This article is related to Lessons on reporting and measuring impact: What works, what doesn't, and why it matters.

For over 30 years, we’ve helped clients measure and report the impacts of their activities, whether to build a case for new initiatives, evaluate existing ones, or report ongoing outcomes to stakeholders.

Impact measurement and reporting often rely on economic evaluation techniques, most commonly, Cost Benefit Analysis (CBA) in the public sector and Social Return on Investment (SROI) in the non-government sector. While these techniques have more in common than differences, SROI typically focuses more on the experiences and outcomes of service users (clients/customers) as it’s often used by organisations that deliver services directly to community members.

Despite their differences, both CBA and SROI aim to:

• identify the incremental costs and benefits of moving from the base case to the initiative
• monetise these incremental costs and benefits using market and non-market valuation techniques
• discount future costs and benefits to present day values before generating performance measures (e.g. Benefit Cost Ratio, Social Return on Investment, Net Present Value)
• test the sensitivity of these performance measures to changes in underlying assumptions
• check for the likely effect of non-monetised items on the results, and the distributional equity of cost and benefit sharing among stakeholders.

Fundamental framing decisions

Framing the above processes are 3 decisions that can materially influence results. Getting them right is important both for internal consistency and the defensibility of the process.

These 3 framing decisions include defining the:

• community of influence of the initiative
• time period for the evaluation
• discount rate adopted to convert future values to present values.

Community of influence

Most published guidance on economic evaluation uses the term ‘community of influence’ when framing costs and benefits. This community of influence defines the boundaries of the analysis — that is, whose welfare is being considered — and includes all people, organisations, governments and ecosystems impacted by the initiative.

The community of influence can be:

• narrow, for example, when local government assesses the value of retaining a local park
• wide, for example, when federal health authorities assess the value of subsidising a treatment for chronic illnesses affecting Australians.

This can get complicated when assessing regional initiatives, affecting how some benefits are defined and understood. Some of the starkest examples of this are evident with economic development initiatives in regions across Australia. For example, when evaluating an inland wave pool for surfers in Western Sydney, 2 major beneficiary groups are likely to emerge: local residents who gain improved recreational opportunities, and visitors from outside the region. Depending on the geographic scope of the analysis, these groups may be treated differently regarding how their benefits are valued.

If the boundaries for the analysis are set to Western Sydney, the improved recreational opportunities for surfers visiting from the NSW Central Coast will be excluded from the analysis. However, spending by these visiting surfers generates economic benefits for Western Sydney, which are included in the analysis.

The net effect of this geographic differentiation can skew the analytical results considerably.

Another complication arises when considering the benefits to both users and non-users of the service or facility. In the case of the proposed wave pool in Western Sydney, local residents who use the wave pool will clearly benefit. However, non-users may also derive value by appreciating the option to use the facility in the future, or by valuing the benefits it brings to others in the community. Suppose we confine the analytical boundary to Western Sydney. In that case, the number of non-users will be much less than what it would be if a broader geography (e.g. metropolitan Sydney) is adopted. Again, this geographic differentiation can skew the results considerably.

A final consideration is the geographic lens adopted by funding agencies. When initiatives seek funding through a state budget process, the analysis is typically limited to the boundaries of that state’s jurisdiction — for example, New South Wales in the case of the wave pool. However, if the project seeks funding from a local authority such as Blacktown City Council, elected Councillors may prefer to analyse the project’s merits from the municipality’s perspective, not a broader Western Sydney perspective.

Tip: Ensure the geographic frame of reference considers the initiative's key objectives (e.g. recreation or tourism), its intended beneficiaries (e.g. local residents or tourism-serving businesses), and its prospective funding partners.

Time period

Most guidance material around economic evaluation suggests adopting an evaluation period that reflects the initiative's life. When assessing improved service provision, the analysis timeframe often reflects when improved services will be funded if no medium to longer-term impacts are anticipated.

This is a big ‘if’, so getting it right is essential. For example, if we evaluate the value of subsidising the cost of hosting a major sporting event with existing infrastructure, such as the Formula 1 Grand Prix in Melbourne. You would expect the evaluation duration to closely reflect the length of the event itself, including event setup, hosting and pack-up periods. This assumes that hosting a single, one-off event does not generate longer-term impacts for the host city — surely a hotly contested debate.

On the other hand, the Victorian government has recently expanded funding for kindergarten services. The evaluation of this initiative should extend over the long term, given the measurable benefits kindergarten attendance generates for students as they progress through their schooling.

When new infrastructure assets are being contemplated, the timeframe for analysis can extend into decades. New facilities are often evaluated over 20 to 30 years, given they can operate without extensive refurbishment for this time. However, some infrastructure assets, such as port or rail infrastructure, can operate for over 50 years without major refurbishment.

Choosing the right timeframe for evaluation is important with infrastructure assets because it introduces implications surrounding:

• annual and cyclical asset maintenance costs
• valuation of the asset in the final year of analysis (i.e. it’s not worthless in year 30 or 50)
• broader considerations surrounding induced land use changes.

Tip: It’s increasingly difficult to forecast costs and benefits accurately as timeframes increase, and the discounting process can nullify the effect of longer-term costs and benefits. Sensitivity tests should assess how changing evaluation timeframes impacts results.

Discount rates

The final framing decision is selecting the discount rate that should be applied to convert future costs and benefits to present-day values. This is important because if a high discount rate is adopted, upfront costs are weighed more heavily in decision-making than similarly scaled benefits spanning the long term.

Government guidance materials prescribe discount rates. If the initiative is fundamentally commercial, the discount rate should reflect the inherent risk in pursuing the initiative. Often, this reflects the ‘cost of capital’ of organisations pursuing similar activities.

If the initiative is non-commercial, prescribed discount rates can vary depending on how easily benefits can be monetised. For example, Victorian government guidelines suggest adopting a real discount rate of:

• 4% for core government services, such as public health, justice and education, where the benefits of these projects are not easily monetised
• 7% for core government services where benefits are more easily monetised, such as public transport, roads and public housing.

A contemporary debate revolves around using different discount rates for different costs and benefits generated by an initiative, particularly if long-term environmental impacts are anticipated (e.g. climate mitigation). Some commentators in this context argue that future benefits should not be discounted to protect intergenerational fairness in current-day decision making.

Tip: Arguing about different approaches to discounting can be time-consuming and unproductive. It’s better to present a range of results rather than single-point estimates, primarily when the analysis extends beyond 20 years.

Clear impact reporting starts with the right foundations. By carefully choosing who benefits, how long impacts last, and how future value is measured, you can make better decisions and tell a stronger story about the value of your work.