FACULTY OF BUSINESS AND DEVELOPMENT STUDIES

DEPARTMENT OF ECONOMICS AND STATISTICS

COURSE: MASTER OF MONITORING AND EVALUATION

COURSE UNIT: COST-BENEFIT ANALYSIS

COURSE CODE: MME 7403

FACILITATED BY

QUESTION. Suppose you are the economic advisor to your District Local government
authority. The Chairman LC 5 is proposing to conduct a new road connecting one sub county to
the headquarters. This new road will have to pass through a densely populated community and it
will require substantial compensation of the community for their land and development before
the road can be constructed. Using cost benefit analysis advise the district councilors under
condition the project should be taken or abandon

COST BENEFIT ANALYSIS OF A SUBCOUNTY ROAD PROJECT

1 Introduction
Community road built for the purpose of connecting the district headquarters to the wider
population, can be beneficial to the community as well as political and civil leaders plus all other
development partners. For the district leadership to construct this road, it will require the use of
scarce resources in addition to environmental and social cost that will be incurred. Economic
analysis is there use in such a case to establish whether the benefit outweighs the cost. The
decision to construct this particular road to the district headquarters has to be made under
conditions of limitation of which the most common factor is the availability of financial capital.

Due to this scarcity of resources, the Local council five (LC5) chairperson and his team must
direct their expenditure to this road project on assumption that it will offer the most efficient
outcome. The decision to go ahead with this particular investment requires an evidence based
method of analysis so as to establish the viability of returns. The cost benefit analysis is the
method that can be used to support the LC5 and team in decision making.

2 What Is a Cost-Benefit Analysis?

A cost-benefit analysis (CBA) is a process that is used to estimate the costs and benefits of
decisions in order to find the most cost-effective alternative (Pienaar, 2018). It can also be
defined as the process used to determine the value of a project in relative terms. A CBA is a
versatile method that is often used for the business, project and public policy decisions. An
effective CBA evaluates the following costs and benefits:
That mean the project justification is measured as economic worth to the community. To
evaluate a project’s benefit to the stakeholders, CBA will compare the benefit with the overall
cost, to deliver and sustain the project. If overall benefits are demonstrated to exceed the
expected costs, a project is considered economically viable.
CBA has a consistent approach and methodology that can be applied to all road projects thus
enabling projects or project elements to be compared. The method applies monetary values to a
project to ensure a robust measure of the economic costs and benefits. This creates a degree of
transparency and comparability for the decision maker when considering competing alternatives
for funding.
3 Purpose of CBA
The overall purpose of the CBA is to inform the LC5 chairperson and team about the cost
implication which include financial, environmental and social cost in relation to the expected
benefits to the district, community and wider population.
4 Process to considered in CBA when making the decision about the Road project
The Basics of Benefit-Cost Analysis as its name implies, Cost Benefit analysis compares the
expected benefits of a project to the expected costs over the projected life of the project. Because
the benefits and costs occur over time, standard financial procedures are used to create a “present
value” of both costs and benefits. Using the known process of CBA,

Determining the list of stakeholders is required: These stakeholders include the District officials
(both political and technical), the Central government and government agencies, the affect
community and those in close proximity, donors, contractor, environmentalist, consultants and
employees. Measuring all cost and benefits elements of the project through the proposed area
and the alternatives. These cost and benefits considered relate to (i) Effects on users or
participants, (ii) Effects on non-users or non-participants, (iii) Externality effects and (iv) Option
value or other social benefits. Predicting outcome of cost and benefits over relevant time period.
Converting all costs and benefits into a common currency. This requires the district to convert
the currency for determination of cost and benefits into Uganda shillings, apply discount rate,
calculate net present value (NPV) of project options, performing sensitivity analysis, adopting
recommended choice.

The process of establishing the viability of the project can be summarized as below

Cost & Benefits Parameters Outcome

 Cost of road project  Timeframe  Net present value

 Benefits  Discount (NPV) above 0
 Value of statistical  Benefit-cost ratio
life above 1
 Line of intervention

Adopted from (Cortes & Mayrhofer, 2016)

5 Consequences of the road project
Benefits:
Owing to the nature and objective of the road project work proposed by the LC5 chairperson,
major benefits will be transport-related. The key benefits of the project include.
i. Vehicle operation cost (VOC) savings. VOC are the costs associated with the running
of a motor vehicle such as fuel, oil, tires, repair and maintenance and depreciation costs.
ii. Travel time cost savings: Savings in travel time is a primary economic benefit sought
from many road projects such as the road works to the district headquarters. These
savings are enjoyed by district officials and all visitors. A main benefit predicted by users
of the new road is travel time savings.
iii. Savings of accident costs: Accident avoidance (fatalities, injuries, property damage):
Costs:
The road project cost that are considered will include measurable and non-measurable cost
i. Cost of construction This include the total project cost which is composed of the contract
cost, compensation cost for the land and other items in places where the will pass.
ii. Road-user costs which include
 Vehicle operating costs, such as fuel consumption and vehicle maintenance cost
for the district and other regular road users accessing the headquarters
 Time costs of vehicle occupants which includes all delays, counting those
experienced as a result of change of access road
 Accident costs resulting from the usage of the new road. Even though accidents
also have an external effect, all direct and indirect accident costs in this case are
treated as if they were road-user costs
iii. Road maintenance costs.
iv. Other road-user disutility experienced like personal security. Air pollution for community
close to the road resulting from dust generated by moving vehicles and motorcycles. This
main not be quantified in money value since intangible but still has a nevegative
consequence on the community and other road users.
6 Conclusion
The LC5 and team can consider the road project a viable one if consideration is made for the
benefits and the cost as outlined. The benefit cost ratio will be computed as indicated below;

Benefit-Cost Ratio (BCR) = Present Value of Benefits/Present Value of Costs.

If the ratio realized is greater than one, this means that benefits exceed costs. The District local
government can proceed with the project. However, if the BCR does not exceed one, the will
mean the road project is not worth the resources/cost project and should not be pursued.

7 References

Cortes, F. R., & Mayrhofer, D. K. (2016). Cost benefit analysis Technical note (Issue February).

Pienaar, W. J. (2018). Principles of social cost-benefit analysis of public road projects followed
in South Africa. South African Journal of Industrial Engineering, 29(4), 129–140.
https://doi.org/10.7166/29-4-1926