B3.4 Cost-Benefit Analysis

Needless to say, the role of public works is to secure safety and comfort. It is also important to secure the efficiency and transparency of public investment projects. By improving pleasant living standards and preserving the natural environment, we can vitalize local communities and the overall economy in modern society. In order to improve the efficiency of public works, the government must launch and/or continue only those projects whose necessity is confirmed and discontinue those whose necessity has diminished or where progress is inadequate. It is also useful to disclose the evaluation methods and results to ensure the transparency of public works.

Regarding the methods of evaluation, the government should conduct comprehensive evaluations, including cost-effective analysis. It should thus check whether a new project deserves to be launched and decide whether an existing project should be continued or discontinued after considering all the relevant issues comprehensively. These evaluations should include those aspects of public works that are hard to express in monetary terms.

We may describe the workflow of project evaluation as follows. In the planning stage, policy targets must be clarified and several policy proposals must be compared and evaluated. In the evaluation stage, the necessity of a new project must be carefully evaluated to decide whether to launch the project. In the reevaluation stage, the necessity of a project should be reviewed to decide whether to continue or discontinue the project. In the ex-post evaluation stage, the effects, benefits, and environmental impacts of a project must be analyzed after its completion and, if necessary, appropriate measures and planning must be discussed for future projects.

There are some controversial arguments in Japan regarding evaluations in terms of benefit (B)/cost (C) ratio, B/C. In principle, government officers who carry out a project must understand that B/C is just one of the indices in the evaluation process. Evaluation should be comprehensive, taking into account many different factors beyond the standard B/C. The current B/C is incomplete because it fails to take into account factors relating to the environment and safety, among others.

However, many citizens believe that transparency regarding public investment projects has still a long way to go. People distrust the disclosed figures, suspecting some window dressing with political bias toward the overestimation of benefit, B. They conjecture that the calculations are made by government-friendly consultants. The natural belief of most voters in Japan is that accurate estimations of B/C should be at the center of all evaluations. Since efficiency matters the most, evaluations should begin with high B/C scores.

Thus, we have some serious concerns regarding the current evaluation system in Japan. Many voters still criticize public works regarding their necessity. They also find fault with the current evaluation system. Evaluation methods have two difficulties. The first is the limitation of accuracy. Evaluation requires an element of prediction; thus, inevitably, it involves a degree of error in the results. The second difficulty relates to the limitation of estimation technology. Some projects’ effects are not measurable. Even though some effects can be quantified, many cannot be expressed in monetary terms. Moreover, the use of evaluation results has two associated problems. First, it is unclear how evaluation results are related to decision-making. Although comprehensive evaluations are made, including cost- benefit analysis and much other data, it is hard to understand how such results are used in priority setting, budget allocation, and other decision-making in the actual political process. Second, it is important but hard to disclose all information on evaluations.

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