Cost Benefit Analysis

At a glance

Cost–benefit analysis (CBA) is the core appraisal tool in ATAP Guidelines framework. This part of the Guidelines, ‘T2’, sets out the general approach to undertaking CBAs, which is elaborated on in the mode-specific (M) parts.

In the ATAP Framework, CBA is undertaken in step 3, where options are assessed and filtered to arrive at a single preferred option (ATAP Part F3 Options generation and assessment). CBA can be undertaken at a ‘rapid’ level to determine whether further assessment of an option is justified, and at a ‘detailed’ level.

CBA aims to identify and express, in monetary terms, all the gains and losses (benefits and costs) created by an option or initiative to all members of society, and to combine the gains and losses into a single measure of net benefit (benefits minus costs). If the result, expressed as a net present value (NPV), is positive — that is, total benefits exceed total costs — implementation of the option will be an economically efficient use of resources. Benefits and costs are estimated by comparing changes between the Base Case (without the option or initiative) and the Project Case (with the option or initiative).

The method for undertaking CBA is presented as a series of steps, starting with specifying the options, including the Base Case, followed by listing the various benefits and costs. Each of these is monetised as far as possible in the subsequent steps: capital investment costs, infrastructure operating costs (including maintenance), user benefits (principally time and money cost savings) both for the infrastructure improved by the initiative and, if required, for related infrastructure, safety benefits and externalities. Demand forecasts play a critical role in estimating future benefits. Benefits and costs estimated for each year of the appraisal period are discounted and combined into summary results that can be used to make decisions. Techniques are presented to assess and adjust for risk and uncertainty.

The final chapter proposes techniques to ‘adjust’ CBAs where the analyst wants to give particular government objectives greater prominence in relation to the economic efficiency objective