Using iSIKHNAS for Budget Advocacy

1. Using iSIKHNAS for Budget Advocacy 3.5 Cost-benefit analysis

2. Objectives for this session • At the end of this session you should be able to: • Describe the meaning of net present value, benefit-cost ratio and internal rate of return • Interpret the results of a cost-benefit analysis • Implement a simple cost-benefit analysis

3. Role of economic analysis • Economic value (benefit) is only one factor in making decision about a proposed program • May be other reasons to go ahead with uneconomic program • For example public health concerns such as for Rabies • Or to not go ahead with program with a high NPV or benefit-cost ratio • For example political reasons, financial reasons (lack of funds), other priorities more important • Decision maker will consider all of these factors to make a decision

4. What is a cost-benefit analysis? • Compares costs and benefits of a program over multiple years • Takes account of fact that money spent or received in the future is worth less than money spent/received today – why? • All costs and benefits discounted (depreciated) to current year value for comparison = Present value • Discount (depreciation) rate similar to interest that would be earned if money was invested

5. Usually for: • larger and more complicated programs • Programs that run over multiple years (5 or 10, up to 20 years) • Programs where costs are higher at the start and benefits higher at the end

6. Inputs • Costs of the program • Fixed costs • capital equipment, • staff, • Vehicles • Office rent. electricity • Variable costs • Surveillance costs, • control costs, • per diems, travel • Need to be calculated separately for each year of the program

7. Benefits • Savings due to reduced level of disease • Lower mortality • Lower morbidity • Reduced treatment costs • Losses from disease without program – losses with program • Need to be calculated separately for each year of the program

8. Outputs • Net Present Value (NPV): = Overall value of all of the program in today’s $ = Present value of benefits – present value of costs • Benefits and costs discounted by the “discount rate” to provide values in today’s $ • NPV >0 program has an overall benefit • NPV <0 program not economic – Costs greater than benefits • The larger the difference the greater the value of the program

9. Benefit-cost ratio: = Present value of benefits / present value of costs • > 1 means a program is worth doing (benefits greater than costs) • < 1means not economically worthwhile (costs exceed benefits)

10. Internal rate of return • The discount rate required for Net Present Value = 0 (or Benefit-Cost Ratio = 1) • This is the interest rate (return) you would need to get to be worth investing elsewhere

11. Discussion and questions?

12. NPV example • Open spreadsheet Net present value calculations.xlsxworksheet NPV calculations • Work through calculations to see how the NPV function calculates the discounted value of future benefits. • Variable benefit received for each of next 10 years • Each annual benefit is discounted back to a current value according to the discount rate • Sum of discounted values for all amounts = value from NPV function • The more years until the benefit is received the less it is worth today • Works the same for costs

13. IRR example • Open spreadsheet Net present value calculations.xlsxworksheet IRR calculations • Work through calculations to see how the IRR function calculates the discount rate required to make NPV = 0. • Variable net return (benefits-costs) received for each of next 10 years • Some years return is negative (spend more than the benefit gained) • Each annual value is discounted back to a current value according to the discount rate and rate is calculated so that NPV = 0

15. Exercise • Open and work through spreadsheet • cost-benefit analysis.xlsx • This is: • Brucellosis in dairy cattle • Losing calves every year due to abortions • Proposing a vaccination program to control the disease • Is the program going to be economic (profitable)

16. Proposed program • Vaccinate all cows in first year then only replacement heifers • Initial cost (first year only) for • cold-chain, • whole herd vaccination and • staff training • Ongoing cost (every year after first year) for • annual vaccination of replacements • Extra feed and treatments for additional calves • Other costs • Additional staff costs (salary and operational expenses)

17. Benefits • Extra calves born and sold • Other benefits – extra milk sold • Benefits delayed because: • extra calves born in second year • sold in third and later years

18. Calculation • Calculate: • Costs and benefits calculated over 20 years • Discounted (present) value of all costs • Discounted (present) value of all benefits • Calculate • Net present value • Benefit-cost ratio • Internal rate of return • The spreadsheet will do this for you once you enter the values

19. Exercise • Work through spreadsheet together (on screen) or individually • Enter values in the orange cells • Try alternative values and see what effect they have, for example: • Lower calf value? • Double the cost of vaccination? • Increased initial costs • Look at formulae to see how the calculations work

20. Discussion and questions? • Show completed model on-screen • Do the results make sense? • How do you interpret the results? • Is the program profitable with the values used? • What impact do changes to input values make: • Calf value? • Cost of vaccination? • Staff costs?

21. Example (if required) • There is a worked example in 3.5 cost-benefit analysis example.xlsx • If required, open this and look at input values and results • Note: input values may not all be realistic • See results on next slide and discuss

22. Year 1 expenses high and no return • Year 2 expenses only slightly higher than benefits • From year 3 on Benefits exceed costs

23. Report back and discuss • Project is economically worthwhile • Results below for example analysis • Net Present Value (benefit) = IDR 53 billion • Discounted benefits 2.9 times the discounted costs • IRR = 0.8 means need 80% return to be better off investing elsewhere

24. Final discussion • Any final questions or comments?

25. Session summary • Cost-benefit analysis used for larger projects extending over multiple years • Costs and benefits estimated for each year of the project • Values then discounted back to calculate a present value for total costs and present value for total benefits • Result summarised as: • Net Present Value • Benefit-cost ratio • Internal rate of return