Section 32 of the Resource Management Act 1991 ("the
RMA") requires an evaluation of benefits and costs before
certain actions are taken by resource management decision-makers
(e.g., a local authority publicly notifying a proposed plan or
policy statement). To date, there has been no requirement for those
benefits and costs to be quantified, but that would change if the
present Resource Management Reform Bill ("the Reform
Bill") is passed into legislation. The Reform Bill, which was
introduced to Parliament in December 2012 and is currently being
considered by a select committee,2 would amend section
32 (among other changes) to require the decision-maker to "if
practicable, quantify the benefits and costs" of the effects
anticipated from the proposal being evaluated (e.g., the proposed
plan or policy statement).3 The requirement for quantification is likely to improve the
rigour of section 32 evaluations. Quantification forces the analyst
to clearly specify the assumptions underlying the analysis, and
allows independent testing of these assumptions, which can have
value even if there is significant uncertainty about the actual
dollar values determined by quantification. Quantification can
increase the objectivity of the assessment of the extent of
benefits and costs, which can be used to support (or refute) more
subjective claims about their magnitude, as well as allowing an
objective weighting of the benefits against the costs. Indeed, it
will often be very difficult to form an objective view on whether
the benefits of a particular plan or policy statement exceed the
costs without some idea of the numeric values for those benefits
and costs. We have, however, heard concerns expressed that quantification
of benefits and costs is difficult and complex, and that this
complexity will limit the use of quantification in section 32
evaluations. It may therefore be helpful to note that there is another
high-stakes decision-making regime in New Zealand that involves
quantification of benefits and costs to the degree practicable
– that operated by the Commerce Commission, particularly
under the Commerce Act 1986. This regime is mature, transparent,
and tractable, and provides some comfort that quantification of
benefits and costs under section 32 of the RMA will be feasible to
implement in practice. In the remainder of this paper we outline how the Commerce
Commission approach to quantification works, and explore the
implications for section 32 of the RMA, if it is amended as per the
Reform Bill. Section 47 of the Commerce Act prohibits acquisitions that have
the effect of substantially lessening competition in a market. If a
business is undertaking an acquisition that breaches section 47,
the business can apply to the Commerce Commission for an
"authorisation" of the proposed acquisition under section
67 of the Commerce Act. Section 67 provides that the Commission may
authorise the acquisition if it is satisfied that, despite the
lessening of competition, the acquisition will result in "such
a benefit to the public that it should be permitted". The
benefits could include things that may arise from the acquisition
like rationalisation of fixed costs, higher quality products, and
greater ability to innovate. Similar provisions apply in respect of anticompetitive practices
such as contracts or arrangements that may substantially lessen
competition (and therefore would breach section 27 of the Commerce
Act). The Commission may authorise such practices if there is a
"benefit to the public which would outweigh the lessening of
competition" (section 61 of the Commerce Act). The Commission's assessment in each case is referred to as
the "public benefit test". Despite the differences in the
statutory wording for the public benefit test for acquisition
authorisations and authorisations of anticompetitive practices, the
courts have concluded that there is no material difference between
the two.4 Moreover, and importantly in relation to the
proposed amendments to section 32 of the RMA, the courts have also
held that, in applying the public benefit test, the Commission
should "quantify the benefits and detriments to the extent
practicable, rather than rely solely on qualitative
judgement".5 In practice, the Commission applies the public benefit test by
first identifying all the relevant benefits and costs, and then
quantifying these benefits and costs (to the extent practicable).
The identification of benefits and costs is based on an assessment
of what is likely to occur in the future with (the
"factual") and without (the "counterfactual")
the relevant acquisition or anticompetitive practice. A similar
sort of factual/counterfactual analysis of likely future outcomes
would presumably be required under the section 32 amendments, where
the benefits and costs are those of the "effects that are
anticipated" from the implementation of the provisions of a
proposal. The Commission quantifies benefits and costs by drawing on
evidence submitted by the relevant parties (e.g., the merging
parties, or the parties to an anticompetitive practice), such as
financial statements, consumer surveys, internal or external
studies, independent expert reports, etc. It complements this with
evidence that it gathers itself, including evidence from
independent experts and affected parties (e.g., customers and
competitors of the merging firms). The focus of the Commission's analysis is on changes in the
welfare of New Zealand consumers and firms,6 rather than
on macroeconomic metrics such as GDP or employment. This is
consistent with the approach recommended by the Treasury in
quantifying benefits and costs for government policy and
regulation, which also focuses on New Zealand's
welfare.7 The Commission has carried out such quantitative analysis for
many years. The earliest acquisition authorisation listed on the
Commission's "authorisations register" is in
1992,8 while the earliest authorisation of an
anticompetitive practice is from 1986.9 While it is not
clear if these early authorisations involved quantitative analysis,
quantification of benefits and costs has occurred in numerous
Commission authorisation decisions since at least
1995.10 A recent example is the Commission's authorisation in 2011
of Cavalier Wool Holdings' (CWH) proposed acquisition of the
wool-scouring assets of New Zealand Wool Services
International.11 In that authorisation process, CWH
submitted evidence setting out its views of the benefits of the
proposed acquisition (such as cost savings and the sale of surplus
land and buildings) as well as the detriments (such as increases in
prices and less investment and innovation). Economic experts
engaged by CWH and opposing parties filed evidence quantifying many
of the costs and benefits.12 The Commission subjected
the filed evidence to intense scrutiny, and held a conference to
allow interested parties to present their views in person to the
Commission. Ultimately the Commission authorised the acquisition,
on the grounds that the benefits exceeded the
costs.13 Over the years the models used by the Commission to quantify
certain costs, such as those arising from a price increase, have
become established and generally accepted. However, the Commission
is often faced with benefits and costs that are quite difficult to
quantify. For example, one of the potential costs associated with
an acquisition that lessens competition is a reduced incentive for
the merging parties to invest and innovate in order to compete with
their rivals. It can often be difficult to place a monetary value
on this cost, as the Commission noted in the CWH
decision:14 ...it is difficult to measure with any precision the cost to
society of a lessening in innovation attributed to a substantial
lessening of competition in a market. Consequently, a qualitative
element is always a significant part of this assessment. Nonetheless, there are approaches that can be used to
approximate the costs of a loss of innovation, and the Commission
applied one of these in the CWH decision (as well as in previous
authorisation decisions). In doing so, the Commission also applies
its qualitative judgement, for example in determining the most
appropriate quantification method and in determining a relevant
monetary value to take from a range of quantified
values.15 While the nature of the benefits and costs will often differ,
many elements of the cost-benefit analysis undertaken by the
Commerce Commission will be broadly applicable under an amended
section 32 of the RMA. For example, this type of analysis was
applied and filed in the Environment Court by economic experts
engaged by various parties with an interest in the Waikato Regional
Council's Variation 6 amendments to its proposed regional
plan.16,17 In particular, the costs and benefits of one
of the effects of the policies in the proposed
plan—allocating water for consumptive uses (such as
irrigation) rather than hydroelectric generation—were
quantified. It is important to note that the focus of the Commerce
Commission's analysis is on changes to economic welfare,
whereas the amended section 32 may have a broader scope ("the
benefits and costs of the environmental, economic, social, and
cultural effects").18 It is also often the case
with resource management decisions that benefits or costs are
"non-market" values that are not easily quantified. For
example, it can be difficult to quantify the value of a landscape
or the value of the preservation of a species. However, techniques
do exist for quantifying such environmental values. These include
contingent valuation (which uses a survey to elicit willingness to
pay for a given environmental change or feature), travel cost
methods (which infer the value of a resource by how much visitors
spend to travel to the resource), hedonic property value approaches
(which isolate the impact of an environmental change on property
values), and averting expenditure approaches (which estimate the
expenditure incurred by society to avert an environmental
action).19,20 There is often considerable merit in
applying these sorts of approaches as, even if they only provide an
approximation to the true environmental value, this at least
indicates if the values are likely to be substantial or trivial.
Furthermore, as the CWH example above demonstrates, these
quantitative assessments can often be balanced with more
qualitative judgements. In summary, the proposed amendments to section 32 of the RMA, if
they are implemented, will increase the rigour and objectivity of
RMA decision-making. While the changes might increase complexity,
the regime operated by the Commerce Commission under the Commerce
Act provides comfort that the quantification of benefits and costs
(to the extent practicable) can be achieved in a manner that is
transparent, robust and tractable. Footnotes 1 We acknowledge the helpful comments of Will
Taylor. 2 The select committee's report is due in June 2013
– see http://www.parliament.nz/en-NZ/PB/Legislation/Bills/3/7/a/00DBHOH_BILL11932_1-Resource-Management-Reform-Bill.htm. 3 The exact wording is that the section 32 evaluation
must "(a) identify and assess the benefits and costs of the
environmental, economic, social, and cultural effects that are
anticipated from the implementation of the provisions [e.g., the
policies, rules and methods of a proposed plan], including the
opportunities for (i) economic growth that are anticipated to cease
to be available; and (ii) employment that are anticipated to be
provided or reduced; and (b) if practicable, quantify the benefits
and costs referred to in paragraph (a) ...". 4 See Air New Zealand and Qantas Airways Limited v
Commerce Commission (2004) 11 TCLR 347 at [33] and Godfrey
Hirst NZ Ltd v Commerce Commission (2011) 9 NZBLC 103,396 at
[88]-[90]. 5 These are the Commerce Commission's words in its
draft Authorisation Guidelines (March 2013), referring to the High
Court decision of Air New Zealand and Qantas Airways Limited v
Commerce Commission (2004) 11 TCLR 347 at [319] and the Court
of Appeal decision of Telecom Corporation of New Zealand Ltd v
Commerce Commission [1992] 3 NZLR 429 at 447 per Richardson
J. 6 Technically consumer and producer surplus. 7 See New Zealand Treasury (2005), "Cost Benefit
Analysis Primer", Version 1.12, December. 8 See http://www.comcom.govt.nz/authorisations-register/ 9 See http://www.comcom.govt.nz/anti-competitive-practices-authorisations-register/ 10 See Commerce Commission (1997), Decision 302,
21 July. This decision refers to early decisions in 1995 and 1996
where benefits and costs were quantified. 11 Commerce Commission (2011), Decision No. 725,
9 June. 12 NERA Economic Consulting was engaged by
CWH. 13 Although to date CWH has not actually acquired New
Zealand Wool Services International, for commercial as opposed to
Commerce Act reasons. 14 Commerce Commission (2011), op cit., at
paragraph 278. 15 Ibid., at paragraphs 306-311. 16 Carter Holt Harvey Ltd & Others v Waikato
Regional Council [2011] NZEnvC 380. 17 NERA Economic Consulting and Professor Lewis Evans
were engaged by Wairakei Pastoral Limited in this
process. 18 It is interesting to note that the proposed section 32
refers to "economic growth", but only in the sense of
"opportunities for ... economic growth that are anticipated to
cease to be available". The proposed section 32 also refers to
"employment". In this regard we note that one of the
critiques of what is often referred to as "economic impact
analysis" or "input-output multiplier analysis" is
that such methodologies typically take no account of the
opportunity costs of the resources used in the project. For
example, such methodologies often assume that there is an idle
workforce, whereas the jobs created by a new project may actually
be filled by people already working in other jobs. If the objective
is to assess the effects of a decision on economic welfare, then a
proper analysis would include all relevant opportunity costs. See,
for example, Ronald C. Griffin (1998), "The fundamental
principles of cost-benefit analysis", Water Resources
Research, 34(8), 2063-2071. 19 A high-level summary of these, and other non-market
valuation techniques is in Tom Tietenberg and Lynne Lewis (2009),
Environmental and Natural Resource Economics, Eighth
edition, Pearson-Addison Wesley, pp.39-50. 20 As one example, a cost-benefit analysis in the
Variation 6 proceedings included valuation of the environmental
costs of increased nutrient discharge from dairy farming, such as
costs associated with damage to water resources, damage to
ecosystem biodiversity and damage to human health. This was based
on a study which predominately used the averting expenditure
approach to valuing these costs. The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.Introduction
Quantification of Benefits and Costs under the Commerce
Act
Applicability to the RMA
ARTICLE
4 June 2013
Quantifying Benefits And Costs Under The Resource Management Act: Lessons From Commerce Commission Decision-Making
Section 32 of the Resource Management Act 1991 ("the RMA") requires an evaluation of benefits and costs before certain actions are taken by resource management decision-makers.