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A spreadsheet for benefit-cost analysis.

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.


* increased revenues and fees; facility

specific revenues and fees; taxes from

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

and economies of scale.


* 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. The landfill is operated by the county as an enterprise fund and has no outstanding bonded indebtedness.

The city contracts with private haulers for twice-weekly collection and hauling to the county landfill, paying the haulers $6 million annually for collection and disposal. City residents are not billed separately for waste collection; rather, the city pays the private haulers out of its general fund revenues.

The county charges all haulers a $10/ton tipping fee at the landfill. The existing landfill has four years of capacity left. Costs for closure of the existing landfill are estimated to be $1.5 million. Costs for siting and opening the new landfill are estimated to be $8 million.

Proposed Structure and Characteristics of Public-Private Venture. A private entrepreneur has made the following proposal: The enterpreneur will design, locate, build and operate a solid waste composting facility to receive organic wastes currently being disposed at the county landfill. The entrepreneur estimates that 25 percent of wastes (by volume) currently going into the county landfill are compostable. The cost of siting and constructing the compost facility is estimated to be $2.5 million, including land. The enterpreneur anticipates charging $15/ton for wastes received by the compost facility. The compost facility will extend the life of the present landfill by one year. The 30-year life of the new landfill would be extended by 10 years.

The private haulers estimate they would have to charge an additional $1.5 million for municipal customers, and $2 million for nonmunicipal customers, for weekly curbside collection of compostable materials.

The entrepreneur proposes that the county own and finance the facility using a tax-exempt facility bond. The entrepreneur would manage and operate the facility through a lease-operator agreement with the county.

The financial profile of the new landfill, both with and without the proposed compost facility, is shown in Exhibit 1. This example shows that composting is not less expensive on a cost-per-ton basis than the present landfill operation. Nor is composting less costly on a cost-per-ton basis than the new landfill would be. While this is not necessarily true of all composting operations, this example illustrates that environmentally preferable disposal alternatives may evidence higher costs to residents and businesses. Among the explanations as to why solid waste operations are susceptible to higher costs are regulatory requirements, lack of economies of scale for smaller operations, high land and permitting costs, lack of reliable markets for the end product and the risk premium associated with new technologies.

The Benefit-Cost Spreadsheet. Based on the above financial data, it is possible to construct a spreadsheet to analyze the benefits and costs to the county and its taxpayers. The time period selected for the analysis was 40 years, as this was the extent of time over which the benefits and costs would occur. The spreadsheet consists of three linked worksheets.

Worksheet I, depicted in Exhibit 2, itemizes the benefits associated with the compost facility, consisting of revenues and avoided costs.

Column I-1 consists of the lease revenues paid to the county by the operator in the amount of $475,000 annually. Lease payments are expected to increase 3 percent every five years.

Column 1-2 represents one year of avoided costs of the new landfill as a result of extending the life of the existing landfill by one year. These avoided costs consist of one year of interest earnings on the replacement reserves plus one year of interest earnings on debt service associated with the new landfill.

Column 1-3 represents avoided costs associated with the extended life of the new landfill in years 30 to 40, which are calculated similarly to the earlier one-year avoided costs.

Column 1-4 represents a savings of 25 percent in operating costs of the new landfill. These savings are a result of the lower volume of waste that would be handled by the new landfill upon diversion to the compost facility. Avoided operating costs are assumed to increase 3 percent annually.

The benefits are summed by row for each year in column 1.5 and discounted in column 1.6. Column 1-7 represents the net present value of the stream of benefits flowing to the county over the 40-year period calculated at a discount rate of 5 percent.

Worksheet II (see Exhibit 2) itemizes the costs associated with the compost facility. Column II-1 consists of the annual debt service of compost facility. Debt service is assumed to be level and is calculated at 7 percent over 20 years.

Column II-2 represents the county's additional debt issuance costs estimated at 1.5 percent of the cost of the compost facility. (Note: it is assumed that the compost facility debt would be rolled into the debt for the new landfill, thereby reducing the issuance costs associated with the compost facility debt to only 1.5 percent of the additional principal.) Additional costs associated with the county's oversight and administration of the project are estimated at $15,000, increasing 1 percent annually.

Column II-3 sums the costs for each year and column II-4 represents the discounted value. column II-5 shows the net present value of the costs over the 40-year facility analysis period.

While the county's costs consist of issuance, debt service and administration, additional costs will be incurred by the county's residents and taxpayers in the form of higher tipping fees and collection costs. These are accounted for in columns II-6 and II-7.

Column II-8 displays the discounted value, and column II-9, the net present value of the additional costs borne by county residents and taxpayers. These represent external costs which do not appear on the county's balance sheet as they are not part of the county's budget. As such, they are identified as "Noncounty Costs" and are treated separately.


Worksheet III provides the combined results of worksheets I and II by subtracting the identified costs from the benefits. The results are presented in two forms: net benefits or costs, and the benefit-cost ration. A positive dollar figure represents net benefits. Negative figures represent net costs. When benefits exceed costs (producing a "favorable" benefit: cost ratio), the ratio is calculated by dividing the benefits by the costs. When costs exceed benefits (producing an "unfavorable" benefit: cost ratio), costs are divided by benefits.

Column III-1 shows the county's annual benefits less costs, and column III-2 shows the discounted value thereof. (For example, column III-2 is the result of column 1-6 minus column II-4.) Over the 40-year analysis period, the project would produce a net of $12,404 in benefits (net present value) to the county as shown in column III-3. Since benefits are greater than costs the project is shown to produce a favorable county benefit cost ratio of $4 54: 1.00 ($15,912,390) / $3,508,343 = $4.54), which can be stated as four dollars and fifty-four cents in benefits for every one dollar in costs.

Column III-5 and 7 address the wider issue of costs to the public at large. These columns display the current, discounted and net present value of the higher tipping fees and collection costs paid by county and city residents and taxpayers.

Column III-8, combines the net county and noncounty benefits and costs. Column III-9 shows the discounted value and column III-10 the net present value thereof. When noncounty costs' are included, the project results in costs exceeding benefits by $61,184,546 over the 40-year analysis period. While this figure may at first seem large, it is put in perspective by converting it to an annual amount per household. Assuming households generate and pay for 75 percent of the county's waste stream, it amounts to only $11.47 annually for each of the 100.000 households in the county.

Column III-11 displays the project's overall benefit-cost ration of $1.00: 4.85 (inclusive of noncounty costs). This figure is obtained by dividing the sum of county and noncounty costs from worksheet II, columns 5 and 9, respectively by total county benefits from worksheet U, column 7 ($3,508,343 plus 573,588,592 divided by $15,912,390).


While this particular project results in mixed benefit-cost rations, it does not necessarily follow that the project should not be undertaken. Governments often undertake projects and programs which, when measured by standard benefit-cost analysis result in unfavorable benefit: cost ratios. Indeed, this is one of the functions of government - to undertake projects not likely to be accomplished by the private sector, but which are in the public interest. Benefit-cost analysis allows decision makers and the public the opportunity to answer the question "Is it worth it?" by providing a monetary benchmark against which the exercise of public choice and public investment can be made.

In the example cited above, the community did engage in the project, although in a somewhat modified form. The reason it chose to do so was the public support shown for the facility despite the modest increase in costs associated with it. This points out the primary limitation of benefit-cost analysis - its inability to account for intangible and nonmonetary concerns. Since the decision was made to proceed with the project, the public perceived that it would receive approximately $11.50 annually per household in nonmonetary or monetarily uncertain benefits. These might be the satisfaction of knowing that the community was making an ecologically preferred choice by expressing its commitment to recycling, or, as a demonstration of the community's willingness to invest in technology which may provide a monetary return in the future.
 Exhibit 1
 Current Landfill Profile
Annual tonnage 200.000
Tipping fee per ton $10.00
Tipping fee revenue $2,000,000
Total households in county 100.000
Total households in city 50,000
 New Landfill With Composting Option
Annual tonnage 150,000
Operating costs & coverage $1,000,000
Debt service, coverage, reserves $1,222,227
Revenue requirement $2,222.227
Tipping fee per ton -
 with composing $14.81
 without composing $12.36
Capital costs and debt service -
 Closure $1,500,000
 New landfill $8,000,000
 Total capital requirement $9,500,000
Funds on-hand $1,500,000
Amount to be financed $8,000,000
Projected debt service $814,818
 Composting Operation Profile
Annual tonnage 50.000
Proposed tipping fee per ton $15.00
Projected tipping fee revenue $750.000
Projected compost sales $400.000
Total compost operation revenue $1,150.000
Operating costs and operator fee $550,000
Maintenance, replacement and
 reserves $125,000
Lease payment to county $475.000
Composting facility capital cost $2,500.000
 Projected debt service $ 254,631
Author Michael L Siege is assistant director of
GFOA's Government Finance Research Center where
be specializes in environment finance, fiscal impact
analysis and community development. He is currently
assisting the U.S. Environmental Protection Agency in
its public-private partnership initiatives.
COPYRIGHT 1991 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Siegal, Michael L.
Publication:Government Finance Review
Date:Dec 1, 1991
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