Applied Cost-benefit Analysis & Cost-Effectiveness Analysis
Wednesday, 02 April, 2014

On March 31, 2014, ISET hosted Dr. Joseph Tham of Duke University, who is currently collaborating with USAID Georgia. He provided a summary of the basic principles of project appraisal and discussed the applications of Cost-Benefit Analysis in the USAID/India Fiscal Management Reform Project.

At the beginning of his presentation, Dr. Tham spoke about the idea and role of Cost-Benefit Analysis (CBA) as a well-defined, objective, and systematic way to decide whether a project is good or bad. When conducting CBA analyst estimates expected cash inflows and outflows during a project’s life, thus there is an intertemporal problem in which values of flows have to be “translated” in one reference point of time, usually in the present, and then analyst calculates the net present value (NPV). If NPV>0, then the project is good.

The presenter then spoke about two different types of CBA: Financial and Economic. When conducting a financial CBA, the negative or positive effects of projects, in other words, externalities, are not taken into account. However, from a social point of view, these effects are very important. An economic CBA takes into account all effects a project will have to calculate NPV. There are four possible scenarios, the best case is when both economic and financial CBA shows NPV>0 and the worst is when both NPVs are negative. In the best-case scenario, a project should be approved and in the worst-case scenario, it should be rejected. When a project is not financially profitable the private sector will not implement it, however, if it is still economically beneficial the government should approve it. That is why roads, water supply, healthcare, and education projects are mainly undertaken by governments. Towards the end of the presentation, Dr.Tham spoke about project implementation and distribution problems. This was followed by plenty of questions from the audience.

ISET would like to thank Dr. Tham for providing an engaging and entertaining presentation about a very interesting and practical topic.