13-02-2013, 03:36 PM
BENEFIT OF COST ANALYSIS AND COST EFFECTIVE ANALYSIS IN ENVIRONMENTAL PROJECT
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INTRODUCTION
In project appraisal, information is also required on the appraisal of the environmental impact. Cases such as the construction of motorways, commercial sea ports, plants for eliminating toxic or dangerous waste, integrated chemical plants and other plants or other works have a strong impact on the environment.In the context of major projects appraisal, the environmental impact should be properly described and appraised, possibly with recourse to state of the art qualitative-quantitative methods. Economic analysis is often useful in this framework (Anonymus,1991).
Economic analysis is a critical element of the planning process, although it is but one of many important elements. The objective of economic analysis is to determine that a project represents the best use of resources over the analysis period (that is, the project is economically justified).
Economic analysis play an important role in evaluation of Environment, Social equity and in Economic and financial evaluation.There are three common economic analysis methods, These are cost-effectiveness, benefit-cost, and economic impact analyses. The use of one or more of these methods will depend upon the scope and objectives of the analysis as well as the available data (Schwarzenegger 2008).
Cost-effectiveness analysis focuses upon costs of achieving or exceeding an objective that can be expressed in specific, non-monetary terms (acre-feet, milligrams per liter, habitat units, etc.). For example, if the objective of the project is to deliver x acre-feet of water to a service area per year, then a cost-effectiveness analysis would compare the costs of alternative plans that meet or exceed that objective. Other things being equal, the plan that delivers the specified water quantities at the least cost would be the preferred plan. Although benefit-cost analysis is the primary method used to economically justify a project (as described below), cost-effectiveness analysis can often provide additional information that can serve as a “reality check” for the benefit-cost analysis (for example, Does it make sense?) and has implications for the financial analysis (for example, Can the community really afford the project?). Cost-effectiveness analysis is particularly important when the objective cannot be expressed in monetary terms and therefore cannot be included in a traditional benefit-cost analysis.The costs usually included in a cost-effectiveness analysis are capital and annual operation, maintenance, and replacement. Capital costs refer to the construction or “first costs” of the project, whereas the other costs are annual costs incurred to keep the project operational. If there are other costs imposed upon others as a result of project operations (externalities), then these should be included as well if they can be monetized.
Benefit-cost analysis is the procedure where the different benefits and costs of proposed projects are identified and measured (usually in monetary terms) and then compared with each other to determine if the benefits of the project exceed its costs. Benefit-cost analysis is the primary method used to determine if a project is economically justified (Kuik, 2003)
Benefits are the values of goods and services produced by the project and by activities stemming from or induced by the project. Benefits play a critical role in determining the economic justification of a project and in allocating costs among different project purposes and sponsors. There are many different types of benefits, some more easily measured than others, that can complicate a benefit-cost analysis .These are Primary benefits ,Secondary benefits , Tangible benefits ,Intangible benefit ,Private benefits and Public benefits.There are certain types of cost.i.e Capital cost ,Operation , maintenance, replacement cost and Externalities. (Schwarzenegger 2008).
Background:
The idea of CBA originated with Jules Dupuit, a French engineer whose 1848 article is still worth reading. The British economist, Alfred Marshall, formulated some of the formal concepts that are at the foundation of CBA. But the practical development of CBA came as a result of the impetus provided by the Federal Navigation Act of 1936. This act required that the U.S. Corps of Engineers carry out projects for the improvement of the waterway system when the total benefits of a project to whom soever they accrue exceed the costs of that project. Thus, the Corps of Engineers had created systematic methods for measuring such benefits and costs. (Delia, 2006)
Expressed Willingness to Pay:
Many resources (including water) are not traded in markets and are not closely related to any marketed goods. Thus, people cannot “reveal” what they are willing to pay for them through their market purchases or actions. In these cases, surveys can be used to ask people directly what they are willing to pay based on a hypothetical scenario (contingent valuation) or what they would be willing to accept in compensation if an amenity were to be taken away. Alternatively, people can be asked to make trade-offs among different alternatives, from which their willingness to pay can be estimated (contingent choice).
Benefit Transfers:
The benefit transfer method does not specifically measure benefits of proposed projects. Instead, this method is used to transfer values developed by other studies for similar projects to the project currently being evaluated. For example, values for recreational fishing at a particular site may be estimated by applying measures of recreational fishing values from a study conducted at another site. Thus, the basic goal of benefit transfer is to estimate benefits for one context by adapting an estimate of benefits from some other context. Benefit transfer is often used when it is too expensive or there is too little time available to conduct an original valuation study, yet some measure of benefits is needed. The benefit transfer method is most reliable when the original site and the current study site are similar in terms of factors such as, quality, location, and population characteristics; when the environmental change is very similar for the two sites; and when the original valuation study was carefully conducted and used sound valuation techniques