Once a complete set of shadow prices representing social values and real
scarcities has been established, then these are applied to the quantities of inputs
and outputs, and a spreadsheet expressed solely in shadow price values is
produced. Where particular costs and benefits are seen as accruing heavily to
vulnerable or other target groups, weightings could be applied to reflect
distributional concerns. All assumptions about the time pattern of physical
activities, pricing of resource use and physical effects, and distributional
weightings should be fully documented.
The spreadsheet is then expanded by three rows to calculate total costs and total
benefits, and net costs/benefits in each year. A standard discounting formula is
applied to net costs/benefits in each year to take account of the effects of time.
Either net present values can be calculated for a target discount rate, or an
internal rate of return (reducing the sum of discounted net costs and benefits to
zero) can be calculated as a first complete scenario.
This scenario presents the most likely estimate. It can then be adjusted to best
case and worst case scenarios by reviewing the risk analysis and the
assumptions made. All risks and assumptions that tended to increase benefits
and decrease costs are quantified and used for a best case scenario. To construct
a worst case scenario, all risks and assumptions that would increase costs and
decrease benefits are quantified.
All three scenarios, with their associated documentation, can then be offered to
decision-makers for consideration in the final assessment process. Presenting at
least three scenarios is a clear signal to the decision-makers that the social cost–
benefit analysis is not merely a technical calculation, but an indicative exercise
in which judgement must be exercised by decision-makers.
Social cost–benefit analysis is not presented here as a panacea for appraising or
evaluating water interventions. Social cost–benefit analysis can help in making an
assessment but cannot determine a decision on the results. The practice of social
cost–benefit analysis has matured since the 1970s. In its best practice, social
cost–benefit analysis today is explicit and transparent about assumptions and
judgements involved. Social cost–benefit analysis presents decision-makers with
choices they can make with good deliberative reason, and does not seek
technical closure (Morimoto & Hope, 2004).
In this chapter we have attempted to describe social cost–benefit analysis at its
most technically ambitious, in terms of a wide-ranging livelihoods framework. We
have found no studies of water interventions that meet the high demands of both
rigorous principles and empirical range. We hope that this book will encourage
more ambitious efforts to apply social cost–benefit analysis to more local
drinking-water interventions in the future. Chapter 12 outlines the best examples
currently available of using social cost–benefit analysis to assess water
interventions at a highly aggregated level.