The Cost/ Benefit Analysis (CBA) is an economic assessment tool/ technique for comparing the anticipated benefits of proposed investments/ projects with the corresponding costs to help users identify the alternative with the maximum net benefit (benefits minus costs). The more the benefits exceed the costs, the more the end users (society) will benefit from the project activity or policy decision.
In this context, the CBA can be used not only during the development of Business Case for the identification of the most preferable solution option, but also during the Inception & Prioritising Stage in order to give a higher priority to the investments/ projects which prove to be more profitable efficient not only in monetary but also in socioeconomic terms (refer to subchapter 1.4.2 “Setting Priorities”).
It should be noted, that wherever possible the CBA should be undertaken from a national perspective rather than government or departmental perspective. This is often termed “economic CBA” and is preferred because the actions of one agency or department can impose costs or benefits on individuals or the nation as a whole (e.g. increasing the size of a programme operated by a particular department may assist the operation of the department but may nonetheless require a large increase in income tax on individuals). In other words, economic CBA seeks to capture all benefits and costs regardless of to whom they accrue. Of course, in case of investments or projects where costs and benefits are limited to impacts on an individual agency or department (e.g. purchase of new notebooks for a department, lease or buy decision for an agency building), a “finacial CBA” should be used. That is to consider only the benefits and costs to an individual agency or department.
The elaboration of a CBA is usually a complicated and sophisticated task that should be carried out by specialised professionals or assigned to external advisors, since it involves advanced calculations and financial analysis, which require a relevant background knowledge and familiarisation with investment appraisal techniques. Especially in cases of large investments/ projects, where the CBA may be a prerequisite in order to apply for EU funding (e.g. investments for waste treatment, water supply and depuration, transport, etc.), the CBA should be conducted very carefully and by specialised experts in order to justify the request for co-financing and receive the relative approval.
However, for the purposes of this Guide a simplified approach for conducting CBA is presented in Annex 1-3 in order to facilitate users with little economic or financial knowledge in identifying whether an investment or a project is worth implementing.
The most important parts of a CBA are the following:
|●||Determining the lifetime of the investment/ project (period of analysis)|
|●||Identifying all relevant costs and benefits of a given investment/ proposal/ option |
|●||Valuing all relevant costs and benefits of a given investment/ proposal/ option (assigning monetary values)|
|●||Preparing the cashflows for the analysis period|
|●||Discounting of cashflows to present values|
|●||Calculating the Net Present Value (NPV)|
|●||Evaluation of alternative options and selection of the preferred option |