Chapter A1: Context Matters!

Types of CBA 

CBA can be used as a tool to assess future projects as well as to evaluate existing projects which have already been implemented. It is important to know what type of CBA you are conducting to ensure you use suitable technical methods for evaluation and provide appropriate recommendations.

An ex-ante cost-benefit analysis is carried out prior to investing in a policy or project. It is a prospective CBA, where you consider the possibilities available. This format of CBA is useful for making decisions about the use of resources in the future. An ex-ante CBA will allow a policymaker to identify if resources should be used on a particular policy or project. When undertaking an ex-ante CBA, you are essentially asking – “Will this policy/project be worthwhile?”. An ex-ante cost-benefit analysis results in a recommendation of whether a project should, or should not, be undertaken.

An ex-post cost-benefit analysis is conducted at the end of a policy or project. This format of CBA is retrospective and evaluates the profitability and/or goals of the completed project. An ex-post CBA evaluates the efficiency of a policy or program in a way that allows you to measure the exact impact caused by the project. When undertaking an ex-post CBA, you are essentially asking – “Was this a good policy/project?”. Ex-post CBA is often used as a learning tool to ensure that future projects can identify the errors and biases that may have been present in the previous project’s ex-ante CBA.

A more recent method of CBA, called in medias res, allows decision-makers to utilise preliminary data to evaluate the policy or project while it is currently in progress. The idea of this type of CBA is to consider if the continuation of the policy or project is a good idea. This format of CBA is particularly useful in the public sector when evaluating the continuation of a policy. An example of an Australian in medias res CBA can be found here:

An In Medias Res Economic Cost‐Benefit Analysis of ACT Container Deposit Scheme

Steps in a CBA

In this course, we follow the same steps as outline by the Australian Government Department of the Prime Minister and Cabinet. ^[1]

1. Specify the options or set of alternatives under consideration.
2. Decide whose benefits and costs count.
3. Identify the impacts and select measurement indicators.
4. Predict the impacts over the life of the proposed project, program, or policy.
5. Monetise all impacts (attach $ values).
6. Discount future costs and benefits to obtain present values.
7. Compute the net present value (NPV) of each project.
8. Perform a sensitivity analysis.
9. Reach a conclusion.

In addition to the aforementioned steps, when conducting a CBA as a consultant it is imperative to discuss the terms of reference with the stakeholder or client requesting the CBA.