COST-BENEFIT ANALYSIS OF
UNWANTED ORGANISM OR PEST RESPONSE OPTIONS
Ministry of Agriculture and Forestry
February 2002
Contents
Introduction ................................................................................................................................ 1
The cost-benefit analysis process ............................................................................................... 2
Step one: define the problem ...................................................................................................... 2
Step two: select the control options............................................................................................ 2
Step three: specify the baseline scenario .................................................................................... 3
Step four: estimate control costs for the control options ............................................................ 3
Step five: identify the effects of the control options .................................................................. 4
Step six: quantify these effects ................................................................................................... 5
Step seven: value these effects ................................................................................................... 6
Step eight: consider the timing of these effects .......................................................................... 8
Step nine: discount annual costs and benefits ............................................................................ 9
Step ten: calculate decision criteria .......................................................................................... 11
Step eleven: perform sensitivity analysis ................................................................................. 13
Step twelve: report on the CBA ............................................................................................... 15
Limited applications of CBA techniques ................................................................................. 16
Appendix .................................................................................................................................. 18
Introduction
1. Cost-benefit analysis (CBA) is a formal technique for the systematic and consistent
appraisal of activities in terms of their outcomes relative to their use of resources. CBA can
contribute to public sector policy analysis not only in examining the effects of a proposed
policy, but also in informing the choice of policy option and guiding the efficient allocation of
limited resources.
2. The consideration of relative costs and benefits is already part of the policy analysis
process. In some cases a qualitative assessment, comprising identification of all positive and
negative consequences and the relative significance of each, may suffice. A quantitative CBA
provides a more rigorous assessment, however. It is the application of this approach,
specifically in the consideration of options for responding to an unwanted organism or pest,
that is outlined in this document, to assist in commissioning and interpreting, and to ensure
consistency in preparing, cost-benefit analyses to inform decisions on response options. A
summary is provided in the appendix.
The cost-benefit analysis process
3. The key steps in conducting a CBA of one or more options for the control of an unwanted
organism or pest can be described as follows:
1. define the problem;
2. select the control options;
3. specify the baseline scenario;
4. estimate control costs for the control options;
5. identify the effects of the control options;
6. quantify these effects;
7. value these effects;
8. consider the timing of these effects;
9. discount annual costs and benefits;
10. calculate decision criteria;
11. perform sensitivity analysis; and
12. report on the CBA
Step one: define the problem
4. The first step in the CBA process is to define the problem to be addressed by the analysis,
formulated in such a way that it can be modelled within a CBA framework. It is necessary to
establish from whose perspective to analyse this problem (e.g. in terms of costs and benefits
to particular individuals, businesses, groups, industries or sectors or, most often, in
consideration of government policy, from the perspective of the national economy) and the
scope of this analysis (e.g. to the farm gate or business door only, inclusive of effects on
upstream and downstream industries and related sectors or extending throughout the economy
through multiplier effects on regional income, output and employment). Unless the problem is
conceptualised and analysed in a way appropriate to the needs of decision-makers, the
analysis may be of little value in informing, and may even mislead, decision-making. There
may be only one feasible, or a single clearly most suitable, approach in terms of the structure
and composition of a CBA. Otherwise, in this and other steps in the CBA process, direction as
to preferred approach may be sought from relevant government departments, industries and
other stakeholder groups.
Step two: select the control options
5. The number of control options included in a CBA depends on the scale of the analysis.
The purpose of the CBA may be to compare the costs and benefits of a single, proposed
response to an unwanted organism or pest or to compare the net benefits, or net costs, of a
range of control options.
6. The control options selected for assessment may comprise management and/or eradication
programmes of differing objectives and/or mechanisms, involving different types, locations,
magnitudes and/or timing of control activities, of differing effectiveness and/or cost. A
comprehensive analysis of control options includes all feasible alternatives available to
decision-makers. The greater the number of control options, however, the greater the amount
of data and analysis required. It may be sufficient to focus on a short-list of options. A single,
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proposed response or a small number of control options for consideration is likely to have
been identified prior to the request for a CBA.
7. CBA is not able to determine the optimal of all possible levels of control but compares,
and identifies the superior of, only the levels of control associated with the control options
specified.
Step three: specify the baseline scenario
8. In selecting control options for assessment, it is necessary to identify the baseline scenario
with which they are compared and relative to which their costs and benefits are measured.
The baseline scenario represents the default, reflecting conditions in the absence of the control
options (not conditions before or without the unwanted organism or pest). It is in terms of the
divergence from this baseline scenario that the control options bring about that they are
assessed. Any scenario can be adopted as the baseline, but all control options should be
assessed relative to the same baseline scenario. All assumptions implicit in the baseline
scenario should be clearly identified.
9. Most often, the most appropriate baseline scenario is no intervention to control the
unwanted organism or pest. This is usually defined in terms of a response co-ordinated by
central government, but can refer to responses co-ordinated by regional councils or industry
organisations in CBA of control options for these agencies. Where the option of no
intervention cannot realistically be considered, for technical, social or political reasons, for
example, the baseline scenario may be whatever is considered to represent the minimum
tenable level of intervention. Where some form of intervention already exists and is to
continue in the absence of an alternative, the baseline scenario may be the status quo, with
which to compare alternative levels or forms of control, which could include reduced or zero
control. Adoption of either a minimum or status quo level of intervention as the baseline
scenario implies an incremental rather than an absolute analysis, in which the basis for
assessment is the increase or decrease in costs and benefits rather than the total costs and
benefits caused by the control options.
10. In reflecting conditions in the absence of the control options, the baseline scenario should
allow for the behaviour of affected sectors (e.g. in the absence of intervention to control an
unwanted organism or pest, affected sectors may choose to undertake some degree of
corrective or preventive action to mitigate the impacts of which they are at risk).
Step four: estimate control costs for the control options
11. The primary, and in some cases only, cost associated with a response to an unwanted
organism or pest may be expenditure on control activities. The control costs of each control
option should be expressed as a time series of annual expenditure, estimated on the basis of
the magnitudes and unit costs of control activities. Any ongoing expenses, such as those of
surveillance or continuing management (e.g. to prevent re-establishment or to limit incidence
or distribution), and the costs of any subsequent responses to this unwanted organism or pest
within the time period covered by the CBA (see step eight) should be indicated.
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12. The time series of control costs should reflect any significant changes over time in the
types, locations and/or magnitudes of control activities (e.g. where control activities are
cyclical or related to the incidence or distribution of the unwanted organism or pest). The rate
of increase in control activities may be limited by control capacity. As a control option
approaches its objective, control activities may be scaled down or, alternatively, intensify as
resources become available from areas brought under control or as increasingly more effort is
required to achieve greater levels of control (e.g. in pursuing eradication).
13. Market values tend to exist for the types of costs incurred in conducting control activities
(e.g. materials, labour and overheads). Costs should be expressed in real terms (i.e. net of the
effects of inflation). It is usually most convenient to adopt the price level at the time of
analysis to represent real values over the duration of the time period covered by the CBA.
Allowance should be made for any significant changes in real unit costs during this period.
For example, real unit costs may decline with economies of scale or efficiency gains or
increase with increasing difficulty (e.g. as control activities extend into more arduous terrain).
14. Estimates of the magnitudes and costs of control activities may be available from
technical staff with responsibility for formulating response options. Advice may be sought
from relevant industries and other stakeholder groups with specialist knowledge or past
experience of the control methods considered. It may be necessary to adapt information on
previous responses to this or a similar unwanted organism or pest, including in other
countries.
15. Note that although full annual control costs for each control option should be identified, if
the baseline scenario is a minimum or status quo level of intervention, it is the difference
between full annual control costs and the annual control costs associated with the baseline
scenario (i.e. the increase or decrease in annual control costs) that is used in the subsequent
CBA.
Step five: identify the effects of the control options
16. The next four steps in the CBA process address the effects of the control options. These
effects describe the divergence, brought about by the control options, from the conditions
existing under the baseline scenario.
17. The first of these steps is to identify all significant effects, irrespective of whether or not
they can be quantified and valued. Different control options may have similar types of effects,
of different magnitudes or timing, or, where the mechanisms of control differ, may have
different types of effects. The identification of effects should encompass all likely
consequences and implications that may have a bearing on the choice of control option. These
effects should incorporate the reactions of affected sectors and, where possible, recognise the
dynamics of biological and economic systems (i.e. allow for how these systems behave or
respond, where effects are sufficiently large to impact on them, e.g. effects on the production
base in one year may in turn affect output for several years thereafter; a change in quantity
may cause a change in cost or market price, or vice versa). The construction of a matrix or
flow chart identifying all relevant sectors or processes and the linkages between them in order
to determine the flows of effects between different groups or areas of activity may facilitate
not only the comprehensive identification of effects but also the avoidance of double
counting.
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18. The effects of the control options should be defined in terms of specific outcomes (e.g. an
improved product quality may be represented by an increase in price and/or quantity sold,
including according to market). Although most effects may be positive (the most obvious
example being avoidance of some or all of the adverse impacts of the unwanted organism or
pest), the control options may also generate significant negative effects (e.g. imposing
additional costs on, or reducing the revenues of, affected sectors, including through restricting
their activities and distorting the efficient allocation of resources within the economy). It is
important to identify not only the direct effects – effects directly associated with the primary
purpose of the control options – but also any significant indirect effects (e.g. control options
to reduce the impact of an unwanted organism or pest on a production sector may affect other
sectors including conservation and tourism). Although indirect effects are incidental to the
purpose of the control options, they can be substantial. Control options may also have both
tangible and intangible effects. Although difficult to assign satisfactory measures of economic
value, intangible effects (e.g. impacts on native species) can be of considerable importance to
society and should be identified even if not represented in the quantitative analysis.
19. Whilst the primary purpose of CBA is to measure total effects, the distribution of effects
may also be of concern. The ultimate distribution of costs and benefits can be difficult to
identify, as some or all of their incidence may be passed on to other sectors and thus not borne
solely and in full by the sector affected in the first instance (e.g. part of an additional cost to
producers may be passed on to consumers in the form of a higher price). Such transfers
between sectors have no net impact on total net benefits, being a cost to one sector and an
equivalent benefit to another sector, but may prompt real effects (e.g. at a higher price, from
the previous example, consumers may demand less). Distributional effects may be specified
in a CBA, to the extent possible (e.g. for the above example, information would be required
on the responsiveness of supply and demand to changes in price), with particular care to avoid
double counting. Often, however, detailed distributional analysis lies outside the scope of the
CBA.
Step six: quantify these effects
20. The next step is to quantify the key effects of the control options. Some of the effects
identified in step five, such as some intangibles, it may not be possible to quantify. There may
also be effects that, although important to identify in alerting decision-makers to the
implications of the control options, are considered to lie outside the scope of the quantitative
analysis.
21. Effects should be quantified in terms of annual outcomes relative to the baseline scenario
(e.g. the effect of the loss of an asset should be defined in terms of the loss of the value
derived from the asset annually). Coefficients – incidence and unit magnitudes or rates of
effects – may be drawn from literature or data on the unwanted organism or pest and its
control or gauged in consultation with technical experts and relevant industries and other
stakeholder groups. Coefficients based on overseas experience may need to be adapted to
New Zealand conditions (e.g. for differences in climate, habitat, presence of host species and
predators, as well as production practices and other human activities). It may be necessary to
adapt information on related species believed to have similar effects and methods of control.
It is essential to identify all assumptions and their bases. Data on the variables – numbers of
units – to which to apply these coefficients are often easier to obtain. These may be available
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from statistical or industry publications, government departments or agencies or industry or
other stakeholder organisations. A useful source of information on New Zealand’s agricultural
and forestry sectors, including land cover statistics and annual production and trade data, is
the statistics section of the MAF internet site. A wide range of economic and social data can
be obtained from Statistics New Zealand publications and its internet site. Forecasts,
consistent with national trends, may be required for variables that are likely to change
significantly within the period covered by the CBA (e.g. reflecting growth or decline in key
sectors). All data sources, and any modifications to the raw data, should be clearly identified.
22. At what level of disaggregation to model the effects of the control options depends on
how effects vary significantly (e.g. by location according to differences in climate, habitat,
human population or activities or timing, with the spread of the unwanted organism or pest)
and the needs of decision-makers (e.g. for identification of effects by type or distribution such
as by sector, group or activity) but may be constrained by levels of aggregation in available
data. In modelling these effects, some degree of simplification is inevitable given the
complexity of biological and economic systems, data limitations and time and other resource
constraints. The more detailed the modelling of costs and benefits, the greater the data
requirements and the amount of time required for the analysis. These may be more warranted
the greater the impacts of the unwanted organism or pest, the effects of the control options or
the control costs at stake. Ultimately, however, in how much detail to model the components
of the CBA depends on the valued added to the analysis in terms of the extent to which
greater detail alters, or improves confidence in, the findings of the CBA.
Step seven: value these effects
23. The reason for expressing positive and negative effects in monetary terms is to enable the
direct comparison in a common unit of effects that are qualitatively different.
24. The annual effects, relative to the baseline scenario, quantified in step six should be
valued, where valuation is possible, in real terms, at the same price level as adopted in
estimating control costs (usually that at the time of analysis). Allowance should be made for
any significant changes in real unit values over time.
25. For many of the more tangible effects of the control options, particularly effects on
commercial activities, market values may be directly applicable (e.g. revenue less variable
cost per unit of production). It should be recognised, however, that market price can
understate economic value, as some consumers may be willing to pay more than the market
equilibrium price, and may not be a reliable indicator of value to society under price
distortions (e.g. subsidies) or market failures (e.g. incomplete information, imperfect
competition, externalities or public goods).
26. For some effects, there may be no market values. Valuation of these effects may be
approached in terms of either cost value or benefit value.
27. Cost value reflects the costs saved or avoided, for a positive effect, or the costs incurred,
for a negative effect (e.g. repair or replacement costs for damage to property). Measures of
cost value are generally considered inferior to measures of benefit value in that an effect may
be valued in excess of the costs it avoids or incurs (e.g. human health benefits, including
reduced mortality, tend to be valued at more than simply the costs, such as medical expenses
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and labour productivity losses, avoided). Benefit value tends to be more difficult to derive,
however, and cost value is sometimes used to represent its lower bound.
28. Benefit value reflects the value of the benefit secured, for a positive effect, or the benefit
forgone, for a negative effect. The most accurate measure of benefit value is what society is
willing to pay to secure a positive effect or to prevent a negative effect, or willing to accept in
compensation for forgoing a positive effect or tolerating a negative effect (varying according
to socio-economic characteristics and over time). Benefit value is thus able to incorporate
psychological factors such as amenity and aesthetic attributes and levels of inconvenience,
annoyance, discomfort or distress. Benefit value may comprise not only use value, but also
option value – the value placed on retaining the option to use an asset, including for purposes
yet unknown, in future years or providing for its use by others (vicarious benefit) or future
generations (bequest value) – and existence value – the value placed on the continued
existence of an asset, independent of its present or anticipated use. Existence value may be
particularly important for environmental, cultural or historical assets, the irreversible loss of
which may be represented as the loss, in perpetuity, of the value derived from such an asset
annually. There are two categories of techniques for attempting to elicit willingness-to-pay
(WTP) where market values do not exist – revealed preference methods and stated preference
methods.
29. Revealed preference methods seek to derive WTP where markets do not exist from
transactions in related markets. The property value method compares differences in property
prices with differences in housing characteristics, including location, and local environmental
attributes in order to estimate the values attached to the latter. The travel cost method
examines the relationship between visits to recreation sites of different levels of
environmental quality and the travel costs, including travel time, associated with these visits.
One approach to valuing human life draws on labour markets, using the wage premia in
occupations that have higher than normal probabilities of worker death to indicate how much
compensation workers require to be willing to accept this increased risk, from which the value
of human life can be inferred. An alternative approach uses market prices for safety products
(e.g. smoke detectors) to indicate how much consumers are willing to pay to reduce the risk of
loss of life. Difficulties can arise in distinguishing the value sought from other reasons for the
transaction and some effects may be too widely dispersed to be captured in values in related
markets.
30. The stated preference approach involves surveying representative groups using carefully
framed questionnaires or interviews to identify consumer preferences in trading off costs and
benefits, including reductions in risk, under a range of scenarios, in effect establishing
hypothetical markets. Such surveys can be expensive and time consuming to conduct and
require careful question design, sample selection and interpretation of responses if reliable
estimates are to be obtained. The extrapolation of results to the national level can generate
very large totals, the validity of which may be questioned. Often briefing material is supplied
to enable respondents to make informed choices, but some effects may be too remote or too
poorly understood (e.g. effects on soil or marine organisms and ecosystem impacts) for
meaningful estimates of WTP to be derived.
31. Estimation of WTP is a complex and often contentious procedure. For the purpose of the
CBA, it may be adequate to use or adapt estimates from past valuations of similar effects.
Where it is considered necessary to undertake a revealed or stated preference study, it is
advisable to seek the assistance of research providers with expertise in this area. Time
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constraints in preparing cost-benefit analyses of unwanted organism or pest response options
and the difficulties of deriving reliable estimates of WTP may preclude use of this measure of
economic value.
Step eight: consider the timing of these effects
32. The effects quantified in step six and valued in step seven should to be expressed as time
series of annual benefits and costs, reflecting the timing of these effects. This involves
determining when the effects commence and how they develop over time, as well as how
many years of costs and benefits the CBA should encompass.
33. The effects of the control options may commence immediately upon, or may be lagged
some time behind, the commencement of control activities. Effects may occur in full from the
moment they commence or may develop gradually, taking several years to reach full annual
magnitude. Different types of effects may develop at different rates. How the effects of a
control option develop over time may reflect the pattern (type, location and/or magnitude) of
control activities, the rate of change in the incidence or distribution of the unwanted organism
or pest, the rate of recovery from the impacts of the unwanted organism or pest (e.g.
consumer reaction or trade impacts may persist for some time after the objective of a control
option is achieved, until consumer confidence recovers or market access is restored) or other
limits to the rates at which effects could practicably arise (e.g. production responses may be
sluggish due to the constraints of biological cycles). Benefits associated with avoidance of the
impacts of the unwanted organism or pest may be modelled as realised at the rate at which
these impacts would otherwise have occurred (e.g. according to the rate of spread of the
unwanted organism or pest without the control options). It may be necessary to approximate
the rate at which effects develop by phasing in full annual effects proportionately (e.g. on a
straight-line basis or at an increasing or decreasing rate, in aggregate or sequentially by
location or sector) over the length of time until effects reach full annual magnitude.
34. The longer the time period covered by the CBA, the greater the number of years of effects
to compare with control costs, but the greater the uncertainty of coefficient and variable
values. The analysis period may reflect:
 the duration of the control options – this may not be suitable where a significant
proportion of effects occur after a control option’s completion or over an extended
time period;
 the department or agency planning or budgeting horizon – (e.g. the time scale in
assessing long-term, public sector investments is often in the range of 25 to 35 years)
short planning or budgeting horizons should not constrain the analysis unless
decision-makers explicitly require a control option to be justified within this period;
 the time required to encompass all major effects of a control option or all major
differences in effects between control options, sufficient that extending the analysis
period does not significantly alter the findings – this may be influenced by:
- the rate at which effects develop – (e.g. according to the rate of spread the
unwanted organism or pest would otherwise have had) short of effects reaching
full annual magnitude, the ultimate annual costs and benefits of the control
option are not represented; and
- the effect of discounting – this becomes increasingly pronounced the later the
costs and benefits to which the discount rate is applied, such that, except under
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


slow rates of development of effects or low discount rates, costs and benefits
beyond the first 25 years are often not critical to the findings;
the frequency of incursions, reinfestations or recovery in incidence or distribution of
the unwanted organism or pest – this indicates the length of time over which the
objective of the control option can be expected to continue to be met, beyond which
prolonging this level of control requires a further response;
the degree of uncertainty – it may be necessary to limit the analysis to the time period
over which the values adopted for uncertain coefficients and variables can be
considered to remain valid; or
control costs or effects in perpetuity – this may be necessary in comparing control
options that incur different ongoing annual control costs and/or effects indefinitely.
35. Unless all costs and benefits are captured within the analysis periods appropriate to the
individual control options, options are fairly compared only over the same analysis period (the
longest of those appropriate to the individual control options).
36. An alternative to specifying a single analysis period is to present results for each of a
number of time periods. This is advisable where findings are particularly sensitive to time
scale and allows decision-makers to select the time horizon they consider most appropriate to
their decision. This approach can also be used to indicate results for interim years of a long
analysis period.
Step nine: discount annual costs and benefits
37. Quantitative CBA allows explicitly for the implications of differences in the timing of
costs and benefits. Society weights costs and benefits according to when they occur, tending
to value a dollar of cost or benefit occurring at some point in the future less than a dollar of
cost or benefit occurring today. This is particularly relevant in the consideration of unwanted
organism or pest responses, which often incur largely short-term costs to prevent, reduce or
defer predominantly long-term impacts. The technique of discounting converts annual costs
and benefits that occur at different points in time into values that are directly comparable.
Without discounting, comparisons of the costs of a control option with its benefits, the net
benefits of one control option with the net benefits of an alternative or the impacts of one
unwanted organism or pest with the impacts of another fail to take into account differences in
their timing.
38. Discounting reduces all future, and increases any past, annual costs and benefits to their
present values in a given base or reference year. The discount rate describes the extent to
which, irrespective of inflation, a future dollar of cost or benefit is considered to have a lower
equivalent value in the base year, the more distant the point in time at which the cost or
benefit occurs. This reduced value is due to not only uncertainty as to whether future costs
and benefits will actually occur, but also attitudes to deferring costs and benefits, given
alternative uses of resources. The discount rate is generally considered to reflect the
opportunity cost of capital – the rate of return on investment, forgone for current consumption
– or the rate of time preference – the extent to which current consumption is valued over
future consumption, and thus the compensation required to forgo current for future
consumption. If costs and benefits are valued in real rather than nominal terms, the discount
rate should also be expressed in real terms.
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39. The formula for discounting an annual cost or benefit is:
present value = a/(1+d)t
where: a is the annual cost or benefit;
d is the discount rate; and
t is the number of years from the base year to when this cost or benefit occurs.
40. For example, under a ten per cent discount rate, a cost of $5 million incurred in 2005 has a
present value in the base year 2002 of 5/(1+0.10)(2005-2002) = 5/(1.1)3 = $3.757 million.
41. To discount a time series, this formula is applied to each annual cost or benefit, with the
effect of discounting becoming more pronounced the later the point in time at which the cost
or benefit occurs, and these present value annual costs or benefits aggregated. This is
demonstrated in Table 1 for the example of a control option comprising five years of control
activity commencing in 2003. Whilst total expenditure over the five year period is $19
million, the present value in 2002 of this total cost is $15.104 million.
Table 1: discounting of annual control costs
Base year
Discount rate
2002
0.10
Year
Annual expenditure ($ million)
Present value ($ million)
2003
5
4.545
2004
5
4.132
2005
5
3.757
2006
3
2.049
2007
1
0.621
Total
19
15.104
42. Any subsequent ongoing costs should also be discounted. The sum of the present values
of a constant annual cost or benefit incurred in perpetuity from year one converges to this
constant annual cost or benefit divided by the discount rate. Thus for the example in Table 1,
if these five years of control activity are followed by ongoing control expenditure of $0.1
million per annum indefinitely, the present value of the total control costs is $15.104 million
plus 0.1/0.10 (ongoing costs for all years) less 0.1/(1+0.10)1 + 0.1/(1+0.10)2 + 0.1/(1+0.10)3 +
0.1/(1+0.10)4 + 0.1/(1+0.10)5 (given that ongoing costs do not commence until 2008), at
$15.725 million
43. Any year can be set as the base year, provided that it is consistent with the price level
adopted in valuing annual costs and benefits. For ease of computation, however, the standard
practice is to use the year at the time of analysis. This base year should be indicated in
reporting results.
44. The level at which to set the discount rate is subject to considerable debate and may
depend on the scope and perspective of the analysis given that the opportunity cost of capital
and the rate of time preference may vary according to context. Private sector investments tend
to be subject to market discount rates of ten to twelve per cent. In the past, the New Zealand
government set a discount rate, for use in CBA from a national economy perspective, of ten
per cent. This remains the rate preferred by the Treasury, applied consistently across not only
all costs and benefits in a CBA but also all cost-benefit analyses of proposed public
expenditure. For public sector investments, a number of overseas government departments
and international organisations recommend discount rates of around six to eight per cent. The
behaviour of individuals is often consistent with discount rates in the range of five to seven
per cent. It is sometimes suggested that a much lower, or even zero, discount rate be applied
to non-commercial or social effects, the future values of which, it is considered, should not be
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discounted relative to current value. It is preferable, however, to model explicitly increasing
values of an annual cost or benefit (e.g. the value attached to the annual benefit derived from
an environmental asset may increase over time as society becomes more wealthy and the
stock of environmental assets declines) than to apply a lower discount rate to a constant value
to compensate for understating the future values of such an effect.
45. Sensitivity analysis (see step eleven) can be used to investigate how sensitive findings are
to the discount rate applied. An alternative is to determine the internal rate of return, which is
the discount rate at which a control option just breaks even (i.e. at which total present value
costs and benefits are equal), and compare this with what is considered to be a reasonable
range for the discount rate. The choice of discount rate is critical only where findings are
marginal, in terms of how benefits compare with costs or how the control options compare
with each other (given that an increase in discount rate increases the relative importance of
more immediate costs and benefits).
Step ten: calculate decision criteria
46. Once the annual costs and benefits have been discounted, their present values can be
aggregated and decision criteria calculated. Three decision criteria that are useful in assessing
unwanted organism or pest control options are:
 net present value;
 benefit-cost ratio; and
 payback period.
47. Net present value is usually the primary criterion, but the benefit-cost ratio and payback
period can provide useful supplementary information and may be important considerations.
48. Net present value (NPV) indicates the surplus of benefits over costs – the net benefit, if
positive, or net cost, if negative – over the time period covered by the analysis. The NPV is
calculated by subtracting total present value costs from total present value benefits.
49. The benefit-cost ratio indicates the average benefit per dollar of cost. The benefit-cost
ratio is calculated by dividing total present value benefits by total present value costs. An
alternative is the net benefit-cost ratio, which indicates the average net benefit per dollar of
cost. The net benefit-cost ratio is calculated by subtracting total present value costs from total
present value benefits and dividing the result by total present value costs. In calculating
benefit-cost ratios, costs representing any negative effects of the control options may be
included as costs in the denominator or as negative benefits in the numerator if the
denominator is to comprise control costs only, but should be treated consistently in benefitcost ratio comparisons.
50. NPV indicates the absolute difference between benefits and costs but not the relative
magnitude of benefits to costs. The benefit-cost ratio indicates the latter, but not the former. In
comparisons of control options of substantially different scales, the option with the highest net
present value does not necessarily also have the highest benefit-cost ratio. Although NPV is
generally considered to be the more important decision criterion, on the grounds that it
indicates which control option generates the largest net benefit, under uncertainty or
competing uses of limited resources decision-makers may have a preference for control
options with high benefit-cost ratios. Although a smaller scale control option may produce
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fewer benefits, it may do so at a sufficiently lower cost to represent a more efficient use of
these resources (in addition to which it leaves more resources available for other uses, which
may enable the generation of greater net benefits in aggregate).
51. The payback period represents the number of years required for sufficient benefits to
accrue to offset the costs incurred. The end of the payback period is reached when the present
value benefits accumulated surpass accumulated present value costs (i.e. at the point at which
cumulative NPV becomes positive). Under uncertainty or budget constraints, decision-makers
may have a preference for control options with relatively short payback periods. Under
frequent incursions, reinfestations or recovery in the incidence or distribution of an unwanted
organism or pest, decision-makers may require a control option’s payback period to be shorter
than the length of time between incursions, reinfestations or recovery in incidence or
distribution, such that the control costs of a response are justified before any further control
costs are incurred for a subsequent response. This requirement may not be suitable, however,
for control options for responding to an unwanted organism or pest that otherwise has major
impacts following a slow rate of spread. The benefits realised in the first few years may be
small, but substantial additional benefits exist with regard to longer-term impacts, even if,
without any subsequent response, these impacts are only deferred. A serious failing of the
payback period as a decision criterion is that it ignores costs and benefits arising after the
initial payback period. Not only can it be misleading as to the time taken to offset costs where
there are significant fluctuations in annual costs and benefits (e.g. where, subsequent to
becoming positive for the first time, cumulative NPV becomes negative again for a time, due
to a second round of cyclical control activities), but it does not necessarily bear any relation to
the total costs and benefits produced.
52. In ranking control options, the superior option is that with the highest net present value
(and/or, as indicated above, the highest benefit-cost ratio or the shortest payback period),
although the range of control options between which to choose can be limited by a budget
constraint.
53. Whether or not the CBA supports implementation of the superior control option in
preference to allowing the baseline scenario to prevail depends on the magnitudes of the
decision criteria relative to the threshold values considered appropriate to this decision. These
threshold values may be set at one of three levels:
 at the break-even level – under unlimited resources, the superior control option may
be required to deliver only at least as much in benefits as it incurs in costs (i.e.
NPV≥0, benefit-cost ratio≥1);
 at a level comparable with other areas of biosecurity or public expenditure – where
resources are limited, the superior control option may be required not only to breakeven but to produce a return in excess of some threshold based on returns to other
resource uses (e.g. NPV≥$3 million, benefit-cost ratio≥2,);
 at less than the break-even level – in allowing for effects that cannot be valued, such
as intangibles, and are therefore excluded from the quantitative analysis, but are
considered to present sufficient additional benefits to outweigh the excess of
quantified costs over quantified benefits, or given other considerations (e.g. social,
political, strategic, international), decision-makers may be willing to accept the
superior of the control options even if it delivers less in quantified benefits than it
incurs in costs (i.e. NPV≤0, benefit-cost ratio≤1).
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54. Which of these levels of threshold values is applicable is a managerial or political
decision.
55. The distribution of costs and benefits may be a factor in choosing between control
options, not only due to equity considerations and concerns for the interests of vulnerable
sections of society (e.g. population groups according to income level, ethnicity or health
status, rural communities, areas of high unemployment, small industries), but also with regard
to the concentrations and types of effects (e.g. substantial benefits, such as lives saved, to a
few compared with a small benefit, such as a modest improvement in health or quality of life,
to each of many). The extent to which distributional effects are specified in the CBA is likely
to be limited, however (see step five). The basis of CBA is total costs and benefits irrespective
of their distributions and the principal measure of value on which CBA relies, willingness-topay, depends on ability to pay (although it is possible to assign relative weights to the costs
and benefits to different social groups).
56. The distribution of the costs and benefits of control options (e.g. between public and
private interests, between sectors or industries or by location) may also inform decisions on
the sharing of control costs. It should be recognised, however, that the distribution of benefits
indicated by a CBA does not necessarily indicate who should pay for control. The CBA
identifies only who gains, and possibly who loses, from implementation of the control
options. It does not address the role of exacerbators of the presence of the unwanted organism
or pest, except in so far as they are affected by the control options. Nor does it usually
incorporate the effects of any charging regime for cost sharing. Although CBA techniques
may be applied in the assessment of charging options (e.g. a comparison of the funds
collected with the transactions costs incurred and the impacts of the charging structure on
output and efficiency), this is usually a separate exercise to analysis of the costs and benefits
of the control options.
Step eleven: perform sensitivity analysis
57. The values of some coefficients and variables may be uncertain. This uncertainty may be
due to incomplete information, or conflicting information or opinions (e.g. on the likely
distribution, rate of spread, hosts or behaviour of the unwanted organism or pest), variability
(e.g. in climatic conditions or crop yields) or the indeterminate nature of the future (e.g. future
conditions, values or behaviour may differ from forecasts based on existing information). For
the purpose of CBA, it may be necessary to resort to the adoption of “best estimates” of
uncertain values. The best estimate is usually the mean or modal value or the value considered
most likely, based on the limited information available. The extent to which the actual net
benefits of the control options might differ from those estimated, should actual values differ
from the best estimates adopted, should be explored and may be a factor in the choice of
control option. This sensitivity analysis is an integral part of the CBA process, without which
a CBA is incomplete, as the robustness of its findings, which is an essential consideration in
using these findings to inform decision-making, is undetermined.
58. Sensitivity analysis is practised by varying uncertain values, one at a time, around the best
estimates adopted and observing the extent to which this alters the findings of the CBA with
regard to how the control options perform, relative to the decision criteria threshold values,
and compare. The technique of sensitivity analysis can be used to investigate:
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


by how much the findings change with changes in the values adopted for uncertain
coefficients and variables over the ranges of likely values;
over what ranges of values of uncertain coefficients and variables the findings remain
robust, and thereby the critical values at which the findings change, which may lie
within or beyond the ranges of likely values; and
to which uncertain coefficients and variables the findings are most sensitive.
59. Subjecting a large number of values to sensitivity analysis can be time consuming and
provide results that are difficult to interpret and to convey. Sensitivity analysis therefore tends
to be used selectively, focusing on the values that are least certain or of particular interest.
Typically, values are adjusted independently (i.e. given the best-estimates of all other values),
but exceptionally, where coefficients or variables are highly correlated, their values may be
adjusted together.
60. The findings of this sensitivity analysis may suggest revisiting previous steps in the CBA
process to refine coefficient or variable values or modelling techniques. Identification of the
uncertain values to which the findings are most sensitive can indicate where seeking
additional information or modelling costs and benefits in greater detail may contribute most to
improving the accuracy of the analysis. The value added to the analysis relative to the
additional resources required should be considered. Time may be of particular concern if
seeking and incorporating additional information delays the response decision, during which
time the unwanted organism or pest spreads further, increasing the costs and/or reducing the
technical feasibility of control.
61. A limitation of modelling single best estimate values of uncertain coefficients and
variables is that this provides decision-makers with information on the net benefits of the
control options under only one possible set of conditions, with no indication of how probable
it is that these conditions will occur or, without sensitivity analysis, by how much the net
benefits of the control options might differ should actual conditions differ from the conditions
modelled. An alternative approach is scenario analysis, also known as multiple case analysis.
This approach consists of modelling a number of scenarios, comprising differing but
internally consistent sets of values of key uncertain coefficients and variables (e.g. according
to the impacts of the unwanted organism or pest in the absence of the control options, the
effectiveness of the control options or the nature or occurrence of relevant conditions or
events), usually within the ranges of values considered likely (modelling extreme conditions
that are very unlikely to occur is generally of little value). Again, sensitivity analysis should
be used to examine how robust the findings are to the coefficient and variable values adopted.
62. As scenario analysis involves deriving multiple estimates, modelling each control option
under each scenario, this technique tends to be applied only where the control options and
scenarios are few in number. It may be sufficient to model only one scenario, with other
scenarios redundant (e.g. where the benefits of a control option are indicated to exceed the
costs even under the unwanted organism or pest otherwise having a “low impact” (i.e. where
the benefits, in terms of the impacts averted, are towards the lower end of their range); where
the costs of a control option outweigh the benefits even under the control option being “highly
effective” (i.e. where the benefits are towards the upper end of their range)).
63. A further limitation of adopting single, best estimate values is that combining mean, mode
or most likely values of uncertain coefficients and variables does not necessarily indicate the
mean, modal or most likely net present value of a control option. The latter is, more
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accurately, the mean, mode or most likely value of the range of possible net present values for
this option. A more rigorous approach to handling risk is provided by risk analysis. Risk
analysis can determine the true expected net present value, as well as provide an indication of
the potential variability in net present value. These it does by generating a probability
distribution of net present value based on probabilities assigned to the possible values of all
uncertain coefficients and variables. Although it may be possible to estimate some of these
probabilities using statistical techniques, often in CBA, for many coefficients and variables
there is little probability distribution information available. If risk analysis is feasible, it is
advisable to refer the CBA problem to staff or research providers with expertise this area.
64. The attitude of decision-makers to risk (where probabilities are known) or uncertainty
(where probabilities are unknown) may influence their choice of control option. This may be
obscured in combining the benefits under each scenario, or given the success of each control
option, with, where known, the relative probability of each scenario eventuating, or the
probability of success of each control option, to derive expected benefits (from which to
deduct control costs to determine expected net benefits). Where there is a trade-off between
net benefits, if realised, and the probability of realising these net benefits, decision-makers
will not necessarily prefer the option with the highest expected net benefit. Where decisionmakers are risk-averse (e.g. in recognition that an unwanted organism or pest may have
irreversible adverse environmental impacts), they may prefer an option that ensures a higher
net benefit under the worst of scenarios, even if this scenario has a relatively low probability
of occurring, or has a higher probability of success, even if the net benefits, under successful
control, are lower. Note that some control options may deliver significant benefits even if not
successful in meeting their objectives (e.g. a failed attempt at eradication may reduce, or slow
expansion in, the incidence and distribution of an unwanted organism or pest such that its
future impacts are reduced or at least deferred). In this case the expected benefits are the
benefits if the control option is successful multiplied by the probability of its success, plus the
benefits if it fails multiplied by the probability of failure (or the sum of a range of different
degrees of failure multiplied by their relative probabilities). Control costs can also be
uncertain, differing according to scenario, depending on the level of control activities required
for example, to which, similarly, it may be possible to attach relative probabilities.
65. There exist a number of decision rules for identifying preferred options according to
attitude to risk or uncertainty (e.g. the “maximin” criterion – favouring the option that
provides the largest minimum net benefit, i.e. the least worst outcome). Precaution is often
exercised less formally through the exercise of managerial or political judgement with regard
to trade-offs. Whether society considers it worth accepting lower net benefits for greater
certainty depends on its attitude to risk or uncertainty and what it is prepared to pay or to
forgo to be more certain of a satisfactory outcome.
Step twelve: report on the CBA
66. The final step, once the analysis is complete, is to draft a report documenting its
methodology and recording its findings. Although a detailed report on the CBA may not be
necessary for immediate policy purposes, reasons for producing such a report include:
 to provide a record for future reference;
 to enable peer review of the analysis;
 to support policy recommendations; and
 to facilitate transparency and accountability in the policy process.
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67. The report should provide sufficient information on the methodology of the analysis,
including the modelling techniques, data sources and technical and economic coefficients
used, to support the reported findings, should acknowledge any deficiencies, limitations or
biases and may indicate areas for further work. How much detail to provide depends on the
purpose of the report and the nature of the interest in the response decision.
Limited applications of CBA techniques
68. Three related forms of quantitative assessment that are less demanding in terms of data
requirements are:
 cost-effectiveness analysis;
 break-even analysis; and
 economic impact assessment.
69. Where there is insufficient information for a full CBA, it may be possible to undertake a
limited assessment of control options using one of these three techniques.
70. It is often easier to estimate control costs than to evaluate the effects of control options.
Cost-effectiveness analysis and break-even analysis can be applied where control costs can be
estimated but there are limits to the extent to which the effects of the control options can be
identified, quantified and valued. Both techniques focus on a single type of benefit – the
primary purpose of the control options – as the only effect providing a basis for assessment.
71. Cost-effectiveness analysis can be applied where the benefit of the control options is not
valued but can be quantified in terms of physical units. This technique may therefore be
useful for effects that are difficult to value or the assigning of monetary values to which
society objects to (e.g. environmental, social or human health effects). Control options are
ranked in terms of average control cost per unit of benefit or, alternatively, average quantity
of benefit per dollar, or per thousand dollars for example, of control cost. It is for decisionmakers to judge whether they consider the value of the benefit to exceed the control cost.
72. Where the quantities of the benefit produced by the control options are not known, breakeven analysis can be used to determine the minimum the control options must provide to
match control costs. Total control costs can either indicate the break-even total value of
benefit required, or, for a given unit value, be used to derive the break-even quantity of
benefit required of each control option. It is for decision-makers to judge whether they
consider the benefit produced likely to exceed the value or quantity required for the control
options to break even.
73. These two techniques possess a number of disadvantages relative to CBA, the most
significant of which is that, in focusing on a single effect, all other beneficial or detrimental
effects that may be relevant to the choice of control option are ignored. These techniques
therefore provide no information on total net benefits, nor are they suitable for comparing
different areas of expenditure having different types of effects. Even in terms of solely the
primary purpose of the control options, it is not possible to determine, using these techniques,
whether, and, if so, by how much, total benefit exceeds total control costs and thus no
objective decision criteria can be defined. A further drawback is that discounting is applied to
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control costs only, thus these techniques do not incorporate fully the implications of
differences in the relative timing of costs and benefits.
74. Economic impact assessment involves evaluating neither the control costs nor the effects
of the control options, but the impacts of the unwanted organism or pest in the absence of the
control options – most often under no intervention but, alternatively, under a minimum or
status quo level of intervention where this is more appropriate. Economic impact assessment
alone is no more than a measure of the scale of the problem to be addressed by any control
options. It may, however, be a precursor to undertaking CBA, given that the purpose of the
control options is to prevent, reduce or defer the future impacts of the unwanted organism or
pest. Under this approach to CBA, it should be recognised that the effects of the control
options are not necessarily simply the avoidance of the impacts occurring in the absence of
the control options. The control options may be able to avert only some of the impacts of the
unwanted organism or pest and may have other effects also.
75. A feature of this approach to CBA is that it can be applied where the magnitude of control
activities required to achieve the objective of a control option is not yet known. A measure of
the costs avoided, again, given how much of the impacts of the unwanted organism or pest the
control option averts and other effects of the control option, may provide an indication of the
maximum that could be spent on control activities or, if the unit costs of control activities are
known, the maximum scale of control activities that could be undertaken without costs
exceeding benefits.
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Appendix
Cost-benefit analysis of unwanted organism or pest response options: summary
Step one: define the problem
Define the problem to be addressed by the analysis.
Establish the perspective and scope and determine the structure and composition of the CBA.
Step two: select the control options
Select the control options to be assessed: a single, proposed response, for comparison of its costs and benefits, or
a range of control options, for comparison of their net benefits, or net costs.
Step three: specify the baseline scenario
Specify the baseline scenario: no intervention, a minimum level of intervention or continuation of the current
level and form of intervention.
Step four: estimate control costs for the control options
Estimate the costs of control activities at market values and in real terms (usually at the price level at the time of
analysis), allowing for any significant changes in real unit costs over time.
Express the control costs of each control option as a time series of annual expenditure, reflecting the pattern of
control activities over time, and indicate any ongoing or subsequent expenses.
Step five: identify the effects of the control options
Identify all significant consequences and implications of the control options (even if not quantified and valued):
positive and negative, direct and indirect, tangible and intangible.
Define these effects in terms of specific outcomes.
Avoid double counting.
Step six: quantify these effects
Quantify effects in terms of annual outcomes relative to the baseline scenario.
Model the effects of the control options at levels of disaggregation and detail appropriate to need and value
relative to cost.
Step seven: value these effects
Value effects in real terms (usually at the price level at the time of analysis), allowing for any significant changes
in real unit values over time.
Apply market values, where available, or measures of cost value (costs saved, avoided or incurred) or benefit
value (willingness-to-pay, as revealed by transactions in related markets or stated in surveys of consumer
preferences).
Step eight: consider the timing of these effects
Express the positive and negative effects of the control options as time series of annual benefits and costs.
Model these annual benefits and costs according to when the effects commence and how they develop over time.
Assess and compare control options over appropriate analysis periods.
Step nine: discount annual costs and benefits
Discount annual costs and benefits to their present values in the base year (usually the year at the time of
analysis).
Step ten: calculate decision criteria
Calculate decision criteria: net present value, benefit-cost ratio and/or payback period.
Rank the control options according to the decision criteria in order to identify the superior option.
Compare the decision criteria with the threshold values for accepting control options in preference to the
baseline scenario.
Identify the distribution of costs and benefits.
Step eleven: perform sensitivity analysis
Examine the sensitivity of the findings to the values adopted for uncertain coefficients and variables.
Refine coefficient or variable values or modelling techniques where of value relative to cost.
Allow for attitude to risk or uncertainty, in particular risk aversion, being a factor in the choice of control option.
Step twelve: report on the CBA
Draft a report on the CBA, documenting the methodology and recording the findings of the analysis.