Cost Benefit Analysis (CBA) involves a systematic evaluation of the costs and benefits, from a societal perspective, of a project, policy, or program. The method can be used to assess the impact of projects that have been completed in the past, or alternatively a forward-looking assessment can be made to examine the expected net returns from projects that are yet to be initiated.
Importantly, the method is designed to account for all impacts on the community and economy over a specified timeframe. CBA provides an objective framework for weighing up different impacts and impacts that occur in different periods.
Through CBA, the welfare gains and losses of a change (brought about by a project or policy, for example) are measured in monetary terms to allow comparability and consolidation into a single net benefit measure. Benefits and costs that occur over time are converted to a Net Present Value, which is a monetary measure expressed in today’s dollars.
The impacts of a project or policy may be numerous and span market-related benefits and costs (e.g. lower production costs from the introduction of new technology) and non-market social and environmental impacts. Synergies use a number of techniques to value these non-market impacts in order to be as comprehensive as possible when accounting for the benefits and costs (see non-market valuation).
Even when full quantification of impacts is not possible, CBA can still be useful in providing a clear decision-making framework as it enables a transparent means of assessing how large the unquantified benefits would need to be to make the project ‘net positive’.
In Synergies’ experience, our clients have found the process of working through a CBA very insightful as it assists to understand which variables are most influential in delivering benefits, and the distribution of benefits and costs across different stakeholders.
Synergies routinely use CBA in development of business cases for infrastructure projects, assessing the impact of proposed regulations, and evaluating the merit of policy options for managing social and environmental issues.
