9579340 Social Cost Benefit Analysis Overview About Two Approaches of SCBA
Overview of Cost-Effectiveness Analysis and Cost-Benefit Analysis and their application to Labour...
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Transcript of Overview of Cost-Effectiveness Analysis and Cost-Benefit Analysis and their application to Labour...
Overview of Cost-Effectiveness Analysis and Cost-Benefit
Analysis and their application to Labour Market and Social
Development PoliciesAn overview of issues
Conference on Cost-Effectiveness in
EvaluationSponsored by:
Social Development Canada
Human Resources and Skills Development Canada
and the Centre of Excellence for Evaluation,
Treasury Board Secretariat
Presentation by Greg Mason
June 17, 2004
2Page
• Review the foundations and techniques of cost-benefit analysis (CBA) and cost-effectiveness analysis (CEA)
• Illustrate how CEA and CBA may be applied to current Treasury Board practices for evaluation
Overview of this presentation
Overview of objectives
3Page
• Many studies claim to be to be CBAs, but are in fact CEAs
• CEA calculates the direct financial cost of reaching specific outcome/output levels and requires one other alternative for comparison
• CBA compares all benefits to all costs and can “stand alone.” If the benefit/cost ratio exceeds 1, the program is socially valuable
• CBA – typically prospective and used for major capital investments
• CEA – typically retrospective and useful for evaluating discrete interventions
• CBA – a macro (societal) view
• CEA – a micro view of program activities, outputs, or outcomes
Overview of objectives
Differences between CBA and CEA
4Page
• Both CBA and CEA examine the costs of producing net outcomes
• CBA really only makes sense when applied to assessing the net value of achieving social outcomes. In other words, CBA measures the full (social) costs of the full (social) benefits resulting from an intervention
• CEA measures the financial cost of producing a specific net outcome
Evaluation analysis most usefully focuses on thecost-effectiveness of activities, outputs, and
immediate outcomesOverview of objectives
Core ideas for this session
5Page
Net change to welfareof all stakeholders value in $
Social cost ($)
Activities/outputs/outcomes(actual changes – not $)
CBA
CEADirect program cost ($)
Overview of objectives
CBA and CEA compared
6Page
CBA takes the long and wide view of program costs and outcomes
CEA takes a short and narrow program view of program outcomes
Time
Ra
ng
e o
f effe
cts
Overview of objectives
Scope of CEA and CBA
7Page
Cost-benefit analysis
Cost-benefit analysis
8Page
• CBA offers a framework to compare the welfare of all stakeholders to a program or investment:– Direct beneficiaries– Indirect beneficiaries– Workers involved in program delivery– Funders (taxpayers)
• CBA imposes a range of assumptions to delimit the scope of the problem– How should distant (future) costs and benefits be valued
(social discount rate)?– What is the social cost of underemployed resources (labour)?– What is the cost of a human life?– Who should be excluded from the calculation of impacts?
Cost-benefit analysis
CBA involves value judgements in an accounting framework
9Page
• The CBA equation divides the total dollar value of benefits by the total dollar value of costs
• Desirable programs have a high benefit/cost ratio (or low cost/benefit ratio)
• Many outcomes are difficult to value (increasing the life span arising from health investments)
Cost-benefit analysis
CBA must translate all outcomes and impacts into a money equivalent
10Page
• CBA often applied to capital-intensive projects
• Costs– Direct capital and labour– Diversion of resources from next best use (opportunity
costs)– External (environmental impacts)– Costs of funding (tax distortions, tax expenditures)
• Benefits– Increased tourist revenues (tax revenues)– Increased profile (Winnipeg, Manitoba, Canada)– Increased multicultural understanding plus intangibles
CBA places a money value on intangible costs and benefits
Cost-benefit analysis
CBA example: Canadian Museum for Human Rights
11Page
Enumerate costs and benefits
• CBA uses “with and without” criteria for setting up benefits, not “before and after”
• All social costs and benefits need to be identified
• Double counting is common
Cost-benefit analysis
Steps in CBA (1)
12Page
Example: Sports and culture events are claimed to produce significant economic impacts for a community. The usual approach is to apply a multiplier to total revenues.
This assumes that audience spending has no alternative use. In fact, the net incremental tourist expenditures associated with an event are typically only incremental spending on such events. Increased spending by community residents represents a diversion of spending, not an increment.
Cost-benefit analysis
Double counting
13Page
Comparing costs and benefits
• Present value is used to place all future costs/benefits on an equivalent basis
• It seems reasonable to place a higher value on $10,000 received now, than $10,000 to be received in two years
A bird in the hand is worth two in the bush
Cost-benefit analysis
Steps in CBA (2)
14Page
Steps in CBA (3)
Program/project ranking and selection
• If the program/project has a benefit/cost ratio that is greater than 1, it “pays” to proceed
• Programs/projects that do not have a benefit/cost ratio greater than 1 are eliminated
• Select the program/project with the highest benefit/cost ratio
Cost-benefit analysis
15Page
• Converting intangibles into money value (Many government programs deal in intangibles)
• Outcomes are long-term
• Avoiding double counting (Hard to do this when programs have broad social outcomes)
• Linking observed changes to program costs (Attribution complicated by the fact that the federal government may not be the sole public funder and many other factors contribute to the outcomes)
Cost-benefit analysis
Challenges for CBA – programs
16Page
Cost-effectiveness analysis
Cost-effectiveness analysis
17Page
• Because CBA compares the welfare among stakeholders, methods to translate welfare into a common denominator (i.e., money) strike many as artificial
• For this reason, CEA is conceptually and operationally simpler. It is also more applicable to evaluation and performance measurement of public programs
• When a cost-benefit study is specified, a cost- effectiveness study is most often what is really desired
Cost-effectiveness analysis
Advantages of CEA
18Page
CEA can be aligned with value-for-money concepts and the results chain
– Economy – the unit cost of an activity
– Efficiency – the unit cost of an output
– Effectiveness – the unit cost of an outcome
Cost-effectiveness analysis
CEA aligns with value-for-money auditing
19Page
Inputs OutputsActivitiesImmediateoutcomes
Intermediateoutcomes
Finaloutcomes
Ex
tern
al
fac
tors
Ex
tern
al
fac
tors
Ex
tern
al
fac
tors
Area of influenceArea of control
The “results chain”
Aligning CEA to the results chain
20Page
Activities OutputsImmediateoutcomes
(Typically within a year)
Longer-termoutcomes
(Up to 15 years)
CEA (cost of producing a unit...)Focus on the amount of activity, output, or outcome
CBA – value ofoutcomes to society
(Net value to all stakeholders including programparticipants and non-participants, tax payers, etc.)
Less precision/application
Overview of objectives
CEA / CBA and the results chain
21Page Cost-effectiveness analysis
Activities OutputsImmediateoutcomes
(Typically within a year)
Longer-termoutcomes(Up to 15 years)
Cost EconomyCost to complete activities(E.g., Staff time per client
assessed, delivery ofintervention...)
Cost EfficiencyCost per output
(E.g., Cost per parent trained,cost per trainee)
Cost EffectivenessCost per unit outcome
(E.g., Total program costs divided bynumber that maintain employment for
specified time, cost per arrest avoided...)
Cost economy, efficiency, effectiveness along the results
chain
22Page
The key is to identify and enumerate immediate outcomes:
– Success in athletic competition (medals)– Increase in number of hours worked (active labour
market program)– Reduced incidence of hospital adverse incidents
(“mistakes”)– Reduced waiting times for diagnosis– Reduced use of social assistance (active labour market
program, welfare reform)– Diversion of clients from in-person to electronic service
(e.g., electronic tax filing)
Cost-effectiveness analysis
CEA – Moving along the results chain
23Page
• Activities should be discrete and measurable (e.g., staff years):– Processing grant applications– Consulting with applicants/clients– Preparing media
• Costing should be allocated by activity
Cost-effectiveness analysis
Measuring efficiency
24Page
• Accounting estimates• Quasi-experimental techniques• “Full” randomization designs• Simulation studies
General framework for CEA outcome measurement – active labour market
programs
Cost-effectiveness analysis
25Page
“Hybrid” analyses allow a cost-effectiveness calculation to incorporate many of the features of a cost-benefit model
Cost-effectiveness analysis
The transition from CEA to CBA: the GAIN model
26Page
Costs “Benefits”
Income assistance payments during training
Reduced SA payments because of earned income of clients
+ Training allowances (books, special needs)
+ Reduced SA due to shorter time on welfare by clients
+ Cost of training (personnel, contracts)
+ Increased taxes from employment earnings
= Total costs = Total benefits
Cost-effectiveness analysis
Application of the GAIN model to Taking Charge!