Appendix 2: Cost-benefit analysis and accessibility and environment

Analysis of cost and benefits

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Having isolated the costs and qualities of the different schemes, it is now possible to compare them, in order to see the difference in benefit that would be obtained from the different degrees of expenditure. The comparison is first made in answer to the question: If the three schemes are considered as alterna-tives, which would show the greatest value for money? Table 6 summarises the position showing, in addition to the 3 schemes, the 'nil expenditure' situation in 2010 (i.e. if no works are carried out). It is the improvement over conditions which would exist if no works were carried out which is the measure of benefit derived from the expenditure in a particular scheme.

Table 6: Benefits and costs of the 3 schemes compared with situation in 2010 if no works are carried out

Scheme	Env. Acc. Index	Benefit	Cost £m.	Benefit / Cost
‘Nil expenditure’	11	—	0	—
Accessibility Index	22	11	2.7	4.1
(E) score	57	46	3.4	13.5
Index of Environmental Accessibility	72	61	5.6	10.9

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The Table shows for each scheme the total cost (from Table 1), the total quality as measured by the Index of Environmental Accessibility (from Table 5), and the Benefit, which is expressed as the improvement in the Index compared with the ‘nil expenditure’ conditions in 2010. In addition, for each scheme the ratio of Benefit to Cost is shown. This ratio represents the scheme's ‘rate of return’, even though the benefit is measured by an index rather than money value.

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From the Table it is apparent that on the basis of this criterion alone, the Authority should choose Scheme B, for it has the highest rate of return in terms of environmental accessibility over money cost.

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But the Authority might then ask a more complex question. Would the additional benefits of Scheme B over A, or C over B justify the additional cost? To answer this, Table 7 shows the incremental (extra) benefits, costs, and benefit-cost ratios of each scheme over the preceding one.

Table 7: Comparison of the incremental costs and benefits of the 3 schemes, in terms of Environmental Accessibility

Scheme	Incremental
	Benefit	Cost £m.	Benefit / costs
‘Nil expenditure’	-	-	-
A	11	2.7	4
B	35	0.7	50
C	15	2.2	7

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The following conclusions emerge from Tables 6 and 7:

1. Environmental Accessibility rises with total costs throughout, including Scheme C. Each scheme thus produces extra benefit for extra cost, and Scheme C produces the maximum benefit.
2. Scheme B is clearly worth proceeding to. Both its benefit-cost ratio and incremental benefit-cost ratio are the highest; the extra benefit over Scheme A is comparatively high for the cost involve
3. But since the incremental benefit-cost ratio for Scheme C falls sharply, from 50 to 7, there must be some doubt about the value of proceeding beyond Scheme B.
4. If the Authority were restricted in its capital budget, and therefore wished to obtain only the highest possible return on each investment, it would stop at Scheme B, for this offers the best benefit-cost ratio.
5. But if investment resources were not so limited, it would be worth proceeding to Scheme C provided the extra benefit was greater in money terms than the extra cost. Since benefits are not put in money terms the analysis offers no conclusion in such cases. It becomes a matter for value judgment by the Authority to determine whether the extra environmental accessibility would justify the extra expenditure of £2.2m.