Social return accounting: new method to help governments pick the best policy

By Stephen Easton

Thursday September 13, 2018

Sydney academics have developed a new method of “social return accounting” that expands on previous ways of estimating the real outcomes of government spending proposals.

Law professor Rosalind Dixon and economics professor Richard Holden, both from the University of New South Wales, and economics consultant Alex Rosenberg at the Northern Territory Primary Health Network, introduced their new methodology as a tool that could help governments reduce inequality, in a report published this week.

The method expands on the existing concept of social return on investment (SROI) by taking physical infrastructure into consideration as well as intangible forms of human or social capital.

The idea is to bring more objectivity and discipline to government policy decisions, by describing standardised ways of measuring intangible returns alongside more easily quantifiable outcomes. For example, they look at the potential of the National Disability Insurance Scheme to create value by giving people with disabilities more independence or reducing stress for carers.

“Any business justifying a big investment would estimate the project’s future cash flow over time and compare that to the cost, aiming for a threshold rate of return,” Holden said.

“What Social Return Accounting does is give policymakers – and taxpayers – real calculations for the shared returns on public investments. It provides an empirical, principled way to compare different policy options and set our priorities.”

The report optimistically suggests the new way of measuring the intangible social benefits of government programs using “rigorous, modern social scientific techniques” could help guard against politicised funding decisions that provide marginal value to the community.

“Powerful cabinet members or those representing certain segments of the population may be very successful in getting their preferred projects funded, regardless of the social and economic merit of those projects,” it notes.

“This report provides a framework for bringing the private-sector approach to capital allocation to public-sector capital budgeting.

“The costs of a public-sector project are typically no harder to estimate than for private-sector projects. On the benefit side, however, matters are more complicated.”

Using their methodology, the authors say the original plan for a National Broadband Network based mainly around a fibre-to-the-premises (FTTP) design would provide a better pay-off than the cheaper fibre-to-the-node (FTTN) design.

They calculate the “social internal rate of return” is 21.1% for FTTP versus 15.2% for FTTN, whereas the financial IRR for the public investment in the current NBN roll-out is expected to be a little over 3%. Holden discussed the NBN calculations in more detail in an interview with iTnews.

Dixon and Holden have been jointly leading the charge to take on the UNSW Grand Challenge on Inequality, one of three big global issues currently receiving special attention at the university, along with rapid urbanisation and “living with 21st Century technology”.

Their aim in developing social return accounting was to establish a “common language” for evaluating social returns from government expenditure in a wide range of very different areas so that spending the community’s money on transport infrastructure, for example, can be more easily prioritised against something very different like education or healthcare.

“The lack of such a language makes it impossible to prioritise these expenditures in a principled manner,” the researchers argue in the opening paragraphs of their report.

“Furthermore, physical infrastructure which is more amenable to traditional financial analysis is often privileged over social infrastructure.”

Dixon pointed out that in the United Kingdom, the assessment of expected social returns on government expenditure is routine as it is required by legislation.

The full report is available from the UNSW website

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