Step 4: How can EOs utilise a CBA

To scale up a proper CBA then financial and human resources are needed. The requisite data needs to be sourced and it needs to be assembled with care. A CBA can be as technical an exercise as the EO wants to make it – depending on their capacity. It can factor in a whole range of economic variables into its analysis and undertake a deep technocratic exercise.

However, most EOs in developing countries will not have this capacity. But a CBA can be undertaken in a simpler fashion and still be a credible tool for policy change. The EO needs to ensure that it carries out this exercise as accurately as possible. Making inaccurate claims can be damaging to an EOs attempts to make a change in the constraint in the short term and in the longer term to its credibility.

Even where the EO is able to quantify relatively few costs (or benefits), using the CBA systematic approach to try to ensure that all benefits and costs have been identified and assessed will help to improve the quality of advice to decision-makers. Where costs have not been quantified, it is often possible to discuss them in qualitative terms, drawing some conclusions about their relative importance.

See the example below which can be convincingly made with not a great deal of effort.

EXAMPLE - EO POLICY POSITION: CHANGING REGULATION Y

EO CLAIM: "Regulation Y is currently costing business over $80 million a year with most of this cost being met by SMEs"

The EO can make this call because through its surveys and focus groups, the EO ascertained the following information:

  1. Direct cost of compliance with this regulation is $200 per year for every enterprise with fewer than 50 staff (first category) and $500 for every enterprise with more than 50 employees (second category)
  2. Indirect costs to the first category of firms (SMEs) are estimated at an additional $100 a year (i.e. administrative work required to maintain compliance with regulation entails 3 man hours to be carried out by administrative function (current market rates are $15 per hour) plus an additional 2 hours professional fees)
  3. Indirect costs to the second category are less (these enterprises have the administrative capacity to absorb compliance easier). Indirect costs are therefore 1.5 man hours to be carried out by administrative function (current market rates are $20 per hour) with no professional fees

Through information attained from the national statistics bureau, the EO can say that enterprises comprised of less than 50 employees make up 80% of all economic activity in the country and 20% have more than 50 employees. There are 20,000 enterprises in the first category in the country and 4,000 of the second.

The total estimated costs then to business are $60,000,000 for SMEs and $21,200,000 for larger enterprises. The aggregate cost to business annually is $81,200,000.

On this basis the EO can make the following claim: The regulation annually is costing business $81,200,000.

The EO could then go on to outline the implications of this lost revenue for the enterprise sector and how it has impacted on economic growth and jobs.

To carry out a CBA in practice take a sample of enterprises and work through the steps below.

Ensure the sample is representative of different sectors (including sectors in which women workers are dominant), sizes, and of GDP make up (e.g. if the mining sector accounts for 50% of GDP then ensure this is reflected in your sample). Also ensure that women-owned enterprises are included in the sample. Work through the following questions:

CBA ASSESSMENT
BUSINESSCOSTSBENEFITS
What are the direct costs/benefits to enterprises also in approximate dollar amounts?
* Include ongoing and ‘once off’ costs. Should also include all costs associated with the regulating from administrative work through to staff time
Example:
  • Costs of lost sales due to restricted access to markets
  • Licence fees or other charges imposed by the regulations
  • Cost of meeting reporting or record-keeping requirements imposed by the regulations
  • Cost of internal inspections, audit fees etc to ensure compliance is being achieved
  • Increased productivity/efficiency due to regulatory prohibitions on anti-competitive behaviours
What are the indirect costs/benefits on business in dollar amounts?
*Include ongoing and ‘once off’ costs
Example:
  • Costs of familiarising with the regulations and planning how to comply (may include purchase of external advice)
  • Higher input costs due to regulatory impacts on the costs of materials
  • Higher production costs due to changes to production, transport or marketing processes required by the regulations
Example:
  • Reductions in workplace accidents and injuries; associated productivity gains
Are there particular costs/benefits implications for certain sectors, including sectors in which women workers are dominant?
Example:
  •  
Example:
  • through cost savings from a regulation that is designed to reduce or simplify existing requirements – or legislation with costs that particularly impact a sector e.g. OSH for heavy manufacturing
Are there significant costs/benefits implications depending on enterprise size or on women-owned enterprises? Example:
exemptions based on enterprise size can lead to:
  • size traps in that they inhibit enterprises from growing beyond the threshold;
  • unfair competition with enterprises that must comply;
Example:
  • exemptions based on enterprise size can conversely help sustain struggling emerging enterprises from costs that they cannot absorb as easily as larger entities
GOVERNMENT
What are the gains/losses in revenue to government? Example:
  • Direct revenue losses
Example:
  • Direct revenue increases
What costs/benefits will government incur in developing and disseminating the policy?
*Include ongoing and ‘once off’ costs
Example:
  • Cost of administering the regulations: includes providing information to business, recruiting and training government staff, processing licence or product approval applications.
  • Cost of verifying compliance: includes conducting inspections and audits, monitoring outputs.
  • Cost of enforcement: includes investigating possible non-compliance, conducting prosecutions.
Example:
  • Ongoing revenue flow increased
WORKERS
What are the costs/benefits of the regulation to workers? Example:
  • Loss of jobs if regulation places too onerous costs on enterprises
Example:
  • Better workplace protection
OTHERS
Are there revenue gains to other parties Example:
  •  Could be compulsory scheme mandated to third party for administration (such as a chamber providing ‘certificate of origin’ fee based service )
Example:
  • Losses to a revenue stream by eliminating a procedural obligation
CONSUMERS
What are the costs/benefits of the regulation to consumers? Example:
  • Increased prices for products or services
  • Reduced range of products available
  • Delays in the introduction of new products (e.g. due to the need for producers to meet regulated product testing requirements)
Example:
  • Reduced prices for products or services (e.g. through regulatory restrictions on anti-competitive behaviours)
  • Improved safety of goods and services
  • Increased minimum quality standards for goods or services
ECONOMY
 
  • changes in behaviour such as fewer enterprises setting up in business, reduced consumer choice, less taxation revenue, less competition between enterprises, less innovation, etc.
  • Costs of reduced competition – e.g. by favouring existing producers and making entry to a market more difficult (leads to both efficiency losses and transfers from producers to consumers due to higher prices
  • Restrictions on innovation & the ability to develop and market new products and services