Cost benefit analysis
Discuss Public-private partners:
•Nonprofits
•Bond issuance
•Multilevel government financing
•Effects of taxation
•Evaluate the role that financial efficiency will play in obtaining this funding at the state
and local levels
Introduction
Cost benefit analysis can be applied when making decisions just as much as economic analysis
influences major decisions. Economic theories provide the structures and concepts for
understanding the allocation of scarce resources or quantity allocation. Cost benefit analysis
influences policy debates and also clarifies the available alternatives that are open to decision
makers. Economic principles are the foundation for the analysis of costs and benefits.
Port Tobacco Project in Charles County, Maryland is on the protection of Port Tobacco River
and the establishment of a recreational park. The acquisition of 149 acres of land is intended to
facilitate the construction several outdoor recreational facilities activities which will enable such
activities like bird watching, hiking and paddling across the river. The project has received
$935,000 for the implementation of the project. (Ferrara, 2010) The recreational park is expected
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to provide the basic amenities required for the activities and which will be available at fee that
will chargeable to enable the park to maintain itself. The Port Tobacco Project in Charles County
is expected to generate an estimated $1m dollar per year. As non-profit making facility it’s
expected to maintain itself after the initial funding. (Boardman, 2006)
- The following is the Cost benefit analysis for the project.
Port Tobacco Project in Charles County, Maryland.
Year Total Project Total Project Discounted Discounted Total
2014 Costs Benefits Total Costs Benefits
(bd) (be) (bf) (bg) (bh)
= (aa) = (bcc) PV of (be) PV of (bf)
1 935,000 1,000,000 850,000 909,091
PV (total) 850,000 909,091
NPV 59,091
B-C Ratio 15.38461538
The Present value (PV) for the initial cost is $850,000 while for the benefits is 909,091. The
Projects Net Present Value (NPV) is $59,091 while the B.C ratio is 15.38. The Port Tobacco
Project cost benefit analysis shows that it’s a sustainable project whose B-C ratio of 15.38 and its
NPV is also positive. The NPV and the PV discount rate has being taken as 10% (percent) which
is the average for the state of Maryland in 2013. (Boardman, 2006) Projects whose NPVs are
negative should be rejected as they are not economical as they unsustainable. (Weimer and
Vining, 2005)
- Cost benefit analysis determines the viabilities of such projects and the level of financial
stability that may be expected. Projects with low BC ratio can improve the Pareto efficiency if
the NPV value is positive. While the analysis and appraisal of all the present and also the future
benefits or costs may be an uphill task, the analysis provides a balanced and a reasonable
Public Finance Proposal Part I: Cost-Benefit Analysis 3
estimate for the best alternative while also taking into account the economic theories of
efficiency while considering also the social welfare and other impact on the stakeholders. (Rosen
and Gayer, 2010)
The opportunity cost for the transfer of the 149 acres of prime forest land to the Port Tobacco
Project in Charles County that could otherwise would have been utilized for the development of
housing units or other industrial projects. Instead the land has been set aside for the
establishment of the recreation park and also the protection of the river.
The other economic theories that could affect the cost benefit analysis also affect taxation and
which also affect the conditions that are directly related to the economic effects of income and
other concepts of substitution. Taxation reduces the disposal income for most consumers which
also affect the purchasing power. Recreational facilities are mostly considered as luxuries that
are affected negatively when income per household reduces. For example, if there is an
increment of 25% in taxation then leisure activities will also reduce by that much.
The effect of the tax on the park’s earnings cannot be predicted theoretically as the tax reduces
the leisure’s consumer prices in the long run as the forces of supply and demand take effect.
- Economic theories of pricing, income and substitution effect have certainly affected the cost
benefit analysis as they form the basis of the costs and the benefits involved. The theories of
economics provide the tradeoff between the various capital expenses and the various benefits of
each option.
Evaluation of possible sources of revenue and their applicability to infrastructure’s development
Public-Private Partners
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Public-private partners mostly team up in long-term financial contracts for financing the
construction and maintenance of public utilities. Private finance initiative is a creation of the
Public-private partnership to finance the construction of public infrastructure with private capital.
Public Finance Initiative (PFI) has been adopted in many countries mostly in the commonwealth
and parts of Europe. It’s considered as a wider part of neoliberal programme that facilitates the
privatization, accountability and efficiency in public spending. The Public Private Partnership
(PPP) draws its financing from the private sector debt or loan and equity that are underwritten
mainly by the public in order to deliver public services such as the public parks and other
recreational services. (Barlow, Roehrich and Wright, 2013)
Before the global financial crisis that occurred between the years 2007 and 2010, large public
private sponsored contracts such as the ones funded by the PFI were mostly financed through
bonds or through senior debts. After the year 2010 most projects are funded by senior debts that
are obtained directly from the banks. These debts are generally more expensive than bonds as the
banks consider bonds more credit worthy than the senior debts. PFI projects mostly have
underestimated risks that are pronounced mostly during the construction phases and the banks
prefer charging more that what the bonds would actually cost.
Most PPPs are financed by banks during the construction stage and later by bonds that have
cheaper financial costs for longer periods especially during maintenance periods. Banks that
provide funds for PFI projects under the PPPs are paid by consortiums that get funding from
governments as the project progresses or during the projects life span.
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Financing from the PPP sector is considered as the most ideal for projects that provide public
services as the PFIs are considered low risks projects for they are unlikely to default on
payments.
Nonprofits
Non profit funding for public utilities may be feasible where the taxes due are generated to fund
the public utilities such as parks, roads or even health and educational institutions. Nonprofit
organizations may donate or agree to fund cost of tax funded public utilities.
Bond issuance
Bonds are instruments that acknowledge indebtness to the holders of the bonds by the issuers.
Bonds are a form of debt security that attracts interest which depends on the bond’s terms. The
interests on bonds are payable at intervals that are fixed which can be semiannual, annual or even
monthly. Bonds are negotiable and they are a form of a loan to the issuers. They provide external
financing to long term investments. Bonds provide different types of rates for example fixed rate
bonds have a constant coupon which remains the same throughout the bond’s life. Floating rate
notes have coupons that are variable and which may be linked to reference rates like Euribor or
LIBOR. The other type of bond is the Zero Coupon which attracts no regular interests but the
issuer is bound to pay all the amounts due on redemption of the bond like the Series E saving
bonds that are issued by the US government. (Clifford, 2008)
Financing of the park can be done through the sale of bonds to finance the project but it may be
expensive to finance the whole project through the issuance of bonds as the project a log duration
of time before it’s completed.
Multilevel government financing
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The funding from county governments to capital projects should also be considered. Multi level
financing are viable as they also supplement their costs with actual subsidies from their own
respective municipal or county governments. The use of hired labor, material transportation and
purchase of public land for construction of public utilities like parks can be fully subsidized from
the county government. Multilevel government financing is also a viable option that can be
utilized to finance the parks project. However the federal government has to liaise with the
national government to facilitate the financing of the project.
Effects of taxation
Non profit funding for public utilities may be feasible where the taxes due are generated to fund
the public utilities such as parks, roads or even health and educational institutions. Nonprofit
organizations may donate or agree to fund cost of tax funded public utilities. Payments that have
been made in lieu of the taxes to be collected from sources that are not guaranteed or reliable and
which their obligations or commitments to fund projects are not legally enforceable hence they
are not a reliable or viable sources of funds for long term public projects like the development of
parks or other public utilities. (Rosen and Gayer, 2010) Tax increment financing or TIF are used
as methods of public financing that subsidize development of community projects in the US. TIF
generates additional revenues but they have been discontinued in the initial states that introduced
them in the market. (Various, 2001)
Finally, the various sources of funds may be available but the most economical, reliable and
whose terms are most flexible should be considered. The other alternatives can only be
considered if the first alternative fails. The PPPs form the best alternative to raise financing
through the PFI programs as they are reliable, affordable and they have low risks status.
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References
Barlow, J., Roehrich, J.K. and Wright, S. (2013). Europe Sees Mixed Results From Public-
Private Partnerships For Building And Managing Health Care Facilities And Services.
Boardman, N. E. (2006). Cost-benefit Analysis: Concepts and Practice (3rd Ed.). Upper Saddle
River, NJ: Prentice Hall.
Clifford, W. S. (2008) Bonds, In David R. Henderson (Ed.) Concise Encyclopedia of Economics
(2nd Ed.) Indianapolis: Library of Economics and Liberty .
Ferrara, A. (2010). Cost-Benefit Analysis of Multi-Level Government: The Case of EU Cohesion
Policy and US Federal Investment Policies. London and New York: Routledge.
Rosen, H.S. and T. Gayer (2010). Public Finance, Ninth Edition. McGraw-Hill Irwin, New York
Public Finance Proposal Part I: Cost-Benefit Analysis 8
Various, J. (2001). Tax Increment Financing and Economic Development, Uses, Structures and
Impact. Edited by Craig L. Johnson and Joyce Y. Man. State University of New York
Press.
Weimer, D. and Vining, A. (2005). Policy Analysis: Concepts and Practice (Fourth Ed.). Upper
Saddle River, NJ: Pearson Prentice Hall.
