A Cost Benefit Analysis (CBA) is an assessment of all the costs and benefits of alternative options to evaluate if the benefits outweigh costs. CBA seeks to value the expected performance of an option (i.e. scenario) in monetary terms. These valuations are based on a well-developed economic theory of valuation. This theory can act as a guide to how valuation should be achieved, and as a referee in disputes about valuation. The valuations are based on the willingness to pay of the potential gainers for the benefits they will receive as a result of the option, and the willingness of potential losers to accept compensation for the losses they will incur. In principle, a project is desirable if the benefits exceed the losses (costs), suitably discounted over time.

 

All cost-benefit studies entail elements which are identified as relevant impacts, but which are not valued. In some circumstances they may be regarded as relatively minor, and so will be listed in the CBA report alongside the overall estimates of those net social benefits which can be valued. They may reinforce the choice ordering implied by the monetary results, or they may not be regarded as sufficient to change this ordering, or sometimes, where the difference between alternatives implied by monetary valuations is small, they may tip the balance.

 

The CBA process

In General, The following steps are carried out to undertake a CBA:

1. Financial experts provide discount rates, external costs/benefits/funding data

2. Experts calculate expected benefits (and sometimes costs) using models

3. CBAs are created for different scenarios

4. Sensitivity of CBA results with respect to discount rates is assessed

5. CBA results from different scenarios are compared

6. Financially most viable scenario(s) (not necessarily profitable) is(are) identified

 

The process is not linear as the decision taken in step 6 may entail going back to step 2 to study more scenarios.

 

step 1 is assumed to be carried out in meeting and workshops involving experts and stakeholders without needing the DSS. Steps from 2-6 are carried out with the help of the DSS and modeling tools as follows:

 

1. Create Models

2. Define Scenarios for the Models

3. Define Indicators for model outputs

4. Run (at least one) simulation per scenario

5. Review the evaluated Indicators

6. Create a CBA Setup

7. Create one or more CBA Sessions