Studies on Cost Benefit Analysis in Appraisal of Infrastructure Projects:A Critical Review

AbstractThe article aims to primarily focus on the economic and social costs and benefits of infrastructure projects which form an important aspect of project appraisal and evaluation techniques. The major approachesto social cost benefit analysis are considered, building the concept from the fiindamentals of applied welfare economics. In the case of economic appraisal and evaluation of infrastructure projects using CBA as a tool, it remains as a potentially viable and unexplored area of research. Various methodologies like European Commission Guidelines, OECD Manual, UNIDO Guidelines and the World Bank approach could be effectively applied for CBA of infrastructure projects.Keywords: Applied Welfare Economics, Cost Benefit Analysis, Pareto Optimality, Economic Efficiency, Distributional Equity.IntroductionOne of the most widely used tools of Applied Welfare Economics is Cost Benefit Analysis which is commonly known as CBA. In the contemporary period, CBA has received attention from the policy analysts as it focuses to measure net gains of a policy or decision to a society rather than to individuals or groups. CBA is the process of comparing all gains (benefits) and losses (costs) in a common monetary unit, resulting from some intended action (ex-ante appraisal) or implemented decision (ex-post evaluation). The economic performance indicator arising out of the streams of net gains and losses are expressed in the form of Economic Net Present Value (ENPV) and the Benefit Cost Ration (BCR). If the ENPV is positive and the BCR is greater than unity, the project is either preferred over similar projects with lesser returns or said to be economically successful.Often, a CBA compares alternative projects, by comparing their economic performance indicators, to determine which one provides the society with the greatest net benefits, through the most economical and efficient use of scarce resources. CBA can therefore be viewed as a decision making tool to provide critical insight on the economic efficiency of a project. When combined with the information on technology readiness, equity, feasibility and macroeconomic environment, CBA is an invaluable lifeline for analysts to differentiate between optimal choices of projects that serve the best interest of a society.Rather than just identifying an acceptable or unacceptable project from the society's point of view, a CBA can be used as a guide to design the most beneficial project, subjecting the elemental gains and losses of the project to a rigorous merit test of assessing the leverage of benefits over costs and screening those projects which draw greater attention of scarce economic resources. This article reviews the CBA of infrastructure projects in a broad societal perspective drawing insights from the grounding theories of applied welfare economics and building upon the thoughts to contemporary practices in CBA to provide a complete representation of the process of CBA.Infrastructure EconomicsThe Economics of Project Appraisal: Project evaluation and appraisal covers the core areas of project planning, investment appraisal, social cost-benefit analysis, project risk, distributional effects and impact assessment. The use of recognized assessment techniques for project proposals has become mandatory as part of the selection and justification process for projects funded by the international financial institutions such as the World Bank, the International Finance Corporation, the African, Asian and Inter-American Development Banks as well as regional banks and other donor agencies. CBA is used mainly to ascertain theeconomic welfare impact of projects.CBA is a practical tool at the disposal of Applied Welfare Economics to evaluate a project. Cost-benefit analysis (CBA) is a method of evaluating the net economic impact of a public project5. The aim of CBA is to determine whether a project is desirable from the point of view of social welfare, by means of the algebraic sum of the timediscounted economic costs and benefits of the project. …