Introduction to Cost-Benefit Analysis

1. Introduction to Cost-Benefit Analysis CBA Unit Office of Best Practice Regulation

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 showthe 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: helpdesk@obpr.gov.au