Defined Terms and Documents     Annexure A

When to Use Benefit-Cost Analysis

Economic evaluation (also called appraisal, assessment or analysis) refers to various methods to determine the value of a policy, program or project. It involves quantifying incremental (also called marginal) economic impacts (benefits and costs) to determine net benefits or net value (benefits minus costs), and the distribution (also called incidence) of these impacts.

Economic evaluation is not limited to market impacts (which involve goods that are commonly traded in competitive markets), it can also incorporate non-market resources such as personal time, health and environmental quality. 

One of the most common economic evaluation methods is Benefit-Cost (also called Cost-Benefit) analysis, which uses monetized (measured in monetary units) values to compare total incremental benefits with total incremental costs. The results can be presented as a ratio, with benefits divided by costs (which is why it is often called Benefit/Cost or B/C analysis). Net Benefits is defined as the sum of all benefits minus the sum of all costs, which provides an absolute measure of benefits (total dollars), rather than the relative measures provided by B/C Ratio.

To perform Benefit-Cost Analysis it is necessary to monetize all relevant impacts. In recent years economists have developed techniques for monetizing non-market impacts, and some transportation agencies have adopted standardized values for travel time, crash damages and environmental impacts. 

Benefit-Cost Analysis is most applicable for evaluating proposed projects that meet the following criteria:

(1)     The potential project expenditure is significant enough to justify spending resources on forecasting, measuring and evaluating the expected benefits and impacts.

(2)     The project motivation is to improve the transportation system's efficiency at serving travel and access-related needs, rather than to meet some legal requirement or social goal.

(3)     Environmental or social impacts that are outside of the transportation system efficiency measurement are either:
         (a)   negligible in magnitude,
         (b)   measurable in ways that can be used within the benefit-cost framework, or
         (c)   to be considered by some other form of project appraisal outside of the benefit-cost analysis.

During the last few decades Benefit-Cost analysis has been widely used to evaluate transportation projects, and standardized methods have been developed, including software programs such as as MicroBenCost and HDM-4 (CalTrans 2006; World Bank 2011).  These are generally designed to evaluate a particular type of transport improvement, such as highways or transit service, and are generally inappropriate for comparing the net benefits of improvements to different modes or of transportation demand management strategies such as pricing reforms or commute trip reduction programs because they do not account for many significant impacts. For example, conventional benefit-cost models generally ignore parking facility costs, and therefore the parking cost savings that result when travelers shift from driving to alternative modes. Most models only account for changes in vehicle operating costs, but ignore vehicle ownership costs, and therefore the savings to consumers from improvements in alternative modes that allow households to reduce their vehicle ownership. Most include no factor for the social equity benefits that result from improving basic mobility for non-drivers, for example, from projects that improve affordable modes such as walking, cycling and public transport. It is therefore important that people who use these models and model results understand their limitations and biases. 

Benefit-Cost Analysis is neither necessary nor desirable to justify all transportation projects. It may not always be appropriate in the following cases:

• Projects motivated by a need to meet legal requirements — such as safety standards, handicapped access standards or environmental impact standards. Changes in population growth, urban development, travel patterns or legal regulations may necessitate new projects to upgrade existing transportation facilities and services, build new facilities or provide new services to meet those current legally required standards.

• Projects motivated primarily by a need to address distributional equity concerns — i.e., legal, political or moral desires for fairness. This includes the provision of some minimum level of basic (road, transit, air or sea) access for isolated or ill-served regions, communities or neighborhoods. It can also include some projects motivated by economic development, i.e., enabling the attraction and creation of new jobs particularly in economically depressed areas. Finally, some decisions are based on the desire (and in some cases, the legal need) to avoid selection of projects and project designs that focus undue negative impact on socially vulnerable groups (such as low income, elderly, or minority groups)

• Projects that are merely maintaining, renovating or rehabilitating already-built transportation facilities, which are necessary to avoid losing the already-demonstrated benefits of those existing facilities (unless there are viable alternatives present)

It is also inappropriate to rely solely on Benefit-Cost Analysis in situations where there are special concerns that must also be considered outside of that analysis. Since benefit-cost analysis focuses on the comparison of total benefits and total costs in dollar terms, some particular concerns affecting a given project may be either hidden or missed within the calculation of total benefits and total costs. In some cases, the desirability of projects needs to be considered in terms of their effectiveness at reducing certain key objectives — such as air pollution reduction, creation of new jobs, or improving mobility for physically, economically and socially disadvantaged people. In such cases, cost-effectiveness analysis (which measures environmental or social benefits per dollar of transportation project spending) may be appropriate, either in addition to or instead of benefit-cost analysis.
 

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