Transcript The 2002/03 Budget

Cost-Benefit Analysis
A presentation by Robin
Sherbourne of the Institute for
Public Policy Research to the
Ministry of Finance
24 June 2003
Overview of Presentation
• Cost-Benefit Analysis: Theory
• Cost-Benefit Analysis: Practice
• Other Approaches
Private Goods
What are private goods?
• Excludable
• Rival
Examples: food, clothing, cars
Private Goods
In a market economy:
Buyers (consumers) and sellers
(producers) together determine how
much gets produced at what price
Left to itself market will reach equilibrium
which maximises total benefits to
consumers and producers
How Are Business
Decisions Made?
• Businesses interested only in private
returns
• Invest or not invest?
• Will investment yield profit?
• Will investment yield private returns
greater than private costs?
Example
I have N$20,000 should I invest in a taxi?
• Cost of taxi N$20,000
• Maintenance, petrol, insurance and
wages N$10,000
• Income from fares? 6,000 passengers
at N$2 = N$12,000
• Profit = N$2,000 a year
• Interest rate < 10% should invest in taxi
Public Goods
What are public goods?
• Not excludable
• Not rival
Examples: national defence, roads, street
lights, knowledge
Can Business Provide Public
Goods?
• Imagine a private business that tried to
provide national defence, roads, street
lights, knowledge
• Provision of the “right amount” of public
goods harder than private goods
Role of Government
• Economic rationale for government is
the provision of public goods but…
• how much to supply given no price
signals that indicate demand?
Cost-Benefit Analysis
• Estimates total costs and benefits of a
project to society as a whole (not just
private costs and benefits)
• Willingness to pay not revealed
• More difficult than private investment
decision
• Tries to measure costs and benefits in
money terms
Cost-Benefit Analysis
• Compares projects using discount rate
yardstick
• High information requirements
• Ongoing research needed
• Rough approximations at best
• Sensitivity analysis required to test
robustness
Cost-Benefit Analysis
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Distribution of costs and benefits
Political factors
Strategic factors
Perceptions
Example
Should municipality install robots at
crossroads?
• Cost of robots N$10,000
• Engineering estimates reduction of risk of
fatal accident from 1.6% to 1.1%
• Statistical value of life N$10 million
• Expected benefit is 0.005 x N$10 million =
N$50,000
• Benefits outweigh costs therefore install
robots
CBA Applied to Namibia
• What proportion of public spending is
subjected to CBA?
• Already applied to some big projects
(especially when funded through
borrowing)
• No government-wide discount rate
• No SVL
Cost-Effectiveness Analysis
What is the most cost-effective way of achieving
given policy goal?
Example: Improving quality of education
• Improve teacher training?
• Improve teaching materials?
• Reduce class sizes?
• Improve school buildings?
Benefit Maximisation
What are the maximum benefits that can be
gained from given amount of spending?
Example:
What is the most number of lives that can be
saved with N$10 million?
• Road safety?
• Primary health care?
• Health education?
• ARVs?
Conclusions
• CBA needed to guide government spending
decisions
• CBA must be workable
• Who should do it?
• Need for common values such as discount
rate and SVL
• Need for monitoring and evaluation
afterwards