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Care
must be taken while carrying out CBA, the things which are not directly
comparable, those must be added. For example, Aggregation over goods- To
compare costs which are in one form and the benefits which are in another form.
As in this case the costs are in the form of concrete and the benefits are in
the form of electricity generated. Similarly, aggregation over time,
aggregation over people etc. are also to be taken care of.

Another
dimension which is to be mentioned in CBA is willingness to pay (WTP) and
willingness to accept (WTA). Traditionally, only WTP was focused upon, but in
present scenario WTA has also to be taken care of, which means how many people
are willing to accept the change occurred by a particular project.

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   There are some variants of the approach and
they are applied depending upon the conditions of the policy/program to be
evaluated. These variants are:-

·          
Cost
effectiveness analysis

Cost
effectiveness analysis is appropriate when a fixed amount of investment funds
have been allocated to an agency or project and the best way of using the total
budget allocation is to be determined.

·          
Cost
minimization analysis

Cost
minimization analysis is appropriate in funding the least cost way of
undertaking a particular project (such as different ways of producing a given
output of electricity or catering for a given volume of airport traffic), where
the same benefits are assumed to result in each case.

A
great evaluator/ planner Nathaniel Lichfield analyzed planned development
practice in UK and later the technique was named as Social Cost Benefit
Analysis (SCBA) because in every public project there was social worth of the
projects, particularly those projects which involved the commitment of
resources.

For
evaluation projects, there is a need to form some sort of rules which make the
project desirable or undesirable. These rules are:

Pareto
criteria- if at least one person is benefitted while hurting no one, then
the project satisfies Pareto criteria, but this situation is difficult to
attain as the project virtually affect some or other adversely.
Social
welfare criteria- If the benefits coming out of a project are multiplied
by individual’s marginal social significance and the sum comes out to be
positive then the project is considered desirable.
Potential
compensation criteria- According to this a project is desirable if the sum
of the rupee value of net benefits to the gainers and losers is positive.
Or in other words it can be said that whether the net gainers are
compensating the losers so as to make them well off.

These
rules can be best understood with the help of an illustration given below:

Table 2.2 : Project evaluation criteria

Person

SMUY

Net
benefits

SMUY
x Net benefits

1

0.8

+250

+200

2

1.2

-200

-240

Total

 

+50

-40

Note: SMUY – social marginal utility of
income (weight attached to each individual in the society)

Source: Kavi K.S. (Dissemination paper on
Cost Benefit Analysis and Environment)

 

Traditionally
CBA focused on efficiency issues and desirable projects were identified on the
basis of Potential compensation criteria only, whereas equity and
distributional aspects were ignored and hence the technique attracted
criticism. In the field of environment, the criticism gained more momentum as
separation of efficiency and equity was very difficult. So, to improve the
method, it was suggested to use some variant of social welfare criteria to
assess the desirability of projects. This simply means that the analyst has to
identify appropriate equity weights that will be applicable for the project.
Now the debate arises about the weighing problem. Many authors argue that
although equity weighing could make a significant difference to CBA analysis-
the range of values these weights could take makes its usage impractical.     

Now,
let us see its development in different countries as the time progressed. In
India, word evaluation is related to benefit cost analysis to a layman and the
method is used by practitioners with some modifications and improvements.
Similarly American countries are also still using the same technique for plan
evaluation. Although from time to time amendments were added, but in literature
no signs of further developments as per the nomenclature of technique are
there. But in United kingdom, the technique was criticized by Nathaniel
Lichfield due to difficulty in measurement and discounting period for public
projects. The other main issue was that it is very difficult to assess each
project’s benefits and costs in monetary units. So, to assess the impacts of
various public projects, he developed a technique named as Planning Balance
Sheet Analysis taking Cost benefit analysis as a base of his technique.

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