Page 61 - DLIS104_MANAGEMENT OF LIBRARIES AND INFORMATION CENTRES

Management of Libraries and Information Centres

Notes The concept of CBA dates back to an 1848 article by Jules Dupuit and was formalized in subsequent
works by Alfred Marshall. The practical application of CBA was initiated in the US by the Corps of
Engineers, after the Federal Navigation Act of 1936 effectively required cost benefit analysis for
proposed federal waterway infrastructure. The Flood Control Act of 1939 was instrumental in
establishing CBA as federal policy. It specified the standard that “the benefits to whomever they
accrue in excess of the estimated costs. Subsequently, cost benefit techniques were applied to the
development of highway and motorway investments in the US and UK in the 1950s and 1960s. An
early and often-quoted, more developed application of the technique was made to London
Underground’s Victoria Line. Over the last 40 years, cost-benefit techniques have gradually
developed to the extent that substantial guidance now exists on how transport projects should be
appraised in many countries around the world.
In the UK, the New Approach to Appraisal (NATA) was introduced by the then Department for
Transport, Environment and the Regions. This brought together cost benefit results with those
from detailed environmental impact assessments and presented them in a balanced way. NATA
was first applied to national road schemes in the 1998 Roads Review but subsequently rolled out
to all modes of transport. It is now a cornerstone of transport appraisal in the UK and is maintained
and developed by the Department for Transport. The EU’s ‘Developing Harmonized European
Approaches for Transport Costing and Project Assessment’ (HEATCO) project, part of its Sixth
Framework Programme, has reviewed transport appraisal guidance across EU member states and
found that significant differences exist between countries. HEATCO’s aim is to develop guidelines
to harmonies transport appraisal practice across the EU.
Transport Canada has also promoted the use of CBA for major transport investments since the
issuance of its Guidebook in 1994. More recent guidance has been provided by the United States
Department of Transportation and several state transportation departments, with discussion of
available software tools for application of CBA in transportation, including HERS, BCA.Net, Stat
Ben Cost, Cal-BC, and TREDIS. Available guides are provided by the Federal Highway
Administration, Federal Aviation Administration, Minnesota Department of Transportation,
California Department of Transportation (Caltrans), and the Transportation Research Board
Transportation Economics Committee. In the early 1960s, CBA was also extended to assessment of
the relative benefits and costs of healthcare and education in works by Burton Weisbrod. Later, the
United States Department of Health and Human Services issued its CBA Guidebook.

Task Compare Cost Effectiveness Analysis and Cost Beneficial Analysis.

Accuracy problems

The accuracy of the outcome of a cost benefit analysis depends on how accurately costs and benefits
have been estimated. A peer-reviewed study of the accuracy of cost estimates in transportation
infrastructure planning found that for rail projects actual costs turned out to be on average 44.7
percent higher than estimated costs, and for roads 20.4 percent higher. For benefits, another peer-
reviewed study found that actual rail ridership was on average 51.4 percent lower than estimated
ridership; for roads it was found that for half of all projects estimated traffic was wrong by more
than 20 percent. Comparative studies indicate that similar inaccuracies apply to fields other than
transportation. These studies indicate that the outcomes of cost benefit analyses should be treated
with caution because they may be highly inaccurate. Inaccurate cost benefit analyses likely to lead
to inefficient decisions, as defined by Pareto and Kaldor-Hicks efficiency. These outcomes are to be
expected because such estimates:
1. Rely heavily on past like projects.
2. Rely heavily on the project’s members to identify the significant cost drivers.
3. Rely on very crude heuristics to estimate the money cost of the intangible elements.
4. Are unable to completely dispel the usually unconscious biases of the team members and
the natural psychological tendency to “think positive”.
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