An Introduction to Cost Benefit Analysis

Here I make available materials intended to give an introduction to cost benefit analysis.

Recently I ran two Cost Benefit Analysis (CBA) workshops – one three day workshop primarily for SPC and Fiji’s Ministry of Primary Industries (co-delivered with economist Marita Manley of GIZ and with a session and other help from economist Paula Holland of SOPAC-SPC), and one shorter workshop run in two morning sessions over 2 days for the EU-Increasing Agricultural Commodity Trade project.  I must also give credit to Aaron Buncle from SPREP for allowing me to adapt his materials for my workshops and advising me from his experiences running his own set of CBA workshops for the Pacific Adaptation to Climate Change project.

The ultimate goal of the workshops – and indeed the goal of CBA – was to be an aid to decision making on resource allocation, or in other words to help all present to decide how to spend their resources in the most beneficial way from an economic and a human welfare perspective.

The immediate aim of the workshops was to support participants to start on the process of creating and implementing their own CBA workplans including their own Excel analysis.  We began by introducing the concepts behind Cost Benefit Analysis, through a series of presentations, and then taking them through two Excel examples with fictional data.

Here, with permission from other contributors, I release the material we used for the workshops, which are downloadable below.  If you would like to get an idea of CBA, then do take some time to run through the presentations to get some idea of what it’s all about.  Important documents to use as tools to take CBA forward are the CBA Workplan and the Excel Template.

The presentations may be tricky to follow as they are designed to be explained verbally in a workshop format, rather than to stand alone.  So for questions on any of this material, please feel free to email me on jonathanb at spc.int

Introduction to CBA

Paula Holland’s presentation giving an overview of CBA, its purpose and role is available here.

Paula Holland’s accompanying paper entitled “Simple Introduction to Cost-Benefit Analysis” is available here.

Cost Benefit Analysis Workplan

This document is a road map to doing Cost Benefit Analysis at the start of a project, including key questions to ask to define the objectives of a project.

Measuring Costs and Benefits

The Measuring Costs and Benefits presentation describes different types of costs and benefits, with an illustrative example.

Discounting

The presentation on discounting describes how we account for the fact that costs and benefits happen at different points in time – and that benefits accruing now are more valuable to us at the present than the same benefits accruing in future.  Marita Manley delivered this presentation in my first workshop.

Here is an online tutorial on discounting from a non-SPC source.

Sensitivity Analysis

Pre-project CBA requires that we predict the future.  But the future is inherently uncertain.  This presentation describes how we account for uncertainty about the future and for things that “go wrong”.  Marita Manley delivered this presentation in my first workshop.

Data Collection: Secondary Data Sources and CBA

Secondary data are data that have been collected from somebody who is not the user.  Often secondary data are publically available such as censuses, household surveys and consumer price indices.  Such data are often essential to supplement primary data (data collected from a project specially in order to do a CBA).  This presentation describes and gives links to secondary data sources in Fiji, PNG, Solomon Islands and Palau.

Example 1

This is a simple example that can be worked through of a drain that prevents flooding.  The data should be treated as fictional although a similar project did take place in Wainikoro, Vanua Levu.  The Excel spreadsheet template (click here) can be filled in on the basis of the information in the powerpoint presentation (click here).

Example 2

The second example is of field trials of soil health preservation treatments – e.g. NPK fertilizer and mucuna planting.  The data are fictional but a similar set of trials will take place under an ACIAR project in Taveuni. The spreadsheet can be filled in on the basis of the information in the powerpoint presentation.

For more in-depth material, here are a couple of references for further reading:

Boardman, E.A., Greenberg, D.H., Vining, A.R. and Weimer, D.L. 2006 Cost-Benefit Analysis: Concepts and Practice, 3rd edition.
 
Weimer (ed)., 2008.  Cost-Benefit Analysis and Public Policy.  Journal of Policy Analysis and Management Classics Series.

Australian Government 2010, Best Practice Regulation Handbook, Canberra.

Commonwealth of Australia (Department of Finance and Administration) 2006, Handbook of Cost-Benefit Analysis, January.

Boardman, E.A., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2006, Cost-Benefit Analysis Concepts and Practice, 3rd edition, Pearson Prentice Hall.

Powerpoint presentation – Introduction to Cost-Benefit Analysis: CBA Unit of Australian Government

OECD, Pearce, D., Atkinson, G. and Mourato, S., 2006, Cost-Benefit Analysis and the Environment: Recent Developments, OECD Publishing.

 
A fairly formal online exposition of CBA from Alexis Tsoukias
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