Sie sind auf Seite 1von 26

Cost Benefit Analysis in a

Government Context
FMI PD Week: November 25th,2014

Elias Hage, CPA, CA, CISA, Advisory Services, Ernst & Young (EY)
Henri Besnier, M.Sc. CPA, CMA, Advisory Services, Ernst & Young (EY)

► What is a cost benefit analysis

► When and how to use a cost benefit analysis in


► Cost benefit analysis examples

► Challenges and success factors

► Questions
Page 2
What is a cost benefit analysis

Page 3
What is a cost benefit analysis (CBA)?

The purpose of a CBA is to perform an analysis where

expected costs and benefits resulting from an opportunity
are analyzed for selected scenarios (including status quo).

► The CBA helps to understand and compare the initial and on-going
expenditures to the expected financial and non-financial benefits.

► Generally, the first step of a CBA involves an investigation and

assessment of the opportunity.

► In examining the preferred option, it is also important to consider

alternatives, including the base case (or ‘do nothing’ alternative) for
comparative purposes.

Page 4
Components of a CBA

A CBA should contain for a given time period:

► Expected costs
► Expected benefits

Page 5
Expected costs

Expected costs should include all internal and external costs over the
selected time period. This would include both direct project and ongoing
(business as usual) costs.

Examples of types of costs include:

► Capital expenditure (e.g. Purchase of a building)
► Operating and maintenance costs (e.g. Fuel)
► Labor costs (e.g. Salaries and benefits)
► Start-up or transition costs (e.g. Disruption to business due to conversion to a new business process)
► Environmental costs (e.g. Remediation of soil at the end of a project )

Project delivery costs may be straightforward to identify; however, indirect costs will
require further investigation. Always consider what activities are impacted by the delivery
of the program/project and the resources consumed in the operational cycle.

Page 6
Expected benefits

Expected benefits should be measurable and can be classified as:

► Financial
► Non-financial – quantitative (e.g. output, efficiency)
► Non-financial – qualitative (e.g. customer satisfaction, compliance)

Examples of types of benefits include:

► Revenues (e.g. Incremental sales)
► Cost saving (e.g. Reduction of wastes,)
► Productivity improvement (e.g. Process more requests)
► Access to better information (e.g. Citizens can see their electric consumption over internet)

Page 7
Varying complexity of CBA
CBAs can significantly vary in level of complexity. There are several factors which can impact the time and effort required
to produce a functional CBA, such as:
► Identifying all relevant expected costs or benefits
► Availability of data and information to measure expected costs or benefits
► Constructing fair alternatives
Cost/benefit complexity matrix
High Consider the complexity of project E versus project H:
A ► An example of Project E may be the implementation of an
Complexity: Benefits

automated envelope stuffer – a low complexity measure of costs
G and benefits
► Expected costs: Cost of purchasing, implementing and maintaining the
F hardware
► Expected benefits: Avoided cost of staff required to manually stuff the

Low Complexity: Costs High ► An example of Project G, on the other hand, may be the
replacement of a governmental program – high complexity measure
C of both costs and benefits
Non-complex ► Expected costs: Direct costs may be simple to measure (the cost of
H transition); however, indirect costs such as the impact on other
E programs can be difficult to measure.
D ► Expected benefits: Security and safety of citizens, but how would this
benefit be measured? What factors would be used? What assumptions
Project /
would be made?

It is important to clearly state any assumptions made in

determining costs or quantifying and delivering benefits.

Page 8
When and how to use a cost benefit
analysis in Government

Page 9
New regulation submission process

Budget CBA
Department Treasury Board
Fiscal Framework
Submission Secretariat (TBS)

Treasury Board
Cabinet Committee

A CBA is required for all regulation No Approved?

submissions. Prior to submission to the
Treasury Board Secretariat, guidance and Yes
validation may be performed with the Treasury
Board Centre of Regulatory Expertise Implementation
& Follow-up

Page 10
Business cases for programs / projects

CBAs are used as part of business cases at the Federal,

Provincial and Municipal level, and may not always require
review or approval by the Treasury Board Secretariat.

The purpose of a CBA as part of the Government of Canada

business case process includes:
► Linking investments with program results and strategic outcomes
► Effectively communicating the costs and benefits of implementing a
project or program, including relevant assumptions used for

Page 11
Treasury Board CBA process

Cost benefit analysis process

Prepare Treasury
Identify Set Develop Prepare
baseline objectives alternatives CBA
accounting Board
statement submission

Page 12

Market ($) Assumptions ($)

Revealed Preference
Willingness to Pay (WTP)

Stated Preference
Willingness to Accept (WTA)

Benefit Transfer
(Existing Study)

Other (VSL, QALY, reduced

material damages, ecological

Page 13

Private sector Government

(Opportunity costs)

Compliance costs
(capital, operating, maintenance,
(Capital, Operating Costs)
admin, cost of substitutes)

Transitional Costs Monitoring


Page 14
Summary of Treasury Board CBA

Illustrated below is a one-table summary of the Treasury Board CBA

accounting statement
Costs, Benefits & Distribution Base Year … Final Total Annual Average


Benefits Stakeholders

Costs Stakeholders

Net Benefits

B. QUANTIFIED IMPACTS IN NON-$ – RISK ASSESSMENT, e.g. mortality, morbidity

Positive Impacts Stakeholders

Negative Impacts Stakeholders


Short List of Qualitative Impacts (Positive and Negative) by Stakeholders

Treasury Board Secretariat: Regulatory Bootcamp Module 5 - CBA

Page 15
Snapshot: TBS accounting statement

Page 16
CBA examples

Page 17
Example: Regulations amending the Food
and Drug Regulations
Cost-benefit statement
These Regulations will provide a net benefit to Canadians, with a net present value (NPV) of about $33.4
million over 10 years. The quantified benefits relate primarily to cost savings to industry due to removal of poor-
quality drug products at the active ingredient (AI) stage instead of recalls at the dosage-form stage. The
qualitative benefits relate primarily to better protection for Canadians from poor-quality drug products.

►Option 1: Status Quo
►No financial impact
►Continued health risks to Canadians
► Option 2: More active and ongoing promotion of the voluntary implementation of
GMP for AI
► Non-regulatory option
► Unlikely to have a material benefit / impact on the existing health risks
► Option 3: Regulatory amendment
► Benefits to consumers, government and industry
► Costs to government and industry
Source: Food and Drug Regulations Regulations SOR - 2013-74 (26-04-2014)
Page 18
Example: Regulations amending the Food
and Drug Regulations (continued)
The table shows the cost-benefit analysis
A. Quantified impacts ($)
Final Year Total (PV) Annual Average
Industry — “Foreign”
inspection fees savings for $1.6M
Benefits $0.7M $8.9M $1.3M
Canadian manufacturers
selling abroad.
Industry — Cost savings due
to removal of poor quality $2.4M
$5.6M $34.4M $4.9M
drug products at API stage
instead of dosage-form stage.
Total benefits $3.1M $7.2M $43.3M $6.2M
Industry — Training and
administration costs for API
fabricators, $1.0M
Costs <$0.1M $1.4M <$0.2M
packagers/labellers, testers,
importers, distributors and
Health Canada —
Administration of new $0.1M $1.7M $8.5M $1.2M
Total costs $1.1M $1.8M $9.9M

Source: Food and Drug Regulations Regulations SOR - 2013-74 (26-04-2014)

Page 19
Example: Regulations amending the Food
and Drug Regulations (continued)
The table shows the cost-benefit analysis (continued)
B. Positive qualitative impacts
• Potential reduction in the number of recall incidents due to API quality issues.

• Reduced impact of recalls should they occur by helping to narrow down the scope of the recall, through
problem identification and record-keeping requirements that allows the isolation of problem lots.

• Consumers and patients, as well as Canada’s international regulatory counterparts, are assured explicitly
that API in dosage-form drugs sold in Canada are meeting the international safeguard standard (GMP).

• As the number of jurisdictions requiring API to meet the international standard continues to expand, the
implementation of the Regulations will protect Canada against the increased risk of becoming a destination
to divert non-GMP-compliant products to, which in turn could translate into health costs to Canadians, and
sales and economic costs to business.

• The Regulations will allow Health Canada to establish regulatory equivalence with its international
counterparts, enabling Health Canada to reciprocate in international regulatory work-sharing to ensure the
safety of the global AI supply.

• Establishing regulatory equivalence will also result in the reduction of duplicative oversight by various
regulators internationally, and the reduction of Canadian manufacturers’ worldwide compliance costs,
consistent with the Government of Canada’s Red Tape Reduction Initiative.

Other considerations in the CBA:

► One-for-one rule
► Small business lens
Source: Food and Drug Regulations Regulations SOR - 2013-74 (26-04-2014)
Page 20
Non-regulatory example: Shared services
Situation (hypothetical example)
A large government department is thinking of adopting a shared services model within finance and
procurement to reduce FTE costs and potentially improve output. Initiatives being considered include:
► Aligning and streamlining processes
► Consolidating or interfacing existing technologies (e.g. ERP, budgeting system, collections tools)
► Master data cleansing and migration into a ‘single source of truth’
► Revisiting the operating model to support centralized transaction processing and streamlined processes
Direct costs and benefits Indirect costs and benefits
Costs Are there other costs and benefits that may not be
► Capital costs (technology & equipment) apparent, but should be considered when performing
a CBA? How are they measured?
► Migration costs (temporary staff augmentation)
► Professional services
► Loss of corporate knowledge due to voluntary
► Training and other costs departures and/or FTE reductions
Benefits Benefits
► Cost savings due to FTE reduction ► Improved decision making due to better quality of
Benefits in one area may result in costs or budgeting information
benefits elsewhere in the delivery chain – it is ► Bulk discounts on procurement due to better data
important to understand all material impacts ► Revenue realization due to ‘single source of truth’
along the chain for collections and billing

Page 21
Challenges and success factors

Page 22
Current CBA challenges in Government

► Choosing the right instrument and design

► Balancing time constraints and accuracy/quality

► Expertise and capacity building within departments

► Lack of standard costs

Page 23
Ten golden rules

1. Start early and continue collecting information throughout the

development of the CBA
2. Map out the data collection process before creating models
3. The CBA does not have to be “perfect” – 80% science, 20% art
4. Identify and define the assumptions being used
5. Disclose risks and the cost of managing them
6. Compare against a baseline scenario
7. Evaluate more than one alternative
8. Objectives should be precise and measurable
9. Understand the audience of the CBA
10. The CBA should not be impacted by political priorities; it should
provide the most accurate evidence for decision making

Page 24

► Canadian Cost-Benefit Analysis Guide: Regulatory


► Business Case Guide


► Center of Regulatory Expertise (TBS)

► Regulatory Bootcamp Module 5 – CBA

Page 25

Page 26