Public Policy Analysis

1. Public Policy Analysis MPA 404 Lecture 11

2. Previous Lecture • Qualitative research and main methods • Reading on Gregory Clark and his book • The differentiation of qualitative methods by nature or use

3. The objectives and approaches to Policy Analysis • The purpose: in general, to measure the efficiency and effectiveness (equity can also be added) of a particular public policy. Indirectly, its also an indication of how good were the policy makers at making use of the resources and where the fault lines lie? • It’s a step wise process; analyze design, implementation and outcomes of a public policy and both quantitative and qualitative techniques can be used for forming a conclusion. • Perhaps the most critical aspect of a policy analysis is to come up with a statement about ‘quality improvements’ as a result of public policy. For example, if government has spent on a sanitation project, then have the people benefitted or not? • THE NEWS editorial on education, 6th July 2014. WB’s study and its implication about the education policies.

4. The methodology of approaches has already been studied in the quantitative and qualitative methods lecture. The approach is generalized by the following: • Accountability (building Government Capacity): Accountability here is normally referred to in the context of post-periodic performance. For example, talking about economic performance implies how good a government or its organization was in using resources judiciously. Similarly, financial accountability covers such aspects as internal and external audit. • Participation Process: Its about giving a sense of ownership to the various participants in a specific public policy because with the help and cooperation of all the participants, because a policy will not get implemented if they don’t cooperate. This requires the policy makers to be flexible enough in terms of listening to various points of views and incorporating the better ones in the policy design and recommendations. • Predictability: This aspect requires predictability in terms of laws that will ease (among other things) the easy implementation of policies, the

5. reduction in the cost of carrying out day-to-day business (transaction costs), and easy interaction between various participants without any formalities or difficulties. All this is easy to do when there are clearly written laws that define the scope of work and responsibilities. • Transparency: The word says it all, and this aspect is critical since we are aware of rampant corruption here. This is due to lack of transparency. When things take place behind backdoors without many knowing anything about it, there are bound to be problems. That is true of policy making too. When decisions are made arbitrarily without the involvement of all concerned groups, there is bound to be problems in its implementation. That is why it is imperative that from policy design to its implementation onwards, transparency should be a necessary part of policy making. Metro project in Islamabad: who was asked or consulted? • Financial Analysis: Every policy or project of public importance needs financial resources to be carried out. The project needs budgeting, pointing out financing agencies, donors, running costs, total costs, over-runs, etc. It is imperative that there should be absolute assurity regarding the finances

6. of the project otherwise the project will be compromised. Example: GolenJol hydro power project’s stalemate due to non-release of funds. Reason: lack of transparency. • Economic Analysis: It covers the financial aspects too, and can be viewed as a complete analysis of the project that takes into account almost everything. The economic analysis is about the justification of project given scarce resources, the opportunity costs, its financial side, its impact upon economy and society, and what it can do for future economic growth. The analysis is done on both micro and macro level, and involves such aspects of policy as taxation, subsidies, expenditure priorities, returns on investment, technical and financial feasibility of the project, etc. We will certainly be going through a lot of this kind of exercise and analysis. • Social Analysis: While the economic analysis may look at the policy from a efficiency criteria, social analysis is more concerned with the distributional outcomes. This kind of analysis is concerned with the question of who benefitted and how much rather than the efficiency and success of a project. Used in analyzing government transfer programs.

7. Technical Analysis: It involves analysis of all the technicalities of the policy for its implementation. For example, the cost-benefit analysis, buildings and structures (if they are being built) and human resource requirement analysis are a part of this. Different sectoral projects have different technical parameters and analysis because they all involve different considerations. The clearest example of these kinds of analysis are the documents of P&D division that is tasked with preparing the yearly, three yearly and five yearly plans. • Sensitivity Analysis: This aspect has is more on the lines of financial aspect since it involves the projected costs and benefits based on few specific financial calculations (like IRR). The logic underlying this kind of analysis is that circumstances change. And with the change, what is the likely change in cost and benefit ratio. In other words, would it be feasible to carry on with the project any further? The estimated change scenario is done at the start, and may even be carried on later. • Cost and Benefit Analysis: This is in fact a part of the sensitivity analysis that we just discussed above. The principle of calculation here revolves

8. around the realization of inflows (through earnings) and outflows (through expenditures). These are calculated over the life time of the project, presenting the stream of income and expenditures at various rates. Before we go on any further, it will be helpful to understand some of the concepts that will be used again and again during the course of our discussions. These are: a) Discounting: The logic of using discounting is simple: the value of a unit of money today will not be the same in the future (owing to inflation, it will be less). So if we have to know what the value of our rupee will be in the future, we will have to discount it by a specific rate. In terms of project valuation, it is important to know what the future discounted value of income and expenditure would be so that a final decision is arrived at about the viability of the project. b) Opportunity cost: The cost of next best alternative! So suppose that we want to consider the opportunity cost of capital (a certain rate) for a project, it will simply mean that the rate of the next best alternative to the project that we are forgoing.

9. The methods used for calculation of these income streams are as follows: a) Benefit-Cost ratio: After calculating the discounted value of future costs and benefits, the present worth of benefits (current plus future discounted benefits) is divided by , the present worth of costs (current plus future discounted costs). If the value is above one, the project is deemed feasible. Note here that the present value (PV) of a future stream of income is given by (Future Value)/(1 + Discount Rate)a ,where ‘a’ is the number of years. b) Net Present Worth (NPW): Simply subtract the discounted costs from discounted benefits and we get the NPW. If the NPW is positive, then the project is desirable. The exact number of NPW depends upon the project, priorities and other such factors. c) Internal Rate of Return (IRR): The internal rate of return is the interest rate that makes the present value of the investment's income stream add up to 0. Note that we need to come up with PV’s of future income stream before we end up on a IRR.

10. The internal rate of return is a measure or a yardstick of the worth of an investment. You may have noticed that we just mentioned the IRR as a rate that equates future income stream to zero (or as near to zero as possible). Why zero or near zero? • The answer can only be understood if we go back to the opportunity cost concept, and that we would want future benefits to be positive in order for the investment/project to go ahead. What would we like the opportunity cost to be? As low as possible (remember it’s a cost). And we would definitely like the future income stream to be positive (negative income is akin to a loss). So the trick revolves around finding a rate (amongst several rates) that is the lowest, yet manages to keep the future income stream positive. • These kinds of calculations are usually carried out by appraisal experts. They do it at the start, before the implementation of the project. Notice that these kinds of measures do not include uncertainty in its calculation. Thus, it is not surprising that an uncertainty may lead the halting of the project since it becomes non-feasable. We discussed the Golan- Jol example, and the uncertain event that occurred just at present after its implementation.

11. I mentioned uncertainty earlier. What uncertainty does is that it imposes costs that had not been realized earlier in the calculations using concepts like PV, IRR, etc. When these costs do occur, it messes up the whole calculations of income stream and increases costs that make the whole project not worth completing. For example, many projects have over the years imposed substantial environmental costs that were never taken into consideration. • Two examples. One of China’s rapid economic development, which has introduced billions of cars on Chinese roads and thousands of industrial units. But one of side effects, which was not taken into consideration at the time of calculations, was environmental pollution. Now, the main Chinese cities are blanketed in a thick fog of smog (smoke due to industrial and economic development), which has led to millions of Chinese becoming sick. It is estimated that it will take billions of dollars to clean up the mess, and even that is not certain. • The Margalla hills quarrying industrial units.