The history of plan evaluation started in the
19th century when French economist Dupuis articulated the benefit
cost analysis in 1844. Earlier the technique was first applied in large scale
public engineering projects funded under the US flood control act. From there
on, public investment analysis methods were widely used to evaluate public
projects and plans based on this technique of evaluation only. During 1960’s as
environmental awareness came into public projects and technological
advancements came in fields of transport and healthcare, this technique also
undergone many developments.
The theoretical foundation of Cost benefit
Analysis (CBA) is that the benefits are defined as increase in human well-being
(utility) and costs are defined as reductions in human well being. So, as per
Kavi K.S., theoretically, CBA has three stages –
1 In the
first stage, all potential costs that will be incurred by implementing a
proposed project must be identified.
2 In the second stage, all anticipated
benefits are recorded.
3 And in
the third stage, costs are subtracted from the benefits to determine the
positive benefits that outweigh the negative impacts or vice versa.
technical terms it can be said that:-
defining the project/ policy, the analyst has to recognize whose welfare
the implications of the outcomes e.g. in case of a dam, amount of
electricity generated etc.
the impact of a specific action in terms of its marginal social cost or
the discounting of costs and benefits- a cost is considered less
detrimental, the further way in time it is incurred. Similarly discounting
of benefits is done. This simply means to translate future costs and
benefits into present values.
next step in CBA is to calculate Net Present Value (NPV). NPV equals the
of the benefits in present value minus the sum of the costs in the present
value. The project should be accepted if NPV>0.
last step of CBA is to apply sensitivity analysis, which means
the NPV when the values of certain key parameters are
changed. Since there is uncertainty in CBA it is important to know for which
parameter the NPV is more sensitive.