Project Appraisal in the Private &

public Sector

04/30/2021 Bahiru Bewket, Ph.D.

 Private versus Public Project
Parameter Private Project Public Project
Purpose Financial Social
Funding Debt and Equity Taxes, Tax Free Bonds, Low
Market interest loans.
Multipurpose Some Most
Project life Shorter Longer
Benefits Financial Financial, Social, Economic,
Aesthetic
Conflict Moderate Common and High
Politics Little-Moderate High
Measure of NPV,IRR,ROI Very Difficult
efficiency

04/30/2021 Bahiru Bewket, Ph.D.

 Project Appraisal in the Private Sector

Analysis focuses on financial issues

Costs are generally well understood for any kind of an expansion

to an existing system (but new technology may require analysis)

Construction, equipment, operations, and maintenance

04/30/2021 Bahiru Bewket, Ph.D.

 Project Appraisal in the Public Sector

Public sector projects are much more complex

Cash flows from the project will be insufficient to justify the
investment .
A high portion of the direct benefits will be in the form of
reduced travel time or increased travel volumes.
Impacts on development and employment may be major goals
of the project, not merely indirect benefits.

04/30/2021 Bahiru Bewket, Ph.D.

 Project Appraisal in the Public Sector

Decision-makers are elected officials who respond directly to

public concerns about externalities.

Equity, aesthetics, etc are important public concerns.

Public sector transportation projects compete with housing,

education, defence, and other public concerns - much broader

competition for funds than in a private company.

04/30/2021 Bahiru Bewket, Ph.D.

 Direct Benefit Estimation
In private CBA, it usually relatively easy to perform because prices
are readily observed.
Prices are socially biased due to externality, public good, or market
power considerations.
This problem is particularly apparent for non-use values which
tend to be more intangible.
Intangible = cannot be valued
If intangibles remain in analysis, then NPV and BCR are incomplete.

04/30/2021 Bahiru Bewket, Ph.D.

 Indirect (Secondary) Benefits

We have all heard public projects and policies being touted for their
employment and income generating effects.
In a full employment economy, however, these inputs were necessarily
reallocated away from other productive uses.

04/30/2021 Bahiru Bewket, Ph.D.

 Benefit/Cost Ratio: simply put it is the financial value of the
benefit divided by the financial cost.
$Benefit
$Cost

Cost Benefit Analysis(CBA)

CBA is a comparison of social cost and social benefit in monetary

terms.
Benefits and costs are often expressed in money terms, and are
adjusted for the time value of money, so that all flows of benefits
and flows of project costs over time

04/30/2021 Bahiru Bewket, Ph.D.

 What is needed to perform a Life-Cycle Cost- Benefit Analysis
of Infrastructures?

• Engineering knowledge

• Economic understanding

• Mathematical experience

04/30/2021 Bahiru Bewket, Ph.D.

 Cost/Benefit Analysis

Benefit Measurement Methods Mathematical Models

•Comparative Approaches
•Linear Programming
•Scoring Models
•Non Linear Programming
•Benefit Contribution
•Dynamic Programming
•Economic Models
•Multi-objective Programming
PBP
NPV
IRR

04/30/2021 Bahiru Bewket, Ph.D.

 Traditional Formulations

Expected Advantage = Expected Benefits - Expected Costs

E[A]  E[B] (E[Cinitial]  E[Cmanagement

]  E[Cfailure]  E[Cuser])

User costs are in most cases the dominating factor.

E[ A]  E[ B]  E[Cuser ]

Benefit/cost calculations can be very difficult when non-

financial factors are dominant!

04/30/2021 Bahiru Bewket, Ph.D.

 CBA is most commonly used for public decisions– policy
proposals, programs, and projects, e.g., dams, bridges, traffic
circles, libraries, and anything else the government might fund.
CBA can be used to rank alternative projects as well as evaluating
the social value of one particular project.
We measure benefits in terms of Willingness to Pay (WTP)

04/30/2021 Bahiru Bewket, Ph.D.

 Overall Appraisal of CBA
Pros:
help prevent bad decisions which would otherwise be
undiscovered
counters rent-seeking (which might normally be successful in
the political process).
Cons:
intangible
BC analysts and information sources are often biased
distributional Issues occasionally objectionable

04/30/2021 Bahiru Bewket, Ph.D.