1. “Analytical Tools and Data Collection” Workshop 15 July 2009 EuropeAid/125317/D/SER/TR Session 3 Assessing Impacts

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

3. 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

4. Policy Analysis Serves Decision Criteria Cost Benefit Analysis (CBA) = Benefits minus Costs Compares overall negative and positive impacts to ask IF options should be considered based on whether they produce more benefits than costs.. Cost Effectiveness Analysis (CEA) = Compares costs per metric of benefit for different options and asks WHAT KIND of action should be taken to maximize results per unit cost. Least Cost Analysis (LCA) = lowest cost to reach a FIXED target. Compares options that reach the same result and asks WHICH action reaches a fixed target at lowest cost. Costs Effects (lives saved, accidents reduced)

5. 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

6. CEA Example: Reduction of Injuries in Minibuses Costs (TL) No. of injuries prevente d CEA Option 14,000,00 0 1,2003,333 Option 25,000,00 0 1,8002,778 Option 37,000,00 0 2,0003,500

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

8. Three Elements of CBA Identification of potential benefits and costs Quantification and valuation of costs and benefits Spread of costs and benefits over time

9. Identification of Costs and Benefits Set baseline Consider ‘Do nothing option’ Avoid double counting

10. Example of wrong baseline Issue: Re-equipped Minibuses causing injuries and discomfort Option: Do nothingOption: 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

11. Example Double Counting Option: Ban of smoking in public places Benefits: Health benefits Productivity benefits Costs: Decrease in sales for importers Decrease in sales for producers Decrease in sales for bars

12. 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

13. 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

14. 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

15. 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

16. 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

17. Example of NPV Calculation Year01234 Benefits0001500 Costs1500300 Net Benefits-1500-300 1200 Discount Factor (for 10%) 1.0000.9090.8260.7510.683 Discounted Net Present Value -1500-272.7-247.8901.2819.6 Cumulative Net Benefits = – 1500 – 300 – 300 + 1200 + 1200 = 300 Net Present Value = – 1500 – 272.7 – 247.8 + 901.2 + 819.6 = – 299.7

18. 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

19. 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

20. 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

21. AdvantagesDrawbacks Status Quo 1. Maintains production and income in the majority of regions, although the level of both gradually decreases. 2. Progressively decreases the budget cost of the regime. 3. Maintains current benefits to ACP/EBA countries. 1. Delays restructuring and improved competitiveness of the sector. 2. Attracts non-restricted quantities of imports, under preferential agreements, at non-competitive prices, to the EU market which threaten continued EU production in the long run. 3. Maintains distortions in competition. 4. Maintains inequalities among farmers. 5. Trade balance is very sensitive to the removal of the safeguard clause and the abolition of C sugar. 6. Complicates the EU's WTO negotiating position. 7. The common market organization for sugar remains complex and non- transparent. Qualitative Presentation: EC Sugar Quotas IA 21

22. AdvantagesDrawbacks Price Fall 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

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

24. Qualitative presentation: EU Postal Services (2006)

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

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

27. Continuation of the previous example

28. Combining Quantitative and Qualitative Presentations Example: UK RIA on Gambling Act Source: www.evidence-based-medicine.co.uk Option 1 Retaining the status quo Option 2 Implement the Gambling Act 2005 Total cost per annum No additional costs £1.9 – 2.6m Total benefit per annum No additional benefits Greater employment opportunities Higher revenue generation as a result of additional websites being based in the UK and non-UK residents visiting UK-based websites Improved regulation Better choice, information and safeguards for customers Other costsVoluntary contributions to the Responsibility In Gambling Trust Additional software to protect the vulnerable and prevent crime Training to identify problem gambling

29. 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?

30. 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