New report assesses economic impact of health and safety measures

A report from the European Agency for Safety and Health at Work, launched in March 1999, provides the first extensive overview of how economic factors are related to the formulation of occupational safety and health policy in the EU Member States. This feature provides an overview of the key findings, as well as the implications for health and safety policy.

A central task of the European Union's European Agency for Safety and Health at Work is to support the exchange of information between Member States, and a new report from the Agency, launched in Brussels on 22 March 1999, examines the Economic impact of occupational safety and health in the Member States of the European Union, summarising the second major information project undertaken by the Agency since its inception in September 1996. The report is based on the results of a questionnaire survey, in which the viewpoints of many agencies, including the social partners, from across the Member States were sought. The project aimed to gauge how economic aspects are related to the formulation of occupational safety and health policy.

The issue of assessing the cost and benefits of occupational safety and health has raised much interest in recent years. For example, an international conference on the subject was organised in 1997 as part of the Dutch EU Presidency. In addition, the EU Advisory Committee on Safety, Hygiene and Health Protection at Work set up an and hoc working group on "socio-economic appraisal of occupational safety and health legislation". However, although it took previous developments into account, the impetus behind the Agency's recent project derived from a concern to broaden the issue further for a number of reasons. Firstly, the project wanted to recognise that the improvement of occupational safety and health cannot simply be reduced to a technical issue about costs and benefits. Secondly, the project perceived many other economic issues to be important in relation to occupational safety and health - for example, the role of financial incentives, such as subsidies and financial sanctions. The main findings of the report are outlined below.

Costs and benefits of health and safety measures

The project's research found that there is substantial interest from a number of Member States in estimating the costs and benefits of occupational safety and health measures. Few countries indicated that this is not a major or increasingly important topic. In some countries, interest in instruments to assess costs and benefits is encouraged by national administrations, notably in Finland and the Netherlands.

From the research, it was found that varying financial incentives and instruments are used in formulating occupational safety and health policy. However cost/benefit analysis is the best known and most frequently used tool at present. Nevertheless, despite the prominence of cost/benefit analysis, the importance of ethical considerations was also widely stressed.

With regard to whether cost/benefit analysis has an impact on decision-making, it appears that in some Member States, such as the UK, and Denmark, an assessment of the economic impact is one of the standard items of information considered in the decision-making process. However, it was also found that in several Member States cost/benefit analysis is not regarded as the major factor in decision-making, although economic assessments are often used to provide greater clarity and to facilitate viable compromises.

A consideration of whether the effects of measures are evaluated either before, or after, they are implemented revealed that cost/benefit analysis before a measure is taken is often routine and in some cases mandatory, as in the UK and in Denmark. There is considerable variation between Member States in terms of the extent to which certain kinds of legislation are evaluated. In respect of post-assessment of measures, it can be concluded that an explicit comparison between the goals and results of a measure is undertaken on a routine basis only in the UK. With regard to measuring the economic efficiency of national occupational health and safety systems, the research concluded that this type of evaluation has so far received limited attention in the Member States.

Overall, the report concludes that economic arguments are playing an increasingly significant role in discussions regarding new initiatives for occupational safety and health measures, as well as the formulation of legislation - particularly in respect of "fine tuning" proposals for legislation. However, at the same time there is no indication that the introduction of legislation occurs only on the basis of economic arguments.

The economic impact of occupational health and safety policy

This section of the report reviews the operation of cost/benefit analysis and its content. Generally, compared with the emphasis paced by many Member States on the assessment of the costs and benefits of health and safety measures prior to their introduction, few Member States carry out any post-implementation assessments. A distinction is usually made in respect of the costs of implementing occupational measures (prevention costs), and the benefits after implementation. Items usually included under prevention costs are, investments in technology and production equipment by employers, costs of external services, costs of additional work time and extra charges per worker - eg for extra medical surveillance. In assessing the benefits after implementation, little experience in quantifying the effects on productivity and product quality was found across the Member States.

The research also found that the way in which assessments are performed varies from country to country and may also vary according to the nature of the measure. In addition, Member States indicated that there are many problems involved in estimating the benefits of preventative measures, and that the scope of an economic impact assessment is limited by a number of factors, particularly the lack of reliable data and the inability to isolate relevant factors, while placing a value upon health and human life is also problematic. Lastly, the benefits of prevention may become apparent only after a long time.

Most Member States collect data on the number of working days lost and disability pensions awarded as a result of occupational accidents. However, the picture given by these statistics is incomplete and underestimates the real costs.

Some Member States have estimated the cost of work-related illness as a percentage of Gross National Product, with percentages ranging between 2.6% and 3.8%. Belgium had the highest direct costs of occupational accidents, amounting to EUR 750 billion in 1995, followed by Germany at EUR 45 billion. The report, however, emphasises that for both groups of calculations, strict comparisons between Member States are not possible due to the variation in cost calculation methods. Commenting on the report's findings, Pádraig Flynn, the EU employment and social affairs commissioner, said that "the case for better health and safety standards in the workplace will be strengthened if policymakers are better informed of what poor standards actually cost, and how these costs can be reduced."

For the majority of companies, the above figures are not useful, as for an individual enterprise such a concept is irrelevant to its own costs and decisions. What is more important at enterprise level is an indication of whether a specific investment in an occupational safety and health measure will reduce the firm's costs or give a competitive advantage. From a review of national practices, it is apparent that the majority of Member States are involved in developing instruments that will help enterprises evaluate the costs and benefits of measures - for example, in the UK a detailed booklet has been produced guiding firms on how to calculate costs of accidents and ill health, while in Portugal, firms with more than 100 employees have to provide a yearly "social balance sheet", which includes reports on accidents as well as direct and indirect social costs.

Importantly, the report recognises the inability of small and medium sized enterprises (SMEs) to act upon nationally supported measures, owing to the limited financial and personnel resources to apply and implement these methods.

The use of financial incentives

The report assesses the use of direct financial incentives which have the aim of promoting preventative measures. Three financial incentives have been reported to be in operation: subsidies; penalties or fines as part of enforcement; and incentives in social insurance schemes.

Subsidies that promote the development, sale or purchase of health and safety products, production methods, and new forms of work organisation exist in the majority of Member States. These are administered in varying ways - for example, via national authorities, national health and safety institutions or funds set up by public authorities and insurance organisations. Subsidies appear in a range of different forms, for example: in the Netherlands and Portugal, specific tax measures are taken to encourage health and safety measures; in Denmark and Spain, specific programmes have been set up to facilitate the removal of specific negative working conditions; and in France and Germany, activities such as training, technical assistance and measures to promote compliance with regulations are subsidised.

The results of the survey show that the effects of measures undertaken as a result of subsidies are evaluated in only a few Member States, particularly Germany, the Netherlands and Denmark, and then only occasionally. As to the future of subsidy arrangements, there appear to be mixed trends: in some countries, initiatives of this nature are just developing - eg Finland, the Netherlands, and Spain; while in other Member States existing arrangements are under pressure to be scaled down - eg Germany and Denmark.

As for the use of financial penalties or sanctions, the survey reveals that there are well developed systems for the imposition of financial penalties and administrative fines. However, in the opinion of the authors of the report, financial sanctions seem to be applied in a moderate manner. This may be explained by the fact that compliance with the legislation in enterprises is the main objective of enforcement, rather than financial gain. Currently there is limited evaluation of the impact of sanctions, but this may because negative publicity associated with the sanction is perceived to have an impact, rather than the sanction itself.

In the majority of Member States, financial incentives are not a central component of mandatory social insurance schemes. However, in some Member States, social insurance systems include, in addition to differentiated rates in premiums and contributions, other tools to encourage companies to improve health and safety measures, for example: advances or grants for preventive action (as in France); reclamation of costs in case of gross negligence by the employer (as in Austria); and partial compensation for employers for the cost of an occupational health service (as in Finland). In general, the Member States do not foresee any major changes in the level or nature of these incentives. In addition to mandatory social insurance schemes, a number of voluntary private insurance schemes include financial incentives to encourage companies to improve health and safety policy.

An emerging approach to promoting occupational health and safety in enterprises, particularly in the public sector, is the specification of particular health and safety conditions and standards as an essential criteria for tendering for contracts. Therefore, contractors are selected partially on the basis of their performance in occupational health and safety.

Initiatives at European level

The final section of the report deals with the issue of the Member States' views on which initiatives on the economic aspects of occupational safety and health could be undertaken at the European level. The responses from the Member States reflect a need for exchanges of information concerning the costs and benefits of measures by national administrations, and in particular the development of a methodology that would make it possible to assess the impact of applying EU Directives using common factors, thus allowing comparison. In addition, the development of methodologies or instruments to be used at company level was suggested by a number of countries.

A number of other suggestions were made for European-level initiatives, including guidelines for homogeneous indicators and a database of measures.

Commentary

The report clearly confirms the increasing inclusion of economic factors and considerations in the formulation of occupational health and safety measures at company level, and in the formulation of legislative instruments at national level. However, at the same time the report suggests that economic factors are still very much competing with "ethical" or social considerations, with economic factors most prevalent in the fine tuning of proposals into legislation.

The increasing importance of the economic rationale and of cost/benefit analysis in formulating health and safety measures and policies arguably represents a positive development for the health and safety of workers across the European Union. This is because the use of economic analysis means that health and safety measures and instruments are more likely to be introduced and maintained in a systematic manner, as opposed to an ad hoc manner reliant upon ethical and social considerations. Moreover, by considering the economic rationale and impact of health and safety measures, action in this area would receive a significant boost in standing, as the economic or business case for health and safety provisions would be largely incontestable. However, as the Agency report indicates, SMEs may find this process more difficult, even with support from national-level institutions.

As for the development of initiatives at a European level, from the perspective of the Member States the highest priorities at present are a systematic exchange of information by national administrations and the development of a common methodology that would make it possible to assess the impact of applying EU Directives. The SHAPE (Safety & Health & Performance & Enterprises) programme financed by the European Commission is currently producing relevant information on methodologies, which it is testing for occupational health and safety cost/benefit analyses. Therefore, greater transparency between Member States' methodologies appears to be the crucial issue at present, particularly if any kind of harmonisation between Member States' health and safety standards is to occur in the future. (Peter Foster, ECOTEC Research & Consulting)