Introduction

1. Neighbourhood Community BudgetsCost Benefit Analysis (CBA) Support Pack – July 2012Contact:robert.rutherfoord@communities.gsi.gov.uk / 0303 44 42258tom.tolfree@communities.gsi.go.uk / 0303 44 43959

2. Introduction • Cost Benefit Analysis (CBA) approaches are helpful in exposing the rationale and potential impact of new ways of working. CBA involves comparing the total expected cost of a project with the total expected benefits, to see whether the benefits outweigh the costs, and by how much. • CBA can also help provide the evidence to prove the feasibility and justification of a concept - such as the Neighbourhood Community Budgets (NCBs) - to a variety of different audiences – for example: 1. Organisations involved in local public services (particularly those being asked to pool budgets)2. Residents and local groups3. Central government spending departments (such as DWP and HM Treasury) • Doing CBA well is to the advantage of every NCB - it is important that you (the pilots) are able to, as far as possible, quantify the benefits and savings derived from your proposals. This will help you to strike deals with your local partners by justifying investment in your NCB proposition, and us to make the case for designing and delivering public services in a new way. • Pilots areas will, however, want to do CBA that is proportionate and relevant to the scope and scale of their NCB proposals. • You [the pilots] also have access to some continued technical guidance from DCLG analysts.

3. Resourcing Cost Benefit Analysis • Conducting CBA may look daunting now but it will be much easier once the nature of the analysis is clear. • It does however require access to partner expertise and analytical capacity. • New Economy Manchester suggest that you need, [for a relatively straightforward intervention]: • Officer skill sets: • Frontline officers – provide detail on delivery model and inform assumptions around performance • Performance officers – confirm data accessibility • Finance officers – help calculate delivery costs • Typical timescales • Initial quick assessment – 1 day • Business case modelling – 1 week

4. EXAMPLE OF WHAT CBA CAN DEMONSTRATE:Preventing re-offending through peer mentoring in Greater Manchester – example of how money is being spent proactively to secure reactive cost savings (across agencies) Shows which partners gain and who bears the costs – can form the basis of ‘deals’ to pool budgets Source: New Economy Manchester CBA Analysis

5. Structuring a cost benefit approach for neighbourhood community budgets • This pack sets out the necessary steps for undertaking a Cost Benefit Analysis (CBA) and signposts to helpful resources. It also suggests the level of staff resource which might be proportionate to developing a business case for NCBs. • We draw upon the New Economy approach – used in the Manchester Community Budget process, and more widely in Whole Place Community Budgets – to build a business case for inter-agency working. • This approach is helpful because it: • deploys a relatively orthodox Cost Benefit approach • has a particular focus on how evidence can build the case for making savings, whilst identifying which partners accrue costs and benefits • has been in development for over two years and has benefited from consistent input from key government departments and HM Treasury • has developed guidance on incorporating and valuing social impacts. • There are other toolkits and CBA approaches which are potentially fit for purpose. These apply similar logical ways of structuring evidence. • For example, Social Return on Investment (SROI) approaches produce values of interventions in order to compare options. These will help produce data you need to build a cost benefit analysis. • The advice in this pack is consistent with the CBA Analytical Support note sent to areas in February (on the Knowledge Hub site), though it is more focussed on providing a worked example to help pilots better visualise the CBA process.

6. Basic steps for doing a cost benefit analysis • Be clear about the intervention or options you are assessing • Calculate the costs of your new way of working • Compare this with your baseline costs (what you are/were doing already) • Calculate the benefits (fiscal - economic - social ) • Compare with baseline case (what benefits/impacts you were getting already) • Account for deadweight (things that would happen anyway) and optimism bias (assumptions based on poor data) • You end up with a ratio ( e.g. 1: 3 → for every one pound spent you get three pounds worth of benefit) • This is a logical process but depends on having evidence on the inputs and outputs of the programme. These are a combination of data collected locally (costs, local evidence) and the results of outcomes , research and costs shown in other areas on similar issues. • The next slides show how the data might look when assembled and some of the steps in more detail.

7. The information needed for CBA requires areas to think through how they get from inputs (costs) to outcomes (benefits) NCB Pilot Area Activities – Information Needed for CBA STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 IDENTIFY INPUTS / RESOURCES What are the costs – (capital, revenue, in kind, other) - of delivering services through the proposed intervention / NCB? What costs are incurred, by which agency, at which point in the project lifecycle? BE CLEAR ABOUT RATIONALE Why is this being done? What supports the rationale? What circumstances (assumptions) is it dependent on? CLARIFY TARGET GROUP / ACTIVITIES For each activity and target group: What is being done and how is this different to what would have been done without the NCB? (This might be a different set of activities, or less of the same activity). SPECIFY OUTPUTS What is done with these resources to the target group? PREDICT INTERMEDIATE OUTCOMES / IMPACTS Things that can be measured in the medium term. Based on the evidence of outcomes What is the likely timing? LONGER TERM OUTCOMES / IMPACTS Things that can be measured in the longer term. What is the likely timing? COSTS BENEFITS

8. STEP 1: IDENTIFY INPUTS Inputs (costs) need to cover those activities under the proposed intervention, less costs under the existing (reference) case This is the net additional COST CALCULATING COSTS – WORKED EXAMPLE * Uplifts to costs may be required to reflect ‘optimism bias’ (the inherent tendency to be overly optimistic when forecasting costs)

9. STEP 2: IDENTIFY RATIONALEA logic model approach is often helpful Example from DCLG (2010) Valuing the Benefits of Regeneration, Economics paper 7: Volume II - Logic chains and literature review

10. STEP 3: CLARIFY TARGET GROUP Identify the number of people who will benefit – and account for what would happen anyway (“deadweight”) CALCULATION OF BENEFITS Target population Deadweight Engaged Impact Value How many potential beneficiaries? What is the value of the desired outcome? How many will we reach? How many will achieve desired outcome? What would have occurred anyway? Source: GM CBA Technical Specification v2.0

11. STEP 4: SPECIFY OUTPUTS AND OUTCOMES Identify the net additional benefits and who they will accrue to CALCULATION OF BENEFITS – WORKED EXAMPLE This is the number of clients for whom additional impact can be attributed

12. STEP 5: PREDICT IMPACT The predicted outcomes need to be monetised THREE MAIN CATEGORIES OF BENEFIT – FISCAL, ECONOMIC AND SOCIAL • FISCAL: Savings to central and local government agencies, resulting in reduced overall government expenditure. • ECONOMIC: Economic benefits to individuals and companies in terms of increased income. • SOCIAL: Social benefits to individuals and society, e.g. increased health, well being and community cohesion. Source: GM CBA Technical Specification v1.0 and v2.0 (Note: v2.0 not published - a number of outcomes values in the table are therefore under review and not finalised)

13. The value of total benefits is derived by multiplying the total engaged group by the value of the expected outcomes DERIVATION OF BENEFITS – CALCULATION OF OVERALL BENEFITS For more guidance on fiscal, economic and social values and how they should be applied see the GM CBA Technical Specification v1.0 (saved on Knowledge Hub). Cost Benefit ratios can then be calculated e.g. Fiscal cost benefit ratio = £1,744,680 (£1,638,000 + £106,680) / £240,000 = 1:7 Economic cost benefit ratio = £694,680 / £240,000 = 1:3

14. STEP 6: ASSESS LONGER TERM / WIDER OUTCOMESNew Economy Working Paper ‘Measuring Social Value’ provides advice on how to include values for personal and social well being into CBA http://neweconomymanchester.com/stories/843-new_economy_working_papers

15. STEP 6: ASSESS LONGER TERM / WIDER OUTCOMES (contd.) http://neweconomymanchester.com/stories/843-new_economy_working_papers

16. Useful sources of evidence • The Green Book : Appraisal and Evaluation in Central Government, HM Treasury 2003 http://www.hm-treasury.gov.uk/d/green_book_complete.pdf • BIS Occasional Paper No. 1: Research to Improve the Assessment of Additionality, 2009 http://www.bis.gov.uk/assets/biscore/economics-and-statistics/docs/09-1302-bis-occasional-paper-01 • Cost Benefit and Value for Money Resources, Educe for Local Government Improvement and Development http://www.idea.gov.uk/idk/aio/28182470 • Greater Manchester Cost-Benefit Technical Specification v2.0, New Economy Manchester, 2012 Shared on Knowledge Hub • New Economy Working Paper May 2012 “Measuring Social Value” http://neweconomymanchester.com/stories/843-new_economy_working_papers • The Social Return on Investment (SROI) Network http://www.thesroinetwork.org/publications-uk • A Guide to Social Return on Investment, Cabinet office/New Economics Foundation http://www.nef-consulting.co.uk/wp-content/uploads/A-Guide-to-Social-Return-on-Investment-2012-edition.pdf?utm_source=nef+consulting&utm_campaign=8c95e09db7-nefCbulletin-Sept&utm_medium=email • The Troubled Families Cost Database – Local Government Association Follow Google link • SROI Network index of values / metrics http://www.wikivois.org/index.php?title=Category:Valuations

17. Annex A: Dealing with uncertainty / optimism bias on cost estimates – potential uplift in cost estimates Source: GM CBA Model

18. Annex A: Dealing with uncertainty / optimism bias on benefits estimates – potential reduction in benefit estimates Source: GM CBA Model