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Project Identification and PPP Screening

35. Option Analysis and Selection Techniques

There are multiple techniques for identifying the best technical solution for a project and hence which projects best meet public needs. This section will briefly introduce those techniques.

The government should have a policy of using a particular technique so that all projects are compared in a standard way. If projects are screened on a case-by-case basis using different techniques, the result would lead to invalid comparisons between different projects.

One of the usual techniques for project selection, as already introduced, is the CBA analysis. It compares different project technical solutions to test which shows highest Net Present Value (NPV) in economic terms or highest economic Internal Rate of Return (IRR). Note that CBA can be a selection technique and is also the most appropriate technique for the economic feasibility assessment.

The CBA technique is explained in depth in section 2.8 of this chapter.

Other analytical techniques that may assist in selecting/defining the project are Cost-Effectiveness Analysis and Multi-Criteria Analysis, which have the advantage of being less intensive in resources and less complex[7].

Cost-Effectiveness Analysis (CEA) is one of the major alternatives to Cost-Benefit Analysis. CEA relates the cost of an alternative to a measure of project objectives (or, in other words, to its key outcomes or benefits). For example, dollars per time saved on various public transportation systems.

Government projects often generate various types of benefits which must be weighted to achieve a common “denominator”. In Cost-Benefit Analysis, dollars are the denominator. Cost-Effectiveness Analysis provides an alternative technique whereby valuing in monetary terms is almost impossible. Kee and Cellini (2010)[8] summarized this ratio as:

As the output is a non-valued ratio, the major difficulty with CEA is that it leaves a subjective judgment to the policymaker.

Multi-Criteria Analysis (MCA)[9] establishes preferences between options by reference to an explicit set of objectives that the decision-making body has identified, and for which it has established measurable criteria to assess the extent to which the objectives have been achieved[10]. The main objective of Multi-Criteria Analysis is to solve a decision problem. Often, conflicting multiple criteria must be taken into consideration[11]. The measurement need not be in monetary terms, but is often based on the quantitative analysis of a wide range of qualitative impact categories and criteria.

Multi-Criteria Analysis is often seen as[12]:

“(...) an ‘alternative’ to defining monetary values for all the major costs and benefits when this is impractical. However MCA must not be seen as a short cut, nor as an easier technique for inexperienced people to use.”

MCA introduces both quantitative and qualitative criteria in the evaluation of an alternative. In some cases, the quantitative criteria may be the result of qualitative factors (for example, poor organization in a hospital will affect its expenses and its results).

[7] For examples of these techniques, see Yates, B.  T.  (2009); Zopounidis, C.  (1999); Zopounidis, C.  and Pardalos, P.  M.  (2010), chapter 2.

[8] Cellini, S.R., Kee, J.  E.  Cost - Effectiveness and Cost - Benefit Analysis.  In Handbook of Practical Program Evaluation, Third Edition (2010), pages 493- 530.

[9]  Often called multiple criteria decision making (MCDM) by the American School and multi-criteria decision aid (MCDA) by the European School.

[10] Department for Communities and Local Government: London (2009). Multi-Criteria Analysis: A Manual.

[11] Zopounidis, C.  Multi-criteria Decision Aid in Financial Management. In European Journal of Operational Research 119 (1999) pages 404-415.

[12] Department for Communities and Local Government: London (2009). Multi-Criteria Analysis: A Manual.

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