Cost Benefit Analysis in the Australian Government - a case of back to the future

1. Cost Benefit Analysis in the Australian Government - a case of back to the future? Dr Leo Dobes Visiting Fellow, ANU Adj. Assoc. Prof. Canberra Uni Leo.Dobes@anu.edu.au ph: 6215 2557 ph: 0417 462 153

2. Whither CBA? Unification of the rail gauge some lessons from the turn of the century A glimpse of current practice Transport and Regional Services (DOTARS) Health Defence Is it time for a CBA renaissance? How could we resuscitate CBA? 21 Nov 2007 Leo Dobes 2

3. Potted history of the rail gauge unification debate 1854: NSW traduces Victoria - adopts 4’8½” gauge rather than previously agreed 5’3” 1883: Railway bridge across the Murray river 1895: Mark Twain upset by train change at Albury 1897-1920: a flurry of conferences 1920-1922: PM Billy Hughes strong advocate at Premiers conferences, using Defence rationale 1922: States reject C’wealth draft agreement because of other priorities 21 Nov 2007 Leo Dobes 3

4. So were the colonies off the rails? common sense of rail gauge unification often accepted as a ‘lay down misere’ almost an Australian article of faith but ex post judgement needs to be based on knowledge and perspectives at the time what would a contemporary ‘turn of the century’ CBA have shown? 21 Nov 2007 Leo Dobes 4

5. 21 Nov 2007 Leo Dobes 5 Conversion of all 5’3” to 4’8½” gauge

6. 21 Nov 2007 Leo Dobes 6 Conversion of all 4’8½” to 5’3” gauge

7. CBA sanity check quantitative analysis: costs > > > > benefits credible result, because benefits limited: drought relief: locomotive logistics limited by water Defence rationale excluded Queensland; and broken gauge was a potential defence against invasion coastal shipping and Murray-Darling river transport were major competitors Engineers differed on relative merits of the 3’6”, 4’8”, 5’3”, 3rd rail, and bogie exchange alternatives cheap labour: transhipment inexpensive colonial rail systems designed to connect hinterland with ports, not to network towns as in USA and Europe 21 Nov 2007 Leo Dobes 7

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9. Some lessons from history hindsight does not support critics rigorous analysis important, even if the solution is ‘obvious’ Australia had early CBA capability but politics paramount ........ even a century later (Darwin-Alice Springs) USA institutionalised CBA in 1936 benefits unclear, but CBA does provide systematic information to decision-makers would Australia have benefited? 21 Nov 2007 Leo Dobes 9

10. Current Commonwealth practice Comprehensive overview difficult no central store of data or analyses studies often not publicly available Chose 3 Australian Government agencies based on limited discussion with each AusLink (DOTARS): infrastructure Health and Ageing : regulation Defence: projects with uncertainty Other governments also employ analysis eg ACT: Summernats, V8 Supercar studies 21 Nov 2007 Leo Dobes 10

11. AusLink (DOTARS) Australian transport since Federation 3 tiers of government piecemeal short-term, modes considered and funded separately Green Paper 2002, White Paper 2004 integrated road & rail, access to ports, airports, and intermodal terminals national planning of 24 transport corridors joint Commonwealth-State approach economic analysis of projects A major achievement 21 Nov 2007 Leo Dobes 11

12. AusLink road and rail corridors 21 Nov 2007 Leo Dobes 12

13. AusLink project analysis Identification: Aust Gov considers broad-level Strategic Merits Test; how well proposal fits corridor strategy, some CBA Scoping: business case with detailed CBA, financial analysis, 3BL for specific options (eg route selection for bypass) Development: detailed, revised CBA for preferred option Delivery: evaluations envisaged CBA based on detailed methodological guidelines 21 Nov 2007 Leo Dobes 13

14. AusLink: some issues Land purchase prices: market or WTP? Transparency if distributional weights used (eg zero passenger travel time value) Inclusion of private equity – policy on access to alternative, toll-free routes (regulation) Incorporation of congestion pricing as alternative to investment Potential ‘2nd best’ outcomes unless compare with non-AusLink urban CBA - jurisdictional 21 Nov 2007 Leo Dobes 14

15. The health sector Dominant analytical paradigm is CEA committees assess effectiveness but only qualitatively ....... or with arbitrary indexes or QALY/DALY measures DoHA : only one or two CBA specialists No(?) use of more sophisticated forms of CEA like Data Envelopment Analysis but CBA can be done (eg Abelson 2003) 21 Nov 2007 Leo Dobes 15

16. Health (cont’d) Zarnke et al (1997): half 95 CBA studies surveyed were in fact CEA; only 13 percent used CVM ‘Value of life’ a contentious concept, but triage systems imply value of life NHMRC (2001) reports ‘shadow price’ thresholds per life-year gained used by PBAC can we monetise QALY using WTP? Data availability issue: analytically useful data not collected? 21 Nov 2007 Leo Dobes 16

17. Defence Defence: a classic ‘public good’ all Australians benefit (non-excludability) no market for Defence services in Aust Expect use of CBA for Defence: ‘standing’ is national large user of resources subject to special interests and mind-sets But precious little CBA in practice Why? And what can be done? 21 Nov 2007 Leo Dobes 17

18. Defence equipment acquisition Increasing attention in recent years on efficiency in procurement a few studies (Ergas, Thomson) more commercial approach: Defence Materiel Organisation (DMO) But doubt about extent of systematic or comprehensive analysis where it counts at the Force Structure and Capability level so there is risk of path dependence and ‘fighting the last war’ risk of large projects crowding out boots and bullets – effective capability may be reduced 21 Nov 2007 Leo Dobes 18

19. Stylised strategic pyramid 21 Nov 2007 Leo Dobes 19

20. Defence budget Defence budget has 6-7 outcomes containing almost 30 outputs reflecting various Force capabilities (eg light infantry operations, intelligence, mine warfare, etc) Like Health, use of committees Implicit trade-offs occur in practice can they be systematised? Difficulties recognised, but projects such as flood control also based on complex scenarios 21 Nov 2007 Leo Dobes 20

21. Defence – some possibilities? At the strategic level, determine Defence budget through conjoint analysis – eg consumer preferences for Defence versus education, etc (Throsby and Withers, 1999) Can Defence adapt QALY-type approach to valuation, eg ‘kill capability’? Use economic costs in cost-effectiveness analysis – currently mainly budgetary Could Delphi scores be used for Data Envelopment Analysis? Diplomacy versus Defence? Or even contingent valuation methods (eg DSTO attempt with Insensitive Munitions) 21 Nov 2007 Leo Dobes 21

22. Why promote use of CBA? Likely large changes in pattern and magnitude of govt expenditure: ageing population (aged care, health) infrastructure (transport, comms) climate change adaptation and mitigation Rational allocation of scarce resources will become even more important CBA supports WhOG in setting priorities Can be used ex post to evaluate lapsing programs due for renewal of funding Lack of credible analytical alternatives 21 Nov 2007 Leo Dobes 22

23. How to foster CBA? Imposition of requirement unlikely to be productive (eg USA: Fuchs 1987) even under Reagan only 1% rules analysed Need to foster more analytical APS culture Simultaneously increase demand and reduce cost 21 Nov 2007 Leo Dobes 23

24. Reducing the cost of CBA Development of standardised methodology For example: treatment of METB CVM survey forms (and NOAA ‘scope’ test) establish value of (statistical) life discount rates: eg regulating plastic bag usage – more a consumption rate? (Mark Harrison) Library of all CBA studies in government for both public and limited access 21 Nov 2007 Leo Dobes 24

25. Reducing the cost of CBA (2) Database of ‘canonical’ shadow prices projections of GDP growth, inflation, value of statistical life, etc simple, but robust and defensible standardised for use across all agencies? Publication of simple manuals: DOFA handbook useful, but does it add more than theory already available textbooks? practical examples of CBA, with calculations (not just diagrams) to transfer knowledge to agencies 21 Nov 2007 Leo Dobes 25

26. Increasing the demand for CBA Educate ministers and their staff Tailor studies to include ministerial needs distributional impacts presentation of comparators (eg health project NPV with a school project NPV or AusLink) Form expert Group to develop ‘lateral’ methodologies and applications: eg application of ‘QALY’ to Defence eg transport tractable regional analysis 21 Nov 2007 Leo Dobes 26

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29. Increasing the demand for CBA (2) Ex post program evaluation to include CBA Extend RIS to CBA for major projects Presentations on CBA to groups such as doctors, ADF, social workers, etc, to explain social benefits 21 Nov 2007 Leo Dobes 29

30. Institutional considerations Mandating CBA should be a last resort But some ‘rules of the game’ may be needed eg require collection of data for eco analysis establish standards: eg full reporting of calculations and data - replicability need to check whether benefits>costs Harness economics profession: special seminars (like this one), working groups of practitioners and government users collaboration with interdisciplinary groups 21 Nov 2007 Leo Dobes 30

31. Institutional considerations (cont’d) Establish databases, libraries, of CBA good studies published on OBPR website to generate competitiveness between agencies Provide basic training for APS Continue provision of OBPR helpline Cooperate with overseas economists – use ARC International Linkage grants? Identify a Minister or central agency to ‘champion’ economic analysis (like Cabinet Implementation Unit for implementation) 21 Nov 2007 Leo Dobes 31