Often funding programmes are established on capital expenditures and do not
arrange for funds related to O&M costs. In practice, only when the project starts
functioning, that the benefits can be really assessed and quantified. Intangible costs
and benefits are often debatable and are not easy to include in an economic analysis.
When non-monetary benefits are excluded, each user’s benefits may be
undervalued, often leading to possible disputes over the contribution of each user.
Combining non-monetary values with monetary ones becomes possible by using
trade-off analysis in a project’s economic analysis. In trade-off analysis, monetary as
well as non-monetary benefits and costs are ordered using user-defined weights. The
monetary and non-monetary components are then normalized, to make all values
unit-less. Multiplying the normalized values by the weights yields a final weighted
value for each. Alternatives can then be ranked by using the normalized and
weighted values. The trade-off analysis will help in choosing alternatives during
the economic analysis. This can therefore be used as a basis for accounting
non-monetary benefits in the costs allocation.
Tables 19.5 and 19.6 show an example which explains the use of trade-off
analysis. The construction of a recycling project will decrease demand from natural
water sources, and consequently allow natural stream flows to increase, influencing
in turn the quality of aquatic and riparian habitats. As a result, the biodiversity in the
stream is expected to improve. Each alternative A, B and C will conserve a different
zone with varying biodiversities. Although the monetary benefits from diversity
cannot be calculated, it is possible to quantify the number of improved native species
populations. This number may then be used as a proxy, and is given in Table 19.5.
Both Tables 19.5 and 19.6 are divided into two parts (Left and Right).
In Table 19.5 (Left), the net monetary benefits are given a weightage of 0.8 while
the benefits from improved stream biodiversity are weighted by 0.2. (0.8 + 0.2 ¼ 1).
For both the monetary and non- monetary factors, the values are normalized by
dividing by the highest actual value from the alternatives. For net benefits, a value of
1000 (from alternative C is used), while for biodiversity, a value of 12 (from
alternative B is used). Multiplying the normalized value by the weightage coefficient
then provides the normalized and weighted value for both monetary and
non-monetary benefits for each alternative A, B and C. The sum of these
characterises the weighted product for each alternative and is used to order and
choose the best alternative. In Table 19.5 (Left), with the given weightage, alternative C is deemed to be the best.
What are the effects of a change in weightage or a change in the values of both
monetary and non- monetary benefits? In Table 19.5 (Right), the same weightage
coefficients have been kept, but the values for biodiversity have been changed. This
gives the same ranking, indicating the influence of the weightage coefficients.
Conversely, Table 19.6 (Left) uses different weightage coefficients, with the same
values as in Table 19.5 (Left). The (Right) parts of both Tables 19.5 and 19.6 may
also be compared. These comparisons, thus, show that it is important to use judicious
weightage coefficients when carrying out such trade off analysis. A high weightage
coefficient might give too much importance to certain parameters.
19.8 Precautions – Problems
555
arrange for funds related to O&M costs. In practice, only when the project starts
functioning, that the benefits can be really assessed and quantified. Intangible costs
and benefits are often debatable and are not easy to include in an economic analysis.
When non-monetary benefits are excluded, each user’s benefits may be
undervalued, often leading to possible disputes over the contribution of each user.
Combining non-monetary values with monetary ones becomes possible by using
trade-off analysis in a project’s economic analysis. In trade-off analysis, monetary as
well as non-monetary benefits and costs are ordered using user-defined weights. The
monetary and non-monetary components are then normalized, to make all values
unit-less. Multiplying the normalized values by the weights yields a final weighted
value for each. Alternatives can then be ranked by using the normalized and
weighted values. The trade-off analysis will help in choosing alternatives during
the economic analysis. This can therefore be used as a basis for accounting
non-monetary benefits in the costs allocation.
Tables 19.5 and 19.6 show an example which explains the use of trade-off
analysis. The construction of a recycling project will decrease demand from natural
water sources, and consequently allow natural stream flows to increase, influencing
in turn the quality of aquatic and riparian habitats. As a result, the biodiversity in the
stream is expected to improve. Each alternative A, B and C will conserve a different
zone with varying biodiversities. Although the monetary benefits from diversity
cannot be calculated, it is possible to quantify the number of improved native species
populations. This number may then be used as a proxy, and is given in Table 19.5.
Both Tables 19.5 and 19.6 are divided into two parts (Left and Right).
In Table 19.5 (Left), the net monetary benefits are given a weightage of 0.8 while
the benefits from improved stream biodiversity are weighted by 0.2. (0.8 + 0.2 ¼ 1).
For both the monetary and non- monetary factors, the values are normalized by
dividing by the highest actual value from the alternatives. For net benefits, a value of
1000 (from alternative C is used), while for biodiversity, a value of 12 (from
alternative B is used). Multiplying the normalized value by the weightage coefficient
then provides the normalized and weighted value for both monetary and
non-monetary benefits for each alternative A, B and C. The sum of these
characterises the weighted product for each alternative and is used to order and
choose the best alternative. In Table 19.5 (Left), with the given weightage, alternative C is deemed to be the best.
What are the effects of a change in weightage or a change in the values of both
monetary and non- monetary benefits? In Table 19.5 (Right), the same weightage
coefficients have been kept, but the values for biodiversity have been changed. This
gives the same ranking, indicating the influence of the weightage coefficients.
Conversely, Table 19.6 (Left) uses different weightage coefficients, with the same
values as in Table 19.5 (Left). The (Right) parts of both Tables 19.5 and 19.6 may
also be compared. These comparisons, thus, show that it is important to use judicious
weightage coefficients when carrying out such trade off analysis. A high weightage
coefficient might give too much importance to certain parameters.
19.8 Precautions – Problems
555