Dealing with the Base Case in Cost Benefit Analysis
Eivind Tveter, Møre Research Molde
In this paper we will discuss the role of the base case and shed light on the fact that in many situations, the most difficult and uncertain step in a cost benefit analysis is to define and specify the base case in a robust and sustainable way.
In socio-economic analysis, different effects of a project are compared with a situation where the project is not implemented. This situation, which in some cases may be purely hypothetical, is termed ‘the base case’. The point of departure for a successful cost benefit analysis (CBA) is that the base case comprises a robust basis for project analysis. The description of the base case should include approved plans for upgrading as well as current operation and management costs. Arguably, it may also be stated that the base case should provide a continuation of the current level of benefits to the society.
In this paper we will discuss the role of the base case and shed light on the fact that in many situations, the most difficult and uncertain step in a cost benefit analysis is to define and specify the base case in a robust and sustainable way. Nevertheless, this fact is to a large degree neglected in the CBA literature. Choosing conceptually different base cases may have substantial impacts the CBA outcome. Hence, the recommendations to the decision-makers may become ambiguous and in some cases biased.
Through working with large infrastructure investment projects in various sectors in Norway, we have experienced severe challenges connected to base case specifications. To shed light on the importance of these challenges, this paper will examine a number of case studies where base case specifications have been a matter of concern. Based on these findings we will discuss the potential for improvements in current practice related to base case definitions and specifications.
Association for European Transport