Engineering

Economics
Module No. 13
Evaluation of Public alternatives

By Muhammad Shahid Iqbal

$$$$$

$$$$$

Private Versus Public Projects

PURPOSE Private Project -- Maximize profit, minimize costs Public Project -- Offer social benefits at minimum cost (i.e., health, employment ) without profit CAPITAL SOURCES Private Project -- Private investors and lenders Public Project -- Taxation; Private Lenders FINANCING Private Project -- Individuals (for sole proprietorships and partnerships); stocks and corporate bonds (for corporations) Public Projects -- Direct taxes, Low, no-interest or private loans, bonds, subsidies

Private Versus Public Projects

MULTIPLE PURPOSES More frequently for public projects ( i.e., reservoir for: flood control, power source, irrigation, recreation) PROJECT LIFE Private Project -- 5 to 20 years; Public Project -- 20 to 60 years CAPITAL PROVIDER RELATIONSHIP TO PROJECT Private Project -- Direct Public Project -- Indirect or none NATURE OF BENEFITS Private Project -- Monetary or near monetary Public Project -- Non-monetary; difficult to equate to monetary terms

Private Versus Public Projects

PROJECT BENEFICIARIES Private Project -- Those undertaking project Public Project -- General public CONFLICT OF PURPOSES More common for public projects (i.e., dam for flood control vs environmental preservation) CONFLICT OF INTERESTS More common for public projects (i.e., intra-agency conflicts) POLITICAL INFLUENCE More common for public projects ( i.e., changing decision makers, pressure groups, financial and residential restrictions) EFFICIENCY MEASUREMENT Private Project -- Rate of Return on capital Public Project -- No direct comparison with private projects

Benefits, Costs, And Disbenefits

Benefits - The favorable consequences of the project to the project sponsors (i.e., the public for public projects) Costs -- Monetary disbursements required (i.e., of the government for public projects) Disbenefits -- The negative consequences of the project to the project sponsors

Benefit / Cost Ratio Method

The benefits may occur at different time periods. For the purpose of comparison these are converted in to common time base. Present worth Future worth Annual equivalent Similarly the costs consists of initial cost and yearly operation and maintenance cost. These are converted to a common time base as done in the equivalent benefit. The ratio between equivalent benefit and equivalent cost is known as the Benefit Cost Ratio If this ratio is at least one, the public activity is justified otherwise it is not justified.

Conventional Benefit / Cost (B/C) Ratio With Present Worth

PW (benefits of the proposed project) B/C = --------------------------------------------PW (total costs of the proposed project)

Bp = Present worth of total benefits P = Initial Investment Cp = Present worth of cost of operation & maintenance Bp BF BA B/C ratio = ---------- = ---------------- = ----------------P + Cp PF + CF PA + C