1. “Analytical Tools and Data Collection” Workshop April 2009 EuropeAid/125317/D/SER/TR Roman Ladus Session 6 Measuring Impacts 1

2. Stages of Impact Analysis
Assess Impacts and Compare Options
Gather Evidence
Identify Impacts

3. Three Major Types of Policy Analysis
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..
Cost Effectiveness Analysis (CEA) =
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.
Costs
Effects (lives saved, accidents reduced)
See Reach proposal – a cost-effectiveness test in a benefit-cost analysis 3

4. CEA Example: Reduction of Injuries in Minibuses
Costs (TL)
No. of injuries prevented
CEA
Option 1
4,000,000
1,200
3,333
Option 2
5,000,000
1,800
2,778
Option 3
7,000,000
2,000
3,500

5. LCA Example: Reducing Emissions
Fixed Target
Option
Cost
Reduce emissions by 30 %
Fixed caps for all emissions
€ 300 million
Tradable permits
€ 100 million
More stringent regulation on high volume emissions
€ 200 million

6. Measuring & Analysis: Three Elements of CBA
Identification of potential benefits and costs
Evaluation of costs and benefits
Spread of costs and benefits over time

7. Measuring & Analysis: Identification of Costs and Benefits
Set baseline
Consider ‘Do nothing option’
Avoid double counting

8. Measuring & Analysis: Example of wrong baseline
Issue: Re-equipped Minibuses causing injuries and discomfort
Option: Do nothing
Option: Quality requirements
Benefits:
None
Decrease in healthcare expenses
Increase in productivity of passengers
Costs:
High healthcare expenses
Lost productivity of passengers
Investment in new minibuses

9. Measuring & Analysis: 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

10. Measuring & Analysis: 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

11. Measuring & Analysis: 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 / opportunity cost

12. Measuring & Analysis: 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

13. Measuring & Analysis: 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

14. Measuring & Analysis: Calculating Net Present Value/Discounting
(Benefits – Costs) * Discount Factor, for year 0 +
(Benefits – Costs) * Discount Factor, for year 1 +
(Benefits – Costs) * Discount Factor, for year 2 +
etc
Discount Factor =
(use discount tables)
Benefits justify the costs if the NPV is positive (NPV>0) 1
(1+ interest rate)year

15. Measuring & Analysis: Example of NPV Calculation
Year 1 2 3 4
Benefits
1500
Costs
300
Net Benefits
-1500
-300
1200
Discount Factor (for 10%)
1.000
0.909
0.826
0.751
0.683
Discounted Net Present Value
-272.7
-247.8
901.2
819.6
Cumulative Net Benefits = – 1500 – 300 – = 300
Net Present Value = – 1500 – – = – 299.7

16. Measuring & Analysis: 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

17. Measuring & Analysis: 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

18. 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 18

19. Qualitative Presentation: EC Sugar Quotas IA19

20. Qualitative Presentation: UK RIA on Implementation of EU Directive on Maximum Levels of Organochlorine Compounds in Animal Feed

21. Qualitative presentation: EU Postal Services (2006)21

22. Quantitative presentation: UK RIA for Directive on Minimum Rules for the Protection of Chicken Kept for Meat

23. Quantitative presentation: UK RIA for Directive Laying Down Minimum Rules for the Protection of Chicken Kept for Meat

24. Continuation of the previous example

25. Combining Quantitative and Qualitative Presentations Example: UK RIA on Gambling Act
Option 1
Retaining the status quo
Option 2
Implement the Gambling Act 2005
Total cost per annum
No additional costs
£1.9 – 2.6m
Total benefit per annum
No additional benefits
Greater employment opportunities
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 customers
Other costs
Voluntary contributions to the Responsibility In Gambling Trust
Additional software to protect the vulnerable and prevent crime
Training to identify problem gambling
Source: 25

26. 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?

27. 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