Value transfers
Monetary values are often obtained from earlier studies or other data sources. In these cases, adjustments may need to be made to the values in order to reflect differences between the assessment and the context in which the values were originally derived. This requires the use of properly formulated transfer functions.
Scope
Purpose:
Value transfers provide adjustments to the monetary values obtained from other sources, to take account of differences in context.
Method description
Rationale:
Spatial transfers
Spatial value transfer describes how to transfer unit values from the original study site(s) to other geographical countries or regions. Three transfer methods are commonly used for this purpose, offering different levels of sophistication:
- unit value transfer
- unit value transfer with adjustment for income differences, or
- value function transfer.
Studies have found that value function transfer often performs less well than the two unit value transfer approaches in the context of environmental health.
Spatial value transfers may involve consideration of a number of different, yet related issues. One of these concerns differences in income between different areas of population groups. In this case, income weighting is sometimes applied. This involves the use of income distribution weights to account for costs and benefits that affect individuals from different income classes. In this case changes in income are converted into changes in welfare, and it is assumed that an addition to the welfare of a lower income person is worth more than that of a richer person.
A closely related issue is that of how to treat different unit values that may exist in different countries, when more than one country is impacted by the proposed policy. In this case, the choice is likely to be between:
- the adoption of country-specific values and
- values weighted to an average of country values.
The use of country-specific values is in accordance with the efficiency-based foundations of cost-benefit analysis, as developed in the theory of welfare economics. Multi-country (EU-wide) average values, however, may be more acceptable from a political perspective. This also has the advantage that the uncertainties in the WTP estimates are likely to encompass the range of values generated by using country-specific values.
Temporal transfers
Transfer values also need to be applied over time. For example, both the general price level and the relative price of individual goods and services in the economy vary with time. This implies that the values included as input in the health impact assessment will also change. This has two sets of implications:
- how to express cost/benefit data in the prices of a common base year; and
- how to derive a price basis for future costs/benefits, which in turn raises two further considerations:
- changes in relative prices and
- changes in real value.
Currency Conversion
Where impact analysis covers countries with different currencies, conversion from one currency to another may be necessary so that all values can be expressed in comparable terms.
Using the official exchange rates to convert transferred estimates to the national currencies does not necessarily reflect the true purchasing power of the currencies, since the official exchange rates reflect political and macroeconomic risk factors. If a currency is weak on the international market (partly because it is not fully convertible), people tend to buy domestically produced goods and services that are readily available locally. This enhances the purchasing powers of such currencies on local markets.
To reflect the true underlying purchasing power of international currencies, the U.S. International Comparison Program (ICP) has developed measures of real GDP on an internationally comparable scale. The transformation factors are called Purchasing Power Parities (PPPs). The PPP exchange rate is calculated from the relative value of a currency based on the amount of a 'basket' of goods the currency will buy in its nation of usage. Typically, the prices of many goods will be considered, and weighted according to their importance in the economy. It should be noted, however, that future PPP will certainly change, if (as seems likely in the EU) the different income levels in the study area become increasingly harmonised over time - though currently no model is available for estimating these changes. Where use of nominal and PPP-equivalent currencies give different recommendations using the CBA decision-rule, the user will need to select their preferred exchange rate.
Method:
The following procedure is recommended for value transfers:
- All unit values should be expressed on a common price base. In general, the most recent year for which all relevant conversion variables are available should be used (at the time of writing, in the EU, the year 2008). The base year should, however, be adjusted regularly as new data becomes available.
- The conversion from the price year in which the data is expressed to the price base year is undertaken using a price index. Ideally, this price index should be sector-specific. In practice this is not always available, and for health unit values the consumer price index should preferable be used. (In the European Union this latter index is known as the Harmonised Index of Consumer Prices, HICP.)
- Account must also be taken of changes in prices relative to changes in the general price level, and unit values presently expressed in nominal, or current, price terms for future years should be converted to constant price terms.
- Unit value transfers should be utilised, in the absence of evidence from function transfers and meta-analysis that might reduce the transfer error. For this purpose, a common value should be applied across the study area (e.g. EU countries), but this can be over-ridden by country-specific values where they exist.
- Changes in the future value of a resource or a preference should be fully reflected in the relevant unit value(s). The rate of growth in GDP is related to the rate of growth in unit values by use of income elasticities. For example, the real value of a given health end-point may be adjusted at 70% of the rate of change in GDP. This equates to adopting an income elasticity of 0.7. Income elasticities tend to differ between resources and between countries. Where evidence exists, the income elasticity used should be specific to the cost or benefit being considered. Where there is no robust impact-specific evidence, a unit income elasticity can be adopted.
- Unit values should be expressed in purchasing power equivalents, as well as at market exchange rate levels, for the base year, in order to accommodate differences between purchasing power in different countries.
Management:
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