“Cost & Benefit Analysis in Public Policy”

Submitted by:
Umar Javed
(F2022122006)
Zuhair Akram
(F2022122007)
Shumaila
(S2024488002)
Fizza Bhatti
(S2024488003)
Saba Razzaq
(F2022122028)
M Talha Sami
(F2022122020)
Submitted to: Ma’am Zerish Tasleem
 Table of Content
Executive Summary
1) Introduction 04
2) Importance of CBA in Public Policy 04
3) Steps in Cost and Benefit Analysis 06
4) Benefit-Cost Ratio 09
5) Case Study 09
6) Limitation to CBA 10
7) Conclusion 11
8) References 12
 Executive Summary:

Cost-Benefit Analysis (CBA) plays an important role in public policy by helping in

making informed decision-making, ensuring transparency and accountability,
enabling efficient resource allocation, and aiding in prioritization. It is a systematic
approach that evaluates the costs and benefits of policy options, allowing
policymakers to maximize net benefits for the welfare of society.
The CBA process involves five key steps: defining project scope, estimating costs,
determining benefits, performing analysis calculations, and comparing alternatives
to make recommendations. The Benefit-Cost Ratio (BCR) serves as a critical
indicator that shows policy or project viability, with values above one indicating
positive returns and value below one suggesting it is not beneficial.
Case studies such as the High Speed 2 (HS2) railway project in the UK
and the Three Gorges Dam project in China demonstrate the application and
outcomes of CBA by showing their Benefit Cost Ratio. However, CBA is not
without limitations, including subjectivity, uncertainty regarding future outcomes,
susceptibility to political influence, and complexity in data requirements. Despite
these limitations, CBA remains an essential tool for evidence-based policymaking,
that by improving societal welfare through rigorous analysis of costs and benefits.
 1) Introduction:
Cost-Benefit Analysis (CBA) is a process that involves the
comparison of the costs and benefits of an intervention, where both costs and
benefits are expressed in monetary units. It is used by governments to make and
evaluate public policy through the quantification of consequences. Cost and
Benefit Analysis (CBA) is a method used in public policy for assessing the
economic efficiency of proposed public policies through the systematic prediction
of social costs and social benefits. (Sonali Goel, 2022)
It involves comparing the total expected costs of implementing a particular course
of action with the total expected benefits it is likely to generate. The goal of CBA
is to determine whether the benefits outweigh the costs, allowing decision-makers
to make informed choices about resource allocation and policy formulation.
This report covers why costs and benefit analysis is important in public policy and
it also signifies the limitation of Cost and Benefit analysis.

2) Importance of Cost and benefit Analysis in Public Policy:

Public Policy is defined as the rules, regulations, principles,

framework, guideline or agreement made for the welfare and development of public.
On the other hand, Cost & Benefit Analysis is a process that involves using
measurable financial metrics such as “revenue earned or costs saved” as a result of
the decision to pursue a project or a certain policy. It also includes what kinds of
intangible benefits and costs or effects people get from a given policy or decision.
(Hayes, 2024)
It helps in public policy by providing the following:
1. Informed Decision-Making:
Informed decision making is one of the important aspect of Cost-
Benefit Analysis (CBA) in public policy. It involves using a systematic and
structured approach to evaluate the available policy options, considering both the
costs and benefits of each option, and selecting the best option that maximizes net
benefits.
 CBA helps in getting to informed decision making for the policymakers by ensuring
that:
 Policy decisions are based on evidence and data, and are not based on intuition
or political pressure.
 All relevant costs and benefits are considered, including both tangible and
intangible impacts.
 Policy options are evaluated systematically and comprehensively.
 The most efficient and effective policy option is selected, based on the
maximization of net benefits.
 Stakeholders are engaged and their perspectives are considered.
 The decision-making process is transparent and accountable.
Informed decision making through CBA enables policymakers to make better
decisions for the welfare of the people by providing a systematic and evidence-based
approach to evaluating policy options.

2. Transparency and Accountability:

Transparency and accountability is another critical components of Cost-Benefit
Analysis (CBA) in public policy, ensuring that the decision-making process is open,
clear, and responsible.
By using CBA policymakers can ensure transparency and accountability by:
 Building trust with stakeholders and the public
 Demonstrating responsible use of resources
 Encouraging participation and engagement
 Enhancing the credibility of policy decisions
 Facilitating learning and improvement By ensuring transparency and
accountability in CBA
3. Efficient Resource Allocation:
Efficient resource allocation is another crucial aspect of Cost-Benefit Analysis
(CBA) in public policy. It includes identifying the most effective and efficient way
to allocate resources to achieve policy objectives.
By achieving efficient resource allocation, CBA enables policymakers:
 Maximize the impact of limited resources
  Achieve policy objectives effectively
 Reduce waste and inefficiencies
 Promote economic efficiency and growth
 Make informed decisions about resource allocation
CBA ensures that resources are used optimally to achieve policy objectives,
maximizing returns on investment and promoting economic efficiency.
4. Prioritization:
Prioritization in Cost-Benefit Analysis (CBA) of public policy is the process that
involves ranking the available policy options or projects based on their expected net
benefits to allocate limited resources effectively. This involves:
• Identifying Policy Options: In this step, CBA identifies various policy
options or projects that address a specific policy problem or objective.
• Evaluating Costs and Benefits: In this step, CBA evaluates the costs and
benefits of each policy option, using monetary values to compare them.
• Calculating Net Benefits: In this step, CBA calculates the net benefits of each
policy option by subtracting costs from benefits.
• Ranking Policy Options: In this step, CBA ranks policy options based on
their expected net benefits, from highest to lowest.
• Prioritizing Policy Options: In this step, CBA prioritizes based on their
ranking etc.

3) Steps in Costs and Benefit Analysis

There are 5 steps in Cost & Benefits Analysis that form the foundational framework
for every analysis that are as following: (Simonson, 2024)

Step 1: Identify Project Scope:

The first step of CBA is clearly defining the scope of the project.
Outline the objectives, the timeline, deadlines and the specific activities involved.
Understanding the full scope of the project helps in understanding that all relevant
costs and benefits are considered in the analysis.

Step 2: Estimate Costs:

 Second step is to assess all the expenses related to the project.
These costs go beyond simply the cost of the project. When accurately estimating
the cost, be sure to include:

 Direct Costs: These are the expenses or costs that are directly tied to the
project or decision such as labor cost, materials cost and equipment cost.
For Example: purchasing new machinery for a manufacturing project would
be a direct cost.

 Indirect Costs: These are the Expenses or costs that are not directly linked
to the project but are linked indirectly to the project but they are necessary
for its operation such as overhead costs, administrative expenses or
transportation fees. For Example: the rent associated with expanding a
business into a new location would be an indirect cost.

 Intangible Costs: These are non-monetary factors or costs that influence

and affect the project such as impact on brand reputation, employee morale
or customer satisfaction i.e. these costs deal with the emotional aspect of the
project. For Example: an intangible cost is a decrease in employee morale
due to increased workload of a new project.

 Opportunity Costs: These costs are the result of benefits or lost by

choosing one option over another like the potential income from an
alternative investment. For Example: losing potential market growth could
be an opportunity cost when choosing to invest in new software
development instead of market expansion.

 Costs of Potential Risks: This is a type of costs that involves quantifying

the potential negative impacts or losses associated with risks of the project.
For Example: the potential loss in customer loyalty when launching a new
product that risks alienating existing customers is a cost of potential risk.

Step 3: Determine Benefits

In this step, we have to identify the expected benefits of the project. There are two
benefits to every project:
 Direct Benefit: A direct benefit that is a primary benefit from the project that has
measurable advantages resulting directly from a project or decision. For Example:
if a company invests in energy-efficient machinery, the direct benefit would be the
reduction in energy costs.

 Indirect Benefit: An indirect benefit is an advantage that is not directly

measurable or immediately linked to the project, but occurs as a secondary effect.
For Example: the enhanced company reputation due to adopting environmentally
friendly practices. The enhanced company reputation could result in increased
customer loyalty and brand value.

Step 4: Compute Analysis Calculations

In this step, perform the calculations that analyze the costs versus the benefits. This
step usually involves mathematical calculation and finding the net present value
(NPV), return on investment (ROI) or internal rate of return (IRR).

Formula to calculate Net Present Value (NPV):

𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘
𝑷𝑽 =
( 𝟏 + 𝒓 )𝒏

Formula to calculate Return on Investment (ROI):

𝑵𝒆𝒕 𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕

𝑹𝑶𝑰 = × 𝟏𝟎𝟎%
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕

Formula to calculate internal rate of return (IRR):

𝑻
𝑵𝒆𝒕 𝑪𝒂𝒔𝒉 𝑰𝒏𝒇𝒍𝒐𝒘 𝒅𝒖𝒓𝒊𝒏𝒈 𝑷𝒆𝒓𝒊𝒐𝒅 𝒕
𝟎 = 𝑵𝑷𝑽 = ∑
(𝟏 + 𝑰𝑹𝑹)𝒕
𝒕=𝟏
− 𝑻𝒐𝒕𝒂𝒍 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝑪𝒐𝒔𝒕

Step 5: Compare Alternatives and Make a Recommendation

In the last step of CBA, compare the project with other alternatives available. Then
evaluate different scenarios or options you have with their respective cost-benefit
analyses. Finally, make a recommendation based on this comparison that shows
best alignment of the project with your objectives.

4) Benefit-Cost Ratio:
The Benefit-Cost Ratio (BCR) is a ratio that tell us the relationship between
the cost and benefit of project or investment for analysis in the same way as it is
shown by the present value of benefit expected divided by present value of cost
which helps to determine the viability and value that can be derived from
investment or project. (Katara, 2024)

1) If the project has a BCR value that is greater than one, the project can be
expected to return beneficial or deliver a positive NPV
2) If BCR value is less than 1, then the project cost can be expected to higher
than the returns and it is not beneficial and should be discarded.

5) CASE STUDIES:
The following are the few list of case studies that involves use of Cost & Benefit
Analysis in Public Policies. Some of the example are from outside Pakistan and
some are from Pakistan:

1) The High Speed 2 (HS2) railway project in the UK:

• High Speed 2 is a proposed high-speed railway network in England that will

connect London, Birmingham, Manchester, and Leeds, and It will provide
faster and more reliable transport services to the people. The project has
been a high initial cost of about £106 billion, and has been opposed by from
environmental groups and local communities in England. The cost benefit
ratio of the project has been estimated to be ranging from 1.2 to 2.3
(depending on the assumptions and methods used).

• The benefits of the High Speed 2 (HS2) project include reduced travel time
for people, increased capacity of people, lower carbon emissions as train are
electric, and result in regional economic growth. While the costs of the
project include construction, operation, maintenance, land acquisition, and
environmental impacts. But overall Benefits of Projects are more than the
estimated Cost. (Barnes, 2024)
 2) Rawalpindi-Islamabad Metro Bus System:

• This is the Second Mass Transit Project operating in the twin cities
Rawalpindi and Islamabad. This project was completed in 4 Phases and the
total cost of the project was around RS 44.31 Billion. The costs of the
project include construction cost, operation cost, maintenance cost and land
acquisition cost while the benefit of the project include providing
connectivity to people, reducing time travel etc.

• The cost benefit ratio of the project has been around 0.289 which is less than
1 that means the above project was not beneficial for Pakistan and it
produced less revenue and more costs (Saqib, 2022)

3) The Three Gorges Dam project in China:

• This is the world's largest hydroelectric power station, built on the Yangtze
River. The project has been praised in China because of its benefits, such as
generating clean energy, controlling floods water, improving navigation, and
boosting tourism. The project has also faced criticism for its costs, such as
displacing millions of people, destroying cultural heritage, disrupting
ecosystems, and increasing seismic risks of Earthquake.

• The cost benefit ratio of the project has been estimated to be ranging from
0.8 to 1.8 (Depending on the scope and perspective of the analysis) which
shows that it has greater benefits than costs.

6) Limitation of Cost and Benefit Analysis:

Cost and Benefit Analysis has the few limitations as well:

Subjectivity:
When we evaluate a policy using costs and benefits analysis it involves
consideration of only external factors (Objective). It is important to acknowledge
the subjectivity involved in the public policy. Your personal biases and
perspectives also influence the policy and how you perceive and assess the costs
associated with a decision or action. In addition to that, quantifying the benefits
can be challenging as they often involve intangible factors that are difficult to
measure objectively.
Uncertain Future:

CBA involves finding Net Present Value of the Project in future that
relies on predictions about the future that are highly uncertain and unpredictable. It
is very difficult to analyze and find this uncertainty and the associated risks
involves, especially for long-term projects with complex outcomes.

Political Influence:
The results of a CBA can be influenced by and based on political
agendas, biases, and the interests of stakeholders involved in the analysis. This can
lead to cherry-picking of data or assumptions to support preconceived conclusions.

Complexity and Data Requirements:

While conducting a thorough CBA analyst has to deal with large

amount of data which may not always be available or feasible, especially for
smaller projects or in developing countries with limited resources. Similarly to
handle those calculation and data we need experts that are also not available or
feasible all the time.

7) Conclusion:

Cost-Benefit Analysis (CBA) acts as a vital tool for the policymakers. It offers a
systematic approach to evaluating the economic efficiency of public policies.
Through the comparison of costs and benefits, CBA empowers decision-makers to
allocate resources effectively, prioritize projects, and make informed choices for
societal welfare. However, while CBA provides a structured framework, it is not
devoid of limitations. Subjectivity, uncertainty regarding future outcomes, political
influences, and data complexity pose challenges to its application. Nonetheless,
recognizing these limitations allows for the refinement and improvement of CBA
methodologies, ensuring its continued relevance in shaping evidence-based public
policies that maximize societal benefits while minimizing costs. As governments
navigate increasingly complex challenges, the importance of robust cost-benefit
analysis methodologies remains paramount in fostering sustainable development
and equitable progress.
 8) Reference:

Barnes, H. (2024, April 10). Faster Capital. Retrieved from Cost Benefit Analysis: How to
Perform a Cost Benefit Analysis and Make Better Decisions:
[Link]
[Link]#Case-Studies-and-Examples-of-Cost-Benefit-
[Link]
Hayes, A. (2024, Feburary 26). What Is Cost-Benefit Analysis, How Is it Used, What Are its Pros
and Cons? ([Link]). Retrieved from Investopedia:
[Link]
Katara, H. (2024, April 29). Benefit Cost Ratio. Retrieved from wallstreetmojo:
[Link]
Saqib, A. (2022). COST BENEFIT ANALYSIS OF PAKISTAN . Islamabad.
Simonson, J. (2024, February 16). How To Conduct A Cost-Benefit Analysis. Retrieved from
Forbes Advisor: [Link]
Sonali Goel, R. S. (2022). Chapter Ten - Cost-benefit analysis for smart grid resiliency,. In
Chapter Ten - Cost-benefit analysis for smart grid resiliency, Electric Power Systems
Resiliency (pp. 245-259,). Academic Press.