Chapter A1: Context Matters!

Learning Objectives

After completing this chapter, students should be able to:
  1. Identify the different CBA types

  2. Outline the steps of a CBA

 

Types of CBA Analysis

CBA can be used as a tool to assess prospective projects as well as tool to evaluate retrospectively. 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 – “Is this policy/project worthwhile?”. The result of an ex-ante cost benefit analysis is the recommendation for a project to be undertaken or not.

An ex-post cost benefit analysis is conducted at the end of a policy or project. This format of CBA is retrospective and allows the evaluation of the profitability and/or goals of the project. An ex-post CBA will allow for the evaluation of the efficiency of the 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 allow for the identification of errors and biases that may have been present in the 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 as part of the evaluation of policy continuation. 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.

Summary of Learning Objectives

  1. There are three types of CBAs – ex-ante (before), ex-post (after) and in medias res (during).
  2. There is a clear 9 step framework for developing a CBA identified by the Australian Federal Government.

 


  1. Note that we will return to this in detail in Chapter 13: Guidelines to CBA Report Writing.

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