367. BCA challenges: over-optimism
On 7 February 2022, I presented an online workshop called “Benefit-Cost Analysis: Traps, Challenges and Best Practice” as part of the Australasian Agricultural and Resource Economics Society Annual Conference. It addressed a range of challenges and complexities that arise when applying BCA in practice. Drawing from my 12-week online micro-credential course on BCA, I discussed a selection of challenges and proposed appropriate ways to address them.
I’m going to present some of the workshop recording as Pannell Discussions, in a series of segments. The first one is on avoiding over-optimism in the assumptions that are used in the BCA. This is a ubiquitous problem in BCA, and indeed in any other type of project evaluation. Dealing with it needs a multi-pronged approach.
Most of these segments will be about 10-15 minutes long, but this one is longer as there is so much to say about over-optimism. I think it’s one of the most important topics in BCA.
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2 thoughts on “367. BCA challenges: over-optimism”
Good presentation Dave. In many of the BCAs I do to support funding applications, the critical uncertain benefit is additional visitor numbers. I always do sensitivity analysis on key parameters, including at least halving the visitor numbers. And then there is the issue of the boundary of the BCA and are the new visitors really a net benefit? From a NSW Govt perspective, unless those visitors come from outside the state, they do not count them as a state benefit. If you apply that logic to the Aust Govt, would only overseas visitors be regarded as ‘additional’?
Discount rate sensitivity from 3% to 10%.
Any BCR that comes out higher than 3.0, I’m wary.
Job creation is reported, but never included as a benefit in the BCA. And only the value-added (i.e. proxy for producer surplus) attached to the additional visitor expenditure is included, not the gross new visitor expenditure.
I have been involved in similar things and agree with much of what is said and in particular the importance of estimated additional visitor numbers.
I have to say that GVA is not a proxy for producer surplus. At best it is a proxy for both producer surplus and labour surplus combined because value add includes profits and wages.
However, even then it is actually an overestimate because it is not properly considering the opportunity costs (in particular the opportunity cost of labour).
Incidentally I would definitely say that from an Australian Government view only overseas visitors would be additional. However, it should not be forgotten that there can be benefits to the referent group – they just need to be estimated a different way. e.g. reduced travel time and cost incurred by visitors, increased consumer surplus, willingness-to-pay (which would generally encompass both of the previous plus non-use value).
I’m in NSW too and would love the opportunity to chat directly if David would send you my email address.