ch. 6 referent group benefit-cost analysis

If only referent group benefits are relevant, why bother to calculate efficiency net benefit?. • Efficiency net benefit is the aggregate net benefit for the project as a whole, using op

© Harry Campbell & Richard Brown

School of Economics The University of Queensland

BENEFIT-COST ANALYSIS

Financial and Economic Appraisal using Spreadsheets

Ch 6: Referent Group Benefit-Cost Analysis

Referent Group Net Benefits

What is the “referent group”?

- it is the group whose net benefits are relevant to the

decision-maker who commissioned the SBCA

What will the referent group normally consist of?

- all residents of a region, state or country

- all members of a social group, for example, pensioners, native peoples etc

If only referent group benefits are relevant, why bother to calculate efficiency net benefit?

• Efficiency net benefit is the aggregate net benefit for the

project as a whole, using opportunity cost as efficiency prices

• This relationship provides a check on the consistency of the

BCA as a whole

• The sum of referent group and non-referent group net benefits

must equal the efficiency net benefit

Recall Figure 1.3:

C

(=referent group

net benefits not

captured by

market prices)

B

(= non-referent group net benefits)

A

(= referent group net benefits)

D

= non-ref group non-market

(we add segment D)

Why do we need BCA to identify referent group net benefits?

• A project evaluation will only capture benefits and costs

which are fully measured by market prices It fails to capture

various public interest aspects of a project For example:

- employment benefits

- indirect tax revenue changes

- pollution costs etc

Four-way Classification of Net Benefits

Net benefits accruing to:

Referent Non-referent Group Group

by market prices

market prices

Figure 6.1: Classification of Net Benefits

Graphical Representation of Classification

In specific cases some of the cells in the four-way classification

can be empty

For example, in figure 1.3 cell D was empty (and was omitted from the diagram) because there were no non-referent group net benefits that were not captured by the market

• Such net benefits might have resulted from global pollution

or from market imperfections in the foreign country

In general, what cells in the four-way classification could be empty?

1 If C+D is empty, then the project analysis coincides with the

efficiency analysis

2 If A+C is empty, then the project has no relevance for the Referent Group

3 If B+D is empty, the non-referent group is not affected by the

project

4 If A+B is empty, the project does not involve any inputs or

outputs traded in the market

How do we identify the various categories of disaggregated

Referent Group net benefits?

1 Follow the financial flows:

- division of project profits between referent and non-referent

group members;

- identify direct and indirect tax flows, e.g business income

tax, sales tax, tariffs etc

2 Learn from the shadow-prices:

- where there is a shadow-price, the project analysis has failed to pick up an efficiency net benefit that must be assigned to either the referent or non-referent group

Figure 6.1: Using Shadow-prices to Identify Referent Group

Benefits or Costs

unemployed tariff revenue,

generated by use

To Recap: How do we approach BCA?

1 Do the project analysis first (A+B) because of availability of data

2 Do the private analysis, i.e identify the subset of A+B that affects private equity-holders

3 Do the efficiency analysis (A+B+C+D) using shadow-prices and non-market valuations where appropriate

4 Calculate aggregate Referent Group net benefits:

(A+B+C+D) - (B+D) = (A+C)

5 Calculate disaggregated RG net benefits

(A1+ A2+ A3+ C1 + C2 +C3) and do a check

Simple Example

NFG Case Study (cont.)

NFG Case Study (cont.)

Distribution of Project Net Benefits

Distribution of Efficiency Benefits

Other Important Issues

• Weighting of net benefits to different stakeholders

• Treatment of risk and uncertainty

• Choice of discount rate

• Valuation (efficiency prices) of non-market costs and

benefits