Where to Use Cost Effectiveness Techniques Rather Than Cost Benefit Analysis

Cost Benefit Analysis, and the measures of economic performance that can be derived from it (see Note 6: When and How to Use NPV, IRR and Adjusted IRR), is the preferred method for demonstrating the economic justification of transport investments. Such an approach, however, relies on the ability to be able to measure costs and benefits in monetary terms (see Note 5: Framework), which renders it problematic for projects where the majority of benefits cannot be readily monetised. Such a project could be a Low Volume Rural Road (see Note 21: Low Volume Rural Roads). In such situations consideration should be given to the use of measures derived from cost effectiveness or weighted cost effectiveness (also known as Multi Criteria Analysis) techniques as the basis for the decision regarding whether to invest or not. Cost effectiveness techniques are also a very useful tool for project screening or ranking. Such a screening process ensures that projects that are subjected to a more detailed analysis (including cost benefit analysis) are those that best fit with the objectives of the investment (e.g. poverty alleviation). Section 1 of this note outlines the situations in which cost effectiveness techniques should be used, whilst Section 2 describes the two main types of approaches. Section 3 discusses the issue of economic viability and cost effectiveness whilst Section 4 presents a summary of recommendations.