The Role of Social Cost-Benefit Analysis Revisited

The role of CBA in river basin management in The Netherlands

A. Ruijs, PhD

Water Economics & Institutions Group

Royal Haskoning
P.O. Box 151
6500 AD Nijmegen
The Netherlands
+31 (0)24 3284934
Arjan.Ruijs@Royalhaskoning.com

Introduction
Traditionally, (social) cost-benefit analysis (CBA) is one of the tools used in policy making to
prioritise the allocation of public spending. Also in the Netherlands, CBA is used regularly for
national and regional policy making for example in the fields of infrastructural investments,
river basin management, flood risk management and spatial development. In short, in a
CBA, all costs and benefits of a number of proposed alternative projects are systematically
assessed and compared. This includes not only direct spending but also direct, indirect and
possibly external effects of the alternative projects. First, for all alternatives concerned, their
effects are identified, quantified and translated into monetary terms. Next, all costs and
benefits are discounted and aggregated in order to determine the present value of the net
benefits and/or the internal rate of return. In theory, for mutually exclusive projects, the one
with the highest net present value or highest internal rate of return would yield the highest
social benefits and should therefore be adopted.
CBA methodologies are applied intensively throughout the world, but receive strong
criticism. Especially for projects affecting natural resources, environmental goods and
services and projects with long planning periods or with irreversible effects, many people
contest the results and point at the risks of basing public decisions too much on the basis of
CBA results. Some comments often brought forward include
1. the problem of putting monetary values on intangible assets;
2. the neglect of equity issues;
3. the undervaluation of long term effects due to discounting;
4. the neglect of irreversible effects;
5. the undervaluation of positive effects of innovations;
6. the costs of doing a proper CBA analysis.
Even though many of these comments are true for particular cases, they detract from the
merits of CBA and the flexibility with which it can be applied (if applied correctly). As will be
argued below, despite all the comments, CBA results may give very useful insights in the

1
effects of proposed projects. Next to that, many of the comments mentioned can be solved if
dealt with in the correct way.
In this paper, the role and value of cost-benefit analysis in public policy making are
discussed. On the basis of a number of cost-benefit analyses that have recently been
performed by Royal Haskoning, it is highlighted how CBA can play a role in local and
national policy making and which results and analyses are especially important. Next to that,
for the main comments on CBA as mentioned above it is assessed to what extent CBA
methodologies (or principles) have to be adapted (or elaborated) in order to mitigate the
objections. Finally, a number of organisational and methodological challenges that have to
be addressed in the future are formulated in order to give CBA the position it deserves in
public decision making.

Case description
Regularly, Royal Haskoning performs cost-benefit analyses. Sometimes these are part of an
environmental impact assessment (which is necessary for any public and private
infrastructure decision in the Netherlands) and sometimes they are part of investment
decisions in e.g. energy efficiency or waste management projects. Two of the projects in the
field of river basin management, in which we recently participated, are of particular interest
for this paper. The first one is a CBA for the Volkerak-Zoom lake and the second is the CBA
for the Making Space for Water project in Deventer.

Volkerak Zoom lake

The first project concerns an environmental impact assessment (EIA) and social cost-benefit
analysis for a number of alternative ways to reduce the problem of blue-green algae
(cyanobacteria) in the freshwater
lakes Volkerak and Zoom in the
province of Zeeland in The
Netherlands. This project was
executed for the Directorate-
General for Public Works and
Water Management (RWS). The
blue-green algae cause
considerable environmental and
health risks and odour nuisance
for tourists, water sports and
inhabitants. Furthermore, due to
the poor quality of the water from
the lakes caused by the algae it is
unsuitable for managing the water
levels in the polders, for irrigation
and as drinking water for livestock.

Figure 1: Volkerak-Zoom lake

2
To mitigate these problems a number of alternatives were investigated from both technical
and cost-benefit perspective. Considering as well the social and economic effects was
deemed important here as there was political and social resistance from the province and the
local farmers against some of the alternatives in which the lakes would change into a
brackish lake. In order to save resources and time, the analysis of alternatives was divided in
two phases. In the first phase the analyses were done on appraisal level. As a result, six of
the seven alternatives were discarded as only one was technically feasible. In the second
phase, the remaining alternative was assessed in more detail and compared with the
reference situation. In the CBA, we concentrated on:
• investment and exploitation costs (in the order of magnitude of 45 million),
• effects on agriculture (including investment costs for alternative irrigation
infrastructure which were in the order of magnitude of 46 million),
• fisheries (recreational and professional),
• navigation,
• housing,
• flood risks, and
• tourism/recreation.
The CBA was performed on a national level. Due to this, some effects were assessed but not
added to the net present value due to possible substitution effects. For example, as a result
of the changes, the recreation sector may grow in the project area but shrink in a
neighbouring area, resulting in a zero net change on a national level. For all effects, it was
clearly indicated who would experience the effects and how important these effects would
be. Next to that, some effects could not be assessed with sufficient certainty and were,
therefore, left blank or evaluated qualitatively. In the sensitivity analysis and conclusions,
however, it was specifically discussed to what extent they might affect the final conclusion.
Despite of the positive net present value calculated, even if also the regional effects were
considered, local resistance against turning the lake into a brackish lake remained. This
resistance was not expressed during the project and ways to mitigate the objections were
deemed insufficient by the stakeholders. As a result, further and more detailed study was
chosen for in order to find ways to get around these problems.

Making Space for Water - Deventer

For the second project, an EIA was performed for three alternatives solutions to remove a
bottleneck in the river IJssel near Deventer in order to reduce the water level during periods
of high discharge. All three alternatives would have different effects for the cityscape of
Deventer, notably an ancient city park, a rural wetland area with rare and endangered fish
and bird species, a number of farms located in the flood plains, a luxury hotel, a camping and
the local water sports associations. Within the framework of the EIA, a detailed analysis was
made of the effects of the alternatives on:
• water levels and flow in the river and the flood plains in periods of high discharge,
• fish and bird species,

3
 • ecological, soil and water quality,
• the historical, archaeological and cultural artefacts in the region and
• socio-economic effects.
Within a traditional EIA, however, the socio-economic effects are evaluated in rather general
terms and are not based on detailed analyses or interviews. In the case of Deventer,
however, differences between the alternatives were politically rather sensitive and might
have had effects on large groups in the local community. Some of these groups had a rather
strong influence in the local stakeholder platform, whereas others were almost absent and
stood at risk that their issues and concerns were not well represented in the analysis. In
order to obtain additional information on which the policy makers could base their decision,
they asked for a social cost-benefit analysis. In this cost-benefit analysis, it was evaluated to
what extent the alternatives would result in
• reduced turnover for the hotel and camping,
• loss of tourists using the harbour,
• loss of memberships for the water sports associations,
• loss of fishing grounds and therefore members of the fisheries associations,
• impacts on house prices,
• effects on environmental goods and services,
• effects on historical, archaeological and cultural artefacts.
For recreation and the fishermen and water sports associations, a lower boundary of the
welfare effects was estimated for each alternative by considering the revenues foregone for
the associations and related shops. For the historical, archaeological and cultural effects, it
was assessed on an appraisal level what would be the impact on recreational expenses.
Finally, for the environmental effects, the effects on environmental services (soil, water and
air quality) were evaluated. Next, appraisal level monetary values were adopted from existing
studies expressing 1) the willingness to pay to prevent deterioration of these services or 2)
health expenses due to service deterioration. Here, specific attention was paid to problems
of duplication of effects (double counting) and uncertainty of these values.

Figure 2: Current situation of the River IJssel

4
 In the reporting, the data were presented in a well structured way. Uncertainty ranges
were shown and it was presented who were affected and in which way. Using this, the
different stakeholders could evaluate to what extent their stakes differed from those of other
stakeholders. Next to that, an aggregate welfare effect was determined in which discounted
values for the different stakeholders were aggregated into the net present value (NPV) for
each alternative. Here, specific attention was paid to the uncertainty ranges of the values for
particular effects. Using these ranges it was assessed to what extent the ranking of the
alternatives depended on the uncertainty. Using Monte-Carlo simulation, we calculated the
probability that a certain alternative would rank as welfare optimising alternative. These
insights gave the municipality a tool to better compare the options. It showed them which
groups were affected and in what way, and it gave them insights in the uncertainties in their
choices. By combining the results from the EIA, the CBA and the stakeholder workgroups,
well founded choices could be made in which all aspects and effects of the alternatives were
included. Without the CBA, the province and municipality would have had fewer tools and
arguments on which to base their choice. Especially because this project contained
important social and environmental effects which had to be weighed against each other, the
CBA resulted in new insights that could not be obtained from the EIA alone. At the end, the
alternative was chosen that was also optimal from a CBA perspective.

Role of Cost-Benefit analysis in public decision making

Before discussing the major comments on CBA as brought forward in the introduction, the
role of cost-benefit analysis in public decision making is discussed. If the role of CBA is clear,
it can be discussed more easily whether the comments are true or whether organisational or
methodological adjustments may be needed. Moreover, if the role of CBA in the projects of
Royal Haskoning is clear, examples can be given on how comments can be dealt with in.

Do not only estimate total welfare effects

As discussed above, it is usually argued that the main objective of social cost-benefit
analysis is to estimate the welfare effects of a number of alternative projects. It serves as
one of the tools policy makers use to select a project or policy from a list of alternatives. In
the media and among stakeholders, it are often only the final conclusions and final welfare
estimates that receive attention. Considerably less attention is paid to the methods used to
derive the results, the intermediate results for the individual effects and the sensitivity
analysis. They are often seen as a black box, only accessible for economists and a few
specialists (see e.g. Savelberg et al., 2008).
The strength of CBA, however, lies precisely in these intermediate steps and the
valuations of the individual effects. The main role of CBA may be to show to policy makers
the effects of their plans on the different stakeholders and to open discussion among them.
This may be a more important role than deriving the aggregate welfare effect. If the individual
effects are shown and if the methods to derive them are clearly described, economists,
policy makers and stakeholders can discuss on the basis of arguments which alternative is

5
preferable according to them. It also shows the trade offs between the alternatives and
shows clearly who will be winners or losers. To realise this, it is important to translate, as
good and complete as possible, all effects into one common unit (usually monetary units).
Only in this way, the different effects can be weighed against each other in an objective way.
This gives the CBA specialists an important task. It is their task to clearly explain in
understandable and sometimes laymen terms how values have been derived, how they have
to be interpreted and why certain elements have or have not been considered. For national
level CBA, it can be expected that policy makers and stakeholder representatives have
knowledge on how to interpret the methodology and results. At this level, the level of detail
usually is not such that stakes of individuals are shown. Only broader categories of effects
and affected groups are shown. For local level studies, however, a CBA may clearly show
which individuals are affected. This gives the CBA analyst the obligation to carefully
argument on how the estimates have been determined. It may also result in sensitive and
emotional discussions among stakeholders. Some argue that a CBA opens a box of
Pandora. On the other hand, I would like to argue that it is good to be transparent about the
envisaged effects of public policy making and take into account possible resistance and
problems already in early stages. The roles of CBA are summarised in Figure 3.

Provide insight in individual

and aggregate effects

Provide a framework to weigh Open discussion among

effects with each other Social stakeholders and
Cost-Benefit decision makers
Analysis

Communicate and explain why Improve transparency in

results are as presented decision making

Figure 3: Roles of social cost-benefit analysis

Improve transparency and open discussion

As discussed above, in the Making Space for Water project in Deventer, stakeholder
participation and focus groups were used to get more insight into local interests with respect
to the changes proposed. On the one hand, this improved commitment of the stakeholders.
On the other hand, there was the risk that a few powerful stakeholders would dominate
meetings and push private agenda’s forward. This would give them a disproportionate vote in
the decision making process and in that way greatly influence public decision making. For
this particular case, the CBA studies gave the decision makers and stakeholders the
information to put their interests in perspective. For example, the analyses showed that some
of the alternatives had a considerable effect on fish stocks and that the region contained rare
fish species attracting a considerable number of fishermen extending to as far as Germany.

6
This group, however, hardly had a vote in the stakeholder platform and the design process.
By taking into account their losses, the decision maker saw that some of the alternatives had
stronger social effects than envisaged.
Also for the project in the Volkerak-Zoom lake, explicit attention was given to the
effects on the different stakeholders, even though for a national analysis some effects do not
have to be considered due to substitution effects taking place in other regions. For the
government, it is important to know whether vulnerable groups are affected, how costs and
benefits are allocated over time, and whether effects in the project area cause other effects
in other parts of the country. So, also for this project, a well-arranged overview of the
intermediate results may be more important than the final conclusions.

Comments on CBA
As argued above, results from CBA are regularly contested. The main comments on CBA
usually deal with
• putting monetary values on intangible assets like environmental goods and services
due to which (ecological) sustainability can not be properly considered,
• the neglect of equity issues if costs and benefits of all people affected are simply
added without considering distributional effects,
• the undervaluation of long term effects if future costs and benefits are discounted,
• the neglect or undervaluation of irreversible future effects,
• the undervaluation of effects of innovative and visionary projects,
• the costs of doing a proper CBA analysis.
For water resources management projects, this is no different. Such projects may have a
substantial effect on environmental goods and services, have effects that continue long into
the future, may result in irreversible changes and may be costly.

Valuing environmental goods and services is problematic

Critics argue that for projects with important environmental effects, CBA results neglect,
underestimate or overestimate the value of the environment for society depending on who is
doing the CBA and the position of the client with respect to the environment. Next to that,
many consider putting monetary values on the environment morally inappropriate. According
to these critics only Environmental Impact Assessments (EIA) can properly consider these
environmental effects. I argue that indeed, proper decision making on environmental projects
should be based on EIA, but not exclusively. Environmental projects also have important
socio-economic effects which are dealt with only very superficially in EIA. If the
environmental effects are not monetarised as well, you risk comparing apples with oranges.
As a result, decision making would lose transparency as it would become unclear how
economic and environmental effects are weighed. For example, in the Volkerak-Zoom lake
example, decision making exclusively on the basis of an EIA would neglect the opposition
from the agricultural sector and the effects on recreation. The CBA highlighted these effects.

7
 Much of the criticism on putting monetary values to environmental goods and
services is related to the methodological difficulties of some of the environmental valuation
methods (see Box 1 for a brief description of the environmental valuation methods). In many
of the assignments of Royal Haskoning environmental effects play an important role. Trade
offs between the environment and the general economy can not be considered properly if
their effects are not analysed in detail as well. In our projects, we therefore carefully consider
not only the economic effects but also consider the effects on environmental services of
which in a step-wise procedure the monetary effects are determined. These are put next to
each other such that the different stakeholders and policy makers can compare them and
weigh in a more objective way the different trade offs.
Box 1: Environmental Valuation
In environmental valuation theory, the total value of environmental goods and services is made up of the use
and non-use value of the environment, see Figure 4. The use value includes the primary use value, e.g.
consumption of timber and fruits, the secondary use value, e.g. swimming, enjoying scenery, hiking, and the
option value which reflects the desire to preserve a resource in order to keep the option open to use it
yourself in the future. The non-use value of the environment refers to the welfare people obtain from
environmental goods, independent from its use, now or in the future. It includes the existence value, i.e. the
welfare obtained from knowing a certain environmental good exists, and the bequest value which reflects the
desire to preserve environmental goods for future generations.
Total Environmental Value

Non-use Value

-Contingent Valuation
-Travel Cost Method -Choice experiment
-Hedonic Pricing
Use Value -Production Function Approach
-Defensive Expenditure Method
-Health Expenditures

Figure 4: Elements of total environmental value and methods to determine them.

The only methods with which the total environmental value can be determined are the so-called stated
preference methods, which include the contingent valuation method (CVM) and choice experiments. In
these methods, respondents state their preference with respect to the good evaluated. In CVM, respondents
state the amount they are willing to pay to prevent an environmental degradation or their willingness to
accept to forego an environmental improvement. Even though guidelines to set up CVM questionnaires and
econometric methods to estimate environmental values have improved considerably (see Harou et al., 2002;
Freeman, 2003), still the values are contested, verifying them remains difficult and the studies are costly.
Instead of directly asking respondents to state their preferences, revealed preference methods
estimate environmental values based on actual expenditures. This can be based on expenditures directly
related to a change of the environmental good or service. Examples are defensive expenditures to forgo
negative effects of environmental change and agricultural production losses or health expenses due to
environmental deterioration. It can also be based on expenditures that are indirectly related to environmental
quality. Examples include the travel costs made to visit nature areas or the increase of house prices if the
environmental situation in the neighbourhood improves (hedonic pricing). See e.g Hanley and Spash (1998)
for a more detailed explanation. Advantages of revealed preference methods are that they are based on
actual data and actual behavior, due to which estimates can be verified. A disadvantage, however, is that
they give an underestimation as the non-use values are not considered.

8
 For determining the monetary values of environmental effects, we usually adopt two
principles. First, they are based as much as possible on values that can be verified. As a
result, revealed preference methods are adopted for which in most cases existing data can
be used. For this, the environmental effects are disentangled in smaller, traceable effects.
Next, the effects on environmental services (dose-response relationship) can be determined,
after which the economic value can be estimated. These disentangled effects can be
summarised in an effect-table, making it for everybody clear what has and what has not been
considered. This is also helpful to prevent double counting of effects. For example, in the
above mentioned projects, some environmental effects were valued as follows:
• changes in hydrological functions affect costs for drinking and waste water companies;
• air quality changes affect public health and therefore medical expenses;
• soil quality changes affect soil fertility and therefore agricultural and livestock production;
• changes in landscape and historical artefacts change the attractiveness of areas and
therefore affect the number of tourists visiting the area and thus revenues.
Secondly, it is important to be transparent about the uncertainty surrounding the different
estimates. Many effects can not be determined with certainty due to the unpredictability of
human behaviour and more study would be needed to reduce uncertainty. CBA conclusions
should pay much more attention to the ranges within which the estimates will lie. Presenting
averages instead of uncertainty ranges is tempting and often asked for by decision makers
and the media. It is the task of CBA analysts, however, to make clear why using only these
averages and presenting them as truth is risky and may put the CBA in bad daylight.
Below, I explain more about how uncertainty can be dealt with more effectively in
CBA. On the other hand, if it turns out difficult to give reliable estimates, the analyst should
not be afraid of admitting this. In the Volkerak-Zoom lake, it turned out to be impossible to
estimate a reliable upper and lower value of the environmental effects. In such cases it is
better to be honest about that and pay extra attention to those issues in the sensitivity
analysis. It may be possible that already without considering these effects, conclusions can
be drawn. If not, additional analyses may shed more light on the consequences for the
conclusions of the study. For example, in the sensitivity analysis it may be possible to derive
the range of environmental values for which the project would yield a positive NPV. It is often
easier to say whether the true environmental value is expected to be within this bandwidth
than to estimate the environmental value itself.

CBA neglects equity

An often heard criticism deals with the lack of equity concerns in CBA. To derive the net
present value, gains and losses of all stakeholders are simply added, without treating effects
on the poor different from those on the rich (see Box 2 for a brief explanation of the
theoretical background). Indeed, if effects differ substantially between the different income
groups, basing decisions only on estimates of aggregate net present value may favour the
rich at the expense of the poor. However, as argued above, if the CBA is used to show the
effects on the different stakeholder groups, also equity effects can be considered in more
detail (see e.g. Ruijs, forthcoming). In that case, jointly with the decision makers, it can be

9
discussed to what extent ranking of alternatives might change if effects are weighed
differently or if different definitions of welfare are applied.
Again, the effect-table is a more useful tool for the decision makers than the final
welfare estimates. By focusing on the intermediate steps of CBA, much more information can
be obtained on the (monetary) effects for the different stakeholders. As was illustrated in the
cases discussed above, CBA was used especially for this. It was not only shown which were
the different effects of the projects, but also who would be affected. In this way, the decision
maker could evaluate how important the different effects were. Moreover, if deemed
important, alternative weighing methods could be used. Furthermore, if a national level
analysis is done, it is important to show who are winners and losers (positively and
negatively affected) even (or maybe especially) if they belong to the same stakeholder
group. For example, for the Volkerak-Zoom lake, recreational effects were not added to the
NPV. It was indicated, however, who were winners and losers as saying there were no net
effect would hide winners in one and losers in another region.
Box 2: Equity in CBA
CBA theory is based on the utilitarian moral philosophy which forms the basis of welfare economics (see
e.g. Perman et al., 2003). It is argued that welfare is optimized if the sum of total gains and losses is
positive. In that case, those who are winning can compensate those who lose and still be better off. This is
known as a Pareto improvement. If this approach is adopted, moral discussions on how to weigh the stakes
of different income groups in society can be avoided. Such compensation, however, hardly ever takes place,
due to which an improvement of total welfare may be negative for the most vulnerable groups in society.

The future is undervalued due to discounting

An important comment of CBA studies refers to the undervaluation of effects taking place in
the far future if they are discounted. This issue receives much attention nowadays within the
climate change discussion as discounted damages of inaction in the far future are small
compared to current costs of climate policies. In CBA, present values of future costs and
benefits are determined in order to be able to compare current with future options, see Box 3
for a brief explanation of discounting. Many argue that for longer term effects, and especially
if irreversible effects are considered, discounting is not the appropriate method. Below, I
discuss how irreversible effects can be considered. For longer term effects, discounting
methods can be adapted such that they consider intergenerational effects more
appropriately. Traditionally, in a sensitivity analysis, it is investigated to what extent decisions
would have to change if lower discount rates were applied. For a discount rate of 2%, a
damage of 100,- in 100 years is worth 14,- in present value terms, considerably more than
the 2,- for a discount rate of 4%. For any positive discount rate, however, discounted future
damages are worth only a fraction of the actual amount. As a partial solution, in the UK the
discount rate adopted gradually declines for effects in the more distant future (HM Treasurey,
2007). Alternatively, hyperbolic discounting can be used in which the discount rate is
inversely proportional to the distance in the future (see e.g. Loewenstein and Prelec, 1992;
Dasgupta and Maskin, 2005; Omura, 2005). As a result, the further away events take place,
the lower the discount rate used for discounting. Moreover, it results in a path that is more
consistent with intergenerational equity. For the examples discussed above, hyperbolic

10
discounting would not have made a big difference. With a discount rate of 2.5%, a benefit of
100 in 25 years is worth 54 in present value terms with exponential discounting and 62
with hyperbolic discounting. For a benefit of 100 in 100 years, this would be 8 and 28
(note that this depends on the parameters used in the hyperbolic discounting function).
Hyperbolic discounting is still rather unknown and therefore not applied regularly.
Box 3: Discounting
Money today has a higher value than money in the future for two reasons. First, people prefer to have
benefits today than benefits in the future. The reason for this is that people are impatient and that if the
economy continues to grow, purchasing powers increase. So, 100,- today is worth more than 100,- in a
year. Secondly, money invested today gives higher future returns. So, 100,- in a year is, with an interest
rate of 4%, worth in present value about 96,-. This means that if a fixed interest rate of 4% would be
applied, a damage of 100,- in 100 years, is only worth 2,- in present value terms. As a result, I will only
decide to forgo this damage, if it doesn’t cost me more than 2,- today.

CBA neglects irreversible changes

In case of irreversible effects, CBA in general does not properly consider the effects of the
irreversible change. Either the irreversible effect takes place after the end of the planning
period and is therefore not considered, or the discounted damages caused by the irreversible
change are small because of the discount rate adopted, or the irreversible effect is not
considered at all. Considering such effects is possible, however, but requires substantial
additional knowledge and information and may therefore be expensive. In case of irreversible
effects and if new information may become available (like e.g. with the probability of flooding
events or the severeness of climate change) or if innovative solutions are likely to be
developed in the future, the quasi-option value can be determined which relates to the
willingness to pay to avoid irreversible changes and the loss of options irreversible effects
entail (see e.g Arrow and Fisher, 1974; Perman et al., 2003). Such analyses require more
information on the risks and uncertainty surrounding the projects. This may open new
information, which also improves transparency of the decision making process and may
therefore improve acceptability of the final conclusions. It is argued, however, that in case
irreversible effects are economically, ecologically or politically undesirable, alternative
decision principles may have to be used. In that case, using precautionary principles or safe
environmental standards may be better to prevent any undesired changes. Next to that, a so-
called ‘no-regret’ check can be done, in which the probability that later you regret the choice
made is assessed. Within the above mentioned examples, irreversible changes were not
considered. For those cases, the interventions would affect valuable and rare nature but
would not cause extinction of species or complete destruction of ecosystems that could not
be replaced. It would, however, have been possible to estimate the costs of reconstructing
these areas and check whether the options chosen would be no-regret options.

CBA undervalues innovative and visionary projects

A classic comment on CBA is that future benefits of innovative projects are undervalued.
There is a tension between the hard figures used in CBA and the broad view of visionaries

11
who often see their visions fail because, according to them, the short term investments costs
are weighed heavier than the long term benefits. As Savelberg et al. (2008) argue, both
visionaries and CBA have their role within the decision making process. Visionaries are
necessary to develop innovative developments and CBA analysts are necessary to assess
the social and economic effects. Within the different phases of decision making (from
planning to detailed design) both have their roles and cost-benefit analysts are important to
separate the wheat from the chaff and select those alternatives that are promising.
A difficulty with CBA, however, is that, at least in the Netherlands, it has not been
prescribed which effects should be taken into consideration in a CBA. Some indirect effects,
which may be important especially in innovative projects, may therefore be neglected. In
order to improve comparability of CBA studies, it may be important to standardise the set up
of CBA studies and to list the effects and beneficiaries that may be important. In the
Volkerak-Zoom lake, in first instance seven possible alternatives were investigated, some of
which had a traditional and others who had a more innovative approach. As the project had
two phases, those alternatives that might have looked interesting at first instance, were
filtered out. In such a way, visionary but unreal ideas were filtered out.

CBA is expensive
A final comment is that it is often argued that CBA studies are expensive. Depending on the
number of alternatives, the size of the project, and the number of effects, it may easily take a
team of specialists a considerable amount of time to determine all effects. I would like to
make two arguments. First, compared to the investment costs, the costs of a CBA are often
modest. For the case of Deventer, the costs of the CBA were less than 0.1% of the total
investment costs. The total costs of the EIA, CBA and stakeholder platforms together were
approximately 0.5% of the total investment costs. This doesn’t seem to be excessive.
Secondly, costs can be reduced if the analysis is set up in a smart and structured
way. One way of reducing the costs is by distinguishing two phases, like in the Volkerak-
Zoom lake example. First, an analysis is done at appraisal level, in order to select the most
promising alternatives, which are then analysed in more detail. Moreover, if methods are
standardised and if existing CBA studies would be generally available, existing data could be
used more easily, making the studies cheaper. This contains, however, the risk that existing
data are copied without properly and critically looking at their transferability. For the
Netherlands, recently a handbook has been set up which contains appraisal level values of
environmental effects (Ruijgrok et al., 2006). In the case studies described above, values
from this handbook are applied for valuing the environmental effects. This handbook gives
useful guidelines, for example when translating the effects of the project to changes in soil,
water and air quality, and translating this further into health effects and expenses. On the
other hand, care must be taken that the values presented can indeed be transferred to the
study situation. For example, the handbook gives estimates of the effects of trees on fine
dust concentrations and therefore health expenditures. It turned out, however, that the
values presented only applied to the hotspot areas in urban conglomerations and that

12
important overestimates would be produced if the values were used for the Deventer project.
So, at all times a critical attitude should be kept towards applying general standard figures.

Some challenges
The above discussion shows that CBA is a useful tool that can take an important role within
public decision making. However, it often does not have the influence it deserves and a
number of organisational and methodological issues should be resolved before CBA can be
used in the way it should be used. I discuss a few challenges that need to be addressed.

Standardisation
One point of criticism on CBA is that there is not a standardised way of doing a CBA or
choosing the effects and that the analyst takes those effects into consideration that suit
himself. In the Netherlands, the OEI-guidelines have improved the uniformity of CBA
considerably (Eijgenraam et al., 2000; see also Bruyn et al., 2007), but still, a number of
improvements are possible. Next to that, water resources management has undergone
important changes in the past 20 years. It has changed from a top-down, technically
dominated management system to a system with much more bottom-up characteristics,
stakeholder involvement and consideration of social, environmental and economic effects. It
can be questioned whether in decision making all of these effects are always considered.
How to set up an EIA is legally prescribed, but guidelines on how to evaluate the social and
economic effects are less strict. I would like to plea for two developments.
First, for CBA, there is not a monitoring agency like there exists for EIA (the MER-
commission) which can advise on the effects to be considered and the alternatives to be
evaluated. If it is decided that it is important to give CBA a more dominant role within public
decision making, it is important that cost-benefit studies are executed in a standardised way
and monitored by an official agency. For local and regional level projects, the tasks of the
MER-commission could be extended and include as well CBA studies. For national level
projects, the Central Planning Agency (CPB) already evaluates CBA studies, but their role
can be extended with more advisory tasks on how to set up the CBA.
A second way of improving standardisation is by making previous studies more
easily accessible and by setting up guidelines on how and when to transfer previous results
to current situations. I would like to make a strong plea for a database of previous public
CBA studies on local, regional and national level that is regularly updated and managed on a
central level.

Uncertainty analysis
Next, as argued above, it is important not to present only average values for the different
effects, but to be honest about the uncertainty ranges. It may even be better not to present
any value but for each effect only the uncertainty range. Also for the total aggregate, the
aggregate of the uncertainty ranges should then be shown. This will in many cases result in
net present values that lie in a very broad range. It may also result in ranges for which the

13
minimum value may be negative and the maximum value may be positive (representing the
most pessimistic and the most optimistic outcomes). In such cases, the analysis should be
complemented with an uncertainty analysis, in which e.g. probabilities are presented for
which a certain alternative is the optimal one. In the Deventer project, we derived
probabilities for which alternatives would be optimal using Monte Carlo simulation. In
Brouwer and De Blois (2008) more detailed and more elaborate suggestions are presented
on how to improve uncertainty analysis. It is argued that the sensitivity analyses should not
be presented as closing entry. It should also be standardised and moreover, uncertainty
analysis should be an integral part of a CBA.

Discounting long term effects

Finally, many of the current Dutch water plans have very long term effects and should
prepare the country for effects of climate change that will only take place in the far future.
Therefore, the discussion on discounting should be extended with the intergenerational
effects of discounting and the effects it has on environmental protection. Above, I already
discussed the possibility of hyperbolic discounting and the advantages it may have. More
elaborate and clearer guidelines have to be formulated on how to deal with discounting,
when to use which discount rate and how to deal with long term effects.

References
Arrow, K. and A.C. Fisher (1974). ‘Environmental preservation, uncertainty and
irreversibility’. Quarterly Journal of Economics, 88:313-319.
Brouwer, R. & De Blois, C. (2008). Integrated Modelling of Risk and Uncertainty Underlying
the Selection of Cost-effective Water Quality Measures. Environmental Modelling &
Software, 23: 922-937.
Bruiyn, S.M., M.J. Blom, A. Schroten, M. Mulder (2007). ‘Leidraad MKBA in het milieubeleid’.
CE Delft, The Netherlands.
Dasgupta, P. and E. Maskin (2005). ‘Uncertainty and hyperbolic discounting’. American
Economic Review, 95: 1290-1299.
Eijgenraam, C.J.J., C.C Koopmans, P.J.G. Tang, A.C.P. Verster (2000). ‘Evaluatie van
infrastuurprojecten: leidraad voor kosten-batenanalyse’. Ministerie van Verkeer en
Waterstaat, Ministerie van Economische Zaken, The Netherlands.
Freeman III, M. (2003). ‘The Measurement of Environmental and Resource Values: Theory
and Methods’, Second Edition, Washington: Resources for the Future, 2003.
Hanley, N.D.. and C.L. Spash (1998). ‘Cost-Benefit Analysis and the Environment’. Edward
Elgar Publishing, Cheltenham, UK.
Harou, P., L. G. Bellu, V. Cistulli and A. Markandya (2002). ‘Environmental Economics for
Sustainable Growth: a Handbook for Practicioners’. Edward Elgar Publishing,
Cheltenham, UK.
HM Treasurey, 2007. ‘The Green book: Appraisal and Evaluation in Central Government’.
HM Treasury, London, UK.
Loewenstein, G. and D. Prelec (1992). ‘Anomalies in intertemporal choice: evidence and an
interpretation’. The Quarterly Journal of Economics, 107: 573-597.
Omura, M. (2005). ‘Cost-benefit analysis revisited: is it a useful tool for sustainable
development’. Kobe University Economic Review, 50: 43-58.

14
Perman, R., Y. Ma, J. McGilvray and M. Common (2003). ‘Natural Resource and
Environmental Economics’. 3d Edition. Pearson Education Ltd., Harlow, UK.
Ruijgrok, E,C.M., A.J. Smale, R. Zijlstra, R. Abma, R.F.A. Berkers, A.A. Németh, A.
Asselman, P.P. de Kluiver, D. de Groot, U. Kircholtes, P. Todds, E. Buter, P.J.G.
Hellegers, and F.A. Rosenberg (2006). Kentallen waardering natuur, water, bodem en
landschap: hulpmiddel bij MKBA’s’. Witteveen + Bos, Rotterdam, Netherlands.
Ruijs, A. (forthcoming). ‘Welfare and distribution effects of water pricing policies’.
Environmental and Resource Economics.
Savelberg, F., A. ‘t Hoen and C. Koopmans (2008). ‘De schijntegenstelling tussen visie en
kosten-batenanalyse’. Kennisinstituut voor Mobiliteitsbeleid, Den Haag, Netherlands.

15