On Balance: [Not] Lost in Translation -- International Perspectives on Benefit-Cost Analysis

October 11, 2017

By Lynn A. Karoly

Since its founding in 2007, the Society for Benefit-Cost Analysis (SBCA) has sought to engage scholars and practitioners from across the world. The Society’s current rolls count members from 35 countries. In support of expanding the Society’s international scope, the SBCA co-sponsored a workshop on September 20, 2017—together with the University of Milan and the Centre for Industrial Studies (CSIL)—titled “The Role of CBA in Government Decisionmaking: International Perspectives.” The workshop was held in conjunction with the annual Milan Summer School on Cost-Benefit Analysis of Investment Projects organized by SBCA board member Massimo Florio and CSIL. 

Overall, the international forum assembled nearly 90 institutional stakeholders, civil servants, academics, and practitioners representing more than 25 countries to share their experiences with economic evaluation in varied sectors.  In addition to presenters from academia, various public-sector institutions were represented, including the European Commission (EC), the European Investment Bank (EIB), the European Court of Auditors, the JASPERS (Joint Assistance to Support Projects in European Regions) initiative of the EU, the EU Innovation and Networks Executive Agency, and government agencies from Italy, Lithuania and Poland.

Despite differences in terminology (BCA in the United States versus CBA in most other countries), the presentations at the workshop served to demonstrate more similarities than differences in the theory and practice of economic evaluation. The workshop presenters called out the growing use of BCA in public-sector decision making in multiple countries, in part driven by mandates to conduct such analyses as part of public-sector spending. For example, new regulations in France as of 2013 make BCA compulsory for any publicly funded investment. For its part, the European Commission considered nearly 1,000 major investment projects between 2007–2013 (those exceeding €50 million) and another 600 projects will be submitted in 2014–2020; all require BCA when asking for EU co-funding. 

Countries do vary in terms of the levels of government and sectors where BCA is required and whether results must be made public. At the same time, as revealed in survey data collected by the OECD, BCAs are typically rated as having only a modest impact on political decisions, as other factors often come into play. Nevertheless, economic analyses have fostered more public debate in general and specifically regarding the social welfare consequences of major investment projects. 

A central theme across presentations was the development of standards for economic evaluation, both in general and for specific policy areas. These include the EC Guide to Cost-Benefit Analysis of Investment Projects and country-specific manuals such as those for France, Poland, Sweden and Lithuania. Several inventories of studies that can be used to derive shadow prices and meta-analyses to establish relevant parameters (e.g., value of time) provide other useful resources. Many of the existing guides in Europe and the U.S. have been developed by government agencies, often with substantial input from external experts. The U.S. also has several examples of standards development by non-governmental organizations such as initiatives by SBCA, the Society for Prevention Research, and the National Academy of Sciences.

European institutions also draw on external resources for quality assurance of economic evaluations, including technical assistance and independent quality reviews performed by such organizations as JASPERS and the use of retrospective BCA as part of the performance audits by the European Court of Auditors. The overriding objectives of these efforts are to raise the quality and consistency of the analyses performed, to foster transparency in reporting, and, ultimately, to improve decisionmaking.  

In addition to traditional areas of application such as infrastructure, transportation, and the environment, conference presenters highlighted new policy areas where economic evaluation tools are being employed across the globe.  Such new areas include social policy, Big Science and other research infrastructure projects, homeland security, and investment in low- and middle-income countries. Another identified growth area is the use of BCA to support funding decisions in the private sector by philanthropies or stakeholders employing pay-for-performance financing mechanisms such as social impact bonds.

Nearly every conference presenter placed a spotlight on a common set of challenges that arise in applying BCA and other economic evaluation tools, including employing the appropriate discount rate and real-world shadow prices, accounting for agglomeration effects, capturing distributional consequences, incorporating more realistic assumptions regarding secondary markets, and performing general equilibrium analyses. Improving the quality of ex ante analyses of major infrastructure projects was another recurring theme.

The growing demand within and across countries for BCA in a wide array of policy areas; the merits of establishing principles, standards, and other quality assurance mechanisms; and the need to address long-standing and emerging methodological issues, all point to the value of the SBCA in providing an international forum for dialogue and exchange, whether as part of the Society’s annual meeting or specialized conferences and workshops such as the one held in Milan. 

For more information about the workshop and the list of presentations, please see here

Lynn A. Karoly is a senior economist at the RAND Corporation and the current president of the Society for Benefit-Cost Analysis. Her research focuses on child and family well-being, human capital investments, economic disparities, social welfare policy, and labor market behavior.