Introduction to Cost-Benefit Analysis

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Outline. What is CBA?need to know about it?Why you is it useful?When should you use it?How can the CBA Unit help?. What is Cost Benefit Analysis?. CBA is an analytical framework used to assess the benefits and costs of policy proposals CBA focuses on economic efficiencyIt calculates the

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Introduction to Cost-Benefit Analysis

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2. Outline What is CBA? need to know about it? Why you is it useful? When should you use it? How can the CBA Unit help?

3. What is Cost Benefit Analysis? CBA is an analytical framework used to assess the benefits and costs of policy proposals CBA focuses on economic efficiency It calculates the net benefits for each policy proposal Takes a long-term view and incorporates all relevant costs and benefits

4. Why you need to know about CBA? Recent government decisions give renewed focus to CBA Agencies need to build their capacity to use CBA to improve the quality of regulatory analysis Greater use of CBA expected by government for regulatory proposals

5. Why is CBA useful? Takes a community-wide perspective Allows the consideration of a range of policy options Determines which policy maximises net benefits to the community Allows benefits and costs to be compared over time Can show the costs and benefits accruing to different groups within the community

6. When do you need to use CBA? Using CBA techniques to quantify impacts is not “new” it has always been part of the regulatory assessment process However there is now a greater focus on quantification for regulatory proposals, particularly those with important impacts Agencies should devote resources to quantification to where stakes are greater

7. CBA and the RIA process Problem Objectives Options Impact analysis Consultation Conclusion and recommended option Implementation and review

8. What are the basic steps in a CBA? Specify the set of options Decide whose benefits and costs count (standing) Identify the costs and benefits and select measurement indicators Predict the impacts over the life of the regulation

9. Basic steps in a CBA (continued…) Attach dollar values to impacts Discount future benefits and costs to obtain present values Compute the net present value of each policy alternative Perform sensitivity analysis Make a recommendation

10. Where possible, quantify important impacts Now a greater focus on quantification for regulatory proposals, particularly those with important impacts agencies should quantify to the maximum extent reasonable given time and resource constraints At the same time qualitative costs and benefits should not be excluded from consideration

11. Qualitative impacts present a challenge Qualitative factors should be adequately considered but not overplayed If a proposal shows large quantified net costs there should be a clear explanation of why qualitative net benefits justify proceeding with a policy option

12. Different techniques can be used Different impacts may call for different estimation techniques Will depend on the nature and complexity of issue and availability of information High quality analysis may require expertise – consultants can be useful

13. Steps to ensuring a good CBA outcome Proper resourcing Getting the right skills Collecting high quality information Consulting with stakeholders Consulting ‘early’ with the OBPR

14. How can the CBA Unit help? Assistance on technical issues Advice on how to improve CBA done in-house or undertaken by a consultant Training/Workshops on CBA Developing CBA guidance material on a ‘needs basis’ Provide examples of CBA reports

15. Useful CBA References Boardman, E.A., Greenberg, D.H., Vining, A.R. and Weimer, D.L. 2006 Cost-Benefit Analysis: Concepts and Practice, 3rd edition. Commonwealth of Australia 2006, Handbook of Cost Benefit Analysis, January. Australian Government 2007, Best Practice Regulation Handbook, August. OECD 2006, Cost-Benefit Analysis and the Environment: Recent Developments

16. Further information www.obpr.gov.au e-mail: [email protected]

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