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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:
0
1
Not financially
justified
2
3
Financially justified
4…..
What do we mean by costs and benefits?
All additional
costs needed to
deliver project
• Fiscal
• Social
• Benefits
Economic
Fiscal
Costs
Economic
Social
Types of benefits
Example
Employment
mentoring
programme for
people with
mental health
problems
Programme to
tackle antisocial
behaviour
Fiscal benefits
Public Value benefits
Reduction in
unemployment payments
as individuals gain
employment
Increased output resulting from increased employment
Reduction in police,
housing and local authority
time spent responding to
incidents.
Improved health with related impacts on well-being (e.g.
confidence and self esteem)
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
Different approaches/uses of CBA?
• 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
fiscal focus
– For government as a whole: the priority is often on overall
growth and prosperity
public value focus
– For charities and their funders the priority may be
focussed on certain aspects of a project and the impact on
people’s lives
Focus on specific social outcomes
• Regardless of the focus, we should consider all types of
benefits.
The CBA model – costs
Costs
Economic Case
• Capital
• Revenue
• In Kind
Outcomes
• Need
• Engagement
• Impact
• Deadweight
• Lag and drop-off
Cashability
assumptions
• Net Present Public Value
• Value for Money Benefit Cost
Ratio
Cost Benefit
Analysis
Tool
Financial Case
• Net Present Budget Impact
• Financial return on
investment
• Payback period
GM approach to calculating costs
What types of
costs are
borne?
Which
agencies bear
costs?
When are
costs borne?
GM approach to calculating costs (2)
Proactive
Reactive
“What we do”
“Consequence of what we
don’t do”
Early intervention
Incident/crisis response
Health visit, employment
support, parenting class,
skills training
COST
Arrest, eviction, hospital
visit, benefit payment
(DIS)BENEFIT
The CBA model – outcomes
Costs
Economic Case
• Capital
• Revenue
• In Kind
Outcomes
• Need
• Engagement
• Impact
• Deadweight
• Lag and drop-off
Cashability
assumptions
• Net Present Public Value
• Value for Money Benefit Cost
Ratio
Cost Benefit
Analysis
Tool
Financial Case
• Net Present Budget Impact
• Financial return on
investment
• Payback period
Outcomes included in the GM CBA model
Level 2 skills
Mental health
Worklessness
benefit payments
Eviction
Looked after
children
A&E visits
Drug/alcohol
dependency
Individual
well-being
ASB incidents
Offending
Homelessness
Family
well-being
Children’s
well-being
Community
well-being
Turning outcomes into benefits
Fiscal benefit
Public Value
benefit
Getting someone into a job
£9,800
£14,610
Gaining a Level 3 apprenticeship
£1,391
£1,925
£63,362
£70,822
£609
£2,933
Outcome
Reduction of one child taken into care
per year
Reduced incident of crime
Running the CBA model
At risk /
affected
population
%Engaged
%Retained
%Impact
%Deadweight
Value
1 - %optimism bias
How many
potential
beneficiaries
?
How many
will we
reach?
How many
will complete
the
programme?
How many
will
achieve
desired
outcome?
What
would have
occurred
anyway?
What is the
value of the
desired
outcome?
How
confident are
we in the
evidence?
• Assumptions tested/updated via evaluation
• Optimism Bias (OB) correction applied to data
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
Uncorroborated expert
judgement
>5 years old
+-25%
-40%
Evidence-based policy – cost data quality
Data source
Age 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%
4-5 years old
+-20%
+25%
>5 years old
+-25%
+40%
Confidence grade
Colour
coding
5
6
Uncorroborated
expert judgement
The GM CBA model – outputs
Costs
• Capital
• Revenue
• In Kind
Outcomes
Benefits
• Fiscal
• Economic
• Social
Net present
value
Cost Benefit
Analysis
Tool
Benefit – Cost
Ratios
Payback
period
Example outputs
Example outputs from CBA model
Intervention
Family intervention project
Fiscal
Return on
Investment
Payback
period
1.4
5 years
Intensive Alternatives to Custody
14.5
<1 year
Integrated Health and Social Care
0.9
N/A
Family Intervention Project – fiscal value
of outcomes
Percentage split between outcomes
Improved mental health, 1.7%
Reduced alcohol dependency,
3.7%
Reduced drug dependency,
19.4%
Reduced A&E attendance,
0.1%
Increased parental
employment, 27.5%
Reduced homelessness, 0.5%
Reduced incidences of taking
children into care, 28.6%
Reduced ASB, 17.5%
Reduced housing evictions,
1.1%
Family Intervention Project
£1,000,000
£900,000
£800,000
£700,000
£600,000
£500,000
£
£400,000
£300,000
£200,000
£100,000
£Local
Authority
NHS
Reactive Cost Savings
DWP (AME)
Police
Work
Programme
Primes
Proactive Costs
RSLs
CJS (excl
Police)
New investment model – applying CBA
Ex-ante
appraisal
Performance
monitoring
£
Ex-post
evaluation
£
Forecast savings
Track savings
Confirm savings
Who invests? How
much?
What to
decommission?
Stop activity?
Continue?
Redraft
agreement?
Apportion
Reinvest into
single pot
Update model
Any questions?
[email protected]