No. 3 - Department of Treasury - The Western Australian Government

More documents

Recommendations

Info

Western Australian Economic Summary2006 No.3IntroductionComputable General Equilibrium (CGE) models are commonly used inAustralia to evaluate the merits of proposals from companies or projects forgovernment support. Project proponents will often submit a CGE analysissupporting their request for assistance, while governments will oftenconduct their own analyses to gauge the merit of proposals.However, unlike Cost-Benefit Analysis (CBA), a standard set of assumptionsand outputs have never been formalised by the CGE modelling community.Partly as a result of this, governments across Australia have not specifiedwhat they require in an analysis to make judgments on the merits ofproposals.This has meant that a variety of assumptions have been used and outputspresented. Additionally, past analyses have tended not to be verytransparent with their assumptions. There seems to be a perception that aCGE modelling analysis is the truth no matter what. In reality, however, theassumptions used will often determine the result of a modelling run evenbefore any buttons are pressed on a computer.Finally, the outputs presented have rarely been the types required forgovernments to make an informed decision on whether the project wouldmake their citizens better off. That is, will assisting a project increaseeconomic welfare? Instead, the economic impact of particular proposals isthe most common output, but this should have no place in thedecision-making process.This paper discusses many of these issues in the context of requests forassistance to the Western Australian Government. It does not aim to beoverly prescriptive, as the flexibility of CGE models to adapt to manysituations is one of their major strengths. Instead it suggests some ‘standard’methods, assumptions and outputs, and notes that shifting away from theseassumptions is acceptable, but the alternative assumptions used must bejustified by sound logic or empirical evidence.This paper is designed as a less technical version of Layman (2006), and isalso slightly less comprehensive than the technical paper. It is recommendedthat modellers should read the more technical paper for exactimplementation of the issues contained below.The paper will make many comments such as “in CGE analyses to date” or“usually” without references. This is because most of the analyses thatmotivated this paper have been confidential submissions to theWestern Australian Government, and so cannot be directly quoted here. Thegeneralities presented are from the author’s direct experience of many suchproposals.At this stage, this paper is structured as a discussion of issues rather than alist of requirements for submitting modelling to the Department of Treasuryand Finance (DTF). However, the issues discussed in this paper willprobably form the basis for a publication of such requirements some time inthe future.76 Department of Treasury and Finance
2006 No.3 Western Australian Economic SummaryComputable General Equilibrium orCost-Benefit Analysis?Before proceeding to a discussion of CGE modelling assumptions andtechniques, it is worth considering whether a CGE model should be used toevaluate a project, or whether a ‘traditional’ CBA (Sugden and Williams,1978, p. 89) is more appropriate.No matter what technique is used, the CBA discipline of considering all ofthe costs versus all of the benefits should still be imposed. A project is onlyworth assisting if the welfare effect is still positive after inputting all of thecosts and benefits into a CGE model or a CBA.While CBA is appropriate for many forms of government decisions 1 , CGEmodels are the appropriate tools for analysing direct subsidies to majorresource projects (Layman, 2006, p. 5). This is because the benefits of thistype of project on the domestic economy are largely the flow-on benefitsfrom the project, particularly if the project is 100% foreign owned. Someform of general equilibrium model, such as a CGE model, is needed tocalculate these flow-on benefits.A grey area in the choice of models is in the provision of government-ownedmulti-user infrastructure at below cost (or more correctly at below requiredrates of return). An example is the Western Australian Government’sdecision in 2003 to provide approximately $160 million of multi-userinfrastructure on the Burrup Peninsula for potential gas-processing projects.While there is no definitive rule the distinction can be made by consideringwhat type of market failure government is trying to correct (Layman, 2006,p. 30). For example, if a road is provided from which users cannot beexcluded, then the market failure is the inability of the road builder tocapture returns from their asset. In such a case, a CBA to value theconsumers’ surplus (Sugden and Williams, 1978, pp. 113-118) from use ofthe road is clearly the appropriate methodology for analysis.In the case of multi-user infrastructure in a contained industrial precinct,however, there is no real market failure with the provision of infrastructure 2 ,but there could be some market failure with the projects that will use theinfrastructure.To put it another way, while in practice the Government is subsidising theinfrastructure, it is really subsidising the projects that will use it. Theinfrastructure is just the means to provide that subsidy. Here, CGE modelsbecome the appropriate analysis tool.1 See MJA (p. 3) and BTRE (p. 106).2 There could be some market failure, like bargaining problems between theproponents. However, this would only require the Government to organise theinfrastructure access, and not subsidise it.Department of Treasury and Finance 77
Page 1 and 2:
Western AustralianECONOMIC SUMMARY2
Page 3:
Table of ContentsOverview .........
Page 6 and 7:
Western Australian Economic Summary
Page 8 and 9:
Page 10 and 11:
Page 12 and 13:
Page 14 and 15:
Page 16 and 17:
Page 18 and 19:
Page 20 and 21:
Page 22 and 23:
Page 24 and 25:
Page 26 and 27:
Page 28 and 29:
Page 30 and 31: Western Australian Economic Summary
show all

No. 3 - Department of Treasury - The Western Australian Government

Create successful ePaper yourself

Delete template?

Save as template?