COST EFFECTIVENESS AND COST BENEFIT ANALYSIS

Dr. Mohamed Sheikh Omar Mohamud MBChB, MPH candidate

COST EFFECTIVENESS ANALYSIS

COST-EFFECTIVENESS ANALYSIS (CEA) AND COMPARATIVE CEA

Cost-effectiveness analysis measures the ratio of the costs of a program to the effects it has on one outcomeMeasure the cost for a given level of

effectiveness: e.g. cost to increase school attendance by 1 year

Or, measure the level of effectiveness for a given cost: years of additional attendance induced by spending $100

WHEN AND WHY IS CEA USEFUL? Good option when there is one key specific

outcome of interest, which is often the case in policyCBA requires quantifying outcomes that

are difficult to quantify (controversial) CEA can allows comparison of multiple

programs by comparing impact in terms of one outcome across schemesHelps with decision making, particularly

under a fixed budget (i.e., which will give the most impact for the least cost?)

CEA REQUIREMENTS AND CONSIDERATIONS Comparative CEA compares the cost-

effectiveness of different programs and requires impact estimates (for the same outcome) and information on program costs

Impact estimatesConsistent approaches to measuring

impact? Standardizing estimates?

Program CostsCosts to provider and beneficiary?Sunk vs incremental costs?

COST BENEFIT ANALYSIS

Any negative effect on an organization resulting from the implementation of the project. Examples:1. maintenance costs 2. environment 3. research and development 4. labour costs

A benefit is any positive effect on the organization resulting from the implementation of the project.Examples:

1. increase in productivity 2. reduction in costs 3. Saving Time4. Decrease road congestion

COST BENEFIT

CONCEPT OF COST – BENEFIT ANALYSIS:

Cost benefit is a tool which modern financial analysts adopt before undertaking any financial operation or commercial activity. The ultimate aim of a business organization is to make profits. Therefore, any system in the organization must produce more benefits as compared to its costs for the organization to survive & prosper.

BENEFITS > COSTS

WHAT IS COST BENEFIT ANALYSIS..???

A cost benefit analysis is done to determine how well, or how poorly, a planned action will turn out. The analysis relies on the addition of positive factors and the subtraction of negative ones to determine a net result. CBA has been established primarily as a tool for use by governments in making their social and economic decisions. CBA measures costs and benefits to the community of adopting a particular course of action e.g. Constructing a dam, by-pass etc. When investment made commensurates with the benefit derived, it can be said that operation is positive and viable; but when benefits derived do not compensate financial investments made, it can be said that it is financially non-viable and negative.

WHY COST BENEFIT ANALYSIS.???Cost Benefit Analysis is used to determine:whether a solution/project is economically feasiblewhich of two or more projects provides the best return on investmentOther issues : Is the project worthwhile financially? Is it the best option? Should it be undertaken at all?

COSTS & BENEFITS OF INFORMATION SYSTEMS:

COSTS BENEFITSHardware TangibleTelecommunications Increased ProductivitySoftware Low Operating CostsPersonnel Reduced WorkforceAccessories : Lower Computer Costs Lower Outside Vendor Costs

Computer ink/ribbon Reduced Facility Costs UPS Intangible Improved Organizational Planning

Services : Increased Organizational FlexibilityInsurance Improved Decision makingPhysical Facilities : Enhanced Employee MoraleBuilding Increased Job SatisfactionFurniture Higher Customer Satisfaction Improved Organizational Image

THE GENERAL STEPS FOR COST BENEFIT ANALYSIS ARE:

1. SPECIFY CLEARLY THE PROJECT OR PROGRAMME:

The first step is to decide on the perspective from which the study is to be done. When we have decided on the perspective on the main elements of the projects such as, the study of the location, timing, group involved, the connection with other program, etc, should be considered. When the project is fixed the following two program are involved:1.Physical project: These projects are physical in nature, which is done when an area is polluted. E.g.,: Public waste treatment plans, hazardous waste removal, etc.2.Regulatory project: This project regulates the amount of pollution in the society. E.g.,: Enforcement of environmental law and regulation, water disposal practice, restrictions of land for certain activities, etc.,

2.DESCRIBE QUANTITATIVELY THE INPUTS AND OUTPUTS OF THE PROGRAMME:

For some projects it is easy to identify the input and output. For eg.,if we are planning a waste water treatment project, the staffs of that program will be able to provide a full physical specification of the plant, together with the inputs required to build it and keep it running. However, it is harder to predict the externalities caused by the disposition of nuclear waste. Because a restriction on development in a particular area can be expected to detect development elsewhere into the surrounding areas.

3. ESTIMATE THE SOCIAL COST AND BENEFIT OF THESE INPUTS AND OUTPUTS :

The next step is to put values on input and output flows. (i.e) to measure costs and benefits. We could do this in any units but in many cases we will be dealing with effects, especially on the benefit side that are not directly registered on market. This means that we try to translate all the impact of the project or the program in order to make them comparable among themselves as well as with other types of public activities.

4.COMPARE THESE BENEFITS AND COST :

Next step is to make comparison between cost incurred and benefit derived from the project. One of them is to subtract the total cost from the total benefit to get net benefit. (Total cost – Total benefit = Net benefit). If the net benefit is positive then the cost benefit is positive and if the net benefit is negative then the cost benefit is negative. Another method is called Cost benefit ratio it is calculated by taking the ratio of benefit and cost.

COST BENEFIT ANALYSIS:

1. The CBC analysis may be applicable for both the new as well as old projects.2. It is based of accepted social principle that is on individual preference.3. This method encourages development for new techniques for the evaluation of social benefits.

1. The government is not completely aware of all the cost and benefits associated with the program.2. This approach does not clearly states that who should bear the population control cost.3. The method of collecting data for this analysis is generally biased.4. The people will have different value system and there will always be loser in the process.

MERITS DEMERITS

HOW IS CEA DIFFERENT FROM COST-BENEFIT ANALYSIS? Outcomes

CBA: Ratio of costs of program to all identified outcomes (benefits)

CEA: Ratio of costs of program to one defined outcome (benefit)

EXAMPLE: Ratio of cost of education program as a ratio to its

impact on learning, physical and mental health, household bargaining power, future labour market outcomes, intergenerational well-being

Ratio of cost of education program as a ratio to its impact on learning

CONCLUSION : It gives planners a method to try and “put all relevant

costs and benefits on a common temporal footing” in order to help people make informed decisions.

It provides people with an understanding as to the economic costs of decisions, and allows arguments to be made for or against a change based upon economic considerations.

It is a decision-making process that forces the decision maker to compare all direct and indirect positive and negative effects of the proposed decision on an objective basis.

A CEA/Comparative CEA is not enough information to make a policy decision, but it can be a good starting point