NOU 2012: 16

Cost-Benefit Analysis

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11 Financial and administrative implications

11.1 Introduction

From the terms of reference of the Committee:

Technical developments have taken place nationally and internationally within the area of cost-benefit analysis since the Ministry of Finance published its cost-benefit analysis guide in 2000, and subsequently revised it in 2005. The Stern Review placed a special focus on social effects in the distant future. Similar and other types of issues have been noted by Norwegian academics. An expert committee is appointed, against this background, to review the cost-benefit analysis framework, and to consider the potential expansion and detailing of the cost-benefit analysis guidelines.
The Committee shall assess financial/administrative implications of its proposed measures.

11.2 Scope and objective

The main purpose of a cost-benefit analysis is to clarify and elucidate the consequences of alternative measures prior to making a decision about the implementation of measures. Consequently, cost-benefit analysis is a way of organising information (NOU 1998: 16 Green Paper). The analysis shall form part of a basis for making decisions, without thereby amounting to a decision-making rule.

Cost-benefit analysis, as a specific method of analysis, and cost-effectiveness analysis enable a uniform ranking of measures on the basis of their economic profitability. A cost-benefit analysis, as a specific method of analysis, quantifies all positive and negative effects of a measure in monetary terms to the extent feasible, based on the main principle that an impact is worth what the population is willing to pay, in aggregate, to achieve it. If the willingness to pay for all benefits associated with the measure exceeds the sum total of its costs, such measure is defined to be economically profitable (NOU 2009: 16 Green Paper). In principle, the cost of a project shall reflect the value of what one must forgo to implement such project, whilst its benefits shall reflect how much one is willing to give up (NOU 1997: 27 Green Paper).

However, economic profitability is not necessarily the sole consideration of relevance to decision makers. In addition to focusing on the economic profitability of measures, the analysis should also aim to describe all consequences that must be assumed to be of importance to the assessment of decision makers, including non-priced effects and the distributional implications of measures. The final discretionary assessment should then be left to decision makers. The handling of distributional considerations in cost-benefit analysis is discussed in more detail in Chapter 4.5 of the NOU 1997: 27 Green Paper, and is also addressed in Chapter 3 of the present Green Paper.

11.3 The recommendations of the Committee

In the chapters listed below, the Committee has set out its recommendations with regard to changes that should be made to calculation prices and to what additional information should be accorded weight to improve the basis for making decisions for each individual decision maker:

  • Chapter 3 Distribution effects

  • Chapter 4 Real price adjustment

  • Chapter 5 The social discount rate

  • Chapter 6 Lifespan, analysis period and residual value

  • Chapter 7 Net wider impacts of transportation projects

  • Chapter 8 Disasters and irreversible effects

  • Chapter 9 Carbon price paths

  • Chapter 10 Valuation of life and health

As far as individual recommendations are concerned, reference is made to the chapters listed above, as well as to the summary of recommendations in Chapter 1; Appointment, terms of reference and recommendations.

The most recent major revision of the cost-benefit analysis framework took place in 1997, with an update in the Ministry of Finance guide from 2005. Several sectors have, against the background of the intersectoral recommendations, prepared sector-specific guides that form the basis for cost-benefit analysis in those sectors.

The efforts of the Committee have been focused on an examination of those elements of the cost-benefit analysis framework identified in the terms of reference. The objective has been to ensure that the framework is in conformity with theoretical and empirical developments within the field.

It would be appropriate, in the wake of such a review, for those sectors that have prepared their own sector-specific guides to examine their guides with a view to ensuring that these are in conformity with the national framework, thus ensuring a harmonised methodology in Norway.

11.4 Administrative and financial implications of the recommendations of the Committee

Administrative implications for the preparation of cost-benefit analysis

Although the Committee makes a number of recommendations with regard to changing assumptions relating to the computation of calculation prices and the weighting of individual elements in cost-benefit analysis calculations, one would not expect the cost of preparing such analyses to increase or decrease. Some recommendations may entail modifications to calculation methods and data gathering, whilst other recommendations may simplify and clarify what information should be gathered. The net overall administrative implications of changes to the recommendations on the preparation of cost-benefit analysis must be assumed to be minor in scale. It must be assumed that any costs associated therewith are non-recurring costs.

Implications for the outcome of cost-benefit analysis

There may be changes in rankings based on the net economic benefits of projects. What impact the new recommendations will have on any given analysis will depend on the cost and benefit profile of the relevant project over time. It must nonetheless be assumed that projects for which it is now being proposed that major parts of the benefits shall be subjected to real price or income adjustment (based on GDP per capita) will perform better for analysis purposes than was previously the case. This may e.g. apply to transportation projects whose main benefits are time savings or a reduced risk of serious accidents.

Implications of changes in project rankings for decision makers

Decision makers are typically found at the political level, or at the executive level if decision-making authority is delegated. Analysis only forms part of a basis for making decisions, and does not amount to a decision-making rule. Consequently, any change in the ranking of projects within a sector and between sectors does not result, in itself, in different decisions. It is up to each decision maker to determine what should be accorded weight in making a final decision, whether it is net economic benefits or other decision-making criteria. Moreover, it should be noted that public sector decisions are made within the budget limits defined by the appropriating authority in Norway.

11.5 Overall assessment of the administrative and financial implications of the recommendations of the Committee

The Committee is of the view that the impacts on the cost of preparing each analysis are minor and that any such implications will take the form of non-recurring costs. The cost associated with the revision of sectoral guides is also a non-recurring cost. The benefits from the recommendations of the Committee take the form of, inter alia, simplified computation methods and more specific recommendations as to parameter values than has previously been the case, in addition to a generally updated framework that reflects theoretical and empirical developments within the field.

The recommendations of the Committee may change the internal ranking between various projects, based on the net economic benefits of the measures. Whether this has an impact on what measures are adopted by decision makers depends on what decision makers attach weight to in making their decisions. If weight is attached to net economic benefits, the recommendations may have implications in terms of which measures are implemented.

The proposals will have no budgetary implications if the general budget limits remain unchanged, either nationally or within a sector.

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