Workshop: RIA for Prime Ministry
Experts
13 October 2009
EuropeAid/125317/D/SER/TR
Session 4
Assessing Impacts
Stages of Impact Analysis
Assess
Impacts and
Compare
Options
Gather
Evidence
Identify
Impacts
RIA Informs Decision
•
Governments should not act unless the
results (benefits) are worth the cost
•
Governments should find the lowest cost
solution to solve problems
•
Benefits and costs must be sufficiently clear
to identify better and worse solutions
3
Policy Analysis Serves Decision Criteria
Cost Benefit Analysis (CBA) = Benefits minus Costs
Compares overall negative and positive impacts to ask IF options
should be considered based on whether they produce more
benefits than costs..
Costs
Cost Effectiveness Analysis (CEA) = Effects (lives saved, accidents reduced)
Compares costs per metric of benefit for different options and asks
WHAT KIND of action should be taken to maximize results per unit
cost.
Least Cost Analysis (LCA) = lowest cost to reach a FIXED target.
Compares options that reach the same result and asks WHICH action
reaches a fixed target at lowest cost.
Use the methods together for a good IA
• They are most effective when used
together
• CEA is based on the comparison of options.
It is valuable only if we consider the right
options
• Cost-effectiveness and least cost analysis
are best seen as an essential supplement
to cost benefit analysis
CEA Example:
Reduction of Injuries in Minibuses
Costs
(TL)
Option 1
Option 2
Option 3
No. of
CEA
injuries
prevente
d
4,000,00
1,200
3,333
0
5,000,00
1,800
2,778
0
7,000,00
2,000
3,500
0
LCA Example:
Reducing Emissions
Fixed
Target
Reduce
emissions
by 30 %
Option
Cost
Fixed caps for
all emissions
Tradable
permits
More stringent
regulation on
high volume
emissions
€ 300 million
€ 100 million
€ 200 million
Three Elements of CBA
• Identification of potential benefits and
costs
• Quantification and valuation of costs and
benefits
• Spread of costs and benefits over time
Identification of Costs and
Benefits
• Set baseline
• Consider ‘Do nothing option’
• Avoid double counting
Example of wrong baseline
Issue: Re-equipped Minibuses causing injuries and
discomfort
Option: Do nothing
Option: Quality requirements
Benefits:
• None
Benefits:
• Decrease in healthcare
expenses
• Increase in productivity of
passengers
Costs:
• High healthcare expenses
• Lost productivity of
passengers
Costs:
• Investment in new minibuses
Example Double Counting
Option: Ban of smoking in public places
Benefits:
•Health benefits
•Productivity benefits
Costs:
•Decrease in sales for importers
•Decrease in sales for producers
•Decrease in sales for bars
Quantification and Valuation
• Whenever possible, quantify (measure) impacts
using different metrics (kilos, metres etc)
• Whenever possible, value impacts in a single metric
to enable adding them together and easy comparison
• Monetary valuation is also referred to as ‘market
valuation’ or ‘economic valuation’
• Use different scenarios whenever appropriate
Estimating Prices
• Market value = willingness to pay
• Some prices do not have market value:
– Health benefits
– Time savings
– Environmental benefits and costs
– Human life
• The basic approach is to estimate the
‘willingness to pay’ (or ‘willingness to accept
compensation’) for a particular outcome
Methods for Estimating Prices
1. Use market prices information
• Change in productivity
• Human capital cost valuation
2. Valuation using information on individuals’
preferences
• Replacement cost or preventive expenditure
method
• Contingent valuation method
• Surrogate market valuation method
3. Benefit Transfer
• Use estimates of shadow prices from other
studies
Spread of Costs and Benefits over Time
• The value of 1TL received tomorrow is less than the
value of 1TL received today
• Individuals expect to receive a rate of interest on
savings to compensate for giving up consumption
today
• The rate of interest gives us a measure of an
individual’s rate of time preference
• Using rate of time preference to convert future value
into equivalent value today is called discounting.
This enables comparison of benefits and costs that
occur in different time periods
Calculating Net Present Value/Discounting
Net Present Value =
• (Benefits – Costs) * Discount Factor, for year 0 +
• (Benefits – Costs) * Discount Factor, for year 1 +
• (Benefits – Costs) * Discount Factor, for year 2 +
• etc
1
Discount Factor =
(use discount tables) (1+ interest rate)year
Benefits justify the costs if the NPV is positive
(NPV>0)
Example of NPV Calculation
Year
Benefits
Costs
Net Benefits
Discount Factor
(for 10%)
Discounted Net
Present Value
0
0
0
300
300
-300 -300
0.909 0.826
3
4
1500 1500
300
300
1200 1200
0.751 0.683
-1500 -272.7 -247.8
901.2 819.6
0
1500
-1500
1.000
1
2
Cumulative Net Benefits = – 1500 – 300 – 300 + 1200 + 1200 = 300
Net Present Value = – 1500 – 272.7 – 247.8 + 901.2 + 819.6 = – 299.7
Risk Assessment
• In assessment of impacts consider risks and
likelihood of their occurrence
• Describe the consequences of risks – could
they stop the regulation from meeting its
objectives?
• Risk analysis provides an overall judgement on
whether the risk-adjusted benefits exceed the
risk-adjusted costs
Must We Quantify Everything?
No, but….
• Governments should not act unless the
results are worth the costs
• Governments should find the lowest cost
solution to solve problems
• Good qualitative comparisons may be better
than very uncertain quantitative comparisons
• Use quantitative and qualitative metrics to
compare benefits and costs
• The important point is that benefits and costs
are sufficiently clear that the public can
understand
Qualitative Weighting
• Where it is difficult to value impacts, describe
them by looking at other impact measures
• You might provide information such as:
– how many people will be affected
– what type of people might be affected
– the nature and impact of the effects
• Effects may be categorized as ‘small’,
‘medium’ or ‘large’ to compare and weight
various impacts
Qualitative Presentation: EC Sugar Quotas IA
Advantages
Maintains production and
income in the majority of
regions, although the level of
both gradually decreases.
2. Progressively decreases the
budget cost of the regime.
3. Maintains current benefits to
ACP/EBA countries.
1.
Drawbacks
1.
2.
Status Quo
3.
4.
5.
6.
7.
Delays restructuring and improved
competitiveness of the sector.
Attracts non-restricted quantities of
imports, under preferential agreements, at
non-competitive prices, to the EU market
which threaten continued EU production
in the long run.
Maintains distortions in competition.
Maintains inequalities among farmers.
Trade balance is very sensitive to the
removal of the safeguard clause and the
abolition of C sugar.
Complicates the EU's WTO negotiating
position.
The common market organization for
sugar remains complex and nontransparent.
21
Qualitative Presentation: EC Sugar Quotas IA
Advantages
1.
2.
Price Fall
3.
4.
5.
6.
7.
8.
9.
Facilitates restructuring and improved
competitiveness of the sector.
Reduces production surpluses and world
market distortion.
Reduces distortions in competition.
Reduces inequalities among producers.
Reduces cost to consumers and users.
Promotes diversification in the market for
sweeteners.
Facilitations WTO negotiations.
Promotes application of cross-compliance.
Reduces budget cost of the regime slightly.
Drawbacks
1.
2.
3.
Producer incomes fall.
Revenue of ACP countries
falls.
Cost of possible accompanying
measures for restructuring
Qualitative Presentation: UK RIA on Implementation of EU
Directive on Maximum Levels of Organochlorine Compounds in
Animal Feed
Qualitative presentation:
EU Postal Services (2006)
Quantitative presentation: UK RIA for Directive
on Minimum Rules for the Protection of Chicken
Kept for Meat
Quantitative presentation: UK RIA for Directive
Laying Down Minimum Rules for the Protection
of Chicken Kept for Meat
Continuation of the previous example
Combining Quantitative and Qualitative Presentations
Example: UK RIA on Gambling Act
Option 1
Retaining
the status
quo
Total cost
per annum
Option 2
Implement the Gambling Act 2005
No additional £1.9 – 2.6m
costs
Total benefit No additional • Greater employment opportunities
per annum benefits
• Higher revenue generation as a result of
additional websites being based in the UK and
non-UK residents visiting UK-based websites
• Improved regulation
• Better choice, information and safeguards for
Source: www.evidence-based-medicine.co.uk customers
Other costs
• Voluntary contributions to the Responsibility In
Presenting Results and Recommendation: Decision
Criteria
• Assessment of costs and benefits informs
decision and provides evidence for
recommended option
• Do the benefits justify the costs?
• Is the approach the least costly option for
achieving the objective?
Presenting Results and Recommendation
• Result of assessment should be clearly described and
explained in RIA
• Sources of evidence should be provided to build
credibility
• Quantify as many impacts (costs and benefits) as
possible
• Present results in tabular form: show positive impacts
(benefits) and negative impacts (costs) separately and,
if possible, net benefits are calculated
• Present separately any significant distributional impact