A Spreadsheet for Benefit-Cost Analysis

By Siegal, Michael L. | Government Finance Review, December 1991 | Go to article overview

A Spreadsheet for Benefit-Cost Analysis


Siegal, Michael L., Government Finance Review


Government officials are increasingly being called upon to participate in venture arrangements with the private sector. This trend is particularly evident in the area of solid waste resource recovery. While the type and amount of participation is highly variable in each of these arrangements, their financial, budgetary and economic aspects can be evaluated through the use of public-sector benefit-cost analysis.

Public-Sector Benefit-Cost Analysis

Benefit-cost analysis can be applied on a system or project basis. In evaluation of public-private ventures, a local government's analysis focuses on the public side of the arrangement.

The first task in conducting a benefit-cost analysis is to identify the entity or group for which a project's benefits and costs are to be analyzed. This may be one or more public entities, or the taxpayers. Benefits and costs tend to be directional - they flow to specific agencies, groups or individuals. One person's or entity's cost may be another's benefit.

Benefits and costs may be incurred by other than the public-sector agency. One obvious example is the fee or profit to be made by the private operator. This will be a cost to either the public entity or the ratepayers, yet it is a benefit to the private operator. Less obvious is the distinction between the flow of benefits and costs to the public-sector entity and its citizens (the ratepayers).

Externalization of costs may occur when other public or private-sector entities pass along costs to their customers. Some costs may be external to the public entity's revenues and expenditures (i.e., they do not appear on its budget), but may be incurred by the ratepayers in the form of higher fees or taxes paid to private operators or other public entities. While externalized costs and benefits may not flow to the public entity in every instance, one must be aware of them incorporate them into the benefit-cost analysis when possible, and describe them they do not lend themselves to quantification.

The next task is to identify the full range of public-sector benefits and costs, and the period of time over which they are to be evaluated. A typical benefit-cost analysis includes the following items; this list is, however, not exclusive.

Benefits:

* increased revenues and fees; facility

specific revenues and fees; taxes from

real property and leasehold improvements; * avoided costs; efficiency improvements;

and economies of scale.

Costs:

* increased borrowing costs; * return on private equity; * monitoring, administration and bid

requirements; * operator and management fees; * diseconomies of scale; * insurance; * additional reserve requirements; * downstream facility repurchase or

refinancing requirements.

A final consideration related to cost, not always amenable to inclusion in a standard benefit-cost analysis, is risk. Although it can be argued that risk is included as a cost in some of the components listed above (increased borrowing costs, insurance and reserve requirements), some elements of risk may not be included. For instance, while the risk of failure may be somewhat mitigated through bond insurance, it is the bondholders who are so insured, not the public entity. In the event of failure, it would continue to be incumbent on the public entity to operate the facility or provide the service through some other means.

Analysis of a Composing Facility

The following example of a proposed public-private arrangement involving a solid waste composting facility is used to illustrate a spreadsheet-based application of public-sector benefit-cost analysis.

St. John's County owns and operates a solid waste landfill which receives residential and commercial wastes from the county and one large city located in the county. The city generates approximately 75 percent of the wastes going into the landfill.

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