Jean-Paul Rodrigue (2017), New York:
Routledge, 440 pages.
Authors: Dr. Brian Slack and Dr. Jean-Paul Rodrigue
Cost-benefit analysis (CBA or COBA) is a tool employed to
evaluate projects by providing with a set of values that are
useful to determine its feasibility
from an economic standpoint. Conceptually simple,
its results are easy for decision makers to comprehend, and therefore
enjoys a great deal of favor in project assessments. The end product
of the procedure is a benefit/cost ratio that compares the total expected
benefits to the total predicted costs. In practice CBA is quite complex,
because it raises a number of assumptions about the scope of the assessment,
the time-frame, as well as technical issues involved in measuring the
benefits and costs.
Before any meaningful analysis can be pursued, it is essential that
an appropriate framework be specified. An extremely important issue
is to define the spatial scope of the assessment. Transport projects
tend to have negative impacts over short distances from the site, and
broader benefits over wider areas. Thus, extending a runway may impact
severely on local residents through noise generation, and if the evaluation
is based on such a narrowly defined area, the costs could easily outweigh
any benefits. A similar issue concerns a port development project
that would have negative local impacts, but being of strategic
importance to a region or a nation. On the other hand defining an area
that is too broad could lead to spurious benefits.
Because transport projects have long term effects, and because the
analysis is carried out on a real term basis, the benefits and costs
must be assessed using specific and pre-determined parameters. For example,
when is the project start date, when will it be completed, over what
period of time will the appraisal run, and what discount rate will be
used to depreciate the value of the costs and benefits over the appraisal
period? These and other parameters must be agreed upon. Costs and benefits
are presented in nominal values, i.e. monetary values of the start year
and discounted for inflation over the
project period. Because most transport projects are assessed for a 30
year period employing different discount rates may influence greatly
Costs associated with the project are usually easier to define
and measure than benefits. They include both investment and operating
costs. Investment costs include the planning costs incurred in the design
and planning, the land and property costs in acquiring the site(s) for
the project, and construction costs, including materials, labor, etc.
Operating costs typically involve the annual maintenance costs of the
project, but may include additional operating costs incurred, as for
example the costs of operating a new light rail system.
Benefits are much more difficult to measure, particularly
for transport projects, since they are likely to be diffuse and extensive.
Safety is a benefit that needs to be assessed, and while there are complex
issues involved, many CBA studies use standard measures of property
savings per accident avoided, financial implications for reductions
in bodily injury or deaths for accidents involving people. One of the most important sets of benefits are efficiency gains
as a result of the project. These gains might be assessed by estimating
the time savings or increased capacity made possible by the project.
Many other elements relating to social impacts, aesthetics, health
and the environment are more difficult to assess. The latter, in particular,
is a major factor in contemporary project assessment, and usually separate
environmental impact analyses are required. Where possible these factors
must be considered in CBA, and a variety of measures are used as surrogates
for environmental benefits and costs. For example, the commercial losses
of habitat destruction and property damage can be estimated. The difference in the values of properties adjacent to airports and
those further away can be used to assess the costs of noise.
Three separate measures are usually obtained from CBA to aid decision
The first two are broadly similar, though with significant differences.
A project may have a high B/C ratio but still generate a smaller NPV.
The results should be subjected to a sensitivity analysis. This would
include considering the robustness of the predictions of costs and benefits,
and usually involves the identification of aspects that would introduce
uncertainty into the predictions. If certain elements are shown to be
subject to variations (inflation, higher fuel charges etc.) various
scenarios would be prepared, and the cost/benefit values re-evaluated.
Results in cost / benefit analyses tend to be
notoriously inaccurate, as
large infrastructure projects systematically have high cost
overruns. An enduring bias concerns the underestimation of costs and
the exaggeration of benefits, which often questions the usefulness and
relevance of cost / benefit analysis. A major factor behind this
bias is the inherent propensity for infrastructure promoters to
portray projects as highly beneficial for the costs involved in
order to secure approval and funding. To make matters worst, the
projects that have the most exaggerated benefits and the highest
cost overruns tend to generate much lower benefits than expected.
- Net Present Value (NPV): This is obtained by subtracting
the discounted costs and negative effects from the discounted benefits.
A negative NPV suggests that the project should be rejected because
society would be worse off.
- Benefit-cost ratio: This is derived by dividing the discounted
costs by the discounted benefits. A value greater than 1 would indicate
a useful project.
- Internal rate of return (IRR): The average rate of return
on investment costs over the life of the project.