Cost-Benefit Analysis

by Maja Jovic on September 12, 2014

In Bearing, we often work with preparing and planning for large projects. When we work with public sector initiatives for projects, especially in the EU, then cost-benefit analysis is a keystone in any feasibility study. Cost-Benefit Analysis (CBA) is a systematic process for calculating and comparing the benefits and costs of a project for two purposes:

  1. To determine if the project is a sound investment decision.
  2. To provide a basis for comparing projects. This involves comparing the total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.

In the latest available working document from the European Commission(1) from the Programming Period 2007-2013, there are guidelines for the methodology for carrying out a Cost-Benefit Analysis. In this article I will introduce some of the main ideas.

The scope of the guideline is referring to general principles of Cost-Benefit Analysis, Determination of the EU Grant and Specific issues, such as profitability, “polluter pays principle”, equity (affordability) and Public Private Partnerships (PPP).

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The guidelines were published to outline the elements to be considered as a part of feasibility studies for project applications submitted to the Commission services for approval. The European Commission’s “Guide to CBA of investment projects” is seen as one of the most important available references for how to work with CBA and it is a useful text to read as it will remove misunderstandings for all of those who are preparing project that require substantial investments.

There are priority requirements of CBA for all projects:

  1. A project must be shown as desirable from an economic point of view in accordance with the EU regional policy, and
  2. The evidence that should be provided that is the contribution of the Funds needed for the project to be financially viable.

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CBA is essentially a tool for estimating the economic benefits of projects where, in principle, all impacts should be assessed: financial, economic, social, environmental, etc.

The objective of CBA is to identify and monetize (i.e. attach a monetary value to) all possible impacts in order to determine the project costs and benefits; then the results are aggregated (net benefits) and conclusions are drawn on whether the project is desirable and worth implementing.

Costs and benefits should be evaluated on an incremental basis, by considering the difference between the project scenario and an alternative scenario with the economic development taking place without the project.

The impact must be assessed against predetermined objectives. By evaluating a project against microeconomic indicators, CBA can assess its consistency with and relevance to specific macroeconomic objectives.

In the European Union regional policy context, CBA is applied to assess the relevance of a given investment project to EU regional policy objectives. The level of analysis used in CBA must be defined with reference to the context of society where the project has a relevant impact. Cost and benefits may be borne and accrue at different geographical levels, so a decision has to be taken on which costs and benefits should be considered. This typically depends on the size and scope of the project. Municipal, regional, national and even EU level impacts can be considered and and justified, depending on context.

When estimating the potential impacts of a project analysts always face uncertainty. This must be properly taken into account and dealt with in the CBA. A risk assessment exercise is an essential part of a comprehensive analysis, as it enables the project promoter to better understand the way the estimated impacts are likely to change should some key project variables turn out to be different form those expected. A thorough risk analysis constitutes the basis for a sound risk-management strategy, which in turn feeds back into the project design.

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In 2014, the European Commission is defining and inserting additional requirements in relevant EU regulations, guides and working documents prepared for implementation in the programming period 2014-2020. One of the most important items is requirements for preparation of CBA in scope of all eligible investment projects for EU funds.

Since the CBA is an essential tool, EU Commission is preparing a New guide to CBA, which will include new content and extension of the methodological approach, and replace the prior version from 2008.

Croatia, as many other countries, has its share of public procurements and for that reason preparation of the whole project documentation needs to be on a high level.  A combination of good organisation with proper usage of country’s legislation, CBA experts and international experience is what leads to provision of EU funding for projects.

The Bearing staff in Zagreb is currently working to prepare projects for the new EU framework period in Croatia, our team in Sweden is doing the same for Swedish and cross border projects and through our colleagues in Barcelona we do this work also in Spain. We also apply a similar assessment methodology for projects in Africa. By all above mentioned, we are more than familiar with all the complexity and effort to prepare projects successfully. Do contact us if you require expert knowledge or a second opinion on your investment projects.

(1) Specifically the Directorate-General for Regional Policy, Thematic development, impact evaluation and innovative actions.

About Maja Jovic :

Maja is a Consultant in Bearings Zagreb office, with experience in cultural management in Local Self-Government Unit System of Croatian Local and Regional Authority. She holds a MA degree in Croatian language and Literature, and a MA degree in History. Currently she is doing her PhD studies in literature, film, culture and performing arts. Her main area of interest is cultural aspects of place development.

{ 1 comment… read it below or add one }

Parinaz Alabaf September 13, 2014 at 12:16

I like your article.

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