Cost-benefit analysis based decision making should be a common practice

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Cost-benefit analysis based decision making should be a common practice

 

Indian policymakers generally take decisions on the basis of their own perception that may not be backed by cost- benefit analysis. They have neither mindset nor patience for basic management tools and techniques such as cost-benefit analysis (CBA) and project appraisal (of which CBA is an integral part). The recent hike in Delhi Metro fare is the latest example. According to the media reports, the hike has resulted in decline in the number of commuters by 3 lakh per day.

The Metro fares in Delhi are now three times more than in several countries. Obviously, commuters have done their own cost-benefit analysis and concluded that travelling by Delhi Metro was no longer economical.

The justification for upward revision of the Delhi Metro fare is that the revenue generated by the existing fare structure was not sufficient to meet the cost of providing the service. However, had those responsible for the decision done a sensitivity analysis – which is part of CBA – to calculate the likely fall in revenue with each percentage point upward revision, they would have been able to take better decision decision. Maybe, they could have thought of generating income from other sources like commercial use of Metro stations (of course, it is being done at several places) and reducing the cost.

Father of cost-benefit analysis, Arsène Jules Étienne Juvenel Dupuit (18 May 1804 – 5 September 1866), an Italian-born French civil engineer and economist, had developed the methodology in 1846 for the calculation of benefit of a road bridge over a river which reduced cost and time of crossing the river.

The fall in the number of commuters not only reduces revenue of Delhi Metro, it adds to other costs such as cost of reducing pollution. (National Green Tribunal to note.) Before introducing London Underground service, a detailed cost benefit analysis had been done. The advantages considered included saving of commuters’ time (though quantification of the benefit is not easy), saving of fuel by users of motor vehicles on roads because of reduced road traffic, etc. Quite likely, such an analysis was done before introducing Delhi Metro. . But it is not an one-time exercise. It has to be done every time there is a major change such as revision of fare, extension of service, withdrawal of an existing service, etc .

In the USA cost-benefit analysis before final decision is a common practice.

Cost-benefit analysis based decision making should be a common practice, not an exception.

Devendra Narain

(Former head of the Project Appraisal Division of the Planning Commission)

November 25, 2017

 

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