The analysis of costs and benefits

We should not confuse the analysis of costs and benefits with a business plan: both of them are used to decide whether a project shall be executed or shall remain as a feasibility study without becoming something real, however they are based on a completely different approach, albeit the methodology is apparently the same.

The business plan concerns a business project, whose purpose is to produce goods or services for sale: known costs must be compared with expected revenues, considering the relative risks and variations, while any other element should not be taken into consideration. In reality, this is not always the case, sometimes the entrepreneur also expects from his project indirect benefits, such as to increase his visibility, personal prestige or success. On the other side, the investors are willing to have a financial return and in general do not care about indirect benefits, that they are not concerned with.

The case of an infrastructural project is different: public works, even in case they produce goods and services for sale, should still have a broader purpose. Their costs are, or at least should be, known, while the benefits are partly the result of political and non-technical decisions: the identification of costs and benefits must be made with a broader view, considering on one side the real costs and on the other side real and virtual benefits, paying attention to avoid confusion between costs and benefits. It seems impossible, but this also happened sometimes: in reality, in a project that is subject to political decision, sometimes the judgement about what is a benefit and what is not is someway subjective and may be different if considered from the point of view of different political actors. In theory, decision should be taken in order to pursue the “common good”, an idea that implies a common vision of the world, while the real vision of each political actor is related to the ideology to whom his party is referring. 

In plain words, the benefits depend on the purpose for which the infrastructure has been designed: to decide which are the benefits to be taken into consideration is an act of discretion of the politician who has taken or must take the decision, not of the technician who performs the analysis.

For the sake of clarity, let’s take a few examples:

  1. The construction of the pyramids: in business terms we have known costs and zero benefits. In reality the benefit that the promoters of the work wanted was the transformation of several tribes more or less tied together in a nation, and they succeeded in it, since they created in empire that, albeit with alternate events, lasted about three thousand years. A side benefit, neither expected nor predictable, was the birth of a civilization that is still studied and partly influences us even today, after more than five millennia. If the purpose had been only the burial of the Pharaoh, it would have been enough to dig a pit.
  2. The great churches of the Renaissance and many other monumental works were built by deliberately underestimating the costs (the most documented is the case of St. Paul Cathedral in London), in reality the promoters of the work had in mind non-economic benefits.
    1. Those project were financed either by governments or by major religious orders or institutions, if a cost analysis based on the aforementioned criteria had been carried out, such works would never have been realized, and today humanity would be poorer. 
    1. Different the case of Medieval cathedrals, where the promoters were only giving finance to start the project, that was then subject to “penitential financing”, namely to the offers from people of every status and economic condition, then construction time was subject to the available finance, with the further complexity due to the fact that the project was evolving continuously.   
  3. The benefits from the large railway constructions of the nineteenth century and in part of the twentieth century were certainly not exclusively expected from the sale of tickets or freight for the transport of goods: one of the purposes which was given great weight was the swift transport of troops in case of need.
  4.  Coming to more recent times, all the big events (Expo, Olympic games, Jubilee, etc.) are passive if ticket sales are compared to known costs, the real benefit is indirect; the same for construction of a state road, no toll is paid therefore zero benefit, while the real benefit is indirect and consists in the improvement of communications and therefore in the standard of living and GDP in the areas served.
  5. The bridge from continental Italy to Sicily, together with the high-speed system from Salerno to Reggio Calabria, should have had the purpose of “shortening” Italy and allowing the economic development of the areas concerned. If we limit ourselves to considering it as a substitute for the ferry and we analyze the costs and benefits of this hypothesis, it cannot stand up (similar considerations could be applied, for example, to the Eurotunnel, to the high-speed railroads and similar projects).

A final consideration concerns the phases of the project: each project first passes through a stochastic phase, called planning, in which the costs and benefits are evaluated, and then through a deterministic phase, correctly called implementation in which the project is carried out. In case that, after starting to carry out the project, you go back to planning activities, something is going really wrong.

(ing. Gianluca di Castri, DIF, EIE/ICEC.A – from ICEC RoundUp, 2019)

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