NSW Drought Program Evaluation Framework · 2015-11-06 · NSW Drought Program Evaluation Framework...

Independent Pricing and Regulatory Tribunal

NSW Drought Program Evaluation Framework

Other Industries — Discussion Paper October 2015

NSW Drought Program

Evaluation Framework

Other Industries— Discussion Paper

October 2015

ii IPART NSW Drought Program Evaluation Framework

© Independent Pricing and Regulatory Tribunal of New South Wales 2015

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-925340-27-3 DP182

The Tribunal members for this review are:

Dr Peter J Boxall AO, Chairman

Ms Catherine Jones

Inquiries regarding this document should be directed to a staff member:

Derek Francis (02) 9290 8421

Anna Brakey (02) 9290 8438

Independent Pricing and Regulatory Tribunal of New South Wales PO Box K35, Haymarket Post Shop NSW 1240 Level 15, 2-24 Rawson Place, Sydney NSW 2000

T (02) 9290 8400 F (02) 9290 2061

www.ipart.nsw.gov.au

http://www.ipart.nsw.gov.au/

NSW Drought Program Evaluation Framework IPART iii

Invitation for submissions

IPART invites written comment on this document and encourages all interested parties to provide submissions addressing the matters discussed.

Submissions are due by Tuesday, 1 December 2015.

We would prefer to receive them electronically via our online submission form <www.ipart.nsw.gov.au/Home/Consumer_Information/Lodge_a_submission>.

You can also send comments by mail to:

NSW Drought Program Evaluation Framework Independent Pricing and Regulatory Tribunal PO Box K35, Haymarket Post Shop NSW 1240

Late submissions may not be accepted at the discretion of the Tribunal. Our normal practice is to make submissions publicly available on our website <www.ipart.nsw.gov.au> as soon as possible after the closing date for submissions. If you wish to view copies of submissions but do not have access to the website, you can make alternative arrangements by telephoning one of the staff members listed on the previous page.

We may choose not to publish a submission—for example, if it contains confidential or commercially sensitive information. If your submission contains information that you do not wish to be publicly disclosed, please indicate this clearly at the time of making the submission. IPART will then make every effort to protect that information, but it could be disclosed under the Government Information (Public Access) Act 2009 (NSW) or the Independent Pricing and Regulatory Tribunal Act

1992 (NSW), or where otherwise required by law.

If you would like further information on making a submission, IPART’s submission policy is available on our website.

http://www.ipart.nsw.gov.au/

Contents

v IPART NSW Drought Program Evaluation Framework

Contents

Invitation for submissions iii

1 Introduction 1

1.1 What have we been asked to do? 1

1.2 What is our proposed approach for this review? 2

1.3 How can you provide input to the review? 2

1.4 The structure of this paper 3

1.5 List of issues for stakeholder comment 3

2 Context for this review 4

2.1 National Drought Policy 4

2.2 Intergovernmental agreement (2013) 11

2.3 Drought policy and measures in NSW 12

3 Draft Evaluation Framework 18

3.1 Overview of draft evaluation framework 18

3.2 Stage 1 – Is the program an option for providing drought assistance? 20

3.3 Stage 2 – Which packages of programs are complementary? 30

3.4 Stage 3 – Which package of programs generates the greatest net benefit? 32

3.5 Using the framework to review NSW programs 33

3.6 Data for collection 34

3.7 Promoting cost-effective program evaluations 34

Appendices 37

A Terms of Reference 39

B The NSW agricultural sector and impact of the drought 42

Erratum 45

1 Introduction

NSW Drought Program Evaluation Framework IPART 1

1 Introduction

The NSW Government has asked the Independent Pricing and Regulatory Tribunal of NSW (IPART) to develop a framework to evaluate its drought programs.

This paper sets out our proposed approach to the review and outlines our preliminary views. It also explains how stakeholders can provide input to the review, and identifies the issues on which we particularly seek stakeholder comment.

1.1 What have we been asked to do?

The objective of this review is to develop a framework that will allow for cost-effective and consistent evaluation of NSW’s drought programs. Specifically, the framework should evaluate a program’s:

complementarity with the Commonwealth’s assistance measures, functions and IGA principles

ability to maintain incentives to invest in drought preparedness measures

ability to effectively target relevant individuals or groups in need

efficiency, equity and effectiveness

ability to minimise transaction costs, and

transparency and consistency.

In the process of developing the framework, the Terms of Reference require IPART to establish what data is required to be collected to ensure the evaluation can be undertaken in a cost effective manner. Our Terms of Reference are included at Appendix A.

The framework should be able to be used to both evaluate drought programs on an individual basis, and to undertake a more holistic review of the total suite of drought programs offered by the NSW Government.

1 Introduction

2 IPART NSW Drought Program Evaluation Framework

1.2 What is our proposed approach for this review?

We have developed a draft evaluation framework consisting of three stages. It:

assesses whether a program is an option for providing drought assistance (Stage 1)

identifies which packages of programs are complementary (Stage 2), and

subjects the complementary packages of programs to a cost-benefit analysis (Stage 3).

Stage 1 of the framework is a screening process that evaluates drought programs individually. Stages 2 and 3 are aimed at identifying the package of ‘screened programs’ (ie, those programs that have already passed the Stage 1 screening process) which deliver the greatest net benefit to the community.

The draft evaluation framework is outlined in more detail in Chapter 3.

1.3 How can you provide input to the review?

In developing the framework, we will undertake our own research and analysis as well as public consultation. This Discussion Paper is the first step in our consultation process, and we invite all interested parties to make submissions in response to the paper by 1 December 2015. (More information on making a submission is provided on page iii at the front of this report.)

We will hold a public roundtable on 24 November 2015, to give stakeholders another opportunity to provide their input on the framework. We intend to webcast this hearing to allow for people to remotely participate in our consultation. We will consider all stakeholder submissions and comments when finalising the framework.

We will provide our evaluation framework and Final Report to the NSW Government by the end of January 2016.

Table 1.1 outlines the indicative timetable for developing the framework.

Table 1.1 Indicative timetable

Milestone Indicative date

Release Discussion Paper End October 2015

Hold Public Roundtable 24 November 2015

Submissions on Discussion Paper close 1 December 2015

Deliver evaluation framework and Final Report to NSW Government End January 2016

1 Introduction


1.4 The structure of this paper

The following chapters provide more information on the review, the issues we will consider in each step of our proposed approach, and our preliminary views on these issues (where we have them):

Chapter 2 provides contextual information, including an outline of the National Drought Policy and the Commonwealth and NSW drought programs available in NSW.

Chapter 3 explains the draft evaluation framework.

1.5 List of issues for stakeholder comment

The following chapters highlight the issues on which we particularly seek stakeholder comment. For convenience, these issues are also listed below. Please feel free to comment on any or all of the issues, or provide other information or comments you consider relevant to the review and our Terms of Reference.

1 Can the draft evaluation framework be effectively applied to review drought

programs? 35

2 What improvements can be made to the draft evaluation framework? 35

3 What areas of market failure should the framework take into account? 35

4 What types of costs and benefits should the cost-benefit analysis take into

account? How should these be quantified? 35

5 Are there any other matters the cost-benefit analysis should take into

account? 35

6 What data is available to be collected in a cost-effective manner in order to

evaluate drought programs against the framework? 35

2 Context for this review



The NSW Government has asked IPART to develop a framework to evaluate its drought programs. This includes consideration of whether these programs complement the Commonwealth Government’s assistance measures, functions and principles under the 2013 Intergovernmental Agreement on National Drought Program Reform. This chapter provides context for this review, discussing the development of national drought policy in Australia and NSW.

A snapshot of the agricultural sector in NSW and how drought has affected it is included at Appendix B. The analysis indicates that drought has often been widespread in NSW, and has adversely affected grain growing, livestock farming, horticulture and fruit growing, and other crop growing subsectors.

2.1 National Drought Policy

When drought occurs, it can significantly impact crops and livestock. In response, Commonwealth and state governments provide various forms of assistance to support primary producers and the sustainability of the agricultural sector.

In the 1970s, severe drought was considered to be a natural disaster.1 As a result, Commonwealth and state governments framed policy responses in that context. In the 1980s, these policies were reviewed and the approach changed to recognise that droughts are a natural feature of Australia’s highly

variable climate rather than an unpredictable natural disaster.2

1 Keogh, M., and Goucher, G., Review of NSW Response to Drought Policy Reforms, Research report,

Australian Farm Institute. Sydney, November, 2014, p 1. 2 Ibid.



The Commonwealth Government initiated the National Drought Policy (NDP) in 1992 to improve preparedness and self-reliance during drought events. In practice, however, the programs focused primarily on providing direct relief to farm households and businesses where there were Exceptional Circumstances declarations. Exceptional circumstances events were defined as rare and severe events outside those that a farmer could normally be expected to manage using responsible farm management strategies.3 States and territories applied to the Commonwealth Government for an event to be declared as Exceptional Circumstances.4 In 1999, agriculture ministers agreed a set of criteria to be used when assessing areas for an Exceptional Circumstances declaration. These included the definition of a rare event as one that occurs on average only once in every 20 to 25 years.5

Recent reforms to Australian drought policy began in 2008. These have seen a return in focus to preparedness and self-reliance. In 2008 and 2009, the COAG Primary Industries Ministerial Council agreed to new principles for drought assistance. These were reconfirmed in April 2011:

removing Exceptional Circumstances declarations or lines on maps and instead focusing more on the specific needs of farming families, businesses and communities

acknowledging that drought is just one of a number of hardships that can adversely affect farmers

recognising the importance of farmers as the nation’s food producers

recognising that welfare assistance should require a degree of mutual responsibility

targeting government support to assist business planning and increase resilience

exempting farm assets from assets test for income support welfare

recognising the role of farmers in managing natural resources and maintaining rural communities during drought and climate change

recognising the importance of building resilience and sustainability against drought.6

3 Department of Agriculture, Fisheries and Forestry, Exceptional Circumstances Information

Handbook, February 2013, p 3. 4 Ibid, p 4. 5 Ibid, p 3. 6 Keogh, M., Granger, R. and Middleton, S., Drought Pilot Review Panel: a review of the pilot of

drought reform measures in Western Australia, Canberra, September 2011, p 2.



As part of the 2008 national review of drought policy, the COAG Primary Industries Ministerial Council commissioned three reports focused on the economic, social and climatic dimensions of drought. These were:

an assessment by an expert panel of the social impacts of drought (2008)7

a climatic study of the likely future climate patterns and the exceptional circumstances standard by the Bureau of Meteorology (BOM) and CSIRO (2008),8 and

the Productivity Commission review of Government Drought Support (2009).9

In addition, a pilot of drought reform measures was jointly conducted by the Commonwealth and Western Australian Governments from July 2010 to June 2012. The measures were directed at helping farmers move from a crisis management approach to risk management. An independent advisory panel reviewed the pilot in 2011.10

2.1.1 Climatic assessment

In 2008, the BOM and CSIRO examined changes in the extent and frequency of exceptionally high temperatures, low rainfall and low soil moisture for seven Australian regions.11 The analysis used observed and projected data covering varying periods from 1900 to 2040.

In their report, the BOM and CSIRO:

Demonstrated the extent and frequency of exceptionally hot years have been increasing over recent decades and that trend is expected to continue.

Projected increases in the extent and frequency of exceptionally low soil moisture years.12

7 Drought Policy Review Expert Social Panel, It’s About People: Changing Perspective. A Report to

Government by an Expert Social Panel on Dryness, Report to the Minister for Agriculture, Fisheries and Forestry, Canberra, September 2008.

8 Hennessy, K., Fawcett, R., Kirono, D., Mpelasoka, F., Jones, D., Bathols, J., Whetton, P., Stafford

Smith, M., Howden, M., Mitchell, C. and Plummer, N., An assessment of the impact of climate change on the nature and frequency of exceptional climatic events, Bureau of Meteorology and CSIRO, July 2008.

9 Productivity Commission, Government Drought Support, Report No. 46, Final Inquiry Report,

Melbourne, 2009. 10 Keogh, M., Granger, R. and Middleton, S., Drought Pilot Review Panel: a review of the pilot of

drought reform measures in Western Australia, Canberra, September 2011. 11 Hennessy, K., Fawcett, R., Kirono, D., Mpelasoka, F., Jones, D., Bathols, J., Whetton, P., Stafford

Smith, M., Howden, M., Mitchell, C. and Plummer, N., An assessment of the impact of climate change on the nature and frequency of exceptional climatic events, Bureau of Meteorology and CSIRO, July 2008, p 1.

12 Ibid.



Found there was more variability in the observed trends for exceptionally low rainfall years. However, the mean projections for 2010-2040 indicated that more declarations would be likely, and over larger areas, in three of the seven areas.13

The BOM and CSIRO concluded:14

there is an increased risk of severe drought projected over the next 20 to 30 years

the current definition of ‘Exceptional Circumstances’ based on the historical climate record is out of date, and

farmers need access to better information about climate change preparedness.

2.1.2 Social assessment

In 2008, an expert panel commissioned by the Commonwealth Government completed its assessment of the social impacts of drought on farm families, rural business and communities. This panel comprised Mr Peter Kenny (Chair), Ms Sabina Knight, Mr Mal Peters, Professor Daniela Stehlik, Mr Barry Wakelin, Ms Sue West and Mrs Lesley Young. The panel undertook their assessment by:15

reviewing existing literature, commissioning independent research and surveys

holding 25 public consultation forums across rural Australia, attracting more than 1000 participants

meeting with governments and non-government organisations, and

receiving more than 230 written submissions.

13 In the southwest of Australia (which incorporates parts of West Australia, South Australia and

Victoria), southwest of Western Australia and Victoria/Tasmania regions. Ibid, p 5. 14 Keogh, M., Granger, R. and Middleton, S., Drought Pilot Review Panel: a review of the pilot of

drought reform measures in Western Australia, Canberra, September 2011, p 9. 15 Drought Policy Review Expert Social Panel, It’s About People: Changing Perspective. A Report to

Government by an Expert Social Panel on Dryness, Report to the Minister for Agriculture, Fisheries and Forestry, Canberra, September 2008.



The panel concluded:16

there is widespread distress in drought-affected rural communities and too many farm decisions are made under stress

while it is hard to separate the social impacts of drought from long-term trends contributing to the decline in some rural populations, drought adversely affects the wellbeing of farm families

policy needs to address the social needs of farm families, rural businesses and communities in ways that do not inhibit the efficiency of agricultural industries

the connection between the farm as a place of work, residence and family tradition has important implications for the effectiveness of institutional support

improved drought policy must focus on preparing for drought and planning for personal and family well-being,17 and

crisis-framed assistance in times of difficulty should be replaced with early intervention to counteract the worst effects of drought.18

2.1.3 Economic assessment

The Productivity Commission review of Government Drought Support found that there was a mismatch between the previous NDP’s objectives and its programs. While the objectives were about self-reliance to prepare against droughts, the policy’s programs were mostly emergency payments to farmers in hardship.19

The Productivity Commission also found most of the farmers managed without government support. Only 23% of farms which were drought affected received government relief in 2007-08.20 However, the Productivity Commission notes the complexity of farm success underpinning this statistic:

In 2005-06, the largest 30% of farms generated 82% of the value of agricultural operations, whereas the smallest 50% generated 7%.

As a group, the bottom 25% of broadacre farms had not recorded a profit in any year from 1988-89 to 2007-08.21

16 Askew, L. E., & Sherval, M. (2012). Short Term Emergency or Recurring Climatic Extreme: A Rural

Town Perspective on Drought Policy and Programs, Australian Journal of Public Administration, 71(3), 290-302 at 293.

17 Keogh, M., Granger, R. and Middleton, S., Drought Pilot Review Panel: a review of the pilot of drought reform measures in Western Australia, Canberra, September 2011, p 9.

18 Ibid. 19 Productivity Commission, Government Drought Support, Report No. 46, Final Inquiry Report,

Melbourne 2009, p XXIV. 20 Ibid. 21 Ibid.



Further, the Productivity Commission notes:

Farm performance is strongly correlated to vulnerability to drought. Apart from local

climatic circumstances, how drought affects farming families and farm businesses

depends on farm management practices, the degree of income diversification and the

store of capital that farmers can draw on — the natural and physical capital of their

farm, their financial and human capital and that embodied in their social networks.22

Box 2.1 lists the assessment of current programs from the Productivity Commission review.

22 Ibid.



Box 2.1 Assessment of current programs from the Productivity

Commission Review of Government Drought Support

1. Declaration of drought. The Exceptional Circumstances (EC) declaration of a

drought was generously interpreted and there was no transparency in the advice given

to government about when a drought commenced so such relief programs are

triggered. The Productivity Commission considered government relief should not be

triggered by declaration of drought and that the EC declaration process should be

terminated.

2. Interest subsidies. Interest subsidies for drought-affected farmers have grown

substantially as the scheme’s criteria were loosened. The Productivity Commission

found unassisted farmers in the same drought areas had better financial performance

than those who applied for interest subsidies. The Productivity Commission also

found the provision of interest subsidies generated perverse incentives and this

program should be terminated.

3. Transaction subsidies. The provision of state subsidies for the transport of fodder,

water and livestock also led to perverse outcomes and potential misuse. For example,

some farmers retained excess stock and bid up the cost of local fodder to the

detriment of others.

4. Exit packages. The provision of special grants to farmers exiting their industry

distorted markets and raised inequities with other groups in the community. There

was no indication that transition out of farming would not occur just as readily in the

absence of exit grants, as currently structured.

5. Irrigation management scheme. The provision of grants (up to $20,000) to Murray-

Darling basin irrigators was found to be generous and largely unrestricted in eligibility

and use. This rewarded inefficient irrigators and delayed decisions to transact water

entitlements, leading to higher costs. The Productivity Commission recommended the

program be concluded as scheduled on 30 June 2009.

6. Relief payments. The eligibility requirements for relief payments were generous

compared with Newstart allowances. These payments encouraged dependency

rather than self-reliance and preparedness. The Productivity Commission

recommended that they should be replaced.

7. Small business income support. There was little justification for assisting small

businesses who are located around drought-affected areas. The small businesses do

not face the same constraints in accessing broader income support measures and

should not receive preferential support.

Data source: Productivity Commission, Government Drought Support, Report No. 46, Final Inquiry Report,

Melbourne 2009, pp XXVIII-XXXVII and XXXIX.



2.2 Intergovernmental agreement (2013)

The findings and recommendations from these studies formed the basis of the 2013 Intergovernmental Agreement on National Drought Program Reform (IGA). The IGA came into effect from 1 July 2014 and replaces measures that were triggered by the Exceptional Circumstances arrangements. The IGA aims to:

1. Assist farm families and primary producers adapt to and prepare for the impacts from increased climate variability.

2. Encourage farmers to adopt self-reliant approaches to manage business risks.

3. Ensure farm families have access to household support payments that recognise the special circumstances of farmers.

4. Ensure that appropriate social support services are accessible to farm families.

5. Provide a framework for jurisdictional responses to needs during periods of drought.23

Five (broad) programs were agreed to be carried out under the IGA (Table 2.1).

Table 2.1 Programs implemented under the IGA

Program Responsibility

A farm household support payment Commonwealth

Continued access to Farm Management Deposits (FMDs) and taxation measures

Commonwealth

National approach to farm business training State

Coordinated, collaborative approach to the provision of social support services

Joint State and Commonwealth

Tools and technologies to inform farmer decision-making Joint State and Commonwealth

Data source: Intergovernmental Agreement on National Drought Program Reform 2013, pp 2-4.

The IGA recognised that programs may be developed in the future which provide temporary, in-drought support. These programs should comply with another set of principles:

be consistent with principles and complementary to measures already in place

occur where there is a clear role for government and deliver a net public benefit

address recognised welfare needs

encourage good farm business decision–making and facilitate adjustment in the agriculture sector

avoid government being positioned as the business ‘lender of last resort’

enable links with other measures or between service providers

23 Intergovernmental Agreement on National Drought Program Reform 2013, p 2.



recognise the importance of maintaining the natural resource base, and

be underpinned by monitoring and performance information to ensure any measures implemented are appropriately targeted.

2.3 Drought policy and measures in NSW

To implement the IGA, the NSW Government established an independent Regional Assistance Advisory Committee (RAAC) to provide feedback on:

the vulnerability of rural communities, and

potential farm business, family and community support programs.24

The RAAC will also oversee preparation of the new Regional Seasonal Conditions Reports that replace the system of State drought declarations.25

In 2014, the RAAC commissioned the Australian Farm Institute to undertake a review of NSW's drought measures to ensure it is in line with the IGA.26 In its report, the Australian Farm Institute observed that NSW drought policies were not consistent with the IGA. However, the Australian Farm Institute was not able to reach a conclusion on the adequacy of current drought policies.27 In part, the Australian Farm Institute stated this was because the changes in national and state drought policies had only recently been implemented. As a result, the impact of these policies had not yet been assessed. The Australian Farm Institute stated:

It seems fair to observe that in the case of the current drought in NSW, there was not

sufficient time, and nor was there sufficient commitment by government to the agreed

changes in national drought policy, and hence the response by the NSW Government

has been somewhat ad hoc and reactive. Drought programs in recent times have

included a mix of ‘legacy programs’ from the exceptional circumstances system of

drought responses and a somewhat muted engagement in the new IGA-mandated

programs.28

24 http://www.dpi.nsw.gov.au/agriculture/emergency/seasonal-conditions/raac. 25 As of February 2013, the NSW Government no longer declares a district to be in drought.

Instead, it issues Seasonal Conditions Reports on a monthly basis to help landholders manage and prepare for worsening conditions and droughts. NSW Parliamentary Research Service December 2013 e-brief 12/2013, p 2.

26 http://www.dpi.nsw.gov.au/agriculture/emergency/seasonal-conditions/raac. 27 Keogh, M., and Goucher, G., Review of NSW Response to Drought Policy Reforms, Research report,

Australian Farm Institute. Sydney, November 2014, p 3. 28 Keogh, M., and Goucher, G., Review of NSW Response to Drought Policy Reforms, Research report,

Australian Farm Institute. Sydney, November 2014, p 49.

http://www.dpi.nsw.gov.au/agriculture/emergency/seasonal-conditions/raac



For example, the Australian Farm Institute commented that a number of stakeholders considered the NSW Government’s transport subsidies to be inconsistent with the IGA.29 Stakeholders noted access to these subsidies was triggered by ‘lines on maps’, meaning the measure was accessible to some who were not adversely affected by drought, but was not available to others in adjoining local government areas that were more adversely affected. Other criticisms expressed by stakeholders included:30

the lack of public benefits arising from the transport subsidies

the subsidies seem unlikely to foster better business planning and drought preparedness by recipients, and

the subsidies was not coordinated with other drought support measures.

Following the Australian Farm Institute’s review, the NSW Government announced the NSW Drought Strategy in February 2015. The NSW Drought Strategy will support the State's farmers to become more resilient and better prepared for future droughts, to improve their business and reduce risks, by delivering a more transparent and targeted system of drought support.31

IPART’s review forms part of the NSW Drought Strategy.

Table 2.2 summarises current drought assistance measures available in NSW from the Commonwealth and NSW Governments.

29 Keogh, M., and Goucher, G., Review of NSW Response to Drought Policy Reforms, Research report,

Australian Farm Institute. Sydney, November 2014, p 35. 30 Ibid. 31 www.dpi.nsw.gov.au/agriculture/drought-bushfire-and-emergencies/drought/support/

nsw-drought-strategy.

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Table 2.2 Summary of current drought assistance measures available in NSW

Program Funding Administration Type of measure

Function Eligibility

Farm Household Allowance

Commonwealth

Department of

Human Services

Support

payments for

financial hardship

Paid fortnightly at a rate usually equivalent to

Newstart (or Youth Allowance if under 22yrs).

Access up to 3 years of payment in total, plus a health card and a dedicated case worker.

Farmers and their partners. By application.

Farm

management deposits

scheme and taxation measures

Commonwealth

Australian Tax Office

Risk-

management tool to help

farmers deal with uneven income

Allows farmers to make farm management

deposits (FMD) between $1,000 and $400,000 and claim a tax deduction. Withdrawals made

later are included as assessable income. Deposits are made with an FMD provider who must be an authorised deposit-taking institution or has Cth/State/Territory guarantee for deposits.

All primary production

businesses, restricted to individuals only.

Concessional loans

Commonwealth

Department of

Agriculture and Water

Resources (Cth)

Rural Assistance Authority (NSW)

Drought -

Loans to restructure

existing debt, provide new debt for

operating expenses or drought

recovery and preparation activities

Maximum loan terms of 5 years.

Up to 50% of eligible debt to maximum of $1m.

Variable concessional interest rate.

Concessional interest period of 5 years.

Interest only payments.

At the end of the loan term, the farm business must repay or refinance the remaining loan balance.

Australian farm business

operating for at least 3 consecutive years.

Experiencing significant

financial impact due to the effects of drought, despite adequate preparation

(including acceptable Drought Management Plan).

Operating as sole trader, trust, partnership or private company (not public company).

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Program Funding Administration Type of

measure


Drought

Recovery – loans

planting and/or restocking

drought recovery activities

Maximum loan terms of 10 years.

Up to 50% of eligible debt to maximum of $1m.

Variable concessional interest rate.

Concessional interest period of 10 years.

Interest only payments for the first 5 years with P & I repayments for years 6-10 based on a 10 year term.

At the end of the loan term, the farm business

must repay or refinance the remaining loan balance.

Australian farm business

operating for at least 3 consecutive years.

Must be within a 1-in-50 or 1-in-100 rainfall deficient area or demonstrate a

significant financial impact due to the effects of drought,

despite adequate preparation (including acceptable Drought Management Plan).

Operating as sole trader,

trust, partnership or private company (not public company).

Farm Innovation Fund

NSW Rural

Assistance Authority (NSW)

Low interest

loans for in-drought and drought

preparedness activities

Loan funding to meet the cost of carrying out

permanent capital works that will significantly benefit the land, long term profitability and address adverse season conditions. Four main categories:

drought preparedness

environment

farm infrastructure

natural resources

Loan amount up to 100% of net GST exclusive cost of works, to maximum $250,000 per project.

20 year term, fixed interest rate

Works must be completed within 12 months from date of loan approval.

Owner or operator of the

property work where is carried out

At least 50% of total gross income provided by farm enterprise.

Satisfactory scope of work,

long term viability, capacity to repay loan, security for loan.

Works forms part of farm

business and risk assessment plan.

Application to be lodged with NSW Rural Assistance

Authority prior to commencement of works.

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measure


Transport Assistance

NSW Rural


Subsidy for

transport of stock to sale or slaughter

for animal welfare

Up to 50% of the total freight cost to a maximum of

$20,000 per farm enterprise per financial year. Intended where animals are at significant risk, there is little or no feed or water available or where

there is significant financial need. Producers pay for the costs of transportation prior to claiming the rebate. Stock must be transported to the nearest

available sale yard or abattoir and cannot be transported to drought affect properties or returned to previously drought affected properties.

Primary producers who

demonstrate financial need through receipt of a Transitional Farm Family

Payment or being a client of the Rural Financial Counselling service. Commercial feedlots

are not eligible. Claims must be submitted within 6 months of stock movement.

Subsidy for transport of

donated fodder

A subsidy for the cost of transporting donated fodder from within NSW up to a maximum of up to

$5 per kilometre to a maximum eligible distance of 1,500 kilometres, to drought affected properties

where the donated fodder is organised by community groups or other organisations for the benefit of multiple primary producers.

Prior to arranging transport of donated fodder the

coordinating community group or organisation must obtain

approval from the NSW Rural Assistance Authority.

Rural Financial

Counselling Service

Commonwealth

and New South Wales

Department of

Agriculture and

Water Resources (Cth)

Rural


Counselling service

Free and confidential service to provide

information and assistance on financial position, budgets and submitting applications.

All

Rural Resilience Program

New South Wales

Department of Primary

Industries (NSW)

Provides referral services

Aimed at providing support for rural communities and farm families impacted by adverse events.

All

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measure


Expert technical

advice from DPI and Local Land Service

New South Wales

Department of

Primary Industries and Local Land

Services (NSW)

Advice Assistance and advice on pastures and livestock including Stockplan and PROGRAZE workshops

All

Data source: Department of Primary Industries.

3 Draft Evaluation Framework



Under our Terms of Reference, we are required to develop a framework to evaluate NSW’s drought programs in a cost-effective and consistent manner. Specifically, the framework should help evaluate a program’s:

complementarity with the Commonwealth’s assistance measures, functions and principles under the 2013 Intergovernmental Agreement on National Drought Program Reform (the IGA)

ability to maintain incentives to invest in drought preparedness measures

ability to target relevant individuals or groups in need effectively

efficiency, equity and effectiveness

ability to minimise transaction costs, and

transparency and consistency.

This chapter summarises our draft evaluation framework.

3.1 Overview of draft evaluation framework

The draft framework can be used to evaluate existing and proposed programs. It consists of three stages, which involve:

assessing whether a program is an option for providing drought assistance (Stage 1)

identifying which packages of programs are complementary (Stage 2)

subjecting the complementary packages of programs to a cost-benefit analysis (Stage 3).

An overview of the three stages, including elements within each stage, is presented in Figure 3.1 below.



Figure 3.1 Draft evaluation framework

3.1.1 Progressing through the three stages of the framework

Stage 1 of the framework is a screening process that evaluates drought programs individually. It involves three discrete steps. A program can only progress to Stage 2 once all steps in the Stage 1 have a ‘Yes’ answer. If there is a ‘No’ response to a particular step, then the program will need to be redesigned or terminated.

Stage 1 Screening to assess if the program is an option for drought assistance

Step 1: Does the program accord with the IGA:

– ensures equitable & tailored assistance

– encourages self-reliance, drought preparedness & mutual responsibility

– recognises the role of farmers & maintaining the natural resource base

Step 2: Is there a clear role for government action?

Step 3: Is the program well designed (efficient, effective, equitable)?

Stage 2 Identify complementary programs to be costed

Is the program complementary? A program is complementary where it does not duplicate or have objectives that conflict with:

an existing Commonwealth program

an existing NSW program (ie, one that is not being screened through

the framework), or

another screened program

Stage 3 Conduct cost benefit analysis

Can the program’s costs/benefits be readily quantified?

YES

YES

NO

NO

Package of NSW programs generating the greatest net benefit

YES

Program needs to be redesigned

or terminated

NO



Stages 2 and 3 are aimed at identifying the package of NSW ‘screened programs’ (ie, those programs that have already passed the Stage 1 screening process) which deliver the greatest net benefit to the community. These latter stages of the framework focus on drought programs in combination, rather than individually. This reflects how potential recipients of drought assistance could consider the issue. That is, they review the package of available programs as a whole, before making decisions about how to prepare for drought and how to manage drought conditions.

Stage 2 identifies which screened programs are complementary. A program is complementary where it does not duplicate or have objectives that conflict with:

an existing Commonwealth program

a NSW program that is not being screened through the framework, or

another screened program.

Complementary programs then progress to Stage 3 of the framework, where they are subject to cost-benefit analysis. This will assist to determine the package of programs that generates the greatest net benefit to the community, and so should be prioritised for funding allocations.

Programs can be assessed individually, or in combination where they enhance each other. Assessing programs together could provide a more accurate calculation of net benefits. This will occur where the programs are likely to generate higher returns in combination rather than individually.

3.1.2 Periodic and ad-hoc reviews

In terms of applying the framework, the package of existing drought programs should be periodically reviewed using the framework, to ensure these programs are effective, complementary and well targeted. In addition, before proposing to add a program to this package, the program should be considered using the framework, to ensure it delivers the greatest benefit and does not duplicate or conflict with existing programs.

3.2 Stage 1 – Is the program an option for providing drought

assistance?

Stage 1 of the framework includes three steps, which are designed to establish the program is an option for providing drought assistance. These steps involve establishing that the program:

addresses one of the IGA’s objectives, and is consistent with the IGA’s principles

has an objective that is best achieved through government action

is well designed (efficient, equitable, effective, transparent, consistent and minimises transaction costs).



Each of these steps is explained in more detail below.

Step 1 – Does the program accord with the IGA?

This step in the framework involves a two part process.

First, the program must address an IGA objective. Specifically, does it:

assist farm families and primary producers to adapt to and prepare for the impacts of drought and climate change

encourage self-reliant approaches to managing business risks

provide access to household support payments that recognise the special circumstances of farmers

ensure appropriate social support services are accessible to farm families, or

guide NSW’s response to the needs of farm families and primary producers during drought?

Second, the program must be consistent with the three overarching principles that we have distilled from the IGA framework:32

1. equitable and tailored assistance

2. self-reliance and mutual responsibility, and

3. recognising the role of farmers and maintaining natural resources.

Principle 1 – Ensure equitable and tailored assistance

For a program to provide equitable and tailored assistance, it should not use blanket eligibility criteria (eg, ‘Exceptional Circumstances’ declarations or ‘lines on maps’).33 Rather, assistance should be tailored to the specific needs of the target group.

Any program that is predicated on the notion of drought declared areas would likely fail this test because it would prioritise funding to those areas irrespective of the specific needs of farming families, businesses or communities.

32 The IGA contains two separate sets of principles to apply when developing a program. Which

set is relevant depends on whether the program is classified as an ‘in drought’ program or another type of program relevant to the IGA’s objectives. There is a large degree of commonality between the sets of principles. Our approach focusses on three core principles within the IGA framework.

33 ‘Lines on maps’ refers to the operation of Exceptional Circumstances declarations. Defining the

boundaries of drought declared area leads to lines being placed on maps, making a distinction between those who can and cannot receive assistance (Productivity Commission, Government Drought Support, Report No. 46, Final Inquiry Report, Melbourne, 2009, p 118).



Principle 2 – Encourage self-reliance, drought preparedness and mutual responsibility

This principle recognises farmers have primary responsibility for operating their businesses, and managing the risks associated with those businesses. Since drought is a natural characteristic of Australia’s variable climate, it is one of the risks farmers must manage to be self-reliant. Strategies to minimise this risk include building financial reserves, diversifying income streams (eg, earning off-farm income), insuring, and having readily available access to credit.34

Programs may enhance self-reliance by:

overcoming impediments to farmers adopting risk management strategies

encouraging farmers to take actions before drought occurs35

facilitating adjustments that need to occur through exits or amalgamations,36

only offering once-off or time limited assistance, to discourage dependency on government assistance.37

Making business support contingent on drought preparedness efforts can promote self-reliance. Programs should not benefit farm businesses that do not take prudent preparatory steps, and those that do prepare should not be penalised. Eligibility tests for relief that do not take account of efforts toward self-reliance would likely fail this test.

Depending on the type of program, this principle asks whether it:

encourages good farm business decision making, for example by:

– basing business support on farms preparing for drought and climate change

– facilitating adjustment in the agricultural sector

supports farming communities to prepare for drought and enhance their long term sustainability and resilience and

avoids government being positioned as the business ‘lender of last resort.’38


Melbourne, 2009, p 39. 35 Ibid, p 126. 36 Ibid, p 133. 37 Productivity Commission noted that: “The longer a farmer is receiving government assistance,

the less capacity and/or motivation might be to take action which would lead the farm or household to become self-reliant” (ibid, p 132).

38 Under the mutual responsibility principle, Government’s commitment to provide targeted

assistance is predicated on recipients undertaking actions to improve their self-reliance.



Principle 3 – Recognise the role of farmers and maintaining resources

As discussed in Chapter 2, farming plays a key role in Australia’s economy. Further, farmers play an important role in maintaining Australia’s natural resource base: its livestock, land, water and vegetation.39

Depending on the type of program, this principle asks whether it:

recognises the role of farmers in food production, natural resource management and maintaining rural communities, and

recognises the importance of maintaining the natural resource base.

Resolving trade-offs between IGA principles

Drought programs may involve trade-offs between IGA principles. For example, a program that allocates funding on the basis of need may be equitable (Principle 1), but it may also undermine self-reliance (Principle 2) by rewarding less efficient farming operations.

It is critical to structure programs in a way that promotes self-reliance. If programs are not appropriately structured, they create incentives for a farm business to adopt:

…less self-reliant strategies prior to droughts in the belief that governments will help

to maintain the farm business during droughts.40

As such, the framework resolves the potential trade-off between IGA principles by giving priority to Principle 2. Even though a program may accord with other IGA principles, it may still not pass this step of the framework if it does not encourage self-reliance.

Box 3.1 illustrates how the framework could be used to assess different types of programs at this step.

39 Intergovernmental Agreement on National Drought Program Reform 2013, p 7. 40 Ibid, p 344.



Box 3.1 Applying the framework – Step 1 of Stage 1 – according with the

IGA

Income support

An income support program for farm families would likely pass Principle 1 if it provides

support based on genuine welfare need, rather than due to ‘lines on maps’. It is also

more likely to pass if it offers similar eligibility to income support as provided to the wider

community.

Program features that could promote self-reliance (Principle 2) include: time limits on the

income support (so that it is only a temporary measure); and requiring recipients to take

action to improve their financial position.

Information programs

Information programs are likely to pass this step where they can be used to make farmers

aware of changing conditions, which assist with drought preparations (Principle 2). These

programs may include seasonal condition reports (which monitor climatic conditions) and

building weather stations (which generate rainfall records).

Concessional loans

These are loans provided by government at a concessional rate of interest (ie, below

commercial lending rates). Unless this assistance is well targeted it may undermine self-

reliance (Principle 2), since it is only available to farm businesses financially impacted by

drought. This penalises farmers who make prudent preparations (eg, keep operating

costs low and diversifying with off-farm income). Also, the program may encourage

farmers to increase their debt above levels they might otherwise have chosen.

The program would be more likely to pass this step if it is well targeted. For example,

farm businesses would only be eligible for assistance where they have taken reasonable

steps to prepare for drought, will use the loan to improve their long term commercial

viability and can demonstrate their ability to repay the loan.

Transport subsidies

Transport subsidies typically provide assistance to farmers in drought to move their

livestock or obtain fodder for them. If the program encourages farmers to keep higher

stock levels during drought, it maintains one aspect of the resource base (ie, livestock) in

accordance with Principle 3. However, it does not encourage farmers to adopt self-reliant

strategies (Principle 2), such as de-stocking when necessary, and so may not pass this

step.

The subsidy may also be rejected on equity grounds (Principle 1). Funding only goes to

livestock farmers, whereas crop farmers may also be affected by drought. Further, if the

subsidy is area-based, it could be inequitable if those outside the area are in similar

circumstances to those inside the area, but are ineligible to receive the assistance.



Step 2 – Is there a clear role for government action?

A program passes this step if:

there is a clear case for government action, and

the government action is expected to improve outcomes versus what would otherwise occur.

Government action is often justified on the grounds that, in the absence of action, the ‘market’ would fail to operate efficiently and/or adverse impacts on at least some segments of the community would be too great. Government action is also justified on the grounds that it is required to achieve a specific policy objective.

The connection between the periodic recurrence of drought and market failure is not clear. The most directly relevant markets are those for: agricultural produce, material inputs to agricultural production, transport and credit. All of these markets are volatile to some extent, but the mere existence of volatility does not constitute market failure, even if it is extreme at times.

There should, in general, be a presumption against government intervention because:

farmers operate for-profit businesses in competitive markets41

the costs of assistance programs are ultimately borne by other members of society

economic efficiency principles suggest governments should not intervene to distort prices and outputs in normal functioning markets

cyclical drought conditions are a well-known fact of life for Australians, and

encouraging self-reliance recognises farm business decisions should not be based on an expectation of government assistance during cyclical drought conditions.

Any intervention that discourages farming businesses from undertaking prudent steps (eg, saving funds in profitable years and borrowing during drought) creates inefficient incentives. Further, any programs that could be more effectively implemented without government support should be. For example, if there is a market for drought preparation or mitigation services, then the government should not become involved in it.

41 These businesses compete with other sectors of the economy for scarce labour and capital

inputs.



Sources of market failure

Some of the market failures that could potentially justify government action under the framework include:

research and development that generates community wide benefits42

incomplete information (eg, sufficient information is not available to improve the adoption of risk management strategies or new technologies)

policy and regulatory failure (eg, government policies that have impeded farmers from becoming self-reliant for droughts)

an absence of insurance markets for drought,43 and

an absence of well-developed or effectively functioning credit markets for farmers.

Absence of drought insurance markets

Farm businesses experience a higher level of revenue volatility than businesses in most other sectors of the Australian economy.44 Drought insurance products could play a role in helping farm businesses manage this revenue risk. However, several reports have found that markets for drought insurance have not developed. Reasons given include:

Systemic risk: there are limited possibilities to offset the drought risk in one area through insuring producers in another. That is, many farmers in a region go into drought at the same time.45

Crowding out: government assistance has crowded out the demand for and therefore development of commercial risk management products.46

Adverse selection: low-risk farmers are less likely to voluntarily take up

insurance, while high-risk farmers are be more likely to do so. If premiums are based on the average risk, then the insurer will under-recover its costs.

42 This leads to market failure because individuals or businesses do not garner all the benefits of

their research and development (ie, these benefits ‘spillover’ to others), resulting in less than socially desirable levels of research effort (Productivity Commission, Government Drought Support, Report No. 46, Final Inquiry Report, Melbourne, 2009, p 183).

43 Adapted from Productivity Commission, Government Drought Support, Report No. 46, Final

Inquiry Report, Melbourne, 2009, p 126. 44 Annual revenue volatility in the farm sector is the highest of any sector and more than double

the ‘average’ for the entire economy (Australian Farm Institute, February Quarter 2015, p 4). 45 Ha, A., Stoneham, G., Harris, J., Fisher, B. and Strappazon, L. “Squeaky Wheel Gets the Oil:

Incentives, Information and Drought Policy”, Volume 40, The Australian Economic Review, 2007, p 132.

46 Ibid.



Moral hazard: farmers can influence the performance of their operations, meaning insurers need to determine whether a loss is caused by drought or sub-optimal management practices.47 Further, moral hazard can also occur to undermine insurance markets where government actions create an expectation of full insurance against loss, even where a farmer fails to take prudent precautions against drought.

ABARES recently explored methods of deepening drought insurance markets.48 It considered there was no strong economic case for government subsidising premiums or underwriting risk. However, government may have a role in providing relevant information or supporting research and development.49

Effectively functioning credit markets for farmers in times of drought

Banks have well developed rural lending programs. In addition, the Australian Banking Association indicates viable farmers should be able to access short term finance or restructure loans in times of drought.50

The available evidence suggests long term profitable farming businesses should be able to efficiently access credit markets in times of severe drought; hence the potential for government intervention to improve on outcomes might be limited.


.

47 Hatt, M., Heyhoe, E., & Whittle, L, Options for insuring Australian agriculture , ABARES report

to client prepared for the Climate Change Division, Department of Agriculture, Fisheries and Forestry, Canberra, September 2012.

48 Ibid. 49 Ibid, p 27. 50 Productivity Commission, Government Drought Support, Report No. 46, Final Inquiry Report,

Melbourne, 2009, p 178.



Box 3.2 Applying the framework – Step 2 of Stage 1 – clear role for

government action

Income support

Income support may be provided to farm families in times of acute hardship, in order to

meet an equity objective.

Information programs

These programs can be used to address areas of incomplete information. As an

example, providing more reliable and location-specific seasonal forecasts could assist

farmers better prepare for drought.

Information programs may also assist the development of drought insurance markets and

deeper credit markets. For example, better information on location-specific yield levels or

weather station data could overcome some of the information asymmetries – such as

adverse selection – which currently exists and inhibits these markets.

Concessional loans

The rationale for government intervening in credit markets to offer this type of program is

unclear. Commercially viable farm businesses may be able to obtain finance from private

sector rural lenders, even in drought conditions. If banks are unwilling to lend to a farm

business, it may be a rational response to managing credit risks. As such, providing

concessional loans may result in the government acting as ‘lender of last resort’, and

society not earning a sufficient return from the loan given the risks.

In addition, offering this type of financial assistance has a hidden cost as it could actually

perpetuate market failure. It can discourage the development of drought insurance

markets and credit markets by crowding out demand for commercial risk management

products and bank credit.

Transport subsidies

There does not appear to be a failure in the agricultural transport market to justify general

subsidies for transport. These subsidies may even distort markets (eg, by increasing

fodder prices).

If the government pursues such programs in order to achieve a specific policy objective

(eg, promoting animal welfare), this should be clearly outlined as the rationale for the

program.



Step 3 – Is the program well-designed?

This step involves examining whether the program conforms to best practice principles for policy design. That is, the program should be effective and efficient. Further, it should be equitable and appropriately targeted to relevant individuals or groups in need. Finally, administrative arrangements for the program should be transparent, consistently applied and minimise transaction costs.

Assessing the effectiveness and efficiency of a program involves evaluating:

how well it achieves its intended objectives (effectiveness), and

whether it achieves those objectives in a least cost manner (efficiency).

To facilitate this assessment, the program should have clear and meaningful indicators of effectiveness (ie, expected outcomes). In addition, the program’s costs to government, expected outcomes and probability of achieving them, should be quantifiable. If they are not, it suggests the program is not sufficiently well designed to be successfully implemented or evaluated.51

To improve efficiency, the program should enable links with other programs and between government and non-government service providers (where relevant).52

In relation to equity and targeting assistance, the framework will evaluate whether the program allocates resources based on identified need.53 This involves considering whether resources are allocated fairly:

within the farming community (ie, between farmers in different geographic areas), and

between farming and other affected communities across the State more generally.

Even if a program passes this step, it is important to regularly review it to ensure it continues to be effective, efficient, equitable and appropriately targeted. As such, programs should be designed to collect relevant performance information (eg, on costs, achievement against indicators) that enable them to be monitored.54


51 If this information is not available then it may not be possible to evaluate it against alternative

programs in the cost-benefit analysis stage (Stage 3). 52 This is consistent with IGA, Attachment B, Principle F. 53 This is consistent with IGA, Attachment B, Principle C. 54 This is consistent with IGA, Attachment B, Principle H.



Box 3.3 Applying the framework – Step 3 of Stage 1 – ensuring the

program is well designed

Income support

Incomes support programs would likely pass Step 3 where they include time limits on

assistance and provide farm families with similar access to these type of payments as

others in the community.

Concessional loans

Concessional loans are more likely to be effective (and so pass Step 3) where they fund

activities that make farm businesses more self-reliant. This is less likely to occur if farm

businesses can use concessional loans to pay their operating expenses or refinance

existing debt.

Having rigorous eligibility criteria (eg, assessing an applicant’s ability to repay the loan)

may increase a program’s effectiveness. However, it would also increase the cost of the

application process. The program may also be costly to administer. For example,

significant time and enforcement costs may arise if recipients do not make repayments on

time. These costs may undermine the program’s efficiency.

Concessional loans may be ineffective as a time limited program if recipients are unable

to repay them or refinance them from commercial sources at the end of the concessional

interest period.

3.3 Stage 2 – Which packages of programs are complementary?

Programs that pass the Stage 1 screening process (which establishes they are options for providing drought assistance) then proceed to Stage 2. This stage of the framework evaluates which of these programs are complementary.




Box 3.4 Applying the framework – Stage 2 – testing for complementarity

There are three aspects to consider when assessing a drought program at this stage.

Does it duplicate or conflict with:

1. a Commonwealth program, or

2. an existing NSW program that is not going through the framework, or

3. another screened program?

At each step, if the drought program being assessed duplicates or conflicts with the

objectives of Commonwealth or NSW programs, it fails Stage 2. That is, the drought

program must be terminated or redesigned.

As an example of complementarity between programs, there could be an environmental

water infrastructure program that could have an indirect benefit in providing drought

preparedness for farmers.

As an example of programs with conflicting objectives, the Productivity Commission found that the effectiveness of programs to facilitate farm exits was limited by the business and household assistance programs, which supported farmers to stay on their farms.55

Step 1 – Is the program complementary with existing Commonwealth or NSW

programs?

Governments are adopting a co-ordinated approach to assisting farming families, businesses and communities. Consistent with the Terms of Reference, the framework assumes that Commonwealth programs are the primary measures for providing this assistance.

In addition, this step involves assessing whether the program is complementary with other NSW programs that are not being screened through the framework. These may include programs that are not specifically targeted at drought, but which may have relevant objectives (eg, water infrastructure and environmental programs).

Any screened programs that duplicate existing Commonwealth or NSW ones, or are inconsistent with them, are not complementary. The framework requires they either be redesigned to complement the Commonwealth or NSW programs, or be terminated.


Melbourne, 2009, p 156.



Step 2 – Is the program complementary with other screened programs?

The framework then considers which screened programs are complementary.

Our initial thinking is that drought preparedness programs are likely to be

complementary. There are many aspects to drought preparedness, and therefore it is possible that many of these programs could be combined (so long as they do not duplicate effort or address the same aspect of preparedness). For example, district-level weather and climate information programs could co-exist with a taxation farm management deposit scheme and programs that encourage the construction of on-farm or district water infrastructure.

In contrast, drought relief programs should generally be few in number and widespread in coverage. That is, each drought relief program should target a different group or outcome, to minimise the risk of duplication or conflicting objectives.

As an example, when it comes to insurance-like programs, it may be preferable to have one universal scheme, rather than multiple schemes with overlapping coverage.

3.4 Stage 3 – Which package of programs generates the greatest net benefit?

Cost benefit analysis

Stage 3 involves using standard cost-benefit analysis tools to evaluate packages of drought programs. The package that generates the greatest net benefit through time within a given budget constraint would be the recommended one under the framework.

In order to provide a more accurate calculation of net benefits, some programs will be assessed together. This will occur where the programs are likely to generate higher returns when in combination rather than individually.

On the cost side, there is uncertainty over the intensity of need for relief and the geographic incidence of requests for it. This uncertainty could be managed through simulation modelling of various medium-term weather scenarios.

On the benefit side, there is a need to clearly identify the objectives of the drought program and its expected outcomes. As discussed at Stage 2, the expected outcomes, the benefits directly associated with them, and the probability of achieving them, should be quantified in order to enable a cost-benefit analysis to be undertaken.



The benefit derived by from particular drought programs should be evaluated on a case-by-case basis. For example, the benefits of a program that improves the information available to farmers on district weather forecasts over the next cropping season may be realised through improved decisions about actions including planting and stock management. This benefit could be quantified using techniques from decision theory, including the expected value of imperfect information.

These benefits would be different to, for example, a crop insurance program. The benefit of this type of program would be that it permits individual farmers to overcome the barrier to investment posed by risk-aversion. It would enable risk-averse farmers to make investment decisions in a way that maximises the expected value of farm investments across the state. With relevant information this benefit could be quantified using techniques from portfolio theory.

Equity between Government funded programs

In Stage 1, the framework initially considers how equitably the benefit arising from drought programs are shared amongst drought-affected groups. However, it is also important to recognise Government needs to allocate its funds between drought-affected groups and other sections of society, since there are many calls on government funds.

The framework conducts this broader examination of equity at Stage 3, by comparing:

The benefits achieved through drought programs, and

the costs of the programs, including the external costs of generating the taxes needed to fund them.

The benefits are determined during the cost-benefit analysis. The external costs include the costs of Government raising funds, which we assume to be the same across all programs that are funded from the budget.56

3.5 Using the framework to review NSW programs

Ideally, all NSW drought programs would be reviewed using the proposed framework. Adopting this consistent approach would help to identify the package of programs (both new and existing) that generate the greatest net benefit to the community.

56 Most taxes impose a burden on society in excess of the tax itself by changing the behaviour of

households and businesses. For example, taxes distort the decisions of consumers by changing their incentives to work, invest or consume. These distortions lead to a loss of consumer welfare. The marginal excess burden is a measure of the social costs resulting from a slight increase in tax to raise additional revenue.



After this process is completed, future programs could be assessed against the framework as they are developed. Further, the resulting package of programs in place would need to be periodically reviewed, to ensure they are still effective, complementary and well-targeted.

3.6 Data for collection

The Terms of Reference ask us to identify what data needs to be collected to evaluate programs under the framework. We will identify these data requirements in consultation with stakeholders as we develop the framework.

3.7 Promoting cost-effective program evaluations

The amount of work required to evaluate a program should be proportionate to the size of the program. As such, the framework includes several parameters to promote cost-effective program evaluations. This is consistent with our Terms of Reference, which require the framework to evaluate programs in a cost-effective manner.

Key parameters are discussed below.

Efficiency parameters

The framework looks at the overall efficient allocation of resources for drought programs – allocative efficiency – in relation to NSW programs only, not NSW and Commonwealth programs. That is, the cost-benefit analysis focuses on identifying the package of NSW programs likely to generate the greatest net benefit.

It does not directly assess the costs and benefits of Commonwealth programs. Instead, they are accounted for at Stage 2, which considers whether NSW programs duplicate or conflict with Commonwealth programs.

Equity parameters

The framework adopts a cost-effective approach to examining equity issues between drought-affected groups and other sections of society. It does this by comparing the relative benefits achieved through drought programs, and selecting only those:

providing the highest returns to society through time (within the given budget constraint), and

where the return is higher than the social opportunity cost of capital (see Stage 3).57

57 The social opportunity cost of capital would incorporate the costs, including excess burden, of

the taxes needed to fund the program(s). Benefit calculations would include social and public benefits from the programs.



Approaching the comparison in this way avoids the need to explicitly compare the benefits generated by drought programs with those generated across all government programs and portfolios (eg, health, education, public safety). This would likely result in an overly costly and time consuming evaluation.

IPART seeks comment:

1 Can the draft evaluation framework be effectively applied to review drought

programs?

2 What improvements can be made to the draft evaluation framework?

3 What areas of market failure should the framework take into account?

4 What types of costs and benefits should the cost-benefit analysis take into

account? How should these be quantified?

5 Are there any other matters the cost-benefit analysis should take into account?

6 What data is available or can be collected in a cost-effective manner in order to

evaluate drought programs against the framework?


NSW Drought Program Evaluation Framework IPART

37

Appendices

A Terms of Reference



B The NSW agricultural sector and impact of the

drought



drought

The gross value of agriculture sector production in NSW in 2010-11 was $11.7 billion, of which $8.1 billion was exported. Adjusting for the ABS multiplier coefficient (to account for direct and indirect outputs), the extended gross value was $25.5 billion.

In 2010-11 there were around 42,000 farms, employing around 66,000 workers, contributing to a quarter of NSW’s primary industries’ outputs and workforce.

NSW’s agriculture sector is dominated by farming and livestock industries (Table B.1).

Table B.1 NSW Agriculture sector, by sub-sector and value (2010-11)

Sub-sector Value ($m)

Wheat for grain 2,511

Barley 471

Rice 172

Canola 407

Cotton 1,126

Fruits and nuts 631

Cattle and calves 1,616

Sheep and lambs 610

Pork 166

Poultry 686

Wool 853

Milk 505

Other 1,961

Total 11,714

Source: NSW Trade and Investment, The contribution of primary industries to the NSW economy – Key Data.

Drought is a natural feature of the NSW climate. NSW experienced two major drought periods over the past 20 years. During these decades, nearly all of NSW was affected by drought for prolonged periods (see dark areas in Figure B.1 below).


drought


Figure B.1 Drought in NSW (1992 to 2012)

Data source: Department of Primary Industries, Drought Advance and Retreat 2013,

http://www.dpi.nsw.gov.au/agriculture/emergency/drought/planning/climate/advance-retreat.

Although difficult to quantify, the long Millennium Drought (2002 to 2009) had a significant impact on the gross value of agricultural production and agricultural income. This is apparent in the decline from a peak and stagnation until 2010 (see red lines in Figure B.2).

http://www.dpi.nsw.gov.au/agriculture/emergency/drought/planning/climate/advance-retreat


drought


Figure B.2 Gross value of production and income in NSW agriculture sector

($m)

Data source: NSW Parliamentary Research Service, Agriculture in NSW (July 2012) Statistical Indicators,

2012, pp 3 and 22.

The impact of the drought on the different agricultural subsectors is also evident in employment between 2000-01 and 2010-11 (Figure B.3). During this period, there were significant reductions in employees in ‘grain, sheep and beef farming’, ‘horticulture and fruit growing’, and ‘other crop growing’ subsectors.

Figure B.3 Employment in agriculture in NSW, by sub-sector

(2000-01 and 2010-11)

Data source: NSW Parliamentary Research Service, Agriculture in NSW (July 2012) Statistical Indicators,

2012, pp 41-42.

Erratum


Erratum

Location of change Changes made

Table 2.2

Rural Resilience Program

‘Rural Support Worker Program’ replaced with ‘Rural Resilience Program’.

‘Provides referral services and a drought incident coordinator’

replaced with ‘provides referral services.’

Note: An updated Table 2.2 was provided to IPART from the Department of Primary Industries on 4 November

2015.

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