This document discusses how to evaluate public projects and activities using cost-benefit analysis. It provides definitions of public activities and authorities. It classifies public activities into protection, enlightenment & cultural development, and economic benefits. It then describes how to conduct a cost-benefit analysis, including enumerating and quantifying costs and benefits, choosing a discount rate, calculating the benefit-cost ratio, and comparing mutually exclusive projects. The key steps involve identifying and valuing monetary and non-monetary costs and benefits over the project lifetime, discounting future cash flows, and determining if total benefits exceed total costs.

1. EVALUATION OF PUBLIC
ACTIVITIES/PROJECTS
BY
Prof. N. N. Panda
GIACR ENGG. COLLEGE, RAYAGADA

2. By public activities we mean the
projects undertaken by the public
authorities for investment to increase
the general welfare of the citizens.
Public activities are measured in terms
of public welfare instead of money.
Public authorities include Central
Govt., State Govt., and Local Self Govt.,
like municipalities etc.

3. Public activities may be classified under
the general headings of protection,
enlightenment & cultural development, and
economic benefits.
Protection includes the activities such as the military
establishments, police forces, flood control, and
welfare & health services
Enlightenment & cultural development includes
activities like the public school system, public
libraries, postal service, and Govt. supported research
&development programmes, etc.
Economic benefits include harbors and canals, power
development, research and development etc.

4. It should be noted that evaluations
of public activities in terms of the
general welfare encompass both the
benefits to be received from and the
cost of the proposed activity. In fact,
cost-benefit analysis is a decision
making tool to evaluate the
economic desirability of public
activity.

5. Cost-Benefit Analysis (CBA)
Cost-benefit analysis is a methodology
developed for evaluating investment
projects from social point of view. In the
control of planned economics CBA helps
in evaluating individual projects within
the planning framework, which spells
out national economic objective and
broad allocation of resources to various
sectors.

6. The cost-benefit analysis can be used to
evaluate a single public investment project as
well as to evaluate mutually exclusive projects
also. The procedure of evaluation is outlined
below –
A)
Identification of cost and benefits
(Enumeration of cost and benefits).
B)
Evaluation of the cost and benefits
(Quantification of the cost and benefits).
C)
Choice of interest rate for discounting and
period of analysis.
D)
Criteria for investment comparability
(Benefit-Cost Ratio)
E)
Conclusions.

7. Enumeration of Benefits
Benefits are advantages, expressed
in terms of money, which will
happen to the nation. These
projects are said to be profitable
whose contribution to nation output
is greater than those with a smaller
contribution. Benefits may be any of
the following –

8. 1) Primary and Secondary Benefits
2) Stemming & Induced Benefits
3) Tangible and Intangible
Benefits

9. Enumeration of Cost
Cost is the anticipated expenditures
for construction, operation,
maintenance, etc. less any salvage
value.
1) Fixed & Variable Cost
2) Direct & Indirect Cost
3) Associated Cost

10. Quantification of the Cost and Benefits
After enumeration of costs and benefits,
the next step is their quantification and
evaluation. In this exercise all relevant
items should be considered one by one
and valued under as a common
denominator. This common denominator
can be the nation currency or some
international currency in the case of
international projects.

11. Choice of Discount Rate
The rate at which future benefits must
be discounted to make them
comparable with present benefits is
called discount rate. There are so many
discount rates given by the
economists, however there is a great
controversy regarding the choice of
discount rate.

12. However, a general discount
rate is normally adopted while
evaluating the public projects is
called social discount rate. This
rate has been defined as the
rate, which is used to evaluate
the public projects.

13. Criteria for investment comparability OR
Benefit-Cost Ratio
The benefit-cost ratio is a relationship
between the relevant benefits and costs. The
ratio is given by Benefit-Cost Ratio = Relevant Benefits /
Relevant Costs
If this ratio is at least one, i.e., the equivalent
benefits are greater than the costs, the public
activity is justified.

14. But the benefits may occur at different
time periods of the activity. For the
purpose of comparison, these are to be
converted in to a common time base
(Present or Future Worth). Similarly the
cost also includes the initial investment
and the annual maintenance & operation
cost. These are to be also converted to a
common time base by using the interest
factors.

15. This redefinition gives –
B/C Ratio = Benefits / Initial Investment
+ Annual Cost
If the B/C Ratio is greater than one, then
accept the project.
If the B/C Ratio is less than one, then
reject the project.
If the B/C Ratio is equal to one, then
remain indifferent.

16. It is important to note that benefit-cost ratio
can be computed on the basis of present
worth, future worth of annual equivalent cost
also.
B/C Ratio =Present Worth of Benefits / Initial
Investment +Present Worth of Annual Cost
(If calculated on the basis of Present Worth)
B/C Ratio =Future Worth of Benefits / Future
Worth of Initial Investment +Future Worth
Annual Cost (If calculated on the basis of
Future Worth)
B/C Ratio =AEC of Benefits /AEC of Initial
Investment / Annual Cost (If calculated on
the basis of Equivalent Cost)

17. Comparing Mutually Exclusive Public Alternatives
When using the benefit-cost ratio to compare and
evaluate mutually exclusive projects, the benefitcost ratio must be applied incrementally. The
method is given below –
1.
Check all the projects individually that the
benefit-cost ratio is greater than one ignoring the
discounting factor. If the ratio of any of them is
less than one eliminate that alternative.
2.
Arrange the remaining alternatives in the
increasing order of denominator (I+C).
3.
Compute the incremental differences for
each term (benefits, Initial Investment &Annual
Cost).

18. 4. Compute the Benefit-Cost Ratio for
the incremental investment.
B/C Ratio = Benefits / Initial Investment
+ Annual Cost
5. Compare the selected alternative
with the next one on the list by
computing the incremental cost-benefit
ratio. Continue the process until you
reach the bottom of the list. The
alternative selected during the last
pairing is the best one.

19. QuestionThe Central Govt. is planning to construct
dam with an initial investment of Rs.
50,00,000. The estimated life of the dam is
15 yrs. The annual operation and
maintenance cost is Rs. 3,00,000. The annual
savings in irrigation cost due to construction
of dam is Rs. 8,00,000 every yr. Check
whether the project is justified by using the
cost benefit method assuming a social rate of
discount of 10%.