Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

eneficiary. The project proposer should, however, following the risk analysis, at least identify specificmeasures for the mitigation of the identified risks, according to international good practice (see Annex Hfor some examples extracted from the World Bank Project Appraisal Documents).2.7 Other project evaluation approachesWhile cost-benefit analysis is the most commonly used technique in appraising public investment and it isthe one required by the Funds regulations for major projects, other kinds of project analysis exist and areused. In this section, the main features and fields of application of Cost-Effectiveness Analysis (CEA),Multi-Criteria Analysis (MCA) and Economic Impact Analysis (EIA) are reviewed. These approachescannot be seen as substitutes for CBA but rather as complements for special reasons, or as a roughapproximation when actual CBA is impossible. Moreover, they are difficult to standardise and, under theStructural, Cohesion and IPA Funds, should be used with caution in order to avoid inconsistencies acrossregions and countries that will make the assessment of projects by the Commission Services moredifficult.2.7.1 Cost-effectiveness analysisCost-effectiveness analysis (CEA) is a comparison of alternative projects with a unique common effectwhich may differ in magnitude. It aims to select the project that, for a given output level, minimises thenet present value of costs, or, alternatively, for a given cost, maximises the output level. CEA results areuseful for those projects whose benefits are very difficult, if not impossible, to evaluate, while costs can bepredicted more confidently. This methodology is often used in the economic evaluation of healthcareprogrammes, but it can also be used to assess some scientific research, education and environmentalprojects. For these examples, simple CEA ratios are used, such as the cost of research per patent, the costof education per student, the cost per unit of emission reduction, and so on. CEA is less helpful when avalue, even an indicative one, can be given to the benefits and not just to the costs.Generally, CEA solves a problem of optimization of resources that is usually presented in the followingtwo forms:- given a fixed budget and n alternative projects, decision-makers aim to maximise the outcomesachievable, measured in terms of effectiveness (E);- given a fixed level of E that has to be achieved, decision-makers aim to minimise the cost (C).Although one could compare the simple ratios of costs to outcomes (C/E) for each alternative, thecorrect comparison is based on ratios of incremental costs to incremental outcomes, since this tells ushow much we are paying in adding the extra, more beneficial, measure. In particular, when the alternativeprojects are competitors and mutually exclusive, an incremental analysis is required in order to rank theprojects and single out the one that is most cost-effective.Generally cost-effectiveness analysis is pursued to test the null hypothesis that the mean cost-effectivenessof one project (a) is different from the mean cost-effectiveness of some competing intervention (b). It iscalculated as the ratio:R = (C a – C b ) / (E a – E b ) = ΔC / ΔEdefining the incremental cost per unit of additional outcome.While the measurement of costs is the same as in the financial analysis of CBA, the measurement of theeffectiveness depends on the type of outcome chosen. Some examples of measures of effectiveness usedin CEA are: number of life-years gained, days of disability avoided (healthcare projects), or test scores(education).When a strategy is both more effective and less costly than the alternative (C a – C b < 0 and E a – E b > 0), itis said to ‘dominate’ the alternative: in this situation there is no need to calculate cost-effectiveness ratios,because the decision on the strategy to choose is obvious. However, in most circumstances, the project64