Question

What reasons are not suitable for using Cost Benefit Analysis as a decision making tool for public sector infrastructure projects(High speed rail) in Hong Kong?

Answer 1

COST BENEFIT ANALYSIS IS THE METHOD USED TO ANALYZE THE WORTHINESS OF A PROJECT TO BE SELECTED OR NOT BY COMPARING THE COST WITH THE BENEFITS TO BE DERIVED.IN SIMPLE WORDS, IT IS COMPARING THE TOTAL COST TO TOTAL BENEFITS. THE COST AND BENEFITS ARE NOT A ONE TIME EVENT. THEY HAPPEN EVERY YEAR LIKE A COMPANY PURCHASE A ASSET AND DERIVE THE BENEFIT FOR YEAR SIMILARLY WHEN A COMPANY INVESTS IN A PROJECT THEY EXPECT RETURN EITHER EQUAL OR UNEQUAL OVER THE YEAR. THESE CASH FLOW AT THEIR PRESENT VALUE ARE COMPARED TO GET THE NET PRESENT VALUE OF THE PROJECT.

THIS APPROACH IN NOT SUITABLE AS THE DECISION MAKING TOOL FOR PUBLIC SECTOR INFRASTRUCTURE PROJECTS.

• AS THIS APPROACH FOCUS ON THE PROFIT MAXIMISATION AND PUBLIC SECTOR INFRASTRUCTURE PROJECT AIM FOR SOCIAL WELFARE.
• THE BUSINESS FUNCTION IN A DYNAMIC ENVIRONMENT WHICH IS CONSTANTLY CHANGING AND FOR COST BENEFIT ANALYSIS WE NEED TO KNOW THE CASH FLOWS IN THE FUTURE. SO WE NEED TO MAKE ASSUMPTION ABOUT THE SAME. THESE ASSUMPTION CAN BE MADE OF IMMEDIATE FUTURE APPROPRIATELY. BUT ASSUMPTION BEYOND THAT TIME MAY OR MAY NOT BE AUTHENTIC.

GENERALLY THE INFRASTRUCTURE PROJECT ARE LONG TERM PROJECTS WHICH INVOLVED HUGE COST AND RECOVERING THOSE COST DEMAND TIME.IN THE INITIAL YEAR THE BENEFITS ARE LOW AND ASSUMPTION BEYOND THAT TIME IS DIFFICULT TO FORM. THUS COST BENEFIT ANALYSIS IS NOT A GOOD DECISION MAKING TOOL