Friday, 24 November 2017

Cost-benefit analysis based decision making should be a common practice




The Indian policymakers generally take decisions on the basis of their own perception. They have neither mindset nor patience for basic management tools and techniques such as cost benefit analysis (CBA) and project appraisal (of which CBA is an integral part).

The recent hike in Delhi Metro fare is the latest example. According to the media reports, the hike has resulted in decline in the number of commuters by 3 lakh per day. The Metro fares in Delhi are now three times more than in several countries. Obviously, commuters have done their own CBA and concluded that travelling by Delhi Metro was no longer economical.

The justification for upward revision of the Delhi Metro fare is that the revenue generated by the existing fare structure was not sufficient to meet the cost of providing the service. However, had those responsible for the decision done a sensitivity analysis – which is part of CBA – to calculate the likely fall in revenue with each percentage point upward revision, they would have been able to take better decision decision. Maybe, they could have thought of generating income from other sources like commercial use of Metro stations (of course, it is being done at several places) and reducing the cost.

The fall in the number of commuters not only reduces revenue of Delhi Metro, it adds to other costs such as cost of reducing pollution. (National Green Tribunal to note.) Before introducing London Underground service, a detailed cost benefit analysis had been done. The advantages considered included saving of commuters’ time (though quantification of the benefit is not easy), saving of fuel by users of motor vehicles on roads because of reduced road traffic, etc. Quite likely, such an analysis was done before introducing Delhi Metro. But it is not an one-time exercise. It has to be done every time there is a major change such as revision of fare, extension of service, withdrawal of an existing service, etc.

CBA based decision making should be a common practice, not an exception.

Devendra Narain
(Former head of the pRoject Appraisal Division of the Planning Commission)
November 25, 2017
(own website:  www.devendranarain.com)