I have been doing cost benefit analyses for a few years now. The concept is deceptively simple but provides a solid framework for insightful decision making.
It is a tool used to assess potential costs and benefits of a decision or project, usually in monetary terms. It is commonly used to evaluate the feasibility and potential impact of projects, policies and regulations.
Recently I have been thinking about the usefulness of the approach given that many major project often seem to float past this analysis.
Here are five epiphanies that might help CBA evangelists:
The true value of a decision lies not just in its financial cost and benefit, but also in its impact on people and the environment.
CBA forces us to weigh the pros and cons, but it’s important to remember that some benefits and costs are difficult to quantify and may have long-term effects that are not immediately apparent.
It should not be the sole factor in decision-making, as there may be intangible or ethical considerations that cannot be easily measured in financial terms.
CBA is a useful tool, but it is important to remember that it does not account for future uncertain events. Therefore, it should be used in conjunction with other decision making tools for a comprehensive evaluation.
Cost-benefit analysis can be misleading if it only looks at short-term financial gains and ignores long-term social and environmental costs. A more holistic approach should be used that accounts for all the potential impacts of a decision.
These are just some of the insights about CBA, but there are more that might be organisational or project relevant.
Is CBA a key driver of your organisation’s project appraisal process or just another compliance element in developing business cases?
Last month Lytton Advisory visited Vancouver, the largest city in Western Canada. A coastal city with an extensive natural resources hinterland, it has long been a hub for trade and a gateway for travellers to and from Asia.
Unsurprisingly, linear infrastructure has been been a factor in its progress. The scope of this is shown by key examples such as:
Lions Gate Bridge (picture above): This bridge connects the North Shore of Vancouver with downtown and is a key transportation link for both vehicles and public transit. Without this 1938 link Vancouver would simply not be the city it is today. A shrewd investment by the Guinness family, which speculated on the land on the northern shore before providing the funding. An example of a possible PPP.
SkyTrain: Vancouver’s rapid transit system, which includes the Expo and Millennium Lines, provides residents with fast and reliable transportation to key destinations throughout the city.
Stanley Park Causeway: This roadway provides a direct link between Stanley Park and downtown Vancouver, making it easier for residents and visitors to access the city’s largest park.
Trans Mountain Pipeline: This pipeline carries crude oil and petroleum products from the Alberta oil sands to the West Coast of Canada, where it is then exported to international markets.
Burrard Street Bridge: This bridge is a major transportation link for vehicles and cyclists, connecting downtown Vancouver with the city’s residential neighborhoods to the south.
Stanley Park Seawall: This popular greenway provides a scenic route for cyclists and pedestrians around Stanley Park and is a key feature of the city’s green infrastructure. Highly recommended cycling through an extensive urban park.
These examples are a few of the key linear infrastructure facilities that support the city of Vancouver and contribute to its quality of life and economic growth. The diversity of investment in this kind of infrastructure hints at the different needs to create the kind of distinctive city that is Vancouver.
When Lytton Advisory was in the US last month we visited Boston. Moving around the old parts of the city, a number of infrastructure challenges were evident.
Boston’s infrastructure is aging, with many of its roads, bridges, and transit systems in need of repairs and upgrades. This can lead to increased maintenance costs and disruptions to transportation and other services, which can impact the city’s economic competitiveness.
A significant part of the old city is on reclaimed land. The city is practically the Venice of the US. It is vulnerable to the impacts of climate change, including sea level rise, which could have significant impacts on the city’s infrastructure. This can lead to flooding and damage to critical infrastructure, such as roads, bridges, and buildings, which could be costly to repair and disrupt economic activity.
Like many other cities, Boston is facing a housing affordability crisis, with high housing costs and a limited supply of affordable housing options. The city has some of the highest rents in the nation. This can make it difficult for low- and middle-income families to find suitable housing, which can limit economic opportunities for those who cannot afford to live in the city.
Boston also experiences significant traffic congestion, which can impact the city’s economic competitiveness by increasing commuting times and reducing productivity. According to the Global Traffic Scorecard, Boston drivers lost about 134 hours of their lives sitting in traffic in 2022. That’s a jump up of 56 hours from 2021 as more workers head back to the office, though still 10% less than pre-pandemic levels. This can also have negative environmental impacts, such as increased air pollution.
Finally, some locals mentioned to me that Boston is also facing challenges related to digital infrastructure, such as access to high-speed internet and other digital technologies. This can impact economic growth and innovation, as well as limit access to important services and resources for residents. Nearly 15% of households in Boston do not have a subscription to Internet service at home, and more than 32,000 households have no Internet access at all. However, I am not as sure how significant the digital divide is in Boston.
These challenges are all known and potentially solvable. Focus and resources are needed to resolve them. The city has huge potential to address these issues given its role in Massachusetts and the nation’s life, as well as its long history of development and adaptation.
Vancouver is known for its progressive approach to cycling as a means of transportation. Over the past decade, the city has invested heavily in cycling infrastructure, including dedicated bike lanes, bike parking facilities, and educational programs to encourage cycling among its residents. Lytton Advisory recently experienced some of this great public infrastructure.
One of the key initiatives in Vancouver’s approach to cycling is the creation of the city’s extensive network of bike lanes. These lanes provide a safe and dedicated space for cyclists, making it easier for people to choose cycling as a mode of transportation. The city also has a bike-share program that provides affordable and accessible rental bikes for residents and tourists, making it easier for people to cycle around the city.
In addition to infrastructure, Vancouver also focuses on education and awareness to encourage cycling. The city runs programs to teach people how to cycle safely, as well as promoting cycling as a means of exercise and recreation. The city also participates in events such as Bike to Work Week, which encourages people to try cycling to work, and promotes the benefits of cycling as a mode of transportation.
Finally, Vancouver has also focused on making cycling accessible to a wider range of people, including families with children and people with disabilities. The city has installed family-friendly bike lanes and has worked with organizations to make cycling more accessible to people with disabilities.
Vancouver’s approach to cycling is a comprehensive one that includes investments in infrastructure, education, and accessibility. Through these efforts, the city is promoting cycling as a safe, accessible, and sustainable means of transportation, making it easier for people to choose cycling as their preferred mode of transportation.
Cost-benefit analysis is a tool that can be used to evaluate the costs and benefits of different options for managing waste. It helps decision makers understand the trade-offs involved in different approaches to waste management and make informed choices about how to allocate resources.
There are many factors that can be considered when conducting a cost-benefit analysis of waste management options. These may include the upfront costs of implementing a particular solution, such as the cost of purchasing equipment or constructing a new facility. Other costs to consider might include ongoing operating costs, such as the cost of fuel or labor, as well as the potential costs of environmental impacts or regulatory fines.
On the other hand, the benefits of a particular waste management approach can include reduced environmental impacts, improved public health, and economic benefits such as the creation of jobs or the generation of income through the sale of recycled materials.
By comparing the costs and benefits of different options, decision makers can choose the solution that offers the greatest net benefit, or the greatest benefit after accounting for the costs. This can help them make informed decisions about how to allocate resources and achieve their waste management goals in the most effective and efficient way possible.
How often does your organisation undertake cost-benefit analysis?
In February Lytton Advisory spent a week in New York City, mainly in Manhattan. It is hard to comprehend the scale and scope of this metropolis and the infrastructure challenges that the City and its residents face. We believe there are three key infrastructure challenges that NYC faces:
Aging Infrastructure: New York City’s infrastructure is aging, with many of its bridges, tunnels, and other transportation facilities built over 50 years ago. This has led to increased maintenance costs and disruptions to transportation and other services, which can impact the city’s economic competitiveness.
Affordable Housing: New York City has one of the highest housing costs in the country, which is a major challenge for many of its residents. The lack of affordable housing options can make it difficult for low- and middle-income families to find suitable housing, which can limit economic opportunities for those who cannot afford to live in the city.
Economic Inequality: Despite being a global economic hub, New York City has one of the highest levels of income inequality in the country. This can create a variety of economic challenges, including limiting access to quality education, healthcare, and other services, as well as limiting economic mobility for those at the lower end of the income spectrum.
In a heavily built urban form solutions are never easy, but there are some possible answers:
Aging Infrastructure: To address the aging infrastructure in New York City, the city could invest in a comprehensive infrastructure renewal plan, which would prioritize repairs and upgrades to critical transportation, water, and energy systems. The plan could also include public-private partnerships to help fund infrastructure improvements and ensure they are completed in a timely and efficient manner.
Affordable Housing: To address the lack of affordable housing options in New York City, the city could invest in new housing construction and rehabilitation of existing properties. The city could also create incentives for developers to build affordable housing units, such as tax breaks or streamlined permitting processes. Additionally, the city could explore policies like inclusionary zoning, which requires a certain percentage of new developments to be affordable for low- and middle-income residents.
Economic Inequality: To address economic inequality, the city could invest in education and workforce development programs that provide training and support to residents from disadvantaged backgrounds. The city could also work to promote small business development and entrepreneurship, which can help create jobs and economic opportunities in underserved communities. Finally, the city could implement policies like minimum wage increases, paid sick leave, and other labor protections that help ensure workers are able to earn a livable wage and have access to essential benefits.
All of these require money and a critical challenge is how NYC could fund the investments needed to address its economic infrastructure needs:
Government Funding: One possible funding source is government funding, such as federal or state grants, which could be used to support infrastructure improvements or affordable housing projects. The city could also allocate funds from its own budget to support these initiatives.
Public-Private Partnerships: Another potential funding source is public-private partnerships, which could help finance infrastructure projects and affordable housing developments. Under this model, private investors or companies would provide financing in exchange for a return on their investment.
Tax Credits: The city could also offer tax credits to incentivize private investment in infrastructure and affordable housing projects. These tax credits could be structured in a way that encourages long-term investment and helps ensure that projects are completed in a timely and efficient manner.
Municipal Bonds: Another option is for the city to issue municipal bonds, which would allow it to borrow money from investors to fund infrastructure improvements or affordable housing developments. These bonds would be repaid over time, typically with interest.
Impact Investing: Impact investing is a relatively new form of investment that aims to generate social and environmental benefits in addition to financial returns. The city could explore opportunities to attract impact investors who are interested in supporting infrastructure improvements and affordable housing projects.
The matrix of need and funding needs to be carefully assessed to make sure the right incentives are generated to do the right projects with the right funding. The problems are not particularly unique, but the scale and scope of work of a key node of the global economy means the investigation is definitely worth the effort.
All too often it is too easy to simply offer financial incentives to encourage greater recycling to households. Municipal waste management often considers that education of households can lead to improvements in recycling outcomes. While this is intuitively appealing, there is often little genuine analysis.
Behavioural economics offers an approach driven by empirical analysis and fieldwork, rather than theory or ‘gut feel’, to develop tailored approaches to achieve better recycling outcomes. Large numbers of household units offer the opportunity to experiment with the recycling incentive architecture before a full roll out across a municipal area.
Behavioral economics is important in recycling because it can help understand why people do or don’t recycle, and how to design policies and programs that encourage more recycling. Here are a few specific reasons why behavioral economics is important in recycling:
People’s behavior is influenced by more than just economic incentives. Traditional economics assumes that people make decisions based on rational self-interest, but behavioral economics recognizes that people’s decisions are also influenced by factors such as social norms, emotions, and cognitive biases. By understanding these other factors, behavioral economics can help design policies and programs that are more effective in encouraging recycling.
People’s behavior is influenced by the design of the recycling system. The way recycling is presented to people, such as the location of recycling bins and the clarity of recycling instructions, can have a big impact on whether or not people recycle. Behavioral economics can help identify ways to make recycling more convenient and understandable, increasing the likelihood that people will recycle.
People’s behavior is influenced by their perception of the benefits and costs of recycling. Behavioral economics can help identify ways to communicate the benefits of recycling more effectively, such as highlighting the environmental and economic benefits of recycling, and can help identify ways to increase the perceived costs of not recycling, such as highlighting the environmental damage caused by waste.
People’s behavior is influenced by the way decisions are framed. Behavioral economics can help identify how to frame decisions in ways that encourage more recycling, such as by highlighting the social norm of recycling or using loss aversion to encourage recycling.
Overall, behavioral economics can help design more effective policies and programs that encourage more recycling by understanding the factors that influence people’s behavior, and by designing the recycling system in ways that take these factors into account.
To what extent are the incentives in your organisation grounded in analysis, recognise bias factors, presented to encourage action, framed to encourage positive decision making by households?
Infrastructure investment planning in the context of Pacific Island nations requires a tailored approach that takes into account the unique characteristics and challenges of these countries. This is because Pacific Island nations have small populations, are geographically dispersed, and have limited resources. Therefore, infrastructure planning must be done in a manner that reflects their unique needs and priorities.
One of the best techniques for infrastructure investment planning in the context of Pacific Island nations is conducting a comprehensive needs assessment. This involves engaging with local communities and stakeholders to better understand their needs and priorities. This process is critical for identifying infrastructure gaps and prioritizing investment projects. Lytton Advisory considers this is best done at agency or infrastructure sector level.
Another important technique for infrastructure investment planning is taking a multi-sectoral approach. Infrastructure planning must take into account the interdependence of different sectors such as transportation, energy, water and sanitation, and telecommunications. A holistic approach is essential to ensure that infrastructure investments are aligned with the overall development goals of the country. In our view it also help more effective conversations with donors and private investors, helping countries retain greater sovereignty over national priorities.
Climate resilience is also a critical consideration in infrastructure investment planning in Pacific Island nations. These countries are particularly vulnerable to the impacts of climate change, and any infrastructure investment planning must take this into account. Projects should be designed to withstand extreme weather events and rising sea levels. Risk identification and mitigation are critical factors here.
Engaging the private sector can help to leverage additional resources and expertise for infrastructure development. Public-private partnerships can be a viable option for financing and delivering infrastructure projects. Private sector engagement can also help to promote innovation and efficiency in infrastructure development. However, the ability to engage the private sector also depends on national government capacity to see the commercial interests and incentives with great clarity.
Capacity building is critical to ensure that Pacific Island nations have the skills and expertise necessary to plan and implement infrastructure projects. This includes training in project management, procurement, and technical skills. By investing in capacity building, Pacific Island nations can become more self-reliant in planning and implementing infrastructure projects.
Sustainable financing mechanisms, such as green bonds and climate funds, can be used to finance infrastructure projects that have positive environmental and social impacts. This is important for ensuring that infrastructure investments are aligned with the overall sustainable development goals of Pacific Island nations. This also means identifying and avoiding some predatory financing practices as well, particularly where there might impose difficult burdens on the national treasury.
Finally, it is important to monitor and evaluate infrastructure projects to ensure that they are delivering the intended benefits and to identify areas for improvement. This includes tracking project performance against key indicators and engaging with stakeholders to gather feedback. By monitoring and evaluating infrastructure projects, Pacific Island nations can continuously improve their infrastructure planning and delivery processes. This is one of the hardest things to do, but has the potential to delivery greater informational value for future projects.
Multi-criteria analysis (MCA) is a valid tool in national infrastructure planning because it allows decision-makers to consider a wide range of factors and objectives in their decision-making process. MCA is a systematic approach that helps to identify, evaluate, and compare alternative options based on a set of predetermined criteria.
There are many factors that can impact the planning and development of national infrastructure, including economic, social, environmental, and technical considerations. MCA allows decision-makers to take these factors into account and weigh them against each other in order to make informed and balanced decisions. This can help to ensure that infrastructure projects are not only economically viable, but also socially and environmentally sustainable.
MCA can also be used to identify trade-offs between different criteria and to prioritise certain objectives over others. For example, a decision-maker might prioritise the economic benefits of a project over its environmental impact, or vice versa. This can help to ensure that infrastructure projects align with the values and priorities of the community and stakeholders involved.
Overall, MCA is a valuable tool because it allows decision-makers to consider a wide range of factors and objectives in a structured and systematic way, which can ultimately lead to better outcomes for all stakeholders involved.
If you use MCA in your organisation, feel free to share your approach in the comments.
Recently I have been thinking about how early-stage screening of infrastructure proposals can be made more effective. Time and again I see lists of projects here in Australia that are unfunded, undeveloped and, frankly, never-deliverable.
A key element of good infrastructure planning is the capture of the complete suite of proposals that could be under consideration at a point in time. This is critical for national infrastructure planning. Part of this also needs to consider the best way to screen all of these proposals, so determine which ones might be come investment ready projects. There are several best practices that can be followed when screening infrastructure proposals.
Identify the goals and objectives of the project: It is important to have a clear understanding of the purpose and potential impacts of the project. This will help to ensure that the proposal aligns with the goals and objectives of the organization or community.
Evaluate the feasibility of the proposal: Consider the technical feasibility of the proposal, including whether the proposed solution is technically sound and can be implemented within the available resources.
Assess the financial viability of the proposal: Determine the costs associated with the proposal and consider the potential return on investment.
Consider the environmental and social impacts: Infrastructure projects can have significant environmental and social impacts. It is important to consider these impacts and ensure that the proposal takes them into account.
Involve stakeholders in the process: Engage with stakeholders, including community members, local businesses, and other interested parties, to gather input and ensure that the proposal is responsive to the needs and concerns of the community.
Utilize a formal proposal review process: Establish a formal process for reviewing and evaluating proposals, including the use of a proposal review committee or panel to evaluate and provide recommendations on proposals.
I wonder how many proposals processes check off against these issues. What has been your experience?
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