3 Critical Questions on Cost-Benefit Analysis

3 huhti 2017
Milos Mladenovic
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Cost-benefit analysis (CBA) is a core practice in international transport planning, primarily used for ex ante project appraisal. In the Finnish context, CBA is part of the larger framework for transport project appraisal, the so-called YHTALI-framework, which includes other elements, such as environmental impact assessment.

As an economic method, CBA has its advantages in measuring the economic aspects of infrastructural alternatives. A particular importance stems from the common sense principle that we should take actions only when their benefits exceed their costs, as reality of decision-making is always situated in a context of constrained monetary resources. Moreover, there is a certain usefulness in using monetary values as a common reference point, especially for comparison between different projects.

Despite its dominance in transport planning practice, CBA has been extensively critiqued from a range of different aspects. For example, one of the recognized issues is “double-counting”, as there is a possibility that certain impacts are included two or even three times in an appraisal. Moreover, just as any other analytical tool, CBA can suffer from a range of other issues, such as incorrect input parameters or lack of transparency in analytical processes.

However, besides these issues, I would highlight three critical questions that arise from using CBA in transport planning.

The first question is – can we use CBA to decide about, often non-quantifiable, quality of life parameters? For answering this question, we have to recognize that measuring quality of life is intrinsically difficult to quantify, especially in terms of monetary effects. Even if this issue is addressed by using qualitative approaches, we run into the so called ‘horse and rabbit stew’ problem, where if you take one horse and one rabbit, no matter how you combine them the taste of the horse dominates the stew. Similarly, quantitative impacts may end up dominating the decision-making procedure.

The second critical question is – can we use CBA in decisions with high level of uncertainty? Nowadays, it is more difficult than ever to think about possible and desirable futures, due to the increasing complexity of our infrastructural systems. This uncertainty about the future is even more prominent when we start facing decisions regarding emerging technologies, such as self-driving vehicles or Mobility-as-a-Service. The difficulty in using CBA in such decision-making scenarios is in the fact that the disruption from these technologies does not solely pertain to the transport sector bur rather to the whole society.   

The third, and certainly not the last, critical question on CBA is – are decisions based on CBA ethical? CBA has often been critiqued for its utilitarian perspective, as the procedure is primarily concerned with maximizing (or minimizing) the net benefits (or costs). Despite the importance of net effects, by subscribing to this narrow conception of social justice, CBA neglects the explicit distribution of costs and benefits across particular segments of society, thus often neglecting the least-advantaged.

In order to avoid solely facing questions in this brief reflection, one should note that extensive efforts have been spent on developing alternative appraisal approaches, such as multi-criteria analysis (MCA). Moreover, there are even composite frameworks combining CBA and MCA, thus opening opportunities for public participation. However, as the time of easy decisions is behind us (or perhaps has never been there), sustainable, strategic, and integrative planning will have to be cautious about CBA (over)application, while continuing to seek improvements in decision-support methods.


Further reading:
Barfod, M. B., & Salling, K. B. (2015). A new composite decision support framework for strategic and sustainable transport appraisals. Transportation research part A: policy and practice, 72, 1-15.
Martens, K. (2011). Substance precedes methodology: on cost–benefit analysis and equity. Transportation, 38(6), 959.
Mladenovic, M. N., Mangaroska, K., & Abbas, M. M. (2017). Decision Support System for Planning Traffic Operations Assets. ASCE Journal of Infrastructure Systems, 05017001.
Næss, P. (2006). Cost-benefit analyses of transportation investments: neither critical nor realistic. Journal of critical realism, 5(1), 32-60.
van Wee, B. (2012). How suitable is CBA for the ex-ante evaluation of transport projects and policies? A discussion from the perspective of ethics. Transport Policy, 19(1), 1-7.

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