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Methods
Cost-Benefit AnalysisCost-Benefit Analysis
The Cost-Benefit Analysis (CBA) is characterized by the fact that alongside financial returns, it simultaneously seeks to assess the most significant quantitative and qualitative aspects of the economic-social impact and to attribute monetary value to such aspects. To attribute monetary value to cost-benefit analysis, various methods, such as willingness-to-pay, WTP or long-run marginal cost (LRMC), are applied.
The European Commission's guideline provides the following cost-benefit analysis definition: it is a conceptual methodology used for systematic quantitative evaluation of a public or private project to determine if and what value the project has from a social perspective. Cost-benefit analysis differs from the simple financial evaluation in that it takes into account all the benefits and losses (costs) incurred by social agents. Cost-benefit analysis generally uses accounting prices (i.e., alternative costs for goods, which sometimes are different from actual market prices or regulated rates).
The EC CBA guidelines emphasize that cost-benefit analysis works as an appropriate method in making competent decisions. By using the cost-benefit analysis method, a project's contribution to the welfare of a region or a country can be measured as well as the contribution of an investment project to theobjectives of the EU Cohesion Policy can be assessed
The social and economic impacts of investments are valued by economic analysis, which is carried out from the perspective of the whole society. EK CBA guidelines suggest a general equilibrium methodology and distinguish five steps in economic analysis: conversion of market prices to accounting prices, non-market type monetary impact, the inclusion of additional indirect effects (if any) in the assessment, estimated cost and benefit discounting, calculation of economic performance indicators
Examples
Methodology for Cost-Benefit Analysis
EK CBA guidelines provide methodological guidance on project evaluations in individual sectors, as well as case studies showing the use of conversion factors and estimates of economic and social impacts. However, the above mentioned EC CBA guidelines do not provide economic and social estimates that could be directly applicable to Lithuania.
Therefore, BGI Consulting, in cooperation with EC CBA guidelines, by request of CSIL Milano and Ministry of Finance of
Republic of Lithuania, has developed a methodology and a model for assessing the socio-economic impact of investments financed by the European Union Structural Funds and the Lithuanian national budget. This methodology includes 13 public policy sectors and provides a list of cost-benefit components for investments in these sectors, unit value estimates for components (in euros), as well as instructions for applying estimates.
Methodology for CBA in Culture Projects
Since the above-mentioned methodology for 13 public policy sectors did not cover the field of Culture, BGI Consulting has carried out a “Methodology for determining the socio-economic impact (benefits / damage) of components of cultural investment, and for calculating and applying component”.
This methodology provides estimates of the components of benefits to the field of Culture. Applying these estimates, we created the preconditions for identifying the (optimal) alternative that most contributes to the welfare of society.
Ex-ante Application of Cost-Benefit Analysis
In numerous investment projects, an application for project financing is accompanied by a cost-benefit analysis. This is referred to as the results of an advance cost-benefit analysis, which is based on the assumptions that will not necessarily be true.
Despite the fact that the results of the cost-benefit analysis are partly based on assumptions, it is still the most reliable method for assessing whether the proposed investment project will benefit the public.
Ex-post Application of Cost-Benefit Analysis
A follow-up (ex post) cost-benefit analysis is carried out to determine if the assumptions for early cost-benefit analysis have been proven. It includes more realistic (or socio-economic) calculations based on the latest available data. The subsequent cost-benefit analysis method is regarded as valuable by the European Commission, which has commissioned several studies to find out the socio-economic impacts of projects implemented in the Member States.
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