Office of Best Practice Regulation

Introduction to Cost-Benefit Analysis

CBA Unit Office of Best Practice Regulation

Outline

Office of Best Practice Regulation

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?

Office of Best Practice Regulation

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

Why you need to know about CBA?

Office of Best Practice Regulation

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

Why is CBA useful?

Office of Best Practice Regulation

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

When do you need to use CBA?

Office of Best Practice Regulation

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

CBA and the RIA process

1.
2. 3. 4. 5.

Office of Best Practice Regulation

Problem
Objectives Options Impact analysis Consultation

6.
7.

Conclusion and recommended option

Implementation and review

What are the basic steps in a CBA?

Office of Best Practice Regulation

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

Basic steps in a CBA (continued)

Office of Best Practice Regulation

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

Where possible, quantify important impacts

Office of Best Practice Regulation

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

Qualitative impacts present a challenge

Office of Best Practice Regulation

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

Different techniques can be used

Office of Best Practice Regulation

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

Steps to ensuring a good CBA outcome

Office of Best Practice Regulation

Proper resourcing

Getting the right skills

Collecting high quality information Consulting with stakeholders Consulting early with the OBPR

How can the CBA Unit help?

Assistance on technical issues

Office of Best Practice Regulation

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

Useful CBA References

Office of Best Practice Regulation

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

Further information

Office of Best Practice Regulation

www.obpr.gov.au

e-mail: helpdesk@obpr.gov.au