Several approaches can be used to construct a cost basis (costing) for a strategy or programme. They all relate an input of costs allocated to certain activities to some output in connection with strategies/targets, and ultimately results (outcomes). Different costing approaches have different strengths and weaknesses and uses, and several are often used in combination. They are described here, and summarized in Table 5.1:

Incremental budgeting approach (IBA)

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Perhaps the most common approach in use. It provides a contrast to the FNA’s focus on “costing” rather than budgeting since budgets are constrained by available funding, whereas the costing in the FNA should indicate realistic needs independent of available budgets. In incremental budgeting, the previous year’s budget is taken as a starting point and a percentage increase (or decrease) is applied. This approach is not recommended because it does not adequately address the basic principles outlined above.

Historical projections

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Historical costs are used to project future costs. This could differ from incremental budgeting if it builds on detailed historical activity or results-based costs. Where detailed historical costs are known, these can be used to estimate future costs for specific activities. For example, the costs for replanting a hectare of mangroves in the past can be used to estimate the costs of replanting a targeted amount in a specific country or area in future. When using historical costs, it is important to: 1) make sure they are accurate and cover the entire cost of an activity; 2) base the new costs on specific biodiversity management targets (i.e. number of hectares, days of ranger missions); and 3) account for inflation, diminishing marginal returns, economies of scale and any other issues that would affect future costs.

Cost modelling

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Estimating future costs based on quantitative models with input variables. Models are almost always used for costing and can be as simple as multiplying a unit cost by the number of units needed. However, this approach here generally refers to complex, potentially non-linear, models with multiple variables. For example, models for estimating protected areas costs based on their area, distance from cities and local purchasing price parity, have been derived from historical costs and used to make future costing predictions. Complex models supported by the literature may be useful for the FNA, especially in cases where actions are new to a country with no available historical estimates.

Activity-Based costing (ABC)

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Estimating budgets based on specific programmes and activities identified and the costs related to those activities. Administrative overheads are tied to activities more closely than in traditional budgeting (which simply adds on administrative costs as a supplement). This is useful when details of biodiversity activities are well known (and quantified), tracking project or programme “outputs” (immediate results of actions) is desired and the “outcomes” (longer-term results) of activities are difficult to quantify or track. For this approach, it is useful to have a catalogue of costing units to help cost activities in an integrated manner.

Results-Based costing (RBC)

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An expansion of activity-based costing where all costs are associated with specific medium- to long-term results, so that the “outcome” of the activity is the budgeting focus and not the activity or short-term outputs. There is a strong push towards this type of costing in national budgeting processes. It is also called “performance-based budgeting,” because it allows the finance ministry and central planning agencies to more easily track performance. RBC is described in further detail below. This approach could also be framed as a finance solution to improve efficiency and cost-effectiveness in biodiversity spending.

Table 5.1: Summary of the Costing Approaches

Costing Approach	Common Use	Opportunities	Challenges
Incremental Budgeting Approach	Annual increments allocated, most budgets	Gradual change	Limited vision, lack of connection with results
Historical Projections	Empirical data used for budgeting	Accurate, based on real experience	Not comprehensive, may not be optimal but based on limited budgets
Cost Modelling	Extrapolation from small cases, budgeting new activities	Alternative scenarios, understanding cost effectiveness	Lack of empirical data, country or geographic specificity
Activity-Based Costing	Project budgeting, programme budgets	Detailed bottom-up budgeting	Not necessarily focused on outcomes
Results-Based Costing	Planning by objectives, log frame, programme- based budgeting	Best practice, detailed, focused on outcomes	Advanced approach, not used in most countries

BIOFIN encourages building up budgets from smaller costable actions and budget line items. Using a catalogue of unit costs is also useful in order to base activity cost estimations in welldefined categories such as human resources, infrastructure, equipment, inputs, consultancies and public consultations, among others. In future, it may be possible to build refined models for future biodiversity management budgeting needs, based on data from a wide range of BIOFIN countries and biodiversity activities linked to strategies and results, similar to models currently used in health care and education. In all cases, unit costs should be based on government norms, research and published documents, and be peer reviewed or validated. Economics and biodiversity literature provides some useful cost estimates for particular actions such as reforestation costs, coral reef restoration, and seagrass restoration. (See Box 5.3).

BIOFIN recommends RBC, or elements from it, in line with best practice in public budgeting. Working backwards from impacts to outcomes, outputs, and actions is a common planning approach and is part of a logical framework methodology. Many countries are moving toward RBC to ensure good governance and hold different government agencies to high standards. Early adoption of RBC-RBB reforms in the ministry of environment can help to achieve cost-effectiveness, and also qualify priority institutions for additional allocations. The extent to which results-based costing is adopted or appropriate for the FNA will depend on each country’s capacity and appetite, particularly in the finance ministry