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Cost Benefit Analysis – overview
Outline
• Background
• Overview of methodology
• Some examples
How does CBA support Community Budgets?
• 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
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
Benefit cost 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
Fiscal benefits
Savings to the taxpayer – e.g. reduced health
service, police or education costs;
Economic benefits
Gains to:
• individuals – e.g. increased earnings
or
• the whole economy – e.g. increased Gross
Value Added (GVA) due to higher skills levels
Social benefits
Gains to society – e.g. improved health and
wellbeing or increased community cohesion
Types of benefits
Example:
Fiscal benefits
Economic benefits
Social benefits
Employment
mentoring for
individuals with
mental health
problems
Reduction in
unemployment
payments as
individuals gain
employment
Improved
Increased income of confidence, self
individuals gaining
esteem and
employment
reduced isolation of
individual
Initiative to tackle
Antisocial
Behaviour
Reduction in police,
housing and local
Increased
authority time spent patronage of local
responding to
businesses
incidents
Reduced fear of
crime of residents
Drug treatment
programme
Savings in reactive
health costs –
Reduced outgoings
Emergency hospital
spent on drugs
visits, long term
health costs
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 Greater Manchester: the priority is on making savings
to the public sector the meet the challenge of reducing
fiscal focus
budgets
– For governments as a whole decisions may be needed to
determine the best way to maintain and improve
economic focus
standards of living
– Charities (and their funders) are most interested in
social focus
improvements to people’s lives
• Regardless of the focus, we should consider all 3 types of
benefits.
Greater Manchester CBA methodology
The GM CBA model – costs
Predicted
efficiency
savings
Costs
• Capital
• Revenue
• In Kind
Outcomes
Benefits
• Fiscal
• Economic
• Social
Cost Benefit
Analysis
Tool
Benefit – Cost
Ratios
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 GM CBA model – outcomes
Predicted
efficiency
savings
Costs
• Capital
• Revenue
• In Kind
Outcomes
Benefits
• Fiscal
• Economic
• Social
Cost Benefit
Analysis
Tool
Benefit – Cost
Ratios
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
Outcomes Framework
Turning outcomes into benefits
Outcome
Fiscal benefit
Econ benefit Social benefit
Getting someone into a job
£9,176
£2,947
Gaining a Level 3 qualification
£1,391
£1,925
Child taken into care
Reduced incident of crime
Reduced Isolation (full
distance travelled)
£35,000
£3,316
£7,640
£3,843
£8,553
£2,640
The GM CBA model – analysis
Predicted
efficiency
savings
Costs
• Capital
• Revenue
• In Kind
Outcomes
Benefits
• Fiscal
• Economic
• Social
Cost Benefit
Analysis
Tool
Benefit – Cost
Ratios
Payback
period
Running the GM CBA model
Target
population
Engaged
How many
potential
beneficiaries?
How many
will we
reach?
Impact
How many will
achieve
desired
outcome?
Deadweight
What would
have occurred
anyway?
• Assumptions tested/updated via evaluation
• Optimism Bias (OB) correction applied to data
Value
What is the
value of the
desired
outcome?
Evidence-based policy – data quality issues
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
Predicted
efficiency
savings
Costs
• Capital
• Revenue
• In Kind
Outcomes
Benefits
• Fiscal
• Economic
• Social
Cost Benefit
Analysis
Tool
Benefit – Cost
Ratios
Payback
period
Example outputs
Example outputs from GM CBA model
Intervention
Family intervention project
Intensive Community Orders
Integrated Health and Social Care
Fiscal BCR
Payback
period
1.4
5 years
14.5
<1 year
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]