graphical presentation of sensitivity test results 129

5.10 Sensitivity tests in text 131

5.11 Summary 133

Note 133

6 Checklist 134

APPENDICES 139

A Uncertainty, probability and risk 141

A.1 Basic concepts 141

A. 2 Attitudes to uncertainty 149

A.3 Ways of handling uncertainty in CBA 153

A.4 Summary and recommendations 159

A.5 Further reading and information sources 159

Notes 160

B The domestic pricing and foreign exchange numeraires 163

B.1 Introduction 163

B.2 Traded and non-traded goods 164

B.3 The domestic pricing system 164

B.4 The foreign exchange system 165

B.5 Comparison of the two systems 166

B.6 Choice of system 167

B.7 Further reading and information sources 169

Notes 170

C Ways of estimating economic prices 172

C.1 Introduction and underlying principles 172

C.2 Market prices with adjustments 175

C.3 Opportunity cost approaches 178

C.4 Stated preferences; contingent valuation 182

C.5 Proxy markets and other revealed-preference approaches 184

C.6 Shadow pricing as an instrument of policy 188

C.7 Choice of valuation method 188

C.8 Benefit transfer 189

C.9 Further reading and information sources 190

Notes 191

D Distribution of costs and benefits between people 195

D.1 General distribution adjustments 195

D.2 Income weighting 196

D.3 Use of distributional weighting 198

Notes 198

E Choice of discount rate 200

E.1 Introduction 200

E.2 Individual and social time preference 201

E.3 Opportunity cost of capital 202

E.4 Capital rationing device 203

E.5 Risk and the discount rate 204

E.6 Synthesis 205

E.7 Further reading and information sources 207

Notes 209

F Multicriterion decision analysis 212

F.1 Introduction 212

F.2 Basic concepts and techniques 214

F.3 Non-numerical methods 220

F.4 A simple numerical method 221

F.5 Other methods 225

F.6 Uncertainty and incomplete information 229

F.7 Further reading and information sources 229

Notes 230

G The effects method 232

Notes 233

H Model answers to readers’ worked examples 235

I Worked example 241

1.1 Introduction 241

1.2 The project 241

1.3 Economic prices 243

1.4 Farm level financial analysis 245

1.5 Economic benefits 246

1.6 Economic costs 249

1.7 Cost-benefit indicators 250

1.8 Sensitivity tests 251

1.9 Conclusion 253

1.10 Postscript 254

J Discounting tables 256

K Bibliography 267

Glossary/index 281