CBA guidelines in Australia and NZ Dr George Argyrous ANZS OG g.argyrous@ unsw.edu.au
Cost-benefit guidelines • Commonwealth of Australia, Department of Finance and Administration, 2006, Handbook of Cost -Benefit Analysis , Financial Management Reference Material no. 6. • NZ Treasury, 2005, Cost Benefit Analysis Primer , Version 1.12 (2011) • New S outh Wales Government, Treasury, 2007, NS W Government Guidelines for Economic Appraisal, Policy Paper TPP07-05. • Queensland Government, Department of Infrastructure and Planning, Cost Benefit Analysis • Government of Western Australia, Department of Treasury and Finance, 2005, Proj ect Evaluat ion Guidelines . • Victorian Government, Department of Treasury and Finance, 2009, Vict orian Guide t o Regulat ion , Version 4, Appendix C • UK Department of the Treasury, 2003, The Green Book: Appraisal and Evaluat ion in Cent ral Government NZ Treasury presentation, 8 February 2013 2 2
Maj or points of difference 1. How to determine the discount rate? a) Conceptual basis b) Operational rule c) Adj ust for maj or risk? 2. How to deal with non-quantifiable costs and benefits? 3. How to deal with equity/ distributional issues? NZ Treasury presentation, 8 February 2013 3
Discount rate: Conceptual differences S ocial Rate of Time Preference “ the value society attaches to present, as opposed to future, consumption ” ( Green Book p.97). Also adopted by Queensland Opportunity Cost of Capital The rate of return that would be expected on some other typical proposal of equal risk (NZ). Also adopted by WA, NS W, Victoria, and Commonwealth In perfectly competitive economy these should produce the same rate. But … NZ Treasury presentation, 8 February 2013 4 4
Discount rate: Operational differences Cwth Use market interest rates; S uggest 7 per cent (real) NZ 8% default rate www.treasury.govt.nz/ publications/ guidance/ planning/ costbenefitanalysis (was 10% ) Qld To be agreed between agency and Queensland Treasury. S uggested reference points: –the interest rate for government borrowings for a term relevant to the expected duration of the proj ect –the long-term average real economic growth rate, with an additional allowance for maj or risks and time preference for current consumption. –the rate of return on debt and equity for comparable private sector proj ects –Currently 6% nominal WA No prescribed discount rate. In general, the discount rate should be based on: –cost of funds - agencies should apply the Western Australian Treasury Corporation (WATC) long- term borrowing rate as the risk-free rate; –adding to this risk-free rate a premium to allow for risk, based on industry norms; and –where appropriate, add a further premium to reflect scarcity of capital funds and the availability of other capital investment proj ects that demonstrate higher internal rates of return –Currently 7% nominal NS W Based on long-term rates; NOT adj usted for market movements; 7% real Vic “ A recent average of the ten-year Commonwealth bond rate … the real risk-free [rate] is currently estimated by the Department of Treasury and Finance to be 3.5 per cent (rounded)” [updated by Current Rat es Advice www.partnerships.vic.gov.au] UK Long-run rate of economic growth, 3.5% real NZ Treasury presentation, 8 February 2013 5 5
Discount rate: Adj ust for risk? • S eparate from calculating expected costs and benefits based on probabilities • Tries to take into account ‘ system-wide’ risk e.g. catastrophic flood, earthquake. • Y es: NZ, Queensland, WA • No: Commonwealth (with exceptions), NS W, Victoria NZ Treasury presentation, 8 February 2013 6 6
Discount rate: Cross-country comparisons Country Discount rate Country Discount rate Australia 1966: 5-6% India 12% 1991: 8% ; 2006: 7% baseline New Zealand 2005: 10% Italy 5% 2012: 8% UK 1967: 8% Norway 1978: 7% 1969: 10% 1998: 3.5% 1978: 5% 1989: 6% 2003: 3.5% Canada 1998: 10% Pakistan 12% 2007: 8% China 8% short/ medium term proj ects; Philippines 15% <8% long-term proj ects France 1985: 8% S pain 6% for transport; 2005: 4% 4% for water Germany 1999: 4% US Before 1992: 10% ; 2004: 3% After 1992: 7% NZ Treasury presentation, 8 February 2013 7 7
Discount rates: Sensitivity analysis Commonwealth +/ -4% (3% and 11% ) NS W +/ -3% (4% and 10% ) WA, Qld S ensitivity analysis using high and low rates should be conducted but no explicit range specified Victoria, NZ Do not explicitly state that sensitivity analysis should involve ranges for the discount rate NZ Treasury presentation, 8 February 2013 8
Non-quantifiable costs and benefits Commonwealth At least specify qualitative pros and cons WA S ocial Impact Analysis used to deal with qualitative j udgments NS W, Queensland, NZ Qualitative and quantitative costs and benefits required Use Multi-Criteria Analysis NZ Treasury presentation, 8 February 2013 9
Equity/ distributional impacts Four positions: 1. Kaldor/ Hicks principle alone should be followed; only social net benefit relevant (Cwth BPRH ) 2. Net benefits to groups/ sectors must be listed as part of CBA (NZ) 3. Use separate social impact analysis to deal with equity/ distributional impacts 4. Modify CBA analysis with distributional weights NZ Treasury presentation, 8 February 2013 10
Other differences/ variation/ gaps 1. Who has standing? 2. How to determine a short-list of options? 3. The relevant time period to take into account 4. What general equilibrium assumptions should be used, and whether income/ employment multipliers should be included? 5. No requirement for literature reviews (except Commonwealth in isolated case) 6. No ‘ plug-in values’ specified 7. Decision-rule to be used 8. Are any of these guidelines followed in practice? 9. IS CBA the decision-making tool or input to decision-making? NZ Treasury presentation, 8 February 2013 11
Aid to decision-making or way of decision-making? “ … my strong suspicion is that the National Broadband Network is going to turn out to be school halls on steroids. I think it is going to be a mine field, an absolute mine field of waste and incompetence and you can be absolutely certain that the Opposition will be hyper- vigilant in this area. No competent Government would commit $43 billion in public funding to a proj ect without a full cost-benefit analysis. ” (Tony Abbott, 8 S eptember 2010) ‘ The New England MP was asked why he had nominated the National Broadband Network as the maj or reason for supporting Labor when no cost-benefit analysis had been undertaken on the $43 billion fibre-optic cable plan. Mr Windsor responded by arguing that most of the nation ’ s maj or infrastructure proj ects had never been subj ect to CBA. “ I think that it ’ s a trap we fall into, ” he said. “ Most things done by government don ’ t have a CBA. The Darwin if someone had done a CBA on that, it would have been scrapped. ”’ to Adelaide rail line – ( The Aust ralian , 24 S eptember 2010) NZ Treasury presentation, 8 February 2013 12
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