Public projects vary exponentially from private projects. This is based on several parameters including the source of funds, the length of the projects and the varying benefits and disbenefits to the different parties involved. In evaluating the viability of a government project therefore, several primary, secondary and tertiary factors come into play. This has resulted in a continued an intensive study relating to the topic of government projects both from an economics and political science perspective. The main premise of the economic study aforesaid is to ensure that all tax-payer dollars are utilized efficiently and to the greatest benefit for the public. The political science perspective entails the acceptability or otherwise of the projects to the owner to with the public. Irrespective of the intense study aforesaid, vagueness still bedevils the evaluation of public-sector projects.
Introduction
Normally, government never has enough funds for all projects envisaged by it and/or proposed by the populace (Arrow & Lind, 2014). It is therefore faced by the continuous and onerous obligation of determining which projects are economically viable to implement or not. Over and above this, the government is also faced with the obligation to decide between which project to implements between the several options available and in some cases which project to implement first. However, due to the very nature of public projects, these decisions are never easy (Eschenbach, 2010). Further, some factors are extremely difficult to quantify and factor such as quality of life and value of life (Eschenbach, 2010). Difficult or not however, it is incumbent upon any democratic government to endeavor not only to make the right decision and implement the right projects at the right time but also to be able to defend them to the tax payer.
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Benefits, Disbenefits and Costs
The viability of a decision is always determined by the outcomes emanating therefrom. A good example lies in the initiation of projects in the private sector. An investor in the private sector will only initiate a project of the profits accruing from the project make the investment made viable (Eschenbach, 2010). This reduces to pecuniary values all variable within the scope of the decision to be made and makes the decisions to be made exponentially easier. In the public sector however, the decision making project is more complex and based on several overlapping variables (Eschenbach, 2010). Among the primary ones is the concept of benefits, disbenefits and costs. In engineering economics, these three variables have to be reduced to pecuniary values with each dollar only being factored once in the two latter variables of disbenefits and cost. For example, if an amount has been reflected in the disbenefits, the same amount can neither be reflected in costs and vice versa (Eschenbach, 2010).
Benefits are the direct rewards of a public project to its owners to wit the public (Eschenbach, 2010). There are various varying benefits of a singular project. Wider roads reduce traffic congestion, reduce fuel costs and also create a better quality of life through avoidance of the stresses related to being caught up in traffic jams. Fuel costs reduction can easily be estimated as a value in dollars but the same is not easy for reduced congestion in traffic or improved quality of life. An economist however must find a way to reduce these values into figures in order to come up with a proper assessment of the project. Disbenefits on the other hand are the negative impacts of the project to the public who as aforesaid are the owners of a project (Eschenbach, 2010). Using the example of wider roads, the actual widening of the road will entail encroaching into the land around it. This will displace the people who had occupied that land erstwhile. Wider roads also increase the average speeds of vehicles which may lead to more accidents and perhaps more pollution due to heightened use of private vehicles. Loss of land can be quantified easily but increased pollution as more people prefer driving to taking the bus is a more complicated figure to arrive at.
Finally, cost is the amount of money spent by the initiators and implementers of the project who in this case are the government (Eschenbach, 2010). It is important to provide a proper distinction between disbenefits and costs as they are both negative attributes. Costs refer to how much will be spent by the government or its subsidiaries in the establishment and maintenance of a project. Disbenefits refer to how much the public or sections of the public will be negatively impacted by the project (Arrow & Lind, 2014). As indicated above however, any amount of money factored in one cannot contemporaneously be factored in the other. Remaining with the example of creating a wider road, loss of land as aforesaid is a disbenefit. If the owners of that land are compensated by the government, the monies paid in compensation are a cost for the project. If the total value of the land is paid to its former owners, loss of land is no longer factored as a disbenefit. If however only 60% compensation is paid for lost land, then the owners of the land will have suffered a 40% disbenefit.
Why Public Projects are Easier to Evaluate and Choose than Private Projects
The first cause of difficulty, which has also been outlined above is the difficulty in quantifying some of the variables in a public project (Eschenbach, 2010). Some parameters of benefits and disbenefits are extremely difficult to reduce to dollar quantities. This is exacerbated by the fact that the benefits and disbenefits amounts are crucial in establishing the overall viability of a project (Arrow & Lind, 2014). A benefit such as increase in quality of life can be the determining factor in the viability of a project that combines commercial advantages and recreational advantages (Eschenbach, 2010). A dam in a sunny and high temperature area for example may have production of hydroelectricity and irrigation as the main benefits. This project however will also operate as recreational grounds for the local populace which will increase the quality of their lives. When deciding between two projects with equal actual benefits, the quality of life factor might be the benefit that tilts the scale hence the need to accurately reduce it to dollar figures (Eschenbach, 2010). This can result in a major impasse.
The second difficulty in public projects that differentiate them from private projects is the longer horizon (Eschenbach, 2010). Private projects are for a relatively shorter duration or in the very least divided into short term phases. Public projects will mostly have a horizon or over 50 years. Many parameters can change over a duration of 50 years which reduces the accuracy of deductions made about a project. For example, dollar rates may increase or plummet or an urban area be transformed into an urban or suburban area during the duration of the project. Uncertain probabilities of possible events is more common in public projects than private sector ones mainly premised by the nature of public projects (Arrow & Lind, 2014). Using the former example of a water dam, the possibility of dam failure or flash flooding is a rare event that cannot be accurately predicted yet an actual threat for any dam. This creates a complex variable that is almost impossible to accurately determine.
Another difficulty in public projects is the existence of different and sometimes conflicting objectives within a singular project (Eschenbach, 2010). This creates difficulty in allocation of funds for the project as the different objectives may be funded by different arms of government (Arrow & Lind, 2014). A water dam for example may be used to keep wildlife and attract tourists. This falls in a different department from flood control which is another objective of the project which also falls in a different arm of government from production of hydro-electricity. Monies for tourism cannot be used to produce electricity yet without electricity production, the project may not be viable in its totality. Further, to prevent floods, it is important to keep the water levels as low as possible more so in the rainy season. This is however the very time that the dam will need to be filled to the brim as a reservoir for electricity production in the dry season.
The contrasting objectives bring in contrasting interest groups pulling in different direction (Eschenbach, 2010). Even without contrasting objectives, contrasting interest groups could also be based on support for different projects or support and opposition of a singular project. Finally, interest rates in private projects are mainly premised on commercial rates but in public projects, so many variables in time and scope are involved that arriving at an interest rate is almost a discretionally not scientific operation (Eschenbach, 2010). The fact that interest rates are extremely curial makes this a major complication.
Interest Rates
This is another area of complication in public-sector engineering economic analysis. Interest rates help determine the cost of a project as relative to the duration of the project (Eschenbach, 2010). In public projects, to arrive at the cost-benefit of a 50 year project, it is important to calculate how much each dollar used in the project will be valued at by the 50th year. This enhances accuracy in determining the actual costs of the project and its viability. The calculation of interest rates in projects is a complex process more so due to the long duration of projects. In mutually exclusive projects, a formula relative to but lower than the borrowing rates of marketable securities whose duration of is congruent the duration of the project can be used (Eschenbach, 2010). When a decision is to be made between several project options with limited funding, unquantifiable variables will also be factored in the interest rate in order to enlist opportunity costs into the interest rates used (Arrow & Lind, 2014).
Point of View
Opinion on any issue is always premised on the point of view of any opinion holder (Eschenbach, 2010). This creates variances in opinion when considering several options. Decisions on public projects in the USA are mainly tied to funding since there is more to be done than the monies available. There are however several levels of funding and subsequently which range from federal government, through state to the local government. The decisions are however tied to how these levels of governments consider projects from a benefit, disbenefit and cost perspective (Arrow & Lind, 2014). Point of view relates to how the different parties involved consider the viability of a singular project, based on the material biases for and against the project (Eschenbach, 2010). The internal point of view is mainly focused on the cost while the external point of view is mainly focused on benefits and disbenefits. Point of view will determine support or opposition of a project and if there are multiple projects or options, it will determine support for one over the other (Eschenbach, 2010).
Allocation of Costs among Different Project Purposes and Different Benefit Recipients
Every project has several purposes and objectives which culminate in the overall outcome of the said project (Eschenbach, 2010). The nature and the scope of the project are determined by these individual purposes within the project that benefit different recipients. Some purposes within a singular project may be more productive than others and will therefore present a higher contribution to the return of a project that other purposes (Arrow & Lind, 2014). Using the earlier example of a dam that serves several purposes such as hydroelectricity, tourism and flood control. The dam is the project but funds will need to be allocated for each of the purposes or if the funds are not enough to some of the purposes. This creates prioritization based on the benefits of each purpose of the dam. The propensity of a purpose to yield a higher return will result in the prioritization of that demand (Eschenbach, 2010).
Value of Human Life for Project Evaluation
Human life is invariable in the normal concepts of life but in project evaluation, it may be considered as a variable and even reduced to a quantum (Eschenbach, 2010). The value of human life can be defined as the dollar amount gained when a human life is saved or lost when a human life is lost. Just as in the instant case where compensation is made for fatalities, the value of a human life is mainly determined by the earnings of a singular human life or the benefits of the said human life to the economy (Arrow & Lind, 2014). This is a complex variable seeing that different people contribute to the economy differently with a remanded person being a cost to the economy and a Fortune 500 CEO being a great benefit. This makes value of human life more of a discretionally quantity as opposed to an absolute one. The value of human life is therefore relative to the project as is arrived at discretionary by the project planners albeit with substantiation (Arrow & Lind, 2014).
Factoring Unquantifiable Benefits
Whereas value of life, albeit difficult to quantify is indeed quantifiable as aforesaid, there are some benefits accruing from public projects that are absolutely impossible to quantify (Eschenbach, 2010). A wider road for example may reduce the probability of accidents and therefore the prevalence of death through accidents on the road. However, so many variables are involved in causing an accident and determining the severity of an accident that it is impossible be quantify accident reduction against the width of a road. Other benefits that are unquantifiable include such benefits as quality of life and improved health. These benefits can inter alia be factored in determination of interest when determining different projects (Eschenbach, 2010).
Life Cycle Cost Analysis for Public Facilities
When finally the project to be undertaken is arrived at by considering all the bearing factors listed above, the final step is to arrive at the most cost effective way to undertake the project (Grant, 2016). Life-cycle cost analysis (LCCA) is a tool that has been developed to determine the most cost effective option of establishing a project (Grant, 2016). LCCA considers are the general particulars that are pecuniary in nature and relate to a project. These include the purchase to be made, level of ownership of the project, how the project and the components thereof will be operated and maintained, and finally how the project components will be disposed of at the end of the project (Grant, 2016).
Different facilities are considered differently through the LCCA tools. A road for example, will require land to be acquired, the actual road to be used and also the maintenance processes. Finally, what will be done to the road when it is no longer viable is also another factor to be considered. The different aspects of the project including the relationship between cost and quality, relative cost of labor and the various other options available create the input variables in LCCA. As many variables as possible must be considered to enhance accuracy. Too many variables however can affect the ability LCCA to function properly (Grant, 2016).
Therefore, for complex projects such as an airport or harbor whose scope is too vast thus creating too many variables LCCA cannot be used effectively. This, therefore, calls for consideration through components of the project at a time. This reduces the variables and increases accuracy. Among the major challenges associated with LCCA in governmental projects is the exponentially long duration of the project (Grant, 2016). This creates uncertainties for some categories to be assessed such as maintenance and disposal. Technically oriented government projects such as Airports are built to last for over a century. However, technology has been changing so quickly it is hard to judge what changes will come in several decades time. This is a major challenge for LCCA.
Conclusion
Successfully carrying out most public sector projects is an extremely difficult endeavor even under the best of circumstances. However, the foregoing shows that arriving at which project to do and which project to avoid is also an exponentially complicated task. This however is a choice that the government has to take continually as there are more projects to be done than the money available to do it. The situation is exacerbated by the varying points of view about government projects from the federal, state, local government and even the populace itself. Viability of projects is determined through the evaluation of its benefits, disbenefit and costs. Once the project to be undertaken is arrived at, LCCA is used to determine how best to carry out the project. In spite of intensive study to fine tune the process of public-sector engineering economic analysis, the field still has an exponential number of undetermined elements.
References
Arrow, K. J., & Lind, R. C. (2014). Uncertainty and the evaluation of public investment decisions. Journal of Natural Resources Policy Research , 6 (1), 29-44.
Eschenbach, T. G. (2010). Engineering economy: Applying theory to practice - 3rd edition (3rd ed.). Oxford: Oxford University Press, USA.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition . New York City: John Wiley & Sons.
