by: Jonny Andrews
In government and private sector decision-making there are always competing priorities for limited funds. Many of our local Governments and sometimes the National Government tend to fund projects without doing a Cost-Benefit Analysis. The purpose of doing a CBA is to allow competing policy priorities to be compared in a consistent way, and for their economic, social and environmental impacts to be assessed.
In all areas of policy, the function of the CBA is to assist policymakers to identify the best way to deliver the strategic objectives of governments.
Government funds for investment in infrastructure and public policy initiatives are limited. These funds come at a significant cost to Papua New Guinea, through taxes collected by state entities. If governments had not collected these taxes, the funds would have been available to private individuals and businesses to spend, save or invest.
One example is in the development of our cities. Cost–benefit analysis can help to achieve the strategic aims of a holistic metropolitan plan by weighing up the economic, social and environmental impacts of different transport infrastructure options and identifying the best approach for the long term.
What are the essential elements?
- Cost–benefit analysis needs to be future looking
A good cost–benefit analysis will guide decision-making in the best interests of current and future generations by taking a long-term view those factors in economic and population growth over time.
The CBA methodology also allows for the consideration of future benefits and risks that are largely unknown or difficult to quantify.
Governments have to pursue policy priorities where there are unknowns – because they are seen to be in the public good or because they are necessarily based on future assumptions. The CBA discipline can help policymakers to wrestle with intangibles and communicate assumptions and judgements in a transparent way.
Uncertainty about the future is no reason to avoid a CBA. In fact it makes the case for undertaking rigorous and transparent CBA even stronger.
- Cost–benefit analysis needs to be objective
Objectivity is critically important when determining the expected costs and benefits of a policy or project. CBAs (both private and public) often fail because future costs are underestimated and future benefits overstated, due to a tendency for ‘optimism bias’.
Independent assessment is a good way to build objectivity into the CBA.
Objectivity also requires that the main findings are based on a realistic ‘central case’ that depicts the most likely outcomes for costs and benefits in the future. It is then fine to test alternative outcomes under best case and worst-case scenarios.
- Cost–benefit analysis needs to consider implementation risks
Cost–benefit analysis ensures implementation risks can be identified and assessed upfront so they can be factored into a project’s implementation program. CBAs can be applied to capital projects as well as major policy and change management initiatives.
- Cost–benefit analysis needs to be easily understood so it can be subject to a degree of contestability
A CBA needs to be straightforward and readily understood by a wide range of people. The idea is not for them to be ‘black boxes’ for technicians but tools that people can use to look at priorities and contest them.
Finally; Investment decisions by governments need to be based on robust assessment of their future costs and benefits to ensure they are making the best use of taxpayers’ funds and deriving the maximum benefits for society.
CBA is one of the key tools that can assist in the development of evidenced-based policy if it is conducted with transparency and objectivity. It provides a framework for weighing up different impacts