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Benefit Cost Analysis and Public Sector Economics: Graw Hill

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salmanshahidkhan
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42 views

Benefit Cost Analysis and Public Sector Economics: Graw Hill

Uploaded by

salmanshahidkhan
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 22

Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

ENGINEERING ECONOMY Fifth Edition


Mc
Blank and Tarquin Graw
Hill

CHAPTER IX

Benefit Cost Analysis and


Public Sector Economics

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 1
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Learning Objectives

9.1 Public Sector Analysis

9.2 Benefit Cost Analysis Using the


B/C
Ratio
9.3 Alternative Selection Approach

9.4 Multiple Alternatives

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 2
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Public Sector Projects

• Public Sector:
• Ownership – by citizens- the public
• Public Sector Projects:
• Provide needed services to the public
and “no profit”

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 3
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Public Sector Projects

Public sector projects have a


primary purpose to provide
services to the citizenry for the
public good at no profit.
Areas such as health and
safety require engineering
analysis.
Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 4
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Types of Projects

• Hospitals
o Parks and recreation facilities
o Highways, dams, bridges
o Courts, schools, prisons
o Public housing
oCodes and standards
o Many other types
Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 5
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Characteristics – Compared

Characteristic Public Sector Private Sector

Size of Larger Some Large;


Investment medium to
small
Life Estimates Quite Long: Shorter:
30-50 years 2-25 years
Annual Cash No Profit: costs Revenues –
Flow Estimates and benefits profit cost
estimates

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 6
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Attributes

• Public Sector Projects do not have


“profits”
• Projects can have certain undesirable
consequences associated
• Thus, can be controversial in nature
• Draw media attention – debated on pros
and cons

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 7
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

To perform an economic analysis


of public alternatives:
 the costs (initial and annual),
 the benefits ,
 and the disbenefits
if considered , must be estimated
as accurately as possible in
monetary units.

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 8
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Estimating for Public Projects:

• Basic elements for public projects:


• Costs
• Construction, operations,
maintenance, less any salvage values
• Initial costs fairly well known
• Future O&M are known and must be
estimated

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 9
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Estimating: Benefits

• BENEFITS to the public (users) must be


estimated in terms of dollar values
• Very difficult to do
• Benefits = the advantages to the public
stated in $
• Owners – generally the public

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 10
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Estimating: Disbenefits

• Disbenefits
• Expected undesirable (negative)
consequences to the owners (public)
• Assuming the project is undertaken
• May be indirect economic
disadvantages to the public
• Very hard to estimate and convert to $
amounts

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 11
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 General Principle

• For public projects we find:

It is very difficult to estimate and reach


agreement on the economic impacts of
benefits and disbenefits for public sector
projects.

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 12
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Example
Assume a short bypass around a
congested area is recommended. How
much it will benefit a driver in dollars
per driving minute to be able to bypass
five traffic lights while averaging 35
ml/hr , as compared to currently driving
through the lights averaging 20 mi/ hr
and stropping at an average of two
lights for an average of 45 sec. each?

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 13
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Conclusion to Example

Relative to revenue cash flow


estimates in the private sector,
benefit estimates are much harder
to make , and vary more widely
around uncertain averages.

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 14
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Funding Sources – Compared

Characteristic Public Sector Private Sector


Funding Taxes, fees, Sale of new
bonds, pvt. stock, bonds,
funds loans, ret.
earnings
Interest Rate Tends to be Higher: At
lower market cost

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 15
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Funding Public Projects

• Generally low interest charges


• Public entities do not pay taxes. e.g.
municipal projects do not pay state taxes.
• Project investments basically backed by
public agencies
• Cost-sharing arrangements often exist
• Less perceived risk with public projects

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 16
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Determination of an Interest Rate

• Determination of the interest rate for


public sector evaluation is as important as
the determination of the MARR for private
sector analysis.
• Determined differently than in the private
sector
• Called the social discount rate

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 17
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Additional Comparisons

Characteristic Public Sector Private Sector

Selection Multiple or Rate of return


criteria many or present
value
Environment of Political arena Primarily
the evaluation (debated, economic
pressure groups)

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 18
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Selection Process

• Not as “clean” as in the private sector


• Involves interest and pressure groups
e.g. Kalabagh Dam.
• Often draws media attention
• Involves many different viewpoints

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 19
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The viewpoint of the public sector


analysis must be determined before
cost ,benefit and disbenefit estimates
are made and before the evaluation is
formulated and performed.
There are several different viewpoints
for any situation, and the different
perspectives may alter how a cash flow
estimate is classified.

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 20
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

General Conclusion about viewpoint

In general , the viewpoint of


the analysis should be as
broadly defined as those who
will bear the costs of the
project and reap its benefits.

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 21
Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9.1 Evaluation Process

• The viewpoint finally adopted will:


• Determine the estimates of..
• Costs
• Benefits
• Disbenefits
• Thus, the viewpoint must be established
before the economic evaluation

Blank & Tarquin: 5th Edition. Ch. 9 Authored by: Dr. Don Smith, Texas A&M University. 22

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