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“Analytical Tools and Data Collection” Workshop
15 July 2009EuropeAid/125317/D/SER/TR
Session 3
Assessing Impacts
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Stages of Impact Analysis
Assess Impacts
and Compare Options
Identify Impacts
Gather Evidence
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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
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Policy Analysis Serves Decision Criteria
Cost Benefit Analysis (CBA) = Benefits minus CostsCompares 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)
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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
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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
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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
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Three Elements of CBA
• Identification of potential benefits and costs
• Quantification and valuation of costs and benefits
• Spread of costs and benefits over time
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Identification of Costs and Benefits
• Set baseline
• Consider ‘Do nothing option’
• Avoid double counting
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Example of wrong baselineIssue: 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
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Example Double CountingOption: 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
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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
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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
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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
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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
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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
Discount Factor =(use discount tables)
Benefits justify the costs if the NPV is positive (NPV>0)
1
(1+ interest rate)year
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Example of NPV Calculation
Year 0 1 2 3 4
Benefits 0 0 0 1500 1500
Costs 1500 300 300 300 300
Net Benefits -1500 -300 -300 1200 1200
Discount Factor (for 10%)
1.000 0.909 0.826 0.751 0.683
Discounted Net Present Value -1500 -272.7 -247.8 901.2 819.6
Cumulative Net Benefits = – 1500 – 300 – 300 + 1200 + 1200 = 300
Net Present Value = – 1500 – 272.7 – 247.8 + 901.2 + 819.6 = – 299.7
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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
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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
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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
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Qualitative Presentation: EC Sugar Quotas IA
21
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Advantages Drawbacks
Price F
all
1. Facilitates restructuring and improved competitiveness of the sector.
2. Reduces production surpluses and world market distortion.
3. Reduces distortions in competition.
4. Reduces inequalities among producers.
5. Reduces cost to consumers and users.
6. Promotes diversification in the market for sweeteners.
7. Facilitations WTO negotiations.
8. Promotes application of cross-compliance.
9. Reduces budget cost of the regime slightly.
1. Producer incomes fall.
2. Revenue of ACP countries falls.
3. Cost of possible accompanying measures for restructuring
Qualitative Presentation: EC Sugar Quotas IA
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Qualitative Presentation: UK RIA on Implementation of EU Directive on Maximum Levels of Organochlorine Compounds in Animal Feed
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Qualitative presentation: EU Postal Services (2006)
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Quantitative presentation: UK RIA for Directive on Minimum Rules for the Protection of Chicken Kept for
Meat
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Quantitative presentation: UK RIA for Directive Laying Down Minimum Rules for the Protection
of Chicken Kept for Meat
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Continuation of the previous example
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Combining Quantitative and Qualitative Presentations
Example: UK RIA on Gambling Act
Source: www.evidence-based-medicine.co.uk
Option 1Retaining 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
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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?
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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