Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

There are many ways to design an MCA exercise. One possible approach is as follows:- objectives should be expressed in measurable variables. They should not be redundant but could bealternative (the achievement of a bit more of one objective could partly preclude the achievement ofthe other);- once the ‘objectives vector’ has been determined, a technique should be found to aggregateinformation and to make a choice; the objectives should have assigned weights reflecting the relativeimportance given to them by the policy-maker;- definition of the appraisal criteria; these criteria could refer to the priorities pursued by the differentparties involved or they could refer to particular evaluation aspects;- impact analysis: this activity involves describing, for each of the chosen criteria, the effects it produces.Results could be quantitative or qualitative;- forecast of the effects of the intervention in terms of the selected criteria; from the results comingfrom the previous stage (both in qualitative and in quantitative terms) a score, or a normalised value, isassigned (this is the equivalent of ‘money’ in CBA);- identification of the typology of subjects involved in the intervention and the determination ofrespective preference functions (weights) accorded to different criteria;- scores under each criterion are then aggregated (simply with a sum or with a non-linear formula) togive a numerical evaluation of the intervention; the result can then be compared with the result forother similar interventions.The project examiner should then verify if:- forecasts for non-monetary aspects have been quantified in a realistic way in the ex-ante evaluation;- there is in any case a CBA for the standard objectives (financial and economic analysis);- the additional criteria under the MCA have a reasonable political weight, so as to determine significantchanges in the financial and economic results.EXAMPLE: MCA AS A COMPLEMENTARY TOOL TO APPRAISE ENVIRONMENTAL PROJECTSMCA is useful when the monetisation of costs and benefits is difficult or even impossible. Let us suppose that a certain projectshows, at a discount rate of 5%, a negative economic net present value of one Millions of Euros. This means that the projectexaminer foresees a net social loss of the project in monetary terms. However, the project proposer could assess that, despitethis, the project should be financed by the Funds because it has a ‘very positive’ environmental impact that it is not possible tomonetise. For example the project is supposed to cut the polluter Z emissions by 10% per year.Now one should ask if:a) the forecast of the emission cut in physical terms is reliable;b) one Millions of Euros is an acceptable ‘price’ for the reduction of 10% in the emissions;c) such a ‘price’ is consistent with the weight that the government of the Member State or the Commission attaches to similarprojects.For instance, one may see whether -regularly or even occasionally- Member States have funded similar projects or, if there is noevidence of consistency, one should enquire why this deviation form previous practice is proposed for the project under EUassistance.When the benefits are not just non-monetary, but also physically unmeasurable, a qualitative analysisshould still be conducted. A set of criteria relevant for the project appraisal (equity, environmental impact,equal opportunity) is collected in a matrix together with the impacts (measured with scores or percentages)of the project on the relevant criteria. Another matrix should then assign weights to each relevant criteria.By multiplying scores and weights, the total impact of the project is obtained: this allows the selection ofthe best alternative. In the example shown in Table 2.17, project B has greater social impact, givenpreferences for the chosen social criteria. It should be stressed that these matrices are simple, but highlysubjective, and much prudence is needed in the interpretation of the results.66