Cost Benefit Analysis of Sustainable Public Procurement
A research report completed for the Department for Environment, Food and Rural Affairs by SQW Ltd.
Cost Benefit Analysis of Sustainable Public Procurement
Final Report to the Department for Environment Food and Rural Affairs
SQW Limitedeconomic and management consultants
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Date: 21st May 2006
TABLE OF CONTENTS
Chapter / Page
Glossary
Executive Summary......
1Introduction
Introduction
Context
Approach
Report structure
2Methodology
Introduction
Background to cost-benefit analysis
Cost-Benefit Analysis framework
Study approach
3Newport Southern Distributor Road
Introduction
Construction and maintenance costs and benefits
Environmental Costs and Benefits
Conclusions
4Video conferencing of court appearances
Introduction
Costs of video link
Counterfactual position
Conclusions
5NHS Furniture project
Introduction
CBA
Conclusions
6Utilising the Unemployed in Northern Ireland
Introduction
CBA
Conclusions
7Natural Gas Buses in Helsinki
Introduction
Costs
Carbon costs
Conclusions
8LED traffic lights in Stockholm
Introduction
CBA
Conclusions
9Conclusions
Introduction
Transferability
Annex A: CBA tables
References
Executive Summary...... i
1Introduction...... 1
Introduction...... 1
Context...... 1
Approach...... 2
Report structure...... 2
2Methodology...... 3
Introduction...... 3
Background to cost-benefit analysis...... 3
Cost-Benefit Analysis framework...... 6
Study approach...... 8
3Newport Southern Distributor Road...... 17
Introduction...... 17
Construction and maintenance costs and benefits...... 18
Environmental Costs and Benefits...... 18
Conclusions...... 21
4Video conferencing of court appearances...... 23
Introduction...... 23
Costs of video link...... 23
Counterfactual position...... 24
Conclusions...... 29
5NHS Furniture project...... 30
Introduction...... 30
CBA...... 30
Conclusions...... 36
6Utilising the Unemployed in Northern Ireland...... 38
Introduction...... 38
CBA...... 39
Conclusions...... 45
7Natural Gas Buses in Helsinki...... 46
Introduction...... 46
Costs...... 46
Carbon costs...... 48
Conclusions...... 53
8LED traffic lights in Stockholm...... 55
Introduction...... 55
CBA...... 55
Conclusions...... 60
9Conclusions...... 62
Introduction...... 62
Transferability...... 63
Annex A: CBA tables...... i
References...... i
Glossary
CBA / Cost Benefit AnalysisCCS / Combined Capture and Storage
CEA / Cost Effective Analysis / Technique for comparing the relative values of alternative actions
CITES / Convention on International Trade in Endangered Species
CNG / Compressed Natural Gas
CPET / Central Point for Expertise in Timber
dBA / Decibels (Acoustic)
Defra / Department for Environment, Food and Rural Affairs
DEL / Department for Employment and Learning – Northern Ireland
DETR / Department for Environment, Transport and the Regions
DFP / Department of Finance and Personnel – Northern Ireland
DfT / Department for Transport
DSD / Department for Social Development – Northern Ireland
EA / Environment Agency
EFA / Ecological Footprint Analysis / Assessment of the extent to which a business or product is ecologically sustainable
EU / European Union
GPV / Gross Present Value / Value of a benefit or cost stream discounted to the present
GPV(B) / Gross Present Value of benefits
GPV(C) / Gross Present Value of costs
HGV / Heavy Goods Vehicle
HKL / Helsinki City Transport
HMP / Her Majesty’s Prisons
HMYOI / Her Majesty’s Young Offenders Institution
HPM / Hedonic Price Model / Price is based on both intrinsic characteristics and external factors. E.g. price of housing is based on the physical characteristics of the house and the surrounding neighbourhood.
ICLEI / International Council for Local Environmental Initiatives
ICT / Information and Communication Technology
ISO / International Standards Organisation
ITEA / Integrated Transport Economics and Appraisal
JSA / Jobseekers Allowance
Kg / Kilograms
LCA / Life Cycle Analysis / Evaluates the environmental consequences of an activity over its entire life-cycle from manufacture to disposal. It encompasses, for example, product reuse and recycling options.
LED / Light Emitting Diode
MCA / Multi-Criteria Analysis / Decision-making tool developed for complex problems
MCPF / Marginal Cost of Public Funds / Allowance for the fact that higher public spending means taxation will be higher than otherwise need be and this introduces distortions, and costs, into the market economy
Mpg / Miles per gallon
MRS / Marginal Rate of Substitution / Marginal values in the demand for goods
MRT / Marginal Rate of Transformation / Marginal costs of factors of production
MWh / Mega Watt Hours
NAO / National Audit Office
NHS / National Health Service
NICS / Northern Ireland Civil Service
NO2 / Nitrous Dioxide
NOx / Nitrous Oxide
NPV / Net Present Value / Difference between total discounted benefits and total discounted costs
ODPM / Office of the Deputy Prime Minister
PASA / Purchasing and Supply Agency
PFI / Private Finance Initiative
PM10 / Particulate Matter
PSFPI / Public Sector Food Procurement Initiative
QWB / Quality of Well-Being / Scale for measuring health related quality of life
RDA / Regional Development Agency
SCP / Sustainable Consumption and Production
SO2 / Sulphur Dioxide
SWRAP / South Wales Regional Action Plan
TAG / Transport Analysis Guidance
UNEP / United Nations Environment Programme
VAT / Value Added Tax
VPF / Value of a Preventable Fatality / Willingness to pay (WTP) to avoid risk of death
VPN / Virtual Private Network
WRAP / Waste and Resources Action Programme
WTP / Willingness to Pay / Value individuals place on some action or its avoidance
CBA of sustainable public procurement:
Executive summary
Executive Summary
Introduction
1.This is the final report of a cost benefit analysis of sustainable public procurement commissioned by the Department for Environment, Food and Rural Affairs (Defra) in November 2005. The study was undertaken by SQW in association with Professor Ken Willis of the University of Newcastle. The aim of this study is to deliver peer reviewed robust evidence of a cost benefit analysis of a sample of sustainable public procurement initiatives to evaluate their efficacy as a policy tool. The definition of sustainable procurement used currently by Defra is - a process whereby organisations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole life basis in terms of generating benefits, not only to the procuring organisation, but also to society and the economy, whilst minimising damage to the environment.
2.The study was in two phases:
Phase 1. A scoping exercise to identify areas of UK public sector expenditure and/or existing sustainable procurement initiatives (anywhere in the world) where the completion of a cost-benefit analysis might be both practical and useful. The aim was to review between 10 and 20 initiatives at this stage.
Phase 2. Carry out Cost Benefit Analysis (CBA) for a series of case studies of different types of sustainable public procurement. Six case studies were covered during this phase.
Newport Southern Distributor Road
Video conferencing of court appearances
NHS Furniture project
Utilising unemployed in Northern Ireland
Natural Gas Buses in Helsinki
LED traffic lights in Stockholm
Findings from the case studies
Newport Southern Distributor Road
3.This project recycled waste from a nearby blast furnace to build the by pass. Benefits amounted to £2.1m in total. There are no offsetting costs. As there are unquantified benefits identified, such as reduced road congestion, and reduced risk of road accidents, associated with the delivery miles avoided, this figure is likely to be at the lower end of the possible scale. The total cost of the project was £55m so this saving is equal to 3.82almost 4% of project costs. Alternatively, the cost saving equates to £219,609 per kilometre of road constructed. This figure may not be the same for similar projects elsewhere, since savings were, in part, achieved at Newport due to the exceptionally close proximity of sources of recycled material and relatively long distance from quarries.
4.However, one element of the project which could be replicated elsewhere relates to site derived recycled aggregate, which is possible for many road upgrading and construction projects. The cost savings associated with site derived recycled asphalt were found to be £5 per tonne and 50,500 tonnes were used at a saving of £252,500. Additionally, £941,360 was saved by avoiding landfill tax on this and other material excavated onsite, equating to £1,193,860 in total, or £125,670 per kilometre.
Video conferencing of court appearances
5.The procurement project, replacing the transportation of prisoners to court for remand and other non-sentencing hearings, by video links produces benefits which exceed the costs of the video conferencing. Discounting over 7 years (the length of the contract), produces a NPV of £645,776almost £650,000 at a 3.5% discount rate. The benefit-cost ratio is 1.02 and reflects the fact that the NPV is small in relation to the overall gross benefits and costs of the project. The outcome of the CBA life cycle analysis is sensitive to the savings in staff costs and transport costs in escorting prisoners to court; since these, and especially staff employment costs, are a significant element in the cost of the counterfactual position.
6.Discounting over a longer time horizon would improve the NPV of the outcome, since the company operating the video conferencing system has to recoup the capital costs of installing the equipment within the 7 year contract, and this is reflected in the price of the current contract. It was not possible to estimate at what price a future contract (with some capital equipment already installed) to operate the video conferencing might be awarded. Hence it was not possible to undertake a CBA of the project over a longer time horizon.
NHS Furniture project
7.The limited amount of data monitoring undertaken precludes a life cycle CBA on the NHS timber procurement policy. Insufficient information is available on the quantities and types of timber used, and on their geographic source. Although cost savings are recorded and attributed to sustainable procurement policy, it is possible that these savings could have resulted from a more competitive procurement policy which may actually have masked increases in costs associated with the sustainable procurement policy.
8.Nevertheless, the case has served to illustrate some important lessons. To evaluate sustainable procurement policy, detailed records need to be kept on the quantities and types of timber. For timber procurement this may necessitate asking contractors to estimate the number of cubic metres of timber used on the contract and report on the type of timber used and its origin. This timber volume then needs to be expressed in terms of acreage or hectares of forest. If information on the volume, type, and source of timber is impossible to attain, both before and after the change in procurement policy was implemented, then the procurement policy may never be fully or accurately evaluated using a life cycle CBA.
Utilising unemployed in Northern Ireland
9.This project encouraged tenderers for government contracts to recruit people unemployed for more than three months. The present value of benefits of employing the previously unemployed amounted to £264,785; whilst the costs amounted to some £167,615, at a 3.5% discount rate. Thus this sustainable procurement project generated a small social gain, with a net present value (NPV) of £97,170.
10.The benefits are relatively small because the procurement policy reduces the average period of unemployment by a few weeks only. Benefits are reduced, compared to what they might otherwise have been, by skilled workers being displaced by the unemployed and themselves become temporarily unemployed. However, these workers are assumed to be re-engaged in the labour market more quickly than the longer term unemployed. The NPV is also sensitive to the costs of the scheme both to contractors who employ the labour and to government departments awarding the contract. Since these costs are low the benefits of the scheme to the unemployed outweigh the costs.
Natural Gas Buses in Helsinki
11.From 2001 buses in Helsinki have gradually been replaced by CNG fuelled vehicles. The benefits (savings in fuel costs, health, and noise reduction benefits) of CNG buses compared with diesel buses, discounted at a 3.5% discount rate, over the life cycle of the buses, indicates a gross present value for benefits of almost €13,915,31914m. The costs (increased purchase costs for CNG buses compared to diesel, initial investment costs in fuelling systems and facilities for CNG buses, and increased carbon emissions from CNG buses), discounted at a 3.5% discount rate, over the life cycle of the buses, indicates a gross present value for of CNG buses of €89,122,40499.1m.
12.The NPV of the Helsinki CNG bus procurement policy between 2001-2003 is thus -€75,207,08585m. This is clearly a large loss in social cost-benefit terms and the benefit-cost ratio is 0.1561. This, in the main, reflects technical changes in diesel fuels since the project was introduced. Diesel is now significantly more efficient and produces less carbon emissions than hitherto.
LED traffic lights in Stockholm
13.The aim of this policy was the gradual replacement of older traffic signals that used incandescent light bulbs with new signals based on light emitting diodes (LEDs), as older signals need to be replaced.
14.If the life of the project is taken to be the length of life of a LED light (i.e. 11 years) then, at a 3.5% discount rate, the project is not viable with a benefit cost ratio of 0.879. However, the investment in converting traffic signals to LEDs from incandescent bulbs will last much longer than eleven years. If the life of the project is assumed to be 21 years before the traffic lights are replaced the project is viable and sustainable at a 3.5% discount rate. Benefits exceed costs at a 3.5% discount rate, the NPV is € 2,801,9543.1m; and the B/C ratio is 1.364. The project in fact breaks even in year 14
Conclusions: CBA as a policy tool for sustainable public procurement
15.We believe that the study has provided some insights into the use of CBA in this context.
It has demonstrated that CBA can provide valuable information on the societal impacts of sustainable procurement.
Although we encountered significant data problems, the CBAs were able to draw on previous research and established shadow prices in some cases
Data availability was a real issue and there is a need to record information in real time for effective analyses
The CBA framework can reveal the tradeoffs between different sorts of benefits (and costs) and can serve as a project design tool to help maximise selected net benefits.
Because of the specificity of the case studies it is difficult to generalise as to whether there are key factors which need to be considered in the CBA of sustainable procurement projects. There are some fairly general principles which apply to any CBA, for example, major items of expenditure; high volume impacts; ensuring that the time horizon of the CBA is consistent with those for project costs and benefits, but little in the way of more specific lessons. However, medium to long term projections of technology developments should perhaps be subject to careful scrutiny and risk analysis in the CBA
The case studies have largely considered projects from the national perspective and have therefore ignored the distribution of costs and benefits. Other procurement organisations may take a different view and CBAs may become more complex as the geographical area shrinks since the distribution of impacts may become a more important consideration
The case studies have identified impacts which could not be valued in a meaningful way. In many cases we are confident that such impacts are small and can be safely ignored, but this is not always the case. There is a continuing need to develop CBA methodologies and applications so that such issues can be addressed meaningfully.
1
CBA of sustainable public procurement:
Final report
1Introduction
Introduction
1.1This is the final report of a cost benefit analysis of sustainable public procurement commissioned by the Department for Environment, Food and Rural Affairs (Defra) in November 2005. The study was undertaken by SQW in association with Professor Ken Willis of the University of Newcastle.
Context
1.2In line with the commitments in the recent UK Sustainable Development Strategy, Securing the Future, the Department for Environment, Food and Rural Affairs (Defra) is seeking to develop a robust evidence base on the outcomes that can be achieved from sustainable procurement. The definition of sustainable procurement used currently by Defra is - a process whereby organisations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole life basis in terms of generating benefits, not only to the procuring organisation, but also to society and the economy, whilst minimising damage to the environment.[1]
1.3Defra appointed the Green Alliance to conduct a scoping study on the subject which reported in April 2005[2]. The study aimed to evaluate existing sustainable procurement approaches (including both costs and outcomes) to understand the potential for public procurement activity. It found that, despite the Lisbon Strategy’s assertion that ‘[sustainable] public procurement is one of the important motors for prosperity: stimulating markets for eco-innovations and helping to bring down costs by creating economies of scale’[3], this is rarely underpinned by evidence on costs and benefits (partly due to the complexity of buying structures and diverse supply routes) and there is a need to generate further evidence to support these initial findings.
1.4This finding provided part of the rationale for the Sustainable Consumption and Production (SCP) evidence base research programme of which this study is a component. There are Within the six Sustainable Consumption and Production research priorities[4]and four projects have been commissioned which deal directly with sustainable procurement[5]. The and the aim of this the current study is to deliver peer reviewed robust evidence of a cost benefit analysis of a sample of sustainable public procurement initiatives to evaluate their efficacy as a policy tool.
Approach
1.5The study was in two phases:
Phase 1. A scoping exercise to identify areas of UK public sector expenditure and/or existing sustainable procurement initiatives (anywhere in the world) where the completion of a cost-benefit analysis might be both practical and useful. The aim was to review between 10 and 20 initiatives at this stage.
Phase 2. Carry out Cost Benefit Analysis (CBA) for a series of case studies of different types of sustainable public procurement. Six case studies were covered during this phase.
Report structure
1.6The remainder of this report is structured as follows:
Section 2 sets out the methodology and case study approach, and explains the process of selection of the six case studies