The $1 billion move: Australia’s polymer story
The Reserve Bank of Australia (RBA) recently released a report titled A Cost-benefit Analysis of Polymer, which analyses Australia’s decision to become the first country to issue a full series of polymer banknotes from a financial perspective.
The report finds the decision to embrace innovation and make the switch, completed over 1992–96, was indeed a clever one, resulting in net savings of close to $1 billion over the past 25 years.
This is without taking into consideration the financial effects of reduced counterfeiting, omitted from the analysis due to the difficulty of putting a dollar value on this benefit.
The advantages are even greater when one considers the savings from outsourcing distribution to the private sector, brought about by the longer lifespan of polymer. This was also excluded from the analysis due to the reasonable assumption this may still (at least partly) have occurred with paper banknotes.
Whilst security was the principal reason for switching to polymer, the report seeks to quantify the durability benefits.
The analysis framework calculates the ‘upgrade’ or ‘up-front’ cost of replacing all old-series banknotes, as well as the ongoing annual savings in production and other costs.
To conduct a fair cost-benefit analysis, the RBA compared the cost of printing polymer banknotes with the cost of printing otherwise similar paper banknotes.
The analysis uses publicly available banknote cost estimates from the Bank of Canada instead of out-of-date Reserve Bank figures. Canada switched from paper banknotes to polymer banknotes over the period 2011–13.
The longer life of polymer banknotes is what drives their reduced ongoing cost. With less banknotes needing to be manufactured, the costs of transport, destruction, processing, and production are lower over time.
The average lifespan of Australia’s polymer banknotes has increased since issuance, at least partly due to improved structural systems which will have occurred regardless of the substrate.
To account for this, the bank grows the counterfactual paper banknote life by the average increase in polymer banknote life.
Using a simple data-driven estimate of average banknote life through time, the cost-benefit analysis estimates the bank has made considerable savings since the introduction of polymer banknotes.
The principal drivers behind the increased savings are the lower denominations ($5, $10 and $20), which have a considerably shorter life in paper form – less than a year prior to issuance on polymer.
For these banknotes, upgrade costs are estimated at between $30 and $50 million, and the break-even point (the point at which total cost and total revenue are equal) was achieved within four years on polymer.
From the issuance of the first polymer series of banknotes until the recent introduction of the Next Generation Banknote Program, the RBA estimates savings totalling just under $1 billion in inflation-adjusted terms.
Read the full report on the RBA website.