Thursday, August 28, 2014

What a real Cost Benefit Analysis does.

Contrast the noise from the Vertigan/Ergas report with a real report from Industry.
Note the description of what a CBA is intended to do.

I'm at a loss as to how a profitable business executing a detailed Business Plan, on-time and on-budget, and running substantially ahead of revenue financial projections, requires an Economic Benefits Assessment to the community. It's already profitable, there is no "Cost" component.

From this BHP Billiton document:

18.1.1 Methodology of Assessment 
The objective of this economic assessment is to identify the potential economic impacts of the project, including the direct and indirect impacts. The input-output methodology is one method of estimating such impacts as it focuses on economic activity impacts and enables direct and indirect contributions to output and employment to be estimated from inputs in the form of spending during both the construction and operational periods. This method, therefore, is consistent with the outputs sought from the ToR.
In contrast, cost-benefit analysis estimates cost and benefits (monetised and non-monetised) of a project using discounted cash flow analysis. Unlike the input-output method, the outputs from a cost-benefit analysis would be the net present value (NPV), internal rate of return (IRR) and benefit-cost ratio (BCR). These indicators are decision making indicators to determine whether a project should go ahead or not go ahead (e.g. if NPV is greater than zero, then it is prudent to invest) and to prioritise investment options. The cost-benefit analysis method essentially measures the net worth of a project, not its economic impacts. Cost benefit analysis is data intensive, requires forecast of revenues and benefits, and is generally done internally before the proponents of a project decide to proceed or not proceed.
In summary, the input-output method is an economic impact assessment method, whereas cost-benefit analysis is an economic evaluation method. Types of economic impacts
The economic impact of the project can be traced through the economic system in several different ways. For the purpose of this assessment, the following types of impacts are considered:
• The direct multiplier effect represents the increase in economic activity (value added) and employment which is directly generated in the industry receiving the initial impact.

• The indirect multiplier effect represents the flow-on impacts that occur from all secondary industries in the economy to support the direct impact.

• The induced multiplier effect represents the change in consumption by the household sector or pay packet effect in response to income changes resulting from the direct and indirect impacts.

• The total multiplier effect is the sum of the direct, indirect and induced multiplier effects outlined above. Measurement of economic impacts
In this assessment, the economic impacts of the project are measured in terms of:
• Output
• Value-added
• Employment.
For the purposes of this assessment, output is used to measure the gross value of production at the national level. The measure includes the value of raw materials that have been generated from previous stages of the production process and thus there is a tendency for double counting.
For this reason, value added is considered to be a better indicator of economic impact and is used to measure the net output impact at the regional level. This measure is equivalent to gross state product as used by the Australian Bureau of Statistics. Unlike the gross output measure used at the national level, only the value of incremental raw materials at each stage of production is included.
Employment measures the number of jobs required to meet the additional production in an economy. Employment may occur through increased use of existing labour or the creation of additional jobs. The measure of employment is equal to the equivalent full-time employment (FTEs).