12. Adjusted cost-benefit analysis

Steps

12.1 Determine whether an adjusted CBA is required.

12.2 Determine which adjustments to make.

12.3 Replace values for certain parameters with nominated values.

12.4 Multiply specified benefits or costs by a weighting factor >1 to give the benefit or cost greater weight and <1 for less weight

12.5 Insert subjectively determined monetary values for particular non-monetised benefits or costs.

12.6 Make percentage estimates of how the benefits are distributed among nominated groups.

12.7 Calculate the distributional multiplier and adjust the benefits accordingly.

12.8 Calculate adjusted NPV and BCR and report results.

12.1 Determine whether an adjusted CBA is required

The ATAP Guidelines provide an optional appraisal technique, adjusted CBA, for jurisdictions to use where they consider it appropriate.

CBA aims to maximise the economic efficiency objective. It recognises a number of other objectives such as safety and environment, but only as far as they are consistent with economic efficiency. Equity is not taken into account at all. The adjusted CBA methodology is a formal way to re-weight or incorporate non-efficiency objectives.

Adjusted CBA is a hybrid of multi-criteria analysis and CBA, retaining the monetary measuring rod of CBA. Adjusted CBA is not an essential component of the methodology established by the Guidelines, but it is included as an option. The decision to use adjusted CBA should be made by the government agency responsible for developing the investment program, not by proponents of initiatives.

All initiatives being compared must be subjected to the same adjustments. Therefore, it is the agency’s responsibility to decide which adjustments should be made and to decide the weights. Any subjectively determined monetary values for impacts omitted from a CBA because they cannot be valued in dollar terms should be agreed between the government agency and a proponent after gaining a good understanding of the impact through consultation and expert opinion.

The government agency may decide to make the adjusted CBA assessment purely an internal process. Alternatively, it could provide the weights to proponents of initiatives and let them undertake the task.

12.2 Determine which adjustments to make

Adjustments will fall into one or more of the categories set out in Sections 13.3 to 13.6.

12.3 Replace values for certain parameters with nominated values

Some market-based parameter values might be replaced with nominated values (such as a lower or zero value of time for non-work travel, higher unit costs for crashes). The government agency to which the proposal is submitted will supply the adjusted parameter values.

12.4 Multiply specified benefits or costs by a weighting factor >1 to give the benefit or cost greater weight and <1 for less weight

Multiply some benefits and costs by weights (such as 2.0 for crash costs, 1.5 for cost savings for freight transport or environmental benefits and costs). The government agency to which the proposal is submitted will supply the weighting factors.

12.5 Insert subjectively determined monetary values for particular non- monetised benefits or costs

Subjectively determined money amounts may be set for one-off, non-monetised benefits or costs such as aesthetic impacts or effects on flora or fauna. Consult with the government agency to which the proposal is submitted to agree on the values. Obtain a thorough understanding of the impacts through consultation with other stakeholders and experts.

12.6 Make percentage estimates of how the benefits are distributed among nominated groups

When considering equity implications, it can be difficult to estimate how the benefits and costs of initiatives are distributed. The ATAP Guidelines propose a simple and practical approach. A small number of groups of people within society can be identified and judgments made about the percentage of benefits that accrue to each group. Distribution of investment costs and infrastructure operating costs are ignored in this simple approach, because investment costs are paid for by governments and private investors and infrastructure operating costs are usually small in comparison to benefits.

The government should assign a weight to each identified group. The weight is multiplied by the proportion of benefits received and the results summed to arrive at a distributional multiplier. Total benefits from the initiative are multiplied by the distributional multiplier. The multiplier will be greater than one for initiatives with favourable distributional effects, and less than one for initiatives with unfavourable distributional effects. A simple numerical example is provided the next section.

If the funding agency decides to use a distributional multiplier, the first step is to estimate how the benefits are likely to be distributed among the nominated groups. Estimate the percentage of total benefits accruing to each group. Note that benefits can accrue well outside the geographical area of the initiative. The origins and destinations and composition of people or freight benefiting from a transport improvement could be important indicators of how benefits are distributed. Because of the difficulty in forecasting distributional impacts of initiatives, the estimation process will inevitably involve judgement, more so in the rapid adjusted CBA stage. Consult with the funding agency about the calculations and judgements made in estimating distributions of benefits. See Part T5 Distributional (Equity) Impacts of the ATAP Guidelines.

12.7 Calculate the distributional multiplier and adjust the benefits accordingly

Obtain from the funding agency the weights to be used for the nominated groups. For each group, multiply the weight by the estimated proportion of benefits accruing to the group, and sum the results. This is the distributional multiplier. See Box 13 for a simple worked example. Note that the distributional multiplier is applied to benefits only, not to benefits less infrastructure operating costs.

Box 13: Numerical example showing calculation of distributional multiplier for an adjusted CBA

In this example, benefits are split three ways. The distributional multiplier is 1.1.

 Share of benefitsWeightShare × weight
Metropolitan 30 0.5 0.15
Regional 50 1.5 0.75
National 20 1.0 0.2
Total 100   1.1

12.8 Calculate adjusted NPV and BCR and report results

Having adjusted individual benefits and costs according to Sections 12.3 and 12.4, sum the benefits less operating costs for each year, including any subjectively determined money values under Section 12.5. Do the same for investment costs. Multiply the benefits by the distributional multiplier if applicable (if the steps in Sections 12.6 and 12.7 were performed).

Finally, calculate the adjusted NPV and BCR.

Adjusted net present values (NPV) can be used to compare options as wells to rank initiatives.

Adjusted BCRs can produce an alternative set of initiative rankings that could be useful in choosing between initiatives in order to develop a program.

A criticism of adjusted CBA is that it ‘distorts’ the results of CBAs in such a way that it can favour less economically efficient initiatives over more efficient initiatives. As a safeguard, the Guidelines recommend that adjusted CBA results never be reported separately from the results of the corresponding unadjusted CBA.