Engineering Economic Analysis

Other Effects of Public Projects -

OTHER EFFECTSOF PUBLIC PROJECTS

,Three areas remain that merit discussion in describing the differences between government

and nongovernment economic analysis: (1) financing government versus nongovernment

projects, (2) the typical length of government versus nongovernment project lives, and

(3) the general effects of politics on economic analysis.

Project Duration

Governmentaland nongovernmentorganizationsdiffer in the way investmentsin equipment,

facilities, and other projects are financed.In general, nongovernment firms rely on monies

from individual investors (through stock and bond issuance), private lenders, and retained

earnings from operations. These sources serve as the pool from which investmentdollars for

projects come. Management'sjob in the nongovernmentfirm is to match financialresources

with projects in a way that keeps the firm growing, produces an efficient and productive

environment, and continues to attract investors and future lenders of capital.

On the other hand, the government sector often uses taxation and municipal bond

issuance as the source of investment capital. In government, taxation and revenue from

operations is adequate to finance only modest projects. However,public projects tend to be

large in scale (roadways, bridges, etc.), which means that for many public projects 100%

of the investment costs must be borrowed-unlike those in the private sector. To prevent

excessive public borrowing and to assure timely debt repayment, the U.S. government,

through constitutional and legislativechannels, has placed restrictions on governmentdebt.

These restrictions include the following:

1.Local government bodies are limited in their borrowing to a specified percentage

of the assessed value of the property in their taxation district. This means that

governmententities in areas with high property values can borrowmore total monies

than those in areas where assessed values are lower.

2. For new construction, borrowed funds attained through the sale of bonds require the
   approval of local voters (sometimes by a two-thirds majority) through the election
   process. An example might be a $2 million levy to fund a new municipaljail. If ap-
   proved by voters, a $2 million increase would raise the property taxes of landowners
   in the city's tax district by $2 for every $1000 of assessed property value. These
   additional tax revenues would then be used to retire the debt on the bonds sold to
   finance the city jail project.


3. Repayment of public debt must be made in a preset period of time and in accordance
   with a specific plan. This is often the case with monies borrowed by issuing bonds,
   since bond interest payments and maturity dates are set at the time of issuance.

Limitations on the use and sources of borrowed monies make funding projects in the

public sector much different from this process in the private sector. Private-sectorfirms are

seldom able to borrow 100% of required funds for projects, as can be done in the public

sector, but at the same time, private entities do not face restrictions on debt retirement or

the uncertainty of voter approval.

I

~

l

-.