Cost Benefit Analysis – overview

Outline Background Overview of methodology Some examples

How does CBA support Public Service Reform? CBA can be used to deliver: – Informed decision-making – Cost-effective decision-making – Equitable decision-making

Background GM Spatial Pilots – Early Years and Better Life Chances Phase 1 Community Budgets Other partnership approaches Greater use of Payment by Results and novel investment models Whole Place Community Budgets

Greater Manchester CBA methodology

What role can CBA play in decision making? Economic tool to assess whether interventions represent value for money Calculates the ratio of benefits to cost Decision support tool Financial return on investment ratio: 014…..23 Not financially justified Financially justified

What do we mean by costs and benefits? Fiscal Social Economic Costs Benefits All additional costs needed to deliver project Fiscal Economic Social

Types of benefits ExampleFiscal benefitsPublic Value benefits Employment mentoring programme for people with mental health problems Reduction in unemployment payments as individuals gain employment Increased output resulting from increased employment Improved health with related impacts on well-being (e.g. confidence and self esteem) Programme to tackle antisocial behaviour Reduction in police, housing and local authority time spent responding to incidents. Opportunity cost of avoided time spent by public sector agencies. Increased patronage of local businesses resulting in net growth in local economy once displacement has been taken into account. Reduced fear of crime amongst local residents. Drug treatment programme Savings in reactive health and criminal justice costs - emergency hospital visits, long term health costs, responses to crime. Opportunity cost of avoided time spent by public sector agencies. Improved health and life expectancy of individual

The approach taken for CBA will depend on what decisions need to be made – e.g. – For individual public sector agencies the priority is likely to be on making savings to their future reactive spend requirements in order to meet the challenge of reducing budgets – For government as a whole: the priority is often on overall growth and prosperity – For charities and their funders the priority may be focussed on certain aspects of a project and the impact on people’s lives Different approaches/uses of CBA? Regardless of the focus, we should consider all types of benefits. public value focus fiscal focus Focus on specific social outcomes

The CBA model – costs Financial Case Net Present Budget Impact Financial return on investment Payback period Economic Case Net Present Public Value Value for Money Benefit Cost Ratio Cost Benefit Analysis Tool Costs Capital Revenue In Kind Outcomes Need Engagement Impact Deadweight Lag and drop-off Cashability assumptions

GM approach to calculating costs Which agencies bear costs? What types of costs are borne? When are costs borne?

GM approach to calculating costs (2) ProactiveReactive “What we do”“Consequence of what we don’t do” Early interventionIncident/crisis response Health visit, employment support, parenting class, skills training Arrest, eviction, hospital visit, benefit payment COST(DIS)BENEFIT

The CBA model – outcomes Financial Case Net Present Budget Impact Financial return on investment Payback period Economic Case Net Present Public Value Value for Money Benefit Cost Ratio Cost Benefit Analysis Tool Costs Capital Revenue In Kind Outcomes Need Engagement Impact Deadweight Lag and drop-off Cashability assumptions

Outcomes included in the GM CBA model Worklessness benefit payments Level 2 skills Mental health ASB incidents Eviction Looked after children Homelessness Drug/alcohol dependency Offending A&E visits Family well-being Individual well-being Children’s well-being Community well-being

Turning outcomes into benefits OutcomeFiscal benefit Public Value benefit Getting someone into a job£9,800£14,610 Gaining a Level 3 apprenticeship£1,391£1,925 Reduction of one child taken into care per year £63,362£70,822 Reduced incident of crime£609£2,933

Running the CBA model Assumptions tested/updated via evaluation Optimism Bias (OB) correction applied to data At risk / affected population %Engaged Value How many potential beneficiaries ? How many will we reach? How many will achieve desired outcome? What would have occurred anyway? What is the value of the desired outcome? %Impact 1 - %optimism bias How confident are we in the evidence? %Deadweight %Retained How many will complete the programme?

Evidence-based policy – benefits data quality Confidence grade Colour coding Population/ Cohort Data Evidence base (engagement / impact) Age of data / analysis Known data error OB correction 1 Figures taken from agency data systems Randomised Control Trial in UK Current Data (<1 year old) +-2%0% 2 Figures derived from local stats International Randomised Control Trial 1-2 years old+-5%-5% 3 Figures based on national analysis in similar areas Independent monitoring of outcomes with a robust evaluation plan 2-3 years old+-10%-10% 4 Figures based on generic national analysis Practitioner monitoring of outcomes with a robust evaluation plan 3-4 years old+-15%-15% 5 Figures based on international analysis Secondary evidence from a similar type of intervention 4-5 years old+-20%-25% 6 Uncorroborated expert judgement >5 years old+-25%-40%

Evidence-based policy – cost data quality Confidence grade Colour coding Data sourceAge of data Known Data error OB correction 1 Independently audited cost data Current Data (<1 year old) +-2%0% 2 Formal service delivery contract costs 1-2 years old+-5%+5% 3 Practitioner monitored costs 2-3 years old+-10%+10% 4 Costs developed from ready reckonners 3-4 years old+-15%+15% years old+-20%+25% 6 Uncorroborated expert judgement >5 years old+-25%+40%

The GM CBA model – outputs Net present value Payback period Costs Capital Revenue In Kind Benefits Fiscal Economic Social Cost Benefit Analysis Tool Outcomes Benefit – Cost Ratios

Example outputs

Example outputs from CBA model Intervention Fiscal Return on Investment Payback period Family intervention project1.45 years Intensive Alternatives to Custody14.5<1 year Integrated Health and Social Care0.9N/A

Family Intervention Project – fiscal value of outcomes

Family Intervention Project

New investment model – applying CBA ££ Ex-ante appraisal Performance monitoring Ex-post evaluation Forecast savings Who invests? How much? What to decommission? Track savingsConfirm savings Stop activity? Continue? Redraft agreement? Apportion Reinvest into single pot Update model

Any questions?