Cost Benefit Analysis Guide - FURTHER GUIDANCE - Building Queensland
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Cost Benefit
Analysis Guide
BUSINESS CASE DEVELOPMENT FRAMEWORK
Release 3
FURTHER GUIDANCEBuilding Queensland is a statutory body that provides independent,
expert advice to support the Queensland Government in making
infrastructure decisions.
Building Queensland performs a key role in developing business
cases for major infrastructure projects. All infrastructure proposals
led by Building Queensland are developed under our Business
Case Development Framework. The framework ensures a
consistent and rigorous approach to proposal development.
© Building Queensland 2020 CONTRIBUTORS
Building Queensland would like to
acknowledge the support received
from partner agencies, industry and
consultants in the development of
This work is licensed under a Creative this guide.
Commons Attribution (CC BY) 4.0
International Licence. You are free to Building Queensland also wishes
copy, communicate and adapt this to acknowledge the Victorian
material as long as you attribute the Department of Treasury and Finance,
work to Building Queensland. To view Infrastructure Australia and NSW
a copy of this licence, visit http:// Treasury. The following resources were
creativecommons.org/licences/by/4.0 used as references in the development
of this guide:
Content from this publication should
be attributed as: » Victorian Department of Treasury
Building Queensland Business Case and Finance: Infrastructure
Development Framework 2020 Investment, Investment Lifecycle
and High Value High Risk Guidelines
ISBN: 978-0-6484591-8-7 (online)
» Infrastructure Australia:
DISCLAIMER Assessment Framework
This publication has been prepared » NSW Treasury: The NSW
for the purpose of section 11 of the Government Business Case
Building Queensland Act 2015. The Guidelines
material contained in this publication
CONTACT US
is made available as a guide only and is
subject to review and regular updates. Level 30, 12 Creek Street,
Users should exercise their own skill Brisbane QLD 4000
and care and seek appropriately E frameworks@bq.qld.gov.au
qualified advice if necessary. T 07 3237 7500
www.buildingqueensland.qld.gov.auBuilding Queensland’s Business Case Development Framework guides the
development of business cases for infrastructure proposals. This guide supports the
Stage: 2 Options Analysis and Stage 3: Detailed Business Case as illustrated in Figure 1.
OVERVIEW
Business Case Development Framework Overview (document)
STAGE 1: STAGE 2: STAGE 3:
Strategic Assessment Options Analysis Detailed Business Case
PURPOSE
To identify potential ideas To narrow the breadth of options To evaluate the viability of the
that could resolve the issues by applying rigorous evaluation highest ranked option/s with
or develop the opportunity. criteria before assessing the surety of outcomes across all
Evaluate whether any of the viability of any remaining options. evaluation criteria and develop
ideas have the potential to investment implementation plans.
be viable options.
Building on the work of the Building on the work of the
previous stage. previous stage.
KEY ELEMENTS
The evaluation will help shape The evaluation will involve The evaluation will involve a
the service need and base case. developing stringent criteria comprehensive assessment across
and applying appropriate all criteria (socio-economic,
Hold workshop/s to generate (optimisation) techniques environmental, financial and
ideas followed by an evaluation to narrow the options. Any sustainability) using in-depth
of these ideas against a set of remaining options are then evaluation tools to develop
relevant criteria to determine subjected to a rigorous detailed conclusive evidence of investment
if any could potentially achieve evaluation of the potential viability (or otherwise) and
viable outcomes to either viability using socio-economic, certainty of expected outcomes.
resolve the issue or develop environmental, financial and
the opportunity. sustainability analysis and Development of detailed
then ranked accordingly. implementation documents
covering governance, risk,
procurement (where appropriate),
contractual terms and operations.
OUTCOMES
Identification of service need and Updated service need and A business case is produced
potential longlist of options. preferred option/s supported which provides clear,
by robust analysis. comprehensive evidence
for decision-makers.
FURTHER GUIDANCE
Investment Logic Mapping Guide
Benefits Management Guide
Stakeholder Engagement Guide
Cost Benefit Analysis Guide
Social Impact Evaluation Guide
Figure 1: Building Queensland Business Case Development Framework
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 1Contents
Introduction 3 4.6.2 Estimating benefits 17
How to use this guide 3 4.6.3 Estimating non-market values 19
4.7 Calculation of economic indicators 21
1 Purpose 4
4.7.1 Discounting theory and practice 21
2 Building Queensland and 4.7.2 Net Present Value (NPV) 21
cost benefit analysis 5
4.7.3 Benefit Cost Ratio (BCR) 21
2.1 Overview and purpose of cost
4.7.4 Other economic indicators 21
benefit analysis (CBA) 5
4.8 Sensitivity and scenario analysis 21
2.1.1 Context and application of CBA 5
4.8.1 Single variable testing 22
2.1.2
Building Queensland CBA guide
and other guides 6 4.8.2 Scenario analysis 22
2.2 CBA in business case analysis 6 4.8.3 Break-even analysis 23
2.3 CBA methodology and assumptions 7 4.8.4 Monte Carlo analysis 23
4.9 Results 23
3 Principles for cost benefit analysis 9
3.1 Robust evidence and objectivity 9 5 Reporting 24
3.2 Tailoring 9 5.1 Executive summary 24
3.3 Scalability 9 5.2 Description of the outcome sought 24
3.4 Modularity 9 5.3 Base case 24
3.5 Professional judgement and research 10 5.4 Summary of options 24
3.6 Internal consistency 10 5.5 Methodology 25
5.6 Sensitivity and scenario testing 25
4 Cost benefit analysis requirements 11
5.7 Quality assurance review 25
4.1 Approach 11
5.8 Results and outputs 25
4.2 Demand assessment 12
5.9 Summary of evaluation 25
4.3 Evaluate the base case 12
5.10 Conclusion and recommendations 25
4.3.1 Base case representativeness 14
5.11 Data sources 25
4.4 Options development and selection 14
5.12 Documentation of procedures 25
4.4.1 Options development 14
4.4.2 Options selection 14 6 Quality assurance 26
4.5 Identify costs and benefits 15 6.1 Quality 26
4.6 Estimating costs, benefits and 6.2 Cost benefit analysis (CBA) health check 27
non-market values 16
7 Abbreviations 29
4.6.1 Estimating costs 16Introduction
How to use this guide
This guide is a supporting supplementary guide to the
business case analysis.
The contents of this document are important—they will
help you develop a business case that supports a robust,
transparent and comparable evaluation.
The government understands that each proposed
investment is unique. Therefore, you should tailor
the strategic analysis to fit the project.
Support any changes with a rigorous and
transparent process.
The following key content indicators have been included
in call-out boxes to help you use this guide.
REFERENCE
TARGET/EXPECTATION
FLAG/IMPORTANT
TO NOTE
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 31 Purpose
This guide details the approach to creating a robust and transparent
cost benefit analysis (CBA) to inform investment decision-making.
It is intended to: This guide forms a key part of Building Queensland’s
Business Case Development Framework (BCDF). A graphical
» provide an approach and methodology for the CBA representation of the way CBA underpins both an options
of significant Queensland infrastructure investment analysis and a detailed business case is presented in Figure 1.
proposals. This will enable comparability
» highlight the level of analysis required for a CBA The additional supporting guides: Social Impact Evaluation
for quality assurance and peer review Guide and Benefits Management Guide should be read in
conjunction with this CBA Guide.
» offer guidance and a detailed methodology on
documentation and reporting requirements, with a full
explanation of all calculations, ensuring any parameter
values are robust and fit for purpose
» inform a qualitative and quantitative analysis of costs
and benefits for the economic analysis section, supported
by the following analyses:
› strategic assessment
› service need and demand analysis
› social impact evaluation
› sustainability and environmental assessment
› financial analysis
› risk and benefits analysis.
Page 4 | Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide2 Building Queensland and cost benefit analysis
2.1 Overview and purpose Traditionally, a key role for government policy is addressing
market failures or regulating public goods. In parallel, private
of cost benefit analysis (CBA) investment in infrastructure also takes place, recognising
CBA is a widely used, methodical and logical approach to that within market-based economies, benefit streams must
economic evaluation. It is the primary method of economic offer attractive rates of return. That is, rates of return in
evaluation and assessment for infrastructure proposals terms of expected revenue/benefit streams are sufficiently
by national infrastructure bodies, including Building attractive compared with other investment choices. This
Queensland. A CBA: fundamental extends across both private and public sectors.
» offers a rigorous approach to assessing the In the case of commercial government-owned corporations
economic viability of investment proposals (GOCs), the primary consideration for investment
decision-making is commercial feasibility incorporating
» has wide-ranging applicability to investment quadruple bottom-line considerations – economic, social,
evaluation across many sectors and economic environmental and financial. However, for government
activity, including infrastructure shareholders, the primary consideration includes robust
» enables expected costs and likely benefits of proposal analysis of the socio-economic costs and benefits.
options to be compared1
A lag between investment timing and the accruing of project-
» ensures costs and benefits have been assessed
benefit streams characterises many infrastructure proposals.
based on a whole-of-life, whole-of-system and
Investment expenditures are often significant and occur
whole-of-state2 perspective
early in the project life cycle, and ongoing annual operating
» supports the evaluation of options costs may be typically small in comparison3. Maintenance
» allows for direct comparison between options, and rehabilitation costs are usually episodic, preserving the
combinations of options and their further development service delivery capacity of the infrastructure asset.
» plays a critical role in informing investment decision- Returns on infrastructure investments—in the form of
making by providing key pieces of evidence about the proposal benefits—are often realised over the long term.
potential investment of funds across competing proposals. Benefits accruing may be small relative to both the proposed
capital outlay and ongoing costs of infrastructure, or
2.1.1 CONTEXT AND APPLICATION OF CBA alternately, may accrue very rapidly where delivery achieves
All state and national infrastructure advice agencies, rapid and pronounced benefit. Ultimately, these benefits
including Building Queensland, use CBA to evaluate the are typically driven by underlying social, economic and
economic viability of investments proposed within business demographic trends.
cases. Building Queensland requires a CBA that takes a wide,
societal view with an economy-wide and system-wide social
perspective. It must consider the costs and benefits across
all affected members of society over the life of the proposal,
including the construction period.
The CBA should be at a whole-of-system, whole-of-state
level, with the entire liability to the state. As an example,
when evaluating the costs and benefits of additional
prison capacity, the full costs for remand prisoner injuries
to Queensland Health are ultimately funded by the state
government, and should be documented and included
in wider effects.
1
CBA considers allocative (or 'real') effects of a proposal as distinct from its distributional (or 'transfer') effects, which represent transfers in welfare
between different groups in society. Distributional ('transfer') effects should not be included as they have no net impact on society. Other CBA exclusions
include interest payments, accounting depreciation, taxation and irrevocable sunk costs.
2
Noting that in some instances benefits and costs of infrastructure proposals may include national and international beneficiaries e.g. cruise shipping port
expansion increasing national and international visitor arrivals.
3
Except, e.g. hospitals where large amounts of expected expenditures are operational.
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 52.1.2 BUILDING QUEENSLAND CBA GUIDE » base case—the business-as-usual (BAU) situation which
AND OTHER GUIDES pre-exists the proposed project case, inclusive of demand
forecasts/projection expectations, demographic growth,
In developing this CBA Guide, Building Queensland policy and operational settings
has considered other national and international CBA
guides including: » option/s—the choices between alternative investment
options with differing levels of demand composition, costs
» Queensland Government’s Project Assessment Framework and benefits
(PAF) (2015) » reference project/s—the investment, or combination
» Infrastructure Australia’s Assessment Framework (2018) thereof, to be delivered, and the specific design of each
» Commonwealth of Australia (2006), Handbook of Cost of the proposal options
Benefit Analysis » central case—the dominant or most likely realistic
» Austroads Project Evaluation Series representative analysis outcome that incorporates the
most robust and defensible central parameters and
» Australian Transport Assessment and Planning (ATAP)
assumptions across growth rates and whole-of-system,
Guidelines (2018)
whole-of-life, whole-of-state costs, benefits and risks etc.
» Victorian Department of Treasury and Finance (2013),
» sensitivity and scenario analysis—including appropriate
Economic Evaluation for Business Cases—Technical
consideration of climate risk and alternative futures to test
Guidelines August 2013
the resilience and design of proposal options.
» HM Treasury (2018), The Green Book—Appraisal and
Evaluation in Central Government The base case is an essential element of the CBA. The CBA
» New Zealand Treasury (2015), Guide to Social Cost Benefit is based on expected and documented differences between
Analysis the base case and business case option/s. Ultimately, CBA is
based on a defined and documented central case4, compared
» Productivity Commission (2014), Public Infrastructure, with the incremental changes from the proposed investment
Inquiry Report No. 71 change, applying a discounted cash flow approach.
» Queensland Productivity Commission (2018),
Whole-of-economy modelling: Beyond the Black Box. Broadly, only those costs and benefits directly attributable
to the relevant option should be considered relative to the
Several government agencies have developed CBA manuals base case (i.e. incremental net benefits and costs). If they
and approaches that provide significant supporting were to occur regardless, then they should be ignored.
information. These manuals address: Avoided costs or benefits should also be considered,
provided they are a consequence of the investment
» specific classes of infrastructure
decision and are not double counted.
» cost and benefit estimation techniques relating to those
asset classes Interactions between the CBA and other broader business
» relevant engineering and technical information case elements are shown in Figure 2. The grey box shows the
interactions between elements and analyses making up the
» standard economic values. core analysis, including the CBA.
2.2 CBA in business case analysis The overarching service need driving demand for the
proposed investment leads to the evaluation of key
The CBA forms a key part of evaluating investment proposals analytical components, as shown within the grey-shaded
and is the preferred method to account for investment cost box. Of note are the interactions between these key
and benefit. analytical assessments and evaluations with the business
CBAs have a high level of rigour and are subject to case risk elements. Key proposal benefits feed into benefits
professional scrutiny. Several concepts are necessary to management5. Within the BCDF, social impacts, economic,
achieve a thorough CBA including, but not limited, to: financial and commercial, and environmental assessments
also form the basis for sustainability considerations.
» service need demand analysis—considers macro-
economic drivers such as population, demographics, The diagram demonstrates how each component
globalisation, technology and climate change, policy and contributes to the development of the business case. Several
regulatory changes activities across all three stages within the BCDF contribute
to the CBA. Figure 3 provides a high-level illustration of these
» scope—the extent of the study area and those affected activities and inputs into the CBA.
within it
4
Central case: being a realistic representation depicting the most likely outcomes of future net economic costs and benefits.
5
Capturing the identification, definition, monitoring, optimisation and realisation of community benefits i.e. KPIs.
Page 6 | Building Queensland Business Case Development Framework – Cost Benefit Analysis GuideSERVICE NEED/DEMAND/OPTIONS OR REFERENCE DESIGN
ECONOMIC ANALYSIS AND NARRATIVE
Social impact
BENEFITS
evaluation
RISK
Environmental
Financial analysis
assessment
Cost benefit analysis
SUSTAINABILITY CONSIDERATIONS
Figure 2: CBA interactions with broader business case elements
Within the Building Queensland BCDF, a CBA may not have
a direct role at Stage 1: Strategic Assessment. However, it
2.3 CBA methodology
may be useful for economic analysts to participate in initial and assumptions
project team scoping meetings to familiarise themselves Importantly, there should be early agreement on the
with proposal benefits, scoping and analytic methodologies. methodology, assumptions, parameter values, sensitivity
Further, there is benefit when teams conducting the CBA are analysis, scenario analysis, the base case, demand and
involved in the early stages of business case development. evaluation period, and the nature of options (reference
This is because valuation of benefits streams can give early design) prior to CBA analysis and modelling. Such an
indications of the extent of (monetised) value of identified approach offers mutual understanding and ongoing
problems and, therefore, potential investment viability. positive engagement. The level of detail required should
be agreed and fully documented before commencing the
economic analysis.
Additional approaches to economic appraisal
Cost-effectiveness analysis (CEA) relies on developing a metric involving the quantitative (un-monetised)
benefit and total costs of the options being assessed. Proposals are then compared in terms of the developed
cost-effectiveness criterion. CEA compares the costs of alternative ways of producing the same (or very
similar) benefit outcomes. Only use CEA where options have very similar benefit outcomes. Always use CBA
to inform the socio-economic viability of any option e.g. preferred options at Stage 2: Options Analysis which
are recommended for further consideration at Stage 3: Detailed Business Case.
Cost utility analysis (CUA) constructs an outcome measure to use as a proxy for changes in individual utility.
Discussion of CUA is outside the scope of this guide but may be worth considering if benefits cannot be
definitively monetised.
Importantly, a limitation of both these approaches is that neither CEA nor CUA provides insight into whether
the selected option delivers a net socio-economic benefit (socio-economic viability).
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 7STAGE 1: STAGE 2: STAGE 3:
Strategic Assessment Options Analysis Detailed Business Case
PURPOSE: PURPOSE: PURPOSE:
Proposal conceptualisation Options analysis and selection Preferred option/s analysis
KEY CBA CONSIDERATIONS: ACTIVITY: ACTIVITY:
» Benefits sought and expected » Qualitative and quantitative » More detailed analysis of refined
economic, social and analysis of economic, social and option/s (reference project/s)
environmental outcomes identified environmental benefits/outcomes » Further analysis of service need
» Consideration of methodological » Economic appraisal of whole-of- (demand) and benefits undertaken
approaches to valuing benefits, life direct costs including proposal in options analysis
including research and construction and operation costs » Estimate economic values
development of evaluative for each option for economic, social and
methodologies » Analysis of benefits for each option environmental benefit/outcomes
» Calculation and application of » Economic appraisal of all costs and
incremental CBA ratios to assess benefits for reference project/s
across multiple options » CBA, plus any initial market
soundings
KEY CBA INPUTS: OUTPUTS/INPUTS6: OUTPUT:
» Problem/opportunity and service » Problem/opportunity and service » Problem/opportunity and service
need/demand documented need/demand updated need/demand CBA with risk and
» Qualitative description of » Key economic indicators, including sensitivity analysis
benefit outcomes, with some incremental benefit-cost ratio » Net economic benefit and
quantification where appropriate/ calculated and applied to options qualitative information described
available filtering » Key economic indicators, including
» Longlist options identified for » CBA with risk, sensitivity and net present value, benefit-cost
Stage 2: Options Analysis scenario analysis ratio and detailed breakdown
» Use of economic evaluation » Preferred option/s identified for of benefit streams including
to assess observed problem/ Stage 3: Detailed Business Case7 sensitivity and scenario analysis
opportunity » Risk-adjusted central case cost » Risk-adjusted central case cost
benefit BCR, NPV and IRR estimate, benefit BCR, NPV and IRR estimate,
including reporting the level of including reporting the level of
design used, risk contingencies, design used, risk contingencies,
full economic NPV/BCR profile, and full economic NPV/BCR profile,
values using P508 and P909 cost (or and values using P50 and P90
P90 cost equivalent) (NPV and BCR) cost (NPV and BCR)
Figure 3: Integration of CBA within the BCDF
6
Outputs of Stage 2: Options Analysis are key inputs for Stage 3: Detailed Business Case.
7
For proposals which are likely to be considered by Infrastructure Australia include two options for progression to Stage 3: Detailed Business Case.
8
P50 value is a 50 per cent confidence that the estimated cost will not be exceeded.
9
P90 value is a 90 per cent confidence that the estimated cost will not be exceeded.
Page 8 | Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide3 Principles for cost benefit analysis
Several principles underpin a quality, impartial and robust CBA.
These principles include concepts relating to the objectivity, scalability
and modularity of the analysis. Appropriate tailoring and internal
consistency are other critical quality principles.
3.1 Robust evidence 3.3 Scalability
and objectivity CBA is scalable as it may be applied with increasing detail
as proposals move through the various phases of
The relevance of a CBA depends on the strength of the development (including scoping, option definition and
evidence base and on practitioners using an impartial, refinement, option evaluation, and selection and detailed
unbiased, independent approach. The analysis should not proposal evaluation). Throughout the development
be driven by arbitrary preference for any specific option. process, CBA relies on escalating levels of data collection
Instead, objective, robust and evidence-based analysis and analysis to ensure enough detail is available to guide
should underpin CBA assessment, that is, analysis should decision-making. This interaction may be an iterative
be conducted in a methodical and impartial manner. process. At each stage of the development, CBA must
Some practices that may lead to doubt about the be applied with consistent levels of rigour, particularly in
objectivity of the CBA include a structural mismatch at analysing options, to avoid asymmetry and distorted results.
the organisational level between analysts and decision- A complete, substantiated and well-documented process is
makers, and an approach of ‘seeing what the results look essential to ensuring credible analysis. This process should
like’ before adjusting analytical elements to achieve a be scaled proportionate to the assessment stage, and the
higher benefit cost ratio, or some other arbitrary number. size and nature of the proposal.
These are unsatisfactory practices for an impartial and
independent analysis, and procedures should be in place
to avoid artificially inflating results e.g. using independent
3.4 Modularity
peer reviews. CBA is not modular. All component cost and benefit
streams should be included throughout the analysis
if they are measurable and are attributable to the proposal.
3.2 Tailoring Component cost and benefit streams cannot be removed,
A CBA requires sophisticated analysis. This analysis must be with the aim of achieving ‘reasonable’ results, as the
fit for purpose, iterated and refined to match the level of analysis progresses.
rigour required for investment-grade decision-making. For options analysis, symmetrical consideration of
Modelling and reporting should be tailored to support a scalability should be applied to avoid biasing any option
robust and transparent analysis to inform the decision-maker. or combination of options. Proposal benefits should be
developed proportionate to the development of the
estimates of proposal cost and apply a very similar level
of rigour including incorporating uncertainty and risk.
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 9Methodical approach to CBA
Importantly, the CBA and report should set out a logical and methodical approach to its development,
and incorporate a relevant and applicable evidence base.
Fundamentally, the central case covers the expected outcomes from the delivery of the proposal
or option/s including climate risk.
Sensitivity analysis highlights key parameter uncertainty ranges, while scenario analysis highlights
macro uncertainties which can impact on options and/or design.
Sensitivity and scenario analysis can enhance decision-making and are presented as additional to this central
case, with key outputs and the associated reporting. This approach presents an integrated quality CBA.
3.5 Professional judgement 3.6 Internal consistency
and research An elementary requirement for a robust CBA is that the
information used for the analyses is accurate and consistent.
The competence, relevant experience and professional Given the definition of project scope, all analyses are derived
judgement of the economic analyst conducting the CBA from, and informed by, the documented demand assessment
contributes greatly to its overall quality. Where professional and the central case. Developing the business case in a
judgement is used, it is essential to document this to provide methodical way builds elements of analysis for this level of
context for the make-up and elemental components of consistency, thereby providing confidence the information
the CBA. Similarly, research conducted to support the CBA has been compiled in a logical, reliable and rigorous manner.
development is to be documented and explained.
Page 10 | Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide4 Cost benefit analysis requirements
This section outlines the guiding principles and methodology for
developing a robust and transparent CBA—its processes, components
and reporting requirements.
Develop the CBA with enough detail to adequately inform Broadly, the approach involves the following considerations
decision-making. It should incorporate high levels of rigour and analysis:
and evidence related to the socio-economic viability.
1. Articulate the service need/demand, which incorporates
Early in the proposal life cycle, the outcomes and initiatives effective stakeholder engagement.
may be very broad and an investment logic mapping (ILM) › Consider all stakeholders who are impacted by the
workshop may help start the conversation on benefits10. problem or may be impacted by the response to
the problem/service. This should occur early in the
4.1 Approach development of the business case analysis. Effective
stakeholder engagement also informs benefits/
The CBA incorporates other important business case
outcomes sought and the relative importance to the
elements such as service need, demand/benefits assessment
desired outcomes.
and cost estimates. It is essential that you fully develop
and finalise these prior to completing the CBA. You may 2. Identify benefits/outcomes sought in the response to the
commence the CBA before finalising these elements; problem/service need/demand.
however, it is critical to incorporate the latest service need, 3. Identify potential options or combinations of options.
demand/benefits assessment and cost estimates. 4. Establish a robust and transparent BAU business case
Importantly, the CBA (and underlying methodology) can which incorporates uncertainty and climate risk.
and should be refined over time as detailed data and clarity 5. Conduct a social impact evaluation (SIE) and also
presents itself within the development of the business case. consider additional benefit analysis workshops to classify
likely impacts/benefits as qualitative, quantifiable/non-
monetised and monetised.
A robust and transparent CBA will:
» clearly define the service need (problem/opportunity/demand)
» identify critical success factors related to achieving the expected outcomes and addressing
the service need
» describe the service need, outcomes and base case, independent of any specific option or solution
(this enables wider consideration of the possibilities)
» establish the basis for government intervention on efficiency or equity grounds
» clearly identify expected outcomes (benefits)
» identify high relevance to government policy
» describe potential options and their expected benefits compared with a designated BAU base case
» identify potential costs including direct project costs and wider economic costs and benefits
» include sensitivity analysis of key variables and scenario analysis of uncertainty and risk
» provide a transparent documentation of the analysis methodology, formulas etc. to allow duplication
of results.
Identifying the problem, in the form of an infrastructure service need, comes before the analysis of costs
and benefits, and their associated outcomes.
10
For further information about ILM workshops, see Building Queensland’s Investment Logic Mapping (ILM) Guide.
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 116. Document marginal incremental benefits between the
base case and options (for each option or combination
4.2 Demand assessment
of options). These are then calculated using a discounted To ensure consistency from the outset and across all
cash flow approach. analyses (not just the CBA), use the same contemporary
7. Complete a detailed evaluation of option/s for the demand profiles (which may differ across options)
quantifiable and monetisable cost and benefits. throughout the business case.
› Document an appropriate evaluation period, residual The economic life (and evaluation period) of the option should
value and base case consistent with the principles be robustly developed, defensible and clearly articulated.
outlined in Section B2. Base case in the Stage 3:
Detailed Business Case Guide. The evaluation period You also need to provide statements and detailed
should be in line with the limits of credible demand discussions of variables, assumptions and project drivers.
forecasting and increasing uncertainty, and the While probabilistic analysis is preferred for all key variables,
economic life of the investment. For all proposals, a it is possible to designate high, medium and low scenario-
credible evaluation period will be less than 30 years based analysis where probabilistic profiles are difficult
and the economic merit will not be determined by the to justify. Document such an approach in the proposed
residual value. methodology and confirm it prior to commencing detailed
CBA assessment.
› Calculate key economic indicators (NPV, BCR and IRR)
applying a discount rate of 7 per cent to the central Within the analysis, applied principles should include that
case, full economic NPV and BCR profile including the business case has a focus on uncertainty/risk/benefits
values using P50 and P90 cost, while also reporting and fit-for-purpose assumptions and parameters.
these values using a 4 and 10 per cent discount rate.
Ensure you thoroughly articulate the robust and detailed
› Conduct sensitivity analysis on key parameter values methodologies and approaches used to capture all user
and variables in the analysis to inform key project (new, existing and induced demand) effects, and you present
drivers. Conduct scenario analysis, as appropriate, for a strong evidence base.
alternate futures etc.
› Incorporate quality assurance and peer review close-
out including confirming CBA against Section 6.1
4.3 Evaluate the base case
Quality and Section 6.2 CBA Health Check. Developing and analysing a robust and transparent BAU
› Conclusions/recommendations. base case is an essential component of CBA. This is because
the base case is the benchmark against which all other
The steps outlined in Figure 4 show interactions and analytical options are compared. The base case is a detailed and fully
outputs that are essential in the development of CBA. articulated description of realistic BAU in the absence of the
proposed project over the evaluation period, which is less
Although shown sequentially, there are several interactions than 30 years (for additional guidance refer Section B2.
and additional considerations necessary for the development Base case in the Stage 3: Detailed Business Case Guide).
of a robust, transparent, fit-for-purpose and repeatable CBA.
The base case must be tightly specified and modelled on
These include quality assurance considerations as outlined in a whole-of-life, whole-of-system, whole-of-state basis
Section 6 Quality assurance. including all expected expenditures and benefit/impacts.
Feedback loops between steps support the refinement and For infrastructure projects, the base case involves
robustness of the analysis and incorporate quality assurance. maintaining realistic service levels, and accounts for
For example, in identifying costs, it may become apparent the full life cycle costs required to maintain them.
that further work is required upstream in refining the base Key characteristics of a base case scenario include:
case and nature of project options.
» a description of what will occur should the proposed
In this way, elemental development steps to conduct the CBA project not proceed, including implications for the
may need repeated revisitation and refinement. Put another expected level of service
way, CBA offers a methodical approach and should be
viewed as an opportunity to explore and fully comprehend » impacts of the continuation of the existing situation
the nature and implications of a proposed investment or with all relevant costs and benefits.
policy changes, as opposed to simply following basic steps.
Page 12 | Building Queensland Business Case Development Framework – Cost Benefit Analysis GuideDocumented service need/demand
Identify stakeholders interest/needs
Identify targeted benefits in responding to service need
Establish base case
Identify options or reference project
Identify whether impacts can be quantified and/or monetised
Risk assessment Monetised costs Financial costs Qualitative and
(costs and benefits) and benefits and benefits quantifiable
(non-monetised
costs and benefits)
Calculate economic
indicators
Undertake an impact
risk assessment
Conduct a sensitivity
and scenario analysis
Document economic Input into financial/ Document social
assessment commercial analysis impact evaluation
Figure 4: Iterative parts of a CBA including subsequent related outputs
The base case is not a ‘zero spend’ or ‘dummy’ option. A critical benefit of having a clearly defined base case is
It should include all expected actions to be taken if none to highlight ongoing costs and/or benefits that would be
of the proposal options are implemented and service levels incurred and/or realised in the absence of any intervention.
are reasonably maintained11. This allows decision-makers The cost and/or benefits of the identified problem or issue
to understand what situation will exist in the absence of are estimated during the valuation of the base case. This
the project being approved. Continuing with budgeted information can then be compared (netted) against the
patterns of expenditure may prove to be a viable alternative, incremental capital, operating and maintenance costs of a
especially where gains from project options are not proposed intervention/investment, measured against the
significant relative to the base case12. incremental benefits.
11
Defined as a reasonably expected level of service by the community. This may mean that with population growth, at some point in the future the
reasonable level of service may deteriorate below current community expectations.
12
For example, where results indicate marginal economic viability.
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 134.4.1 OPTIONS DEVELOPMENT
Base case specification Alongside the specification and evaluation of the base
case, options are similarly developed. This step involves
Examples of oversights include developing a range of reform, policy setting, operational
incorporating ‘interim solutions’ delivered and infrastructure options as a critical element in
in the absence of the project as part of determining the best solution for an identified
the proposed cost and benefit streams, infrastructure service need.
rather than (correctly) specifying them
as elements of the BAU base case. Such Investments in infrastructure assets rarely happen in
isolation. During this stage, give careful consideration
practices have the unfortunate effect of
to non-built solutions including regulatory reform, demand
over-representing the performance of
management policy options and operational changes.
the proposal, leading to a distortion and
Such consideration can either yield innovative solutions
misrepresentation of results, which may that offer higher economic returns or sharpen the analysis
also lead to poor decision-making. and justification for built asset responses.
Analyse potential options in detail and directly compare
them with the base case. These options should all be
practical, viable alternatives i.e. each option should be
inherently feasible in a technical sense. Base innovative
4.3.1 BASE CASE REPRESENTATIVENESS options and solutions on a clear understanding of the
A rigorous CBA depends on clear articulation and base case proposal objectives and expected outcomes.
specification. The base case must be presented accurately
and considered as a potentially viable option. As part of the options analysis, it is important to remove
potentially arbitrary restrictions on the search for solutions.
A common problem in CBAs is the under-specification For example:
of the base case, which is then compared with proposed
investment options. Under-specification (i.e. not including » focus options identification on benefits to be achieved,
all reasonable costs) of the base case leads to misguided rather than ways to improve or expand existing facilities
comparison, or the expected spending patterns, levels of » do not limit options to those that are under the control
service and infrastructure performance are not authentic of a specific agency or jurisdiction
and accurate representations. For example, it is essential » link options to infrastructure capital improvements; this
to include all planned and committed works as well as may address asset operational opportunities, which are
additional investment needed to maintain the current a subset of the potential set of solutions.
service provision. Where the base case is not representative,
any comparison between the base case and proposal 4.4.2 OPTIONS SELECTION
option/s will produce misleading results.
For a Stage 2: Options Analysis, the CBA takes key operating
A base case should identify all costs and detailed information, including cost estimates, into a discounted
subcomponents including fixed, variable, semi-variable and cash flow analysis. Initial streams of benefits that can be
stepped elements. A dual cost analysis of this kind enables quantified and valued in economic terms are discounted to
opportunity costs to be fully considered and sensitivity present-day values and compared with expected options
analysis to be conducted later. costs. In choosing between proposed investment choices,
IBCR assists with shortlisting options and confirming the
4.4 Options development economic viability of the preferred option/s. At a minimum,
CBAs should report:
and selection » the central case BCR, the NPV and IRR using a real
Building Queensland’s Stage 2: Options Analysis Guide discount rate of seven per cent
outlines the process for developing an options shortlist
» the level of design used for the cost analysis
from a longlist. It also outlines the requirement for a
robust service need demand assessment and a robust » NPV, IRR and BCR values for P90 cost, using a P90
and defensible BAU base case. equivalent contingency (if robust and defensible cost
benchmarking data is available)
At the options selection and analysis stage, the primary » alternatively use probabilistic Monte Carlo estimates
purpose of the CBA is to develop a robust and transparent reporting full NPV/BCR profiles and P50 and P90 cost NPV,
filter to shortlist options (including the preferred option or IRR and BCR values
combination of options) for potential consideration at the
detailed business case stage (within the BCDF, this is known » sensitivity analysis of all key parameters and scenarios for
as the Reference Project/s). the central case and for P50 and P90 level cost, including
4 per cent and 10 per cent discount rate.
Page 14 | Building Queensland Business Case Development Framework – Cost Benefit Analysis GuideAt this stage, many quantitative direct benefits and costs are Interest and capital charges are payments for the time value
assigned economic values. In addition, qualitative analyses of money and should be ignored (as this is represented by
of indirect benefits and costs are often refined to provide the discount rate). A large portion of rent or lease payments
quantitative estimates and economic valuations, using a also compensate for the time value of money, so take care
defensible applied methodology. when incorporating rental charges into a CBA. Where private
investment is involved, calculate return on investment after
The longlist of options is filtered against service need, debt servicing.
benefits sought, and socio-economic, legal, environmental
and financial considerations, potentially using a robust Capital gains, particularly as they relate to the market value
multi-criteria analysis approach. Shortlisted options will be of the infrastructure investment’s assets, should generally
evaluated in more detail using CBA, including using IBCR be ignored. They either reflect a change in the discount rate
to identify the preferred option. The increasingly detailed or the net present value (NPV) of future increased earnings,
CBA should continue to examine the proposal, program or which are recognised within the CBA.
portfolio from the community perspective, rather than a
government or departmental one. A common fault in the CBA is to consider benefits and costs
in both real and nominal terms, with an intermingling of the
The CBA is a full consideration and evaluation of societal two. This leads to faulty analysis. If expected (real) growth
and systems-level costs and benefits reflecting real resource in demand e.g. traffic volume or patient needs, is included
usage. At this stage, the CBA should identify the people who in the CBA, an inflation figure should not be applied to the
are affected by a decision (these are the people to whom the analysis. This is because the process of discounting benefit
costs and benefits will apply). and cost streams would cancel out the inflationary effect,
thus making the process of adding in inflation—merely to
Following the economic evaluation of refined options, some just take it away again—superfluous. The preferred approach
will appear more favorable than others in terms of their uses real (present day) amounts and real discount rates.
economic performance and these will be selected for further
refinement and development. Ultimately, these developed EVALUATION PERIOD AND TERMINAL/
options contribute towards the broader conclusions,
recommendations and executive summary of the relevant
RESIDUAL VALUE
business case stage (Stage 2: Options Analysis or Stage 3: Infrastructure investment tends to involve proposals with
Detailed Business Case). long physical and economic lives with increasing uncertainty
(refer Section B2. Base case in the Stage 3: Detailed Business
4.5 Identify costs and benefits Case Guide). Therefore, appropriate and correct treatment
of a realistic and credible evaluation period and terminal
Costs and benefits need to be identified early and as value is essential for a robust CBA.
comprehensively as possible (informed by the social impact
evaluation, demand analysis, financial analysis, benefits and A rigorous and defensible residual or terminal value will be
risk assessments and/or benefits/risk workshops). Costs and linked to the evaluation period and will, in many cases, be
benefits are: nil or negative due to technological, socio-economic and
environmental uncertainty (benefits and costs), exit costs,
» characterised by impacts on people, rather than impacts impaired assets and/or if the proposal has low measured net
on organisations, agencies or decision-makers economic benefits i.e. BCRs less than one. Importantly, an
» characterised by observable consequences asset’s residual value based on financial accounting methods
is generally not relevant for a CBA, as an economic analysis
» checked to ensure there is no double counting.
focuses on real resource usage.
As a general principle, only real direct costs and benefits
(that is, changes in real resources) should be considered.
Payments to suppliers, while technically financial transfers,
are proxies for the consumption of real resources.
Accounting depreciation expenses should not be considered,
since this would double count the capital investment already
incurred as a cost13. Where appropriate, depreciation as a
tax-deductible expense for companies could be considered.
13
Other than for the purposes of accounting for terminal values.
Building Queensland Business Case Development Framework – Cost Benefit Analysis Guide | Page 15Prior to the valuation of costs and benefits, Building Queensland uses the social impact evaluation
(SIE) to identify the scope, scale and expected effect of social impacts. All Queenslanders affected
by a proposed investment should be recognised in the analysis including in their role as taxpayers.
However, there are situations where defining the ‘gainers’ and ‘losers’ is not straightforward.
The focus of the CBA should, therefore, be on those directly and ultimately affected by the investment.
However, there are times when the impact on intermediaries may prove to be a reasonable proxy14.
CBAs of public infrastructure proposals in Queensland are intended to measure the first-round direct
impacts, costs and benefits to the community.
4.6 Estimating costs, benefits » semi-fixed or step costs—which are fixed for a given level
of activity but increase by a certain amount at some
and non-market values critical point e.g. train control systems that need to be
automated for higher service levels.
4.6.1 ESTIMATING COSTS
For infrastructure proposals, the relevant costs equate Identify and express all costs in terms of relevant resource
to the full whole-of-life economic cost of providing the costs and opportunity costs. Examples of opportunity costs
associated services over the economic life of the assets. could include using land in a different, more valuable way,
The full economic cost should be calculated for each or making alternative use of an employee’s time.
option (with revenues expressed as benefits in the CBA). Ignore costs that have already been incurred and are
This includes direct costs, indirect costs, attributable irrevocable, as these are ‘sunk’ costs. For clarity, costs that
overheads and end-of-life costs. have already been incurred but are recoverable (either in
Cost estimation for the CBA should include input from full or partially) are not sunk costs and should be included
accountants, economists, engineers, expert cost estimators in the evaluation.
and other specialists sourced from the financial, cost and Align proposal cost estimates with the CBA requirements
risk analysis. Estimation should be based on whole-of-life, above, namely risk-adjusted, including risk contingency and
whole-of-system and whole-of-state cost, including negative reporting the level of design used, full NPV profile, P50 and
impacts (disbenefits) prior to service delivery e.g. during P90 cost. These cost estimates need to fully and faithfully
the construction period. consider all cost contingency risks.
Ensure all specialists provide relevant cost information Ensure the calculated outputs, such as risk-adjusted central
and thoroughly explore project opportunities. case cost, represent the best possible robust/expected
To aid in enhancing the amount of detail around cost parameters or assumptions. These calculated outputs should
structures, it can be useful to distinguish between consider the cost of contingencies including:
different types of costs15: » the stage of development
» fixed costs—which remain constant over wide ranges » the level of definition (design) or class (categories) used.
of activity for a specified time e.g. a train station
Therefore, the level of project definition (design) should
» variable costs—which vary according to the volume inform the typical contingency ranges applied to an estimate,
of activity e.g. energy for train services during its development at each business case stage.
» semi-variable costs—which include both a fixed and
variable component e.g. maintenance, which may involve
a planned maintenance program and a responsive
maintenance plan
14
An example of this may be that better airport infrastructure that reduces freight costs may benefit a retailing business, but in a competitive environment
most or all the benefit will be passed on to consumers as lower prices. The workers or shareholders of the retailing business may not benefit directly, but
reduced freight costs may be a reasonable proxy for the impact on consumers.
15
Note that this categorisation can help with sensitivity analysis but must be used with care. A cost that is fixed relative to one factor may change with
another, and more complex modelling may be required to describe how costs change over time and with different variables.
Page 16 | Building Queensland Business Case Development Framework – Cost Benefit Analysis GuideAdditional considerations
Contingent liabilities
Some proposals expose the government to contingent liabilities. That is, to commitments of future
expenditure if certain events occur. Appraise any contingent liabilities (and monitor these if the proposal
goes ahead) as part of usual risk analysis procedures, and include them in the project risk register.
One class of contingent liabilities is any cancellation costs the government body may be liable for if it
terminates a contract prematurely. You must include these liabilities and their likelihood in the initial
proposal. This analysis should extend to wider social and economic consequences. Also consider any
legal and commercial contractual risk (though this may be outside of the scope of the CBA).
Limitations
Include detailed analysis of whole-of-life operating costs. The derivation of operating costs should be
clearly articulated including the basis of any calculation applied to the CBA. Timings should be clear,
precise and unambiguous, without mixing between nominal and real amounts. A clear way to present
such data is in table form, with expenditure amounts broken down across investment periods.
Naturally, the increments should tally to the total amounts.
4.6.2 ESTIMATING BENEFITS
In an economic CBA, all benefits should be valued unless Counting costs as benefits
it is clearly not practicable to do so. Costs and benefits
estimates should be based on whole-of-life, whole-of-system A common trap is counting costs as
and whole-of-state perspectives. However, when estimating benefits e.g. the use of resources
benefits, alternative options can be systematically compared such as labour is often counted as
in terms of their net benefits or net costs. an employment benefit. However,
this almost always has a cost (i.e. an
All effects (including all costs and benefits, both direct and opportunity cost) if such resources can
indirect) on the community and business should be identified
be used elsewhere in the economy.
and quantified separately, where it is reasonable to do so.
VALUATION
The value of benefits (and costs in some cases) can
be referenced against real or estimated market prices
CALCULATION
using shadow pricing, in the first instance. However,
there are some exceptions where valuing at market prices The calculation of benefits may also be based on
will not be suitable, and the use of a shadow price (as an estimates that result from the outcomes of previous studies.
approximation of the efficient market price) is required, As databases and records expand, there is increasing scope
such as when the market is dominated by monopoly or for using this benefit transfer method. However, take care
oligopoly suppliers or is significantly distorted by taxes or to allow for different circumstances, as the characteristics
subsidies. In these circumstances, prices will not reflect the of the consumers in the database may differ from those
opportunity costs, so adjustments within the CBA will be relevant for the option under consideration.
required. An example of this is the effect of subsidies, In the absence of an existing, robust monetary valuation
tariffs and taxes in certain markets. of an impact/benefit, the project’s proposer must decide
whether to commission a detailed study incorporating
further research. If research is not appropriate, the CBA
should include a central estimate, together with a maximum
and minimum plausible valuation.
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