Duncan Rose, Rob Green, Joe North, and Linda Blankenship

OBJECTIVES:

The purpose of this project was to develop a Web-based benefit cost analysis tool to assist asset managers in decision making based on a systematic assessment of the benefits and costs of any proposed project.

BACKGROUND:

Benefit cost analysis provides for the systematic identification and subsequent projection of the streams of benefits and costs associated with a management option. The option can take the form of a specific capital project (build a new treatment plant), a change in the level of service (responding to water outages within 2 hours instead of 8), or a program option (require low flow toilets). For assets, the focus is on the whole of life costs and benefits. Usually, such an analysis is carried out to compare alternative options for the creation, refurbishment, renewal, or disposal of an asset. The primary challenge in executing a benefit cost analysis is the valuation of the identified costs and benefits associated with an investment decision, particularly the valuation of an indirect cost or benefit such as impact on the environment, or the effects of a proposal on society in general.

HIGHLIGHTS:

The final product of this project is a CD-ROM containing explanatory text, flowcharts, a benefit cost spreadsheet, and two examples. The spreadsheet is generic and would probably have to be adapted for specific situations.

APPROACH:

The Web-based benefit cost tool is based on a 2006 UK Water Industry Research Ltd (UKWIR) tool developed in manual form called, “The Role and Application of Benefit Cost Analysis.” It was designed to benefit U.K. water industry asset managers and planners with the intention of providing guidance on the various steps to developing a benefit cost analysis to support investment decisions. The logic supporting the UKWIR tool is perceived as being at the forefront of current benefit cost analysis in the global water industry. The focus of this project has been on making the tool Web based and enabling its usage by utility asset managers in the United States, many of whom may not have highly developed economic analytical skills. The tool is designed to be interactive. A utility manager can either follow the process on a step by step basis or use the tool to provide more detailed information on a particular aspect of the analysis.

RESULTS/FINDINGS:

Users of the tool will follow a flow chart through the various sequential steps of creating a benefit cost analysis. At each step, the user is able to access knowledge relevant to the particular step. The steps in the tool include the following:

• Step 1--Establish and rigorously define the purpose of the analysis

• Step 2--Formulate baseline assumptions and parameters (e.g., time frames, discount rates, sensitivity assumptions, uncertainties in cost valuations)

• Step 3A--Measure benefits in financial terms (e.g., economic, social, environmental, direct and indirect, tangible and intangible)

• Step 3B--Measure costs in financial terms (e.g., economic, social, environmental, direct and indirect, tangible and intangible)

• Step 4--Determine the net present value of benefits and costs (i.e., total discounted benefits less total discounted costs for each alternative)

• Step 5--Adjust for distributional effects (i.e., where benefits or costs fall disproportionately on certain sectors of the population)

• Step 6--Review and finalize recommended option

In some steps, the user is able to conduct either a basic analysis or detailed analysis that takes account of more complex economic theory. Accordingly, the tool is considered flexible, as it can be applied at either a basic or detailed level depending on the size and relative degree of importance of the decision to be made by the utility. The tool has been structured to enable the user to use individual steps to obtain information about a certain aspect of benefit cost analysis or to sequentially follow a process to assist in preparing a benefit cost analysis for a particular project.

IMPACT:

This benefit cost tool is intended for use as a step by step guide for developing a benefit cost analysis for the busy asset management practitioner wanting to determine the economic justification for a project, or the prioritization of a group of competing projects. It assumes that the practitioner is likely not a trained economist and is probably quite unfamiliar with benefit cost theory and practice. Unfortunately, no tool can make benefit cost analysis simple--the economic theory behind it is too essential to its proper application and too nuanced to be adequately reduced to a “fill in the numbers” approach. While the tool can facilitate a proper and rigorous application, every application will require digging into the theory and applying proper economics and structured common sense at every step.

MULTIMEDIA:

The tool will be distributed by the Water Research Foundation as a CD-ROM. Water Environment Research Foundation (WERF) will also integrate the tool into the SIMPLE Web site, which is freely accessible to both WERF and Water Research Foundation subscribers.

RESEARCH PARTNERS:

• Global Water Research Coalition

• UK Water Industry Research Ltd

• Water Environment Research Foundation