Image by Jeremy Thomas from Unsplash.
What is the difference between traditional financial analysis and cost-benefit analysis?
Financial analysis focuses on cash flows from the perspective of the entity making the investment, considering income, expenses, debt, and financial return. On the other hand, economic analysis is broadened to include the wider impact on the economy and society. This means considering not only the direct benefits and costs to the project or policy proponent but also the effects of positive and negative externalities that the project may have on the population. Examples of externalities include impacts on water and air quality, reductions or increases in travel time, and reductions or enhancements of ecosystem services. The analysis can be developed from different perspectives; for example, from the perspective of a country, a region, or local communities.
How did the use of cost-benefit analysis begin?
The modern application of CBA was solidified in the 1960s, especially in the United States. Chapter seven of the book The Economist Hour recounts how this methodology was formally integrated into the U.S. defense budget process. This adoption sought to justify military investments through a quantitative approach that compared the benefits and costs of different project execution options. CBA has been widely adopted in the public sector as a tool for assessing the viability and efficiency of projects and policies.
How is cost-benefit analysis applied in Peru?
In Peru, the Ministry of Economy and Finance (2022) provides a comprehensive guide for the identification, formulation, and evaluation of public investment projects, detailing considerations for the development of cost-benefit analysis. This guide helps identify both benefits and costs, considering externalities (both positive and negative) and as well as intangible benefits or costs.
Cost-benefit analysis in the context of Environmental Impact Assessments (EIA) in Peru
In the context of EIAs for mineral resource extraction projects, Chapter 7 on Economic Valuation of Environmental Impacts requires the development of cost-benefit analysis. However, there is no guidelines for developing analysis under the EIA framework. Consequently, the information requirements in the cost-benefit analysis are based on the requirements referred by SENACE, based on the judgment of its specialists.
Therefore, it is pertinent to look at the experience of countries that benefit from their natural resources and have incorporated CBA into the environmental evaluation process of their projects. This would provide a valuable perspective to refine the criteria used in Peru within the context of EIAs, thus improving the precision in identifying and evaluating the benefits and costs associated with projects that exploit natural resources.
