Executive Summary

The public sector is a major user of New Zealand’s available resources and as such, should ensure that it makes a significant positive contribution to the economy and society. More particularly, no new proposal should be adopted without first answering:

• what are the specific outcomes sought?
• are there better ways to achieve these outcomes?
• are there better uses for these resources?
• is this an appropriate role for government?

Cost Benefit Analysis (CBA) is one decision-making tool that can help provide assurance around these questions. Quantifying all costs and benefits in monetary terms makes it possible to quantitatively rank alternative proposals: between a given proposal and the status quo; or between competing proposals. Decision-makers can be provided with a consistent basis for assessing proposals and can be better informed about the implications of using economic resources.

This primer seeks to improve the quality of policy and spending proposals by providing guidance on the issues that should be considered and how proposals will be assessed by the Treasury. It is intended for public sector policy and financial analysts and provides simple, accessible and practical assistance. The Primer presents an overview of Cost Benefit Analysis in a New Zealand public sector context, with particular emphasis on the basic questions that are likely to arise. For more complex issues or more detailed guidance, the reader is referred to the bibliography or the relevant Treasury Vote team.

Cost Benefit Analysis (CBA) is just one of the process steps undertaken when preparing a policy or spending proposal. A fully developed proposal should:

1. Define the problem
2. State the public policy objectives
3. Identify the feasible options
4. Analyse the options (using CBA or similar techniques)
5. Assess how the preferred option will be implemented
6. Describe the consultation undertaken, and
7. Present the overall assessment.

Steps 1 to 3 and 5 to 7 are beyond the scope of this primer.

It is also useful to consider Cost Benefit Analysis as a series of steps:

1. Confirm the desired outcomes of the proposal(s)
2. Establish the assumptions and scope underlying the analysis
3. Decide an appropriate period for the analysis (often termed the 'appraisal period')
4. Identify all significant benefits and costs
5. Assign monetary values to the benefits and costs,[1] wherever possible
6. Discount the benefits and costs to present values (see chapter 3)
7. Assess risk and uncertainty (see chapter 4)
8. Consider the effect of any intangible costs and benefits that could not be reliably assigned monetary values (chapter 4)
9. Select the preferred option (see chapter 5).

Steps a) to f) are covered in chapter 2 where the preferred approach is to undertake CBA from a national perspective rather than a more narrow government or departmental perspective. The chapter then goes onto highlight issues to consider when identifying benefits and costs before dealing with techniques for valuing them.

Discounting, discount rates, and decision rules are introduced in chapter 3. Chapter 4 introduces techniques for assessing and dealing with risk, uncertainty, and intangibles that cannot be reliably quantified. These techniques include sensitivity analysis, scenario analysis, and multi-criteria analysis. The final chapter pulls all the elements discussed in the primer together and provides additional guidance on presenting the CBA to decision makers. Some tips and traps are also provided as a final check.