An economic appraisal systematically analyses all the costs and benefits of various options to achieve a particular service objective. An economic appraisal assists selection of projects or programs which maximise benefits to the community relative to costs, or which are the most cost effective. An economic appraisal will show:
◼ whether the benefits of a proposed project are likely to exceed its costs
◼ which among a range of options to achieve an objective has the highest net benefit and / or
◼ which option is the most cost effective, where benefits are equivalent.
When preparing an economic appraisal, agencies should consider these prerequisites:
◼ if the objectives are scoped and measurable (section 4.1)
◼ are the options, including the base case (section 4.2) are developed and address key risks, environmental, social, financial, technical and legal requirements (sections 4.4-4.6)
◼ if the options have been adequately costed and include capital costs and recurrent costs (note credible methodologies for estimating costs must be used and referenced)
◼ if the quantified and qualified benefits have been identified
◼ if early intervention and demand management strategies have been considered (section 4.2)
◼ if the assumptions underpinning these costs and benefits are included (section 4.4)
◼ if the analysis includes the appropriate discount rates, sensitivity analysis and
◼ if the analysis is applied over the life of the proposal - the project plus its operating life.
The major techniques used are for economic appraisals are:
◼ Cost Benefit Analysis (preferred) or
◼ Cost Effectiveness Analysis.