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  • Print publication year: 2018
  • Online publication date: December 2018

9 - Economic Evaluation of Public Sector Projects

Summary

INTRODUCTION

The projects that are owned, used and financed by the government (and hence the citizens) are classified as public sector projects. The primary purpose of such projects is to provide services to the people at no profit. Examples of projects related to public sector include hospitals and clinics, educational institutions, transportation, police and fire service, public housing, postal services, etc. It has been observed that such projects often require large initial investments, possibly distributed over several years. Public sector projects do not yield direct profit, but they require huge investments that are paid by the appropriate government unit. The successful implementation of the public sector projects provides benefits to the citizens. It is found that certain undesirable consequences, for example impact on environment, are often associated with the public sector projects. Therefore, the economic analysis of such projects must not only consider these negative consequences but also should quantify them with great accuracy. To perform an economic analysis of public sector projects, the costs (initial and annual), the benefits, and the disbenefits, if considered, must be estimated as accurately as possible in monetary units.

Costs refer to the estimated expenditures to the government body for construction, operation and maintenance of the project, less any expected salvage value.

Benefits refer to the advantages expected by the owners, i.e., the public.

Disbenefits refer to any expected undesirable consequences to the owners if the project is implemented.

Economic analysis of public sector projects is different from those of private sector projects. For public sector projects, the initial costs are usually large, the expected life is long and the sources for capital are usually a combination of taxes levied on the citizens, user fees, bond issues and private lenders. It is very difficult to make accurate estimates of benefits and disbenefits for a public sector project. The interest rates for the public sector are lower than those for private sector. The methods that are used to perform economic analysis of public sector projects are discussed in the following sections.

BENEFIT/COST ANALYSIS OF A SINGLE PROJECT

The benefit/cost (B/C) ratio is a fundamental analysis method for public sector projects. In this method, all costs and benefits estimates are converted to a common equivalent monetary unit (P.W., A.W., or F.W.) at the given interest rate.