Service: Cost-benefit analysis (CBA)

Cost-benefit analysis (CBA) refers to the formal process of appraising a decision: is the value of a decision’s benefits more than its costs? Cost-effectiveness analysis (CEA) differs slightly from CBA. CEA is concerned with finding the least cost approach to achieving an objective. CBA and CEA are essential tools for designing policies and investments, where they can help maximize value for money and identify how a decision impacts different stakeholders.

Limestone Analytics is an industry leader in applying cost-benefit and cost-effectiveness analysis (CBA and CEA). At Limestone:

• We conduct CBA and CEA across different sectors, country settings, policies, and investment decisions.
• We design and deliver courses (academic and professional) on CBA, CEA, and Economic Analysis (Examples include Queen’s University CPIA, Mali CEA course, and USAID Education Finance).
• We build integrated CBA models that bring alternative perspectives into one model. In addition to the overall impact on the economy, the integrated analysis estimates the net effect on different subgroups and actors.
• We treat CBA and CEA as decision tools rather than a part of an approval process. Therefore, we build models that can help optimize policies and projects’ design, answering questions such as who to target? When to start? How intense? How long? Etc.
• We use the Unified Cost-Benefit Analysis (UCBA) to specify our CBA models, bringing greater transparency, quality, accountability, and client collaboration.

We have been able to expand the use and relevance of CBA through innovation and continuous expansion of our methods. Below are illustrative examples of how we help our clients use CBA for their decisions.

CBA and Innovative Finance

Innovative finance brings together stakeholders with varying objectives, capacities, and knowledge. Furthermore, innovative finance introduces a range of financing instruments from grants and concessional loans to guarantees and insurance policies. Limestone helps its clients navigate through complexities of innovative finance through analytical services under four steps:

1. Assessment of social feasibility: a financing instrument is a means to an end. We always start by asking if a policy or investment is worth doing, irrespective of how its capital requirements are financed. Most of our clients find this step crucial in engaging the key stakeholders by bringing their attention to the rigorously estimated social and environmental benefits. This step will also help us identify critical sources of risk and uncertainty that can threaten the social and environmental net benefits.
2. Assessment of financial feasibility: in this step, we focus on cash flow impacts on the key stakeholders, aiming to identify the financing needs and financial revenue sources. This step’s output is an integrated CBA model that shows the financial cash flow statements integrated with the statements that outline the net social and environmental benefits.
3. Financial design: in this step, we add financing instruments into the model and test the financial viability under alternative scenarios where loans, grants, and transfer payments can make the project financially sustainable for all parties.
4. Negotiation support: by this step, the integrated CBA has financing instruments built into it. This model can now be used to inform negotiations and deal structuring. The team will support this process by adding any structural changes required, such as adding new stakeholders or financing instruments. Other changes such as changes to interest rates, grant sizes, leverage ratios, and outcome pricing are easily do-able by the integrated model’s end users.

We have performed these steps on investment decisions and policies such as introducing new neonatal care techniques in Cameroon, girls’ education in Zimbabwe, nutrition policy in Lesotho, conservation policy in Indonesia, broadband access strategies in Canada, and many more projects.

CBA of Policies and Institutional Reform Interventions

Policy and Institutional Reforms are considered among the most complex interventions for CBA. First, the existing evidence from other countries or history about the costs and benefits is hardly relevant to the current problems and the solution being analyzed. Second, these projects come with high chances of failure. Even if one succeeds in measuring the costs and benefits accurately and with the right methodology, we still need to make assumptions about the chance of success.

In 2018, Limestone’s CBA on Haiti’s public utility reform received the Distinguished Scholar Award from the International Confederation of Energy Regulators (ICER). This analysis used innovative methods and investment criteria to analyze a challenging reform model and was selected as the top priority among more than 80 different interventions.

Since then, Limestone has used similar techniques to help policy design and advocacy efforts in many other countries and projects.

CBA and Self-Reliance

The international community has recognized the need to ensure sustainability and self-sustainability as important aspects of the design process for projects and policies. We define self-sustainability as the participants’ ability to continue with an intervention without (or with minimal involvement of) donors and grants in the long-run. 

The sustained benefits of many policies and interventions rely on their financial viability for participants. It is only through an integrated model that one can comment on financial viability and measure the financing gaps and risks in the absence of grants and donors in the long-run.

CBA and Gender and Social Inclusion

Using an integrated approach, a CBA model can report the impact on various subgroups in the society, including women, children, rural, and other subgroups in the society. 

However, this is not enough! Integration of gender and social inclusion into economic analysis is more than the ability to understand and report the impact of policies and investment by subgroups. Gender gaps, cultural norms, and other barriers to, or outcomes of, inclusion considerations interact with policies and investment. Therefore, to truly integrate gender and social inclusion, the analysis must also capture how these inclusion barriers and outcomes can leave an impact on the expected benefits and costs of the policy or investment.

Furthermore, interventions, intentionally or not, can change measures of inclusivity such as gender gaps and cultural norms. Such changes, negative or positive, can introduce additional costs or benefits to the analysis. 

For more information, read the USAID guidelines on the integration of gender into a cost-benefit analysis. Limestone’s founder and CEO was the lead author for this guidance document.

CBA and Ecosystem Service Valuation and Conservation

At Limestone, we believe that the impact of interventions on the environment must be considered for all interventions, not only those that intentionally try to conserve the environment or those that cause apparent harm to the environment. Furthermore, we recommend that environmental impact analysis must be a part of the integrated analysis so that it can properly inform the design decisions.

The integration of ecosystem services valuation into CBA include a series of steps:

1. How does the policy or investment impact the environment? 
2. In what ways does the policy or investment depend on ecosystem services?
3. Which impacts and dependencies should be included by the analysis?
4. How to quantify and value the impacts?
5. How to report the impact?

Limestone has conducted such analysis on many projects for USAID, MCC, Conservation International, and other clients. To learn more about our methods, please read the USAID guidelines on the integration of ecosystem services valuation into cost-benefit analysis. Limestone’s founder and CEO was the lead author for this guidance document.