2.3 Identifying Benefits and Costs
Example 2.3a: Benefits and Costs for Roading Analysis
When evaluating roading proposals, Transfund typically considers the following:
Benefits:
- Reduction in loss of life and disability
- Reduction in health care costs
- Reduction in travel time
- Reduction in vehicle operating expenditure
- Environmental benefits less environmental damages
- Residual value
Costs:
- Capital cost
- Maintenance cost
- Cost of any disruption to existing transport operations
2.3.1 What is a Benefit?
An economic benefit is any gain in the welfare of society or the individuals that comprise it from the proposal being considered. Identifying and quantifying benefits is undoubtedly one of the toughest and most time consuming elements of CBA. It is also one of the easiest elements to get wrong. For these reasons, it is essential that the process and assumptions used in identifying and quantifying benefits are thoroughly documented and explained for decision makers.
A useful starting point is to note that benefits can be monetary or non-monetary, qualitative, or quantitative. For example, consider the following combinations:
| Benefit | Type | Example |
|---|---|---|
| Monetary | Quantitative | Operating cost reduction |
| Non-monetary | Quantitative | Lower number of customer complaints, reduction in the number of road accidents, increased percentage of government departments on the internet |
| Non-monetary | Qualitative | Increase in staff skills |
| Outcomes | Quantitative and qualitative | Improvement in the education and health status of New Zealanders |
2.3.2 What is a Cost?
Economic costs[22] relate to actual resource use in the economy and reflect the best alternative uses that the resources could be put to (i.e. they are opportunity costs). It is important to explore what alternative opportunities may exist. Examples of opportunities include:
- using land in a different, or more valuable, way than its current use
- the alternative use of an employee’s time, and
- investing in a public transport system instead of building additional roads.
In all of these examples, the opportunity cost is the next best alternative that must be given up in order to take up the opportunity. As discussed a little later in section 2.4, opportunity costs are usually reflected in market prices (e.g. the salary of an employee). These opportunity costs should be included in the analysis.
Accounting costs do not necessarily relate to actual resource use and therefore may differ significantly from economic costs. Depreciation and capital charges (discussed below) are examples of accounting costs that do not necessarily correspond to actual resource usage.
Costs can be monetary, non-monetary, qualitative, or quantitative:
| Cost | Type | Description and Example |
|---|---|---|
| Monetary | Quantitative – Fixed Costs | Remain constant over different volumes of activity/production (e.g. rent for an office building is constant irrespective of the number of staff working in the building) |
| Quantitative – Variable Costs | Vary according to the volume of activity/production (e.g. electricity costs are likely to increase as the number of staff in an office building increases) | |
| Quantitative - Semi-variable costs | Include both a fixed and variable component (building maintenance is an example, where there is usually a degree of planned maintenance, and a degree of responsive maintenance whose costs vary in proportion to activity, e.g. the number of call-outs) | |
| Non-monetary | Quantitative | Increase in the number of customer complaints, or, road accidents |
| Non-monetary | Qualitative | Decline in staff skills |
| Outcomes | Quantitative and qualitative | Reduced skills and health |
When attempting to identify all relevant costs and benefits, it is useful to constantly ask ‘Is the cost or benefit relevant and material to the analysis?’.[23] If a proposed benefit or cost is outside the scope (refer section 2.1) or immaterial then it should be excluded. Similarly, if the amount of effort or resources required to quantify a particular cost or benefit outweighs the advantages of including it, then clearly it should not be quantified. Instead it should be identified and a qualitative assessment of its potential impact made (refer to chapter 4).
Costs and benefits do not necessarily have to correspond to physical flows of cash (although they usually do). If costs or benefits can be quantified in monetary terms,[24] they can be included in the analysis as per any other cash flow (e.g. costs of death or injury).
Some further points to consider are outlined below.
Notes
- [21]UK Green Book, Chapter 5, http://greenbook.treasury.gov.uk/.
- [22]Transfers of resources from one entity to another are not considered economic costs because they do not create or consume resources for the economy as a whole.
- [23]For a cost or benefit to be material, its impact on the analysis must be significant and capable of influencing the final decision or final selection from a range of alternative proposals. The interests and priorities of key stakeholders should also be considered.
- [24]Subject to the cost or benefit being able to be reliably and efficiently estimated, and it being material to the analysis.
