Benefit: Cost Ratio

Comparing the relative merits of projects of different scales, durations and types has always been a challenge for managers of natural assets. INFFER’s Benefit: Cost Ratio (BCR) has been designed specifically to solve this problem. It reveals which environmental projects would produce the most valuable outcomes per dollar spent.

“Suppose you were looking at buying either a Toyota Corolla or a Honda Civic, and you liked them both equally, but the Toyota was much cheaper. Which would you buy? To buy the more-expensive Honda, you’d have to think it was superior to the Toyota by enough to justify the extra expense. That is exactly what the BCR is capturing for environmental projects.”

David Pannell, Professor, University of Western Australia and INFFER team member

A key factor in allowing comparison of projects of different scales, durations and types is the inclusion of a standardised score for the value of the natural asset (V). This represents the asset value if the project is successful. It is expressed relative to the value of an asset of very high national significance. The other variables in the Benefit: Cost Ratio are all expressed relative to this asset value.

The BCR represents the benefits of a project divided by the costs of the project (including subsequent maintenance costs, if relevant) to calculate the expected level of benefits per dollar spent. This allows us to compare the merits of projects of different scales. The decision rule is to choose the projects with the highest BCRs, down to the point where the budget is exhausted.

There are more detailed explanations of how the BCR works and the formula that’s used to generate the score in the Frequently Asked Questions (specifically section 6), the BCR information sheet and the BCR Powerpoint presentation.

One of the particular strengths of the BCR is that it allows project developers to investigate different scenarios. Among other things, users can modify the parameters throughout the Project Assessment Form to determine the most realistic goal, the optimal suite of on-ground works that are also technically feasible and the most appropriate policy mechanisms to secure adoptability (such as incentive payments or technological change). In this way, the ambitiousness of a project goal can be tailored to a certain budget or alternatively, a larger budget can be justified for a more ambitious goal. An investigation exactly like this was undertaken for the Gippsland Lakes in 2010.

Of course, like any score-generating process, it’s important that the BCR isn’t used in isolation – all aspects of the project need to be considered when decisions on investment are being made.

Gippsland Lakes

 

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