Economic Analysis in the

Public Sector
MSREE
Lecture 13
Amrit Nakarmi
Energy Financial Management
25 Feb 2020

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Benefit –Cost Analysis
The objective of private investment is to increase the
net worth of the company
In the public sector, government spend a lot of money
on projects such as education, health, infrastructure –
road construction, airport construction, water
pipeline, irrigation systems, and hydropower plants
etc.

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Benefit –Cost Analysis
Benefit –cost Analysis is a decision-making tool for
systematically developing useful information about
desirable or undesirable effects of a public project.
Benefit-cost Analysis tries to determine whether the
social benefits are greater than social costs.

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Benefit –Cost Analysis
There are three types of benefit –cost Analysis
To maximize benefits over any costs
To maximize net benefits when benefits and costs vary
To minimize costs to get a certain level of benefits

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Framework of Benefit –cost Analysis
Identify users’ benefits from the projects
Quantify, as much as possible, benefits in Rupee
term
Identify sponsors’ costs
Quantify, as much as possible, social costs in
Rupee term
Determine the equivalent benefits and costs at the
base period using social interest rate
Accept the project if the equivalent users’ benefits
exceed the sponsors’ costs
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Social Benefits
Benefits due to reduction of deaths
Benefits due to reduction of damage to property
Primary users’ disbenefits (need to be deducted)

B =B1 + B2- DB

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Social Costs
Primary sponsors’ costs
Primary sponsors’ savings ( need to be deducted)

C =C1 + C2- S

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Benefit –Cost Ratio
We need to consider social benefits and costs of
primary effects and secondary effects

B – C should be positive

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Benefit –Cost Ratio
If B and C are the present values of benefits and costs,
then
B =Σ Bn (1+i)-n
C = Σ Cn (1+i)-n
The sponsors’ costs consist of the equivalent capital (I)
and equivalent annual operating costs (C’), then

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Benefit –Cost Ratio
I =Σ cn (1+i)-n
C’ =Σ Cn (1+I)-n
Here, C =I+C’
BC(i) = B/C= B/(1+C’)>1
An alternative measure,
net B/C =(B –C’)/I>1, where I>0

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Incremental Analysis
For selecting public projects from mutually exclusive
projects, we must do incremental analysis.
Computing the incremental differences for each of B,
I, and C
ΔB =Bk – Bj
ΔI =Ik – Ij
ΔC =Ck – Cj

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Incremental Analysis
ΔBC (i)k-j = ΔB/(ΔI+ ΔC) >1, then select project ‘k’
If ΔI+ ΔC =0, we cannot use this formula

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ENPV & EIRR
For economic analysis
Economic NPV (ENPV)>=0
Economic IRR (EIRR)>=0

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Levelized cost of electricity (LCOE)

Where
Lcoe levelized cost of electricity in NR/kWh
Capex Capital cost (expenditure) in NR
Opex Annual Operating and maintenance cost
(expenditure) in NR
R Discount rate
Ei Electricity generated in year ‘ i’ (kWh)
N Service life of the plant in years