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Analysis of costs and benefits

Describe all the costs and benefits of each option, compared with the status quo or ‘do minimum’ option. The Summary: Analysis & Evidence page will summarise information on:

• Average annual costs and benefits (as well as transitional costs).
• Estimates of total costs and benefits in present value terms, together with estimates of the range of net benefits.
• Summary information on costs and benefits that impact on particular groups (such as particular, industries, social groups or regions).
• Key assumptions, sensitivities and risks.
• Impact on the Admin Burdens baseline.
• A series of other questions that relate to the impact of regulations and other interventions (for example, on competition or on businesses and third sector organisations of different sizes).

The Evidence Base accompanying the Impact Assessment must support the information contained in the above Summary Pages. The Evidence Base must also allow ready comparisons between options, e.g. by presenting the costs and benefits of each option against each other in a summarised form. For each option, this should show:

• the sectors and groups affected;
• whether there will be disproportionate impacts on particular groups or on the environment
• each cost and benefit recorded only once, even if some costs are passed on to another group;
• as far as possible, monetary values.

The information and analysis should also be proportionate to the likely impact but robust enough to inform decision making.

For each option you must present only the costs and benefits that are additional to those that would have been incurred if no action were taken (or above the do minimum case for implementing an EU Directive). Discussion of current costs and benefits should only be included in ‘background’ information.

It is relatively rare that adjustments for taxation are required, because similar tax regimes usually apply to different options. However, where tax regimes applying to different options vary substantially, this should not be allowed to distort comparison of the options. The HM Treasury Green Book provides further information.

Where there is uncertainty, make it clear and spell out the assumptions you use to arrive at your estimates.

Analysis and adjustments to reflect risk and optimism bias should be conducted.

• Optimism bias is the tendency for project appraisers to be overly optimistic, particularly by overstating benefits, and understating timings and costs. The HM Treasury Green Book provides guidance on making explicit adjustment for this bias.

As it is often difficult to predict accurately the exact costs and benefits you should present a range for your estimate of the net present value of benefits.

• Your Evidence Base should state whether this range represents extreme values or the most likely range of outcomes.
• Sensitivity analysis around key variables is also a fundamental aspect of appraising options. It is aimed at testing how vulnerable the options are to uncertainties. For example, “switching values” should be calculated to demonstrate how much benefits would need to fall (or costs to rise) to make it no longer worthwhile to proceed with the option. HM Treasury Green Book provides further guidance and examples.

Total costs should be further described as either administrative or policy costs. These should be described fully in your Evidence Base.

• Your estimates of administrative costs will feed in to the information on Admin Burdens for calculating the impact on the Admin Burdens baseline.
• Note that burdens are over and above “business as usual” administrative costs that the organisation would have undertaken in the normal course of business.

Identify any related or overlapping regulations that already affect those organisations and individuals likely to be affected by your proposal in order to work out the impact of your proposal. Consider the cumulative effect each option may have and any interactions there may be with other regulations.

Do not assume 100% compliance with existing law or that there will be 100% compliance with your policy proposal. Consider the impact of lower levels of compliance. Additional costs and benefits can arise from new regulations or administrative policies designed to improve compliance with existing law.

Consider what could go wrong or how the policy could turn out better than expected and how this would affect the costs and benefits. This should build on the possible unintended consequences you identified when considering the rationale for government intervention.

You should spell out and test any assumptions, and provide references to any data sources or methodologies used.

Further guidance on cost benefit analysis is available at a number of sources, including

• HM Treasury Green Book: appraisal and evaluation in central Government
• Financial Services Authority: Practical Cost-Benefit Analysis for Financial Regulators [PDF]