COST BENEFIT ANALYSIS GUIDE - Building Queensland
BUSINESS CASE DEVELOPMENT FRAMEWORKCOST BENEFITANALYSIS GUIDESUPPLEMENTARY GUIDANCERELEASE 2 DECEMBER 2016
BUILDING QUEENSLAND BUSINESS CASE DEVELOPMENT FRAMEWORKBuilding Queensland has been established under the Building Queensland Act 2015 to provide independentexpert advice to the Queensland Government about infrastructure.This document forms part of the Building Queensland Business Case Development Framework, as follows:OVERARCHING FRAMEWORKSBusiness Case Development FrameworkBenefits Management FrameworkGUIDANCE MATERIALSUPPLEMENTARY GUIDANCE MATERIALStrategic Business CaseInvestment Logic Mapping GuidePreliminary Business CaseSocial Impact EvaluationDetailed Business CaseCost Benefit AnalysisRELATED DOCUMENTATIONProject Assessment FrameworkEngaging with Building Queensland GuidesBuilding Queensland thanks members of the Building Queensland Reference Groups for their assistance andsupport in developing the Business Case Development Framework documents.Disclaimer: While every care has been taken in preparing this publication, Building Queensland accepts no responsibilityfor decisions or actions taken as a result of any data, information, statement or advice, expressed or implied, containedwithin. This material is provided as a guide only and is subject to regular review and updates.Attribution: Content from the Business Case Development Framework should be attributed to:Building Queensland Business Case Development Framework.V2 December 2016Building Queensland Cost Benefit Analysis Guide1
CONTENTS1.Background . 61.1.2.Business Case Development Framework . 6Introduction and Context . 72.1.Purpose. 102.2.Policy Context for this Guide . 102.2.1. State Level . 102.2.2. Federal Level . 112.2.3. Further Context . 112.3.Key Concepts . 122.4.Precautions Against Misuse . 132.4.1. Objectivity. 132.4.2. Materiality . 132.4.3. Scalability . 132.4.4. Modularity . 132.5.3.4.5.Structure . 13Overview . 143.1.Economic Analysis of Investment . 143.2.Investment Environment . 143.3.Total Economic Value Framework . 153.4.Non-market Valuation . 163.5.Comparison with Financial Analysis . 163.6.Comparison with Cost Effectiveness Analysis . 17Cost Benefit Analysis in Business Cases. 174.1.Role in the Project Lifecycle . 174.2.Role in the Business Case Development Framework . 18Delivering a Cost Benefit Analysis . 185.1.Identify Outcomes . 195.2.Develop Options. 195.2.1. Base Case . 205.2.2. Other Options . 205.3.Preliminary Evaluation of Options . 215.4.Detailed Option Evaluation . 225.4.1. Risk Consideration. 225.4.2. Isolating Impacts–Identifying Benefits and Costs . 235.4.3. Estimating Benefits . 245.4.4. Estimating Costs . 255.4.5. Risk and Sensitivity Analysis. 26Building Queensland Cost Benefit Analysis Guide2
5.5.Recommendation. 275.5.1. Decision Criteria . 276.Investment Decision Making. 297.Reporting and Quality Assurance Activities. 298.7.1.Modern Modelling Practices . 297.2.CBA Reporting . 297.3.Cost Benefit Analysis Results Dissemination and Discussion . 31References . 32Appendix A: Infrastructure and Investment Decision Making . 34Appendix B: Comparison of Economic and Financial Analysis . 35Appendix C: Technical Issues . 37Discounting theory and practice . 37Discount rate designation . 38Negative Costs and ‘Disbenefits’ . 38Avoidance of Double Counting. 38Relative Price Changes . 39Common Pitfalls . 40Common Criticisms . 41Building Queensland Cost Benefit Analysis Guide3
CONTENT AMENDMENTS FROM RELEASE 1 Structural re-arrangement of key figures, and inclusion of information within body text, including:-Earlier inclusion of integration of CBA within BCDF diagram (Figure 4)-Inclusion of contingent valuation figure and information into text-Inclusion of social impact evaluation decision tree into text Enhanced key concepts and requirements Expansion of ‘Precautions Against Misuse’ section Clearer articulation in terms of required transparency, sourcing, calculations and modelling in order toimprove CBA conduct.Building Queensland Cost Benefit Analysis Guide4
ABBREVIATIONSASTAppraisal Summary TableBCDFBusiness Case Development FrameworkBCRBenefit Cost RatioCAPM Capital Asset Pricing ModelCBACost Benefit AnalysisCEACost Effectiveness AnalysisCI&IContinuous Improvement and InnovationCGEComputable General EquilibriumCUACost Utility AnalysisDBCDetailed Business CaseDCFDiscounted Cash FlowFNPVFinancial Net Present ValueFTEFull Time Equivalent/sGOCGovernment Owned CorporationGSTGoods and Services TaxIBCRIncremental Benefit Cost RatioILMInvestment Logic MapIRRInternal Rate of ReturnNBIRNet Benefit Investment RatioNPVNet Present ValuePAFProject Assessment FrameworkPBCPreliminary Business CasePSCCProject Specific Cost of CapitalSBCStrategic Business CaseSIESocial Impact EvaluationSOCCSocial Opportunity Cost of CapitalSROISocial Return on InvestmentSTPRSocial Time Preference RateTEVTotal Economic ValueWEIWider Economic ImpactBuilding Queensland Cost Benefit Analysis Guide5
1.BACKGROUNDBuilding Queensland has been established under the Building Queensland Act 2015 to provide independentexpert advice to the Queensland Government about infrastructure. The preparation of business cases forinfrastructure proposals over 100 million (or the equivalent net present value of financial commitments bythe State) will be led by Building Queensland. Building Queensland will also assist in the preparation ofbusiness cases with an estimated capital cost of 50 million to 100 million.In accordance with the Act, Building Queensland may determine the level of analysis required for a particularinfrastructure project or proposal1. The remit of Building Queensland extends to ‘infrastructure in whichinitial or further investment is likely to have a significant economic, environmental or social impact in theState or any region of the State’2.Further, the Act requires Building Queensland to provide infrastructure advice based on rigourous analysis,including cost benefit analysis and community benefits. This document has been developed to provide aframework for assessing the costs and benefits of such infrastructure investment proposals.Building Queensland provides wide-ranging advice for infrastructure projects and investment proposals.These projects and proposals relate to reform, better use, improvement of existing infrastructure assets andnew build solutions3.1.1.Business Case Development FrameworkBuilding Queensland’s Business Case Development Framework (BCDF) addresses the requirements of theBuilding Queensland Act 2015 and enhances the way in which infrastructure proposals are assessed inQueensland. The BCDF includes the following documents: Strategic Business Case (SBC) Preliminary Business Case (PBC) Detailed Business Case (DBC).The BCDF is also supported by the Social Impact Evaluation (SIE) Guide, Cost Benefit Analysis (CBA) Guide,Benefits Management Framework and Investment Logic Mapping (ILM) Guide, as shown in Figure 1.Figure 1: Building Queensland Business Case Development Framework1Having regard to scope, cost, complexity, and levels of economic, social, environmental and financial CTS/2015/15AC022.pdf, page 35, accessed 31 October 2016.3Reflective of the State Infrastructure Plan (SIP) released 16 March 2016.2Building Queensland Cost Benefit Analysis Guide6
2.INTRODUCTION AND CONTEXTCost Benefit Analysis (CBA) is a methodical and logical approach that: is a widely used form of economic evaluation, offering a rigorous approach in assessing the economicviability of investment proposals has wide ranging applicability to project evaluation across many sectors and economic activity, includinginfrastructure4 allows for direct comparison between options, combinations of options, and their further development offers decision makers additional evidence-based information upon which to allocate funds acrossinvestment choices.In line with best practice project management, assessments and resources are to be proportionate to thesize and nature of the project. An additional consideration is the stage of development of the proposal. Therisk register, cost estimates, financial, commercial and social impact evaluations are key inputs into the CBA.Interactions between key business case elements and social economic assessment — including cost benefitanalysis — is shown in Figures 2 and 3.Figure 2: Relationship between CBA and other business case elements4Across Economic (e.g. transport, water and other utilities), and Social infrastructure (e.g. Health, Arts and Education sectors).Building Queensland Cost Benefit Analysis Guide7
Figure 3: Social Impact Evaluation Decision TreeSource: Social Impact Evaluation Guide, Building Queensland (2016)Taking these issues into account, CBA can be scaled and tailored depending upon the nature and scale of theanalysis being conducted, but at a sufficient level of detail to inform decision making.The placement of CBA within the Building Queensland BCDF is shown in Figure 4.Building Queensland Cost Benefit Analysis Guide8
Figure 4: Integration5 of CBA within the Building Queensland Business Case Development FrameworkStrategicBusiness CasePreliminaryBusiness Case Purpose: Conceptualisation. Purpose: Options analysis. Approach: Identification ofbenefits sought. Identifyexpected economic, social andenvironmental outcomes. Approach: Preliminary(strategic) CBA of multipleoptions. Initial quantitativedescription of economic, socialand environmental outcomes.Economic appraisal of directcosts, including direct projectconstruction and operation costsfor each option. Initial analysis ofbenefits of each option. Output: Description ofproblem/opportunity.Qualitative description of benefitoutcomes, with somequantification whereappropriate/available. Identifiesservice need and initiatives forPreliminary Business Case. Output: Preliminary CBA, withrisk and sensitivity analysis. Keyeconomic indicators calculated,including incremental benefitcost ratio. Identifies preferredoption/s for Detailed BusinessCase. Risk adjusted estimate ofbenefits and costs, reported at a(minimum) P50 level ofconfidence. Alignment: PAF StrategicAssessment of ServiceRequirement5DetailedBusiness Case Purpose: Project selection. Approach: Detailed CBA, plusany initial market soundings.Highly detailed analysis ofrefined option/s (ReferenceProject/s). Estimate economicvalues for economic, social andenvironmental outcomes.Economic appraisal of all costsand benefits for ReferenceProject/s. Output: Detailed CBA with riskand sensitivity analysis. Describenet economic benefit andqualitative information. Keyeconomic indicators calculated,including net present value,benefit cost ratio and detailedbreakdown of benefit streamsidentified. Identifies preferredoption to go out to market. Risk adjusted estimate ofbenefits and costs, reported atP50 and P90 level of confidence. Alignment: PAF Business Case Alignment: PAF PreliminaryEvaluationOutside of assurance processes, including Gateway Review.Building Queensland Cost Benefit Analysis Guide9
2.1.PurposeThe purpose of this Guide is to provide government agencies, government-owned corporations, investmentdecision makers and practitioners with a clear view of the CBA framework that Building Queensland appliesto assess the economic viability of investment proposals6. It is intended to: provide an approach and methodology for the CBA of significant Queensland infrastructure investmentproposals highlight the required level of detail when conducting CBA, including sufficient transparency for qualityassurance and peer review enable Building Queensland to meet its statutory obligations regarding the undertaking and reporting ofproject-based economic evaluation.In keeping with continuous improvement and innovation (CI&I) practices, this Guide will be amended overtime to include relevant feedback and practical experience from users. Government owned corporations(GOCs) should engage with Building Queensland to determine appropriate economic assessment approachesfor investment proposals.2.2.Policy Context for this Guide2.2.1.State LevelThe Queensland Government has a number of frameworks, policies and guidelines to assist in the strategicdevelopment, selection, funding and delivery of projects. Under the Queensland Government’s ProjectAssessment Framework (PAF)7, CBA has broad application to a range of project types8.In developing this Guide, Building Queensland has adopted and adapted relevant elements of PAF materials.The guide has also sought strategic alignment with relevant government guidelines and policies. This ensuresconsistency with the Queensland Government’s overall approach to the economic appraisal of projects,while providing more specific guidance on the quality, appropriateness and robustness of informationprovided by agencies for investment proposals.The PAF provides supplementary guidance on CBA9, which supports the evaluation of options a
Risk adjusted estimate of benefits and costs, reported at a (minimum) P50 level of confidence. Alignment: PAF Preliminary Evaluation Detailed Purpose: Project selection. Approach: Detailed CBA, plus any initial market soundings. Highly detailed analysis of refined option/s
Cost-benefit analysis in practice cost-benefit analysis seems thoroughly entrenched in the federal bureaucracy. (p.5, Adler and Posner, 2000.) “if government agencies should employ cost-benefit analysis, then they should do so because it is a beneficial tool, not because the sum-of-compensating-variations test or any related test has basicFile Size: 383KB
Cost-benefit analysis is not the only cost assessment tool used by the states. Cost-effectiveness analysis also compares the relative costs and outcomes of two or more courses of action, but is different from cost-benefit analysis in that it does not turn all results into monetary values. Due to this limitation, cost-effectiveness analyses are
In the Pacific, the use of cost-benefit analysis to support the design and assessment of projects is still relatively new. Ten years ago, examples of cost-benefit analysis were hard to find. A good example of a project that did draw on the lessons of cost-benefit analysis to inform which activities
CHP Cost-Benefit Analysis General Remarks on Cost‐benefit Analysis 1. Cost‐benefit analysis (CBA) is an economic tool that reduces costs and benefits that occur over time into a numerical score a. Benefit/Cost (B/C) ratio, Net Present Value (NPV), Return on Investment (ROI), Payback Period b.
ries of cost-benefit analyses with increasingly more stringent outcomes phased in over time. See 33 U.S.C. §§ 1311-1314 (1994). For a list of all statutes requiring cost-benefit analysis, see Edward R. Morrison, Comment, Judicial Review of Dis-count Rates Used in Regulatory Cost-Benefit Analysis, 65 U. CHI. L. REV. 1333 (1998). 9.
III. Tabular analysis The cost of production of the selected vegetables were calculated as per the standard cost concept viz; Cost-A, Cost-B, Cost-C and tabulated for interpretation. Cost concepts: These includes cost A 1, A 2, B 1, B 2, C 1, C 2 and C 3 Cost A 1: All actual expenses
Conduct simple cost benefit analyses Follow up with you . Output . Cost utility analysis is closely related to cost effectiveness analysis – . Example – sim centre . Cost benefit “The evaluation of alternatives according to their costs and benefits when
Few existing cost-benefit analyses of criminal penalties There is a large gulf that exists between showing that criminal and civil penalties deter crime and what needs to be done in conducting a cost-benefit analysis. –Obviously if there are costly penalties that don’t deter crime, the cost-benefit
