Performing a cost-benefit analysis (CBA) in companies that are in the business of making money is logical. But what about public-sector entities? After all, they're not generating revenues or trying to earn a profit. While public-sector projects obviously incur costs, the concept of monetary benefits is not as clear. Is a CBA even possible?
The answer is yes. In fact, there is a term commonly associated with this kind of analysis: social CBA. A surprising number of approaches have been developed that strive to estimate the monetary benefits associated with projects that address the needs of the public, such as safer highways, protection from epidemic flu, environmental protection and recreational facilities.
First, some critical terminology: In the private sector, a CBA is referred to as a financial analysis, as it compares the cost and benefit effects of a project on a specific company's financial position. But in the public sector, the CBA is referred to as an economic analysis because it typically considers the cost and benefit effects to the larger economy. Benefits accrue to the general population, or sometimes to a particular subset of the population.
VALUING THE BENEFITS OF PUBLIC-SECTOR PROJECTS
The economic benefit of a public-sector project is often established through a well-designed survey process. Individual respondents are asked questions to determine how much value they would place on addressing a given situation. Hypothetical questions are asked as if each individual had to bear the cost burden. Most surveys revolve around one or more of these three variations:
Willingness to Pay (WTP): The amount of money people—as individuals—say they would consider a reasonable cash outlay to achieve some sort of desired outcome, such as cleaner air or a lower disease rate.
Willingness to Spend (WTS): What individuals say is a reasonable personal expenditure for something they would enjoy or appreciate, such as a reduction in traffic congestion or ready access to a high-quality recreational area.
Willingness to Accept (WTA): The amount of money people would want to receive as compensation to endure something bad or to forego a benefit, such as putting up with some level of pollution, or an increased level of personal harm or injury.
FROM URBAN PARKS TO ANTI-SMOKING CAMPAIGNS
Sanjay Gandhi National Park in Mumbai, India, the largest urban national park in the world, provides a good example. In the mid-1990s, its management faced significant financial challenges, and the park's potential as a recreational destination and natural habitat fell into decline. Something had to be done to turn this around—but would the local population consider such an effort economically justified?
In early 1995, a survey-based social CBA revealed how much the residents of Mumbai would be willing to pay to maintain the park and ensure its preservation. This formed the basis for affixing a monetary benefit to an undertaking that would accomplish this.
Another example is soil contamination in the Netherlands. For years, public pressure had been growing around the need to carry out environmental policy in a cost-effective manner. These two issues converged in 2007, when a social CBA was conducted to assess the societal benefits associated with a proposed soil remediation effort. The analysis estimated the economic worth of addressing a broad array of negative impacts due to contaminated soil, including serious health issues, lower real estate values and a less plentiful supply of safe drinking water.
TO LEARN MORE
buzzle.com(Search for “Importance of Social
Cost Benefit Analysis”)
plosmedicine.org(Search for “Economic Appraisal of Ontario's Universal Influenza Immunization Program”)
Cost-Benefit Analysis by Richard Layard and Stephen Glalster
Cost-Benefit Analysis: Economic, Philosophical, and Legal Perspectives by Matthew D. Adler and Eric A. Posner
Cost-Benefit Analysis for Public Sector Decision Makers
by Diana Fugultt and Shanton J. Wilcox
Cost-Benefit Analysis: Theory and Application
by Tevfik F. Nas
Social CBAs are also common in areas such as healthcare and government intervention in public health. Using a social CBA approach in this environment might consist of weighing the cost of implementing an anti-smoking campaign against the potential benefits related to increased life expectancy and lower costs for hospitalization, medication and treatment.
These analyses come with challenges and drawbacks, but they do offer public-sector organizations the opportunity to express project justification in economic terms. In today's environment, that qualifies them as a noble cause—even if they're not perfect.
The current state of development of social CBA methodology is well beyond what most project managers might be aware. If you work on projects in the public sector, or if you work in the private sector and simply wish to expand your horizons as a business-savvy project manager, learning how social CBAs are conducted can be a very enriching experience. PM