What is Cost Benefit Analysis?

Cost Benefit Analysis (hereafter, CBA) is a tool used to help assist decision-making when investment plans are being developed. There is nothing really new about the tool. For many decades, CBA has been used to analyse public sector investment projects. Basically, it helps answer questions such as:

“Should we invest in a new motorway, or in a light rail system?”, or

“Should we invest in a new centralised computer system or continue with existing systems?”

All public sector capital projects are required to be evaluated under official guidelines, issued by the Department of Public Expenditure and Reform.

What does CBA involve?

Put simply, CBA is the method used to evaluate the various direct and indirect costs and benefits of investment proposals. A CBA is designed to find, quantify, and add-up all the positive factors – these are the benefits. Then it identifies, quantifies, and subtracts all the negatives – the costs. Costs and benefits are brought to a common point in time using a test discount rate. The difference between the discounted costs and discounted benefits determines whether a planned public sector project is worthwhile. The real achievement is making sure that all the costs and all the benefits are included, before being quantified.

Revision of the CBA Guidelines

The Public Spending Code, which incorporates the rules for carrying out CBAs, is now under review.

The commitment for a review was announced by the Department of Public Expenditure and Reform in its Statement of Strategy 2016-2019, published last December.^[i] It is five years since the current Code was first launched, so this review is timely. It is important that the Code now incorporates procedures and processes that are up-to-date with international and national best practice. It also necessary to ensure that the Code, which was issued when the economy was experiencing the worst of the fiscal crisis, is now adapted to meet the requirements of a growing economy.

One area that will require updating is climate change. The Draft National Mitigation Plan published by the Department of Communications, Climate Action and Environment last March noted this issue. Specifically, the draft stated that a review of the Public Spending Code,

“…is necessary to ensure that it provides the best available advice to public bodies on measuring and reporting on the costs and benefits associated with climate change measures”.^[ii]

Developing a wider audience for Cost Benefit analysis

There is merit in “spreading the message” about CBAs to a wider audience, particularly where CBAs demonstrate the basis upon which investment decisions are taken for projects in the public sector.

The public should be made aware of the costs and benefits of projects being funded from the public purse. The real test comes when there is a “look-back” on completed projects to see how realised costs and benefits measure-up against the original CBA projections. Such outputs and outcomes need to be shared with the public. It is essential to demonstrate that public sector projects do, in fact, benefit the State’s citizens and facilitate economic growth and development.

Notes

^[i] Department of Public Expenditure and Reform, “Statement of Strategy 2016-2019”. Available here.

^[ii] National Mitigation Plan. Available here.