Engineering Economic Analysis

490 ECONOMIC ANALYSISIN THE PUBLIC SECTOR

So far wehaveconsideredeconomic analysis for companiesin the private sector, where

the main objectives are to generateprofits for growth and to reward current stockholders.

Investment decisions for private-sector companies involve evaluating the costs at:J.dbene-

fits associatedwith prospectiveprojectsin termsof life-cyclecashflowstreams.In earlier

chapterswe developed several methodsfor calculating measures-of-meritand making de-

cisions. Public organizations, such as federal, state, and local governments, port authori-

ties, school districts, and government agencies also make investment decisions. Fo! these

decision-making bodies, economic analysis is complicated by several factors that do not

affect companies in the private sector. These factors include the overall purpose of invest-

ment, project financing sources, expected project duration, effects of politics, beneficiaries

of investment, and the multipurpose nature of investments. The overall mission in the public

sector is the same as that in the private sector-to make prudent investment decisions that

promote the overall objectives of the organization.

Investment Objective 16 ECONOMIC ANALYSIS IN THE PUBLIC SECTOR

benefit-cost (B/C) ratio. This measure is calculated as a ratio of the equivalent worth

of the benefits of investment in a project to the equivalent worth of costs.If the BICratio

isgreater than1.0,the project under evaluation is accepted; if not, it is rejected. TheB/C

ratio is used to evaluate both single investments and sets of mutually exclusive projects

(where the incremental B/C ratio is used). The uncertainties of quantifying cash flows,

long project lives, and low interest rates all tend to lessen the degree of reliability of the

B/C ratio. There are two versions of theB/C ratio:conventional andmodified.Both pro-

vide consistent recommendations to decision makers for single investment decisionsand

fordecisions involving sets of mutually exclusive alternatives.Nevertheless,the BICratio

is a widely used and accepted measure in government economic analysis and decision

making.

INVESTMENT OBJECTIVE

Organizationsexist to promote the overall goals of those they serve. In private-sectorcom-

panies, investment decisions are based on increasing the wealth and economic stability of

the organization.Beneficiariesof investmentsgenerally are clearly identified as the owners

and/or stockholders of the company...

In the public sector, the purpose of investment decisions is sometimes ambiguous. For

people in the United States of America, the Preamble to the Constitution establishes the

overall theme or objective for why the public body exists:

We the People of the United States, in order to form a more perfect Union, establish

justice, insure domestic tranquillity, provide for the common defense,promote the

general welfare[italics supplied], and secure the blessings of liberty to ourselves and

our posterity, do ordain and establish this Constitution for the United States of America.

The catch phrasepromote the general welfareserves as a guideline for public decision

making. But what does this phrase mean? At best it is a general guideline, at worst it is

a vague slogan that can be used to justify any action. Projects one segment of the citi-

zenry deems to be useful and necessary may not be so viewed by other groups of citizens.