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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]