Engineerin Economics Chapter (Eng. Eco) 013

7/29/2019 Engineerin Economics Chapter (Eng. Eco) 013

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ByMuhammad Shahid Iqbal

Module No. 13

Evaluation of Public alternatives

Engineering

Economics

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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 andpartnerships); stocks and corporate bonds (forcorporations)

Public Projects -- Direct taxes, Low, no-interest or private

loans, bonds, subsidies


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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



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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 vsenvironmental 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



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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

Benefits, Costs, And Disbenefits


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The benefits may occur at different time periods.

For the purpose of comparison these are converted in tocommon time base.

Present worth

Future worth Annual equivalent

Similarly the costs consists of initial cost and yearly operationand maintenance cost. These are converted to a common time

base as done in the equivalent benefit.

The ratio between equivalent benefit and equivalent cost isknown as the Benefit Cost Ratio

If this ratio is at least one, the public activity is justifiedotherwise it is not justified.

Benefit / Cost Ratio Method


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Conventional Benefit / Cost (B/C) Ratio WithPresent 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

Engineerin Economics Chapter (Eng. Eco) 013

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