Transcript Planning & Evaluation of Public Programs

Planning & Evaluation of Public
Programs
1
DR. SIMON HAKIM, DIRECTOR
CENTER FOR COMPETITIVE
GOVERNMENT
AND PROFESSOR OF ECONOMICS
TEMPLE UNIVERSITY
WWW.FOX.TEMPLE.EDU/CCG
[email protected]
Contents
2
 Planning Process and Definitions
 Discussion of Social Cost Benefit Analysis:




Techniques, Historical Background and
Alternatives
Theoretical Principles of Evaluating public
programs
Ferry Case Study
Costs, Benefits, and the Redistribution Objective
Arterial Roads Case Study: A Modified Delphi
Approach
Definition of Planning
3
 Planning is a continuous process of systematic (rational)
decision making through a sequence of choices about a
future action which is aimed to improve social welfare
such that long term goals are being achieved.
 Two Conditions exist:
Scarcity of resources
More than one way to achieve a goal
 Alternative definition: Planning is aimed to use the limited
resources in such a way that will enable to attain the
maximum in the goals weighted by society’s preferences.
Discussion of Planning
4
 Continuous (non-static) process: information may change through






the planning process.
A rational choice process: No personal or ideological biases
Sequence of choices: The planner identifies and describes all the
alternatives available within the conditions (or constraints) of the
situation, and in light of the ends to be obtained.
The planner identifies and evaluates the consequences which would
follow from adopting each alternative. He/she predicts how the total
situation would change by each course of action.
The planner will identify the relative weights for the ends to be
achieved
The planner selects the alternative which the probable consequences
would yield the highest net social benefits.
Efficiency versus equity
Planning Process
5
1. Identification of Problem in Light of Values
2. Decision to Get Involved in the Process
3. Deciding about the Goals
4. Detailing the Goals (objectives)
5. Identifying Subjective Weights for Goals & Objectives, and for
Constraints
6. Data Collection, Projections, and Data Analysis
7. Identifying the Relevant Alternative Plans
8. Evaluation of the Alternative Plans Considering the Social
Weights and Objective attainment of G & O: Social Cost Benefit
Analysis.
9. Deciding About the preferred Alternative
10. Improving the Preferred Alternative
Definitions
6
 A Goal: An end or horizon to which a planned course of action is directed.
It allows indefinite progression in its direction but always receding . It
represents the inspiration of individuals & households like the desired
character of the city.
 An Objective: Characterization of a goal to a specific and measurable
item.
 There could be several objectives to one goal, and a specific objective could
address more than one goal. Objectives could coincide or contradict each
other.
 Examples: Social goals could be organization of efficient and democratic
governance, standard of living, safety, security, stability, environmental
quality, shelter, education, health and welfare. Related objectives are forms
of governmental organizations; level of GDP and employment, marketable
skills of workers; supply of housing, schools, universities, hospitals;
resources for policing, reducing accidents, development of balanced
communities.
Social
Goals:
Efficient
Democratic
Governmen
t
Consump.
Of goods
and services
Shelter
Education,
Health and
Welfare
Safety,
Security
and
Stability
Access to
Opportunities
for
development
Environmental
Quality
Resource Objectives:
Govt.
Organization
Econ.
Dev.
Goods
and
Services
Housing
Schools,
hospitals,
etc.
Police,
Social
Security
Community
Structure
Public Policy
Instruments:
Public
Expenditures
Regulations
Fiscal
Instruments
7
Forceof
Govt.
Organization
Physical
Enviro.
Resources
Evaluation of Public Programs:
Social Cost-Benefit Analysis
8
 Social Cost Benefit Analysis is not a technique but an
approach. It provides a framework for project choice
using regional/national goals & objectives.
Alternatives are judged in terms of their precise
impact on the community as a whole. The objective
is to measure the efficient net attainment of the
objectives (benefits minus costs) subject to resource
constraints.
Techniques of Social Cost Benefit Analysis
9
 Cost Benefit Analysis under unified measures for all
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objectives.
Goals Achievement Matrix
Balance Sheet of Development
Cost Revenue Analysis
Check List of Criteria
Investment Appraisal
Cost Minimization
Historical Background
10
 1844 Dupuit’s Classical paper on the utility of public works.
 The Rivers & Harbors Act, 1902. Navigation improvement require
consideration of not just the costs but also the benefits.
 The “Green Book”, 1950. Overtime contribution to national income;
Discounted net receipts of costs expected to the entrepreneur invested
up to MR=MC. Maximization of profits to the public firm is equal to
Maximization of social welfare exists if:
(1)No barriers exist to the flow of funds and resources.
(2)Benefits and costs can be determined for both at competitive market
P’s
(3) No external costs and benefits.
The lack of these factors explains why for social rather than private C-B
analysis.
Feasibility Study vs. Social C-B Analysis
11
 Feasibility study: Private, direct out of pocket costs and
benefits to suppliers and consumers. All are measured in
monetary scale.
 Social C-B Analysis: Direct and indirect (external) C & B
stemming from or induced by the public investment. It should
guide public action when p’s are monopolistic or even
unavailable. The imputed prices for both C’s & B’s should reflect
real opportunity costs or competitive market prices. It provides
efficient solution with no regard to equity or distribution
consequences. However, the analysis could suggest such
consequences with no regard to their desirability.
 There are 4 types of C & B: P’s that are available in competitive
markets. P’s that are available in non-competitive terms, P’s that
are not measured in monetary terms but can be expressed in
monetary terms, and intangibles that can be expressed on
cardinal but non-monetary scale or on qualitative scales.
“Traditional” Social C-B Analysis
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 Market values of products and services all measured in
their monetary scale less the resources used for their
production or their opportunity costs.
 Calculate for each alternative the net present value of the
stream of benefits minus costs in all sectors by the
government investment.
n
Where,
DPV   ( Bi  Ci ) /(1  r )i
i 1
DPV= Discounted present value of the time stream of net benefits
Bi = Total benefits in year I
Ci = Total costs in year I
r = Discount rate
I
= year 1, …,n
“Traditional” Social C-B Analysis
n
13
n
DPV  ( Bi /(1  r )i ) /( Ci /(1  r )i )  1
 Or,
i 1
i 1
Weaknesses of using the “traditional” C-B model:
1. No consideration of intangibles. Only variables that are
expressed in $ terms can be included.
2. Costs and benefits are supposed to reflect utility
measures. Monetary measures are used to reflect utility
measures. However, marginal utility diminishes for
individuals while monetary values stay constant. Thus,
using any cardinal measures including dollar terms
overestimates benefits.
Differences between Feasibility Study and Social
C-B Analysis
14
1. F.S: Faces specific prices and Doesn’t have to examine what these P’s
represent.
C-B: the planner has to ascertain what these prices mean. External C
& B that escape market pricing must be considered. Also, P’s of
costs must reflect the product/service opportunity cost.
2. The entrepreneur's major objective is maximization of profits. In C-B
analysis the planner needs to address several goals & objectives that could
be measured on various scales. The planner may need to identify societal
relative preferences weights for these goals & objectives.
3. Discount rate (r): in F.S. it is the opportunity cost of money. Usually, if
a loan is taken then the interest rate charged by the bank is the value of r.
C-B: The opportunity cost of resources for other public projects which
should be the same as the value of resources in the private sector
from which the public sector draws its taxes.
Differences between Feasibility Study and Social
C-B Analysis
15
4. Consumers’ surplus: F.S. measures just the total revenues. C-B
includes also the consumers’ surplus enjoyed by the users of the project.
5. The life span of a business is limited to man’s life. The life span of
public projects extends to generations.
6. Equity or income/wealth redistribution consequences are not a
consideration in F.S. However, the gainers and losers by a project and if
necessary the methods of neutralizing such effects is important to public
decision makers. It is important to note that a preferred alternative must
be based solely on efficiency criteria while undesired equity consequences
are not a base for selecting another alternative. Correction actions
through efficient methods of compensation of the losers should be used.
Social Rate of Discount (SRD)
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 SRD (r): The correct discount rate for the evaluation of a
government project is the percentage rate of return that the
resources utilized would otherwise provide in the private
sector. It is the opportunity costs of the resources
committed to this project. Or, benefits foregone from
denying the resources from the best alternative use.
 For example, if the resources for the project chosen denies
their use for an irrigation project then the SDR to be used
for the calculation of the DPV is the return expected for the
water project. Choosing a lower rate than the real one may
lead approval for an inferior project. Choosing a higher
rate than the real one may lead to rejection of an efficient
project.
Internal Rate of Return (IRR)
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 IRR is calculated for a DPV=0. Hence, the IRR
reflects the return for the chosen project, and could
be compared to existing rate of return in that market.
For example, if the calculated IRR is 6% while the
common rate in that market is 5% than this project is
justified.
 The next diagram shows that the higher the IRR or
the Discount Rate (DR), the lower the Discounted
Present Value (DPV)
Relationship between DPV & IRR/DR
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DPV($)
DPV0
0
A
R0
R*
IRR/DR (%)
DPV VS. IRR: The Regular Outcome
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DPV
(net benefits in $M)
Project B
Project A
IRR (%)
DPV VS. IRR: Example
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DPV($B)
Project B
2.0
1.6
Project A
5
10
20 IRR(%)
DPV VS. IRR: Example
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 Assume two projects where conduct of one prohibits the conduct
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of the other.
Project A yields IRR of 20% while project B’s only 10%.
However, the DPV of A is only $1.6B while of A’s higher at $2B.
If the interest rate in the market (that expresses the ongoing
opportunity costs of investment return) is 5% then by the IRR,
both projects are efficient and justified.
By the IRR, project A that yields 20% is preferred to B.
By the DPV at 5% interest rate project B is preferred to A.
When a conflict exists and the above assumption is valid, the
DPV is preferred since the IRR could be much smaller in
magnitude.
Measurements of User’s Benefits
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 In C-B analysis the benefits include the Consumers’ Surplus (CS), and is not
limited to the revenues ($) as in Feasibility Study.
 If the price is zero, then in the Feasibility Study TR=0. In C-B the users’ total
benefits is the entire area under the demand curve (oab). Example, the benefits
calculated for the users of a new road or municipal park.
P
a
Demand
0
b
Q
Measurement of User’s Benefits
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 The motorists using a new road will benefit from decreased driving
time, lower cost of fuel, and improved safety. This can be estimated by
imputing separately all these costs expressed in $. Or, it is assumed
that all these savings are recognized by the users and reflected in an
increase of the CS.
Price
D
P
R
P1
S
0
R1
Demand
E
Q
Q1
Q(number of trips)
Case Study
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 Existing ferry boat service across a river is replaced by a railway bridge.
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Ferry charges $2 per passenger to cover TC: $1.50 for labor and $0.50 for
capital.
Passengers are indifferent between the two ways of crossing the river. If
$2.00 per passenger will be AVC + AFC than there is no incentive for
building the bridge.
The owners of the ferry boat have a sunk investment of $0.50 per
passenger and will be ready to lower their price to a minimum of $1.50.
If the bridge ATC is $1.20 then at the price of $1.40 the bridge owner will
eliminate competition from the ferry and enjoy profits above normal of
$0.20 per passenger.
The annual benefits to the already existing passengers from the investment
in the bridge is $2-$1.40= $0.60. The loss of the ferry owners is $2.00$1.50=$0.50 per passenger which is not a social cost but only a transfer
from the ferry to the passengers. The real social benefit is $1.50$1.20=$0.30 plus the surplus of the additional CS of the new trips added
from the reduction in price from $1.50 to $1.40.
Ferry Case Study
P
D
P1
2 .0
C1
P2
1.50
C2
R1
S1 II
W1
1.40
1.20
I
T1
Q1
D1
W
R2
III
S2
D2
Q
Q2
25
Case Study (Continued 1)
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Conclusion:
Passengers benefit is $2.00-$1.40=$0.60 of which $0.50 is merely
a transfer from the ferry. Social benefits is therefore $1.50$1.20=$0.30 plus additional CS when the price decreased from
$1.50 to $1.40.
Ferry’s CS:
P1DR1
Quasi-rent to ferry: P1R1S1C1
Rail’s CS :
P2DR
Quasi-rent to rail: C2P2R2S2
Social benefits:
C1C2T1S1 +
R1W1R2
+
T1W1R2S2,
where
I: Resources II: Gains to
III: Profits of rail
saved
consumers
on additional
journeys
Case Study (Continued 2)
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 Assuming the variable resources to be perfectly
mobile then the loss of quasi-rents by the ferry
owners will be wholly offset by the gains to
consumers when the price falls from P1 to P2.
 If we are in competitive market where P=AVC, we
should compare just C1 to C2 and the benefits will be
C1C2D2D1.
Direct Costs
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Costs and benefits are simply 2 sides of the same coin. As
benefits measure the contribution of a program to an
objective, costs measure the opportunity costs or the
benefits foregone of the resources committed to the
program. In other words, the extent to which the inputs
committed to the program could yield to objectives if used
in the best alternative use.
If a person goes to the movies and spends there two hours
and $10 then the cost is $10 plus the value of the two hours
if spent in the best alternative activity. The alternative use
must be a realistic and not merely technical alternative.
Direct Costs: Example
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When land is used by a project it is denied to the rest of the
economy. The appropriate measure of the cost of the land
as an input is the consumer’s ultimate willingness to pay for
it. When land markets are competitive then the market
price will measure the cost of the land. If the land has no
legal or practical alternative use then even though a price is
paid for that land, its cost should be zero. If the land has
alternative use but the market does not provide it then
benefits foregone from the alternative use should be
imputed.
Indirect Costs
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These are by products the costs of which escape the
price mechanism. Exclusion of such negative
externalities yields social overproduction. Hence, the
external products differ in their nature from the direct
product sold by the supplier (s). Example, air
pollution and noise that accrue to the neighbors of the
manufacturing plant.
Direct Benefits
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 The benefits are based upon the consumers’
willingness to pay criterion. i.e., the net output
defined as the goods and services made available
which would not be in the absence of the project.
 By the same token, the costs are its net input
defined as the goods and services withdrawn by the
existence of the proposed project. For small projects
the costs are the money spending on the project. If
the supply of inputs increases with the same amount
used by the project (idle otherwise) then net costs
will be zero.
Measurement of Direct (User’s) Benefits
32
P
Total Users’ Benefits= OBCD
B
If market price is Pa then
Total Revenues = OPaCD
Consumers’ Surplus = PaBC
Pa
C
Demand Curve
O
D
Q
Feasibility Study vs. Social C-B Analysis
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 Feasibility study: Analysis of direct costs (investment+
operating costs) vs. revenues accruing to the suppliers.
 Social C-B Analysis: direct + indirect costs (negative
externalities) vs. direct + indirect benefits (positive
externalities) resulting to society.
 Benefits and costs are achievement and dis
achievement of goals and objectives. Or, adding and
subtracting, respectively resources to society.
 Redistribution-Transfer Effects: loses and gains that
are added to some and subtracted from others.
Indirect Benefits
34
These are the benefits that escape the price mechanism.
Hence, benefits that result from the project and differ from
the direct benefits while could occur also to others. The
existence of such positive externalities yield social
underproduction of the product.
Example, scenery of a park enjoyed not only by its users. Or,
if a manufacturer constructs a road to transport material but
the road is used also by others in that region that will
experience lower transport costs.
The Redistribution Objective
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The aggregate costs and benefits do not make distinction
among the recipients of the benefits or the bearers of the
costs. A rich man’s consumption counts as much as a poor
man’s. No question is asked in C-B Analysis about the
value of a good to society as a whole.
However, we are interested to know which groups are the
losers and which gain the benefits. If we examine a toll
road then the drivers pay for the use of the road. Their net
benefits is the Consumers’ Surplus. Their payments are
transferred to the owner of the road. If a restaurant is
located at the rest area then its profits after transferring the
rent, will be added to the direct benefits.
Case Study: Evaluation of Alternative Arterial
Roads: A Modified Delphi Approach
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 A team of planners produced five alternative scenarios,
each based on six-lane road concept but differing in their
road siting and the degree of corollary development.
 Area was a narrow strip of coastline about 11km long,
stretching from downtown coastal section of Tel Aviv to the
old city of Jaffa.
 Plans need to address the relationship between the
acquisition and maintenance of open space and beaches for
public use. Also, the allocation of lands for both public and
private concerns.
The Problem
37
The evaluation of transportation projects often involve
measurement of benefits and costs on various scales
which makes conversion to monetary scale impossible
or significantly biased.
The method used is a combination of the Goals
Achievement Matrix and the Delphi method that
allows evaluation at different measurement scales of
goals and objectives. It uses subjective weights, and
objective measures on the achievement of the G&O to
determine the preferred alternative.
The Delphi Process
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First formulated at the Rand Corporation during
WWII to determine the optimal number of ships for
convoys the Atlantic Ocean.
It is being used for transportation and regional
forecast and planning, and in similar uses for
technological, medical, and grievance arbitration.
 It is used to formulate a unified group opinion and
value judgment for rational decision making about a
preferred alternative.
The Delphi Process
39
In transportation and land use planning, a group of
experts are gathered to provide weights to goals and
objectives that reflect social welfare. Participants are
requested to provide their weights to G & O and the intent
is to achieve a maximum possible consensus of the group.
Then the means and variance of the responses are
calculated and provided to the participants.
In the second round, each participant considers the
group’s weights in re-evaluated his/her own. The process
ceases when stability and convergence is achieved.
Stage 1 of Analysis
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 Monetary direct cost-revenue evaluation of the
alternative plans. Included are costs of construction,
maintenance, and operation, and the benefits are the
returns on all real estate reclaimed or improved for
each alternative.
 The C’s & R’s generated by each alternative are
projected to the expected lifetime and discounted to
present value. The DR is based on the rate paid on
government bonds at the time of the evaluation.
Stage 2 of Analysis
41
 Qualitative evaluation which is a Delphi based
technique to assess how each alternative fulfills
social welfare. Social welfare is expressed by weights
for the G’s & O’s; weights were quantified by a panel
of experts.
 The cost-revenue analysis solely expresses the
minimization of the direct monetary effects. All
other effects that are non-monetary and included in
the qualitative analysis. The decision making group
will consider the trade-offs between the monetary
and the qualitative stages.
Qualitative Analysis: 6 Steps
42
1.
2.
3.
4.
5.
6.
Members of the Delphi panelists are asked to set objectives that the
urban road along the beach should attain.
The technical committee assembles the responses and establishes a
set of generalized goals and their respective measurable objectives.
Delphi panelists rate independently the G’s & O’s without being
familiar with information of the alternative plans.
The statistical distribution is determined, and the means and S.D
calculated and presented to the Delphi panelists for second rating.
This enables the individuals to assess and change their rating
according to the group’s assessment.
The process continues until a consensus is achieved.
The final weights determined by the Delphi group are multiplied for
each alternative by the respective achievement of each objective.
Figure 1: The Delphi Process
43
Round
Problem
identification
Panel
selection
Evaluation
of option
Statistical analysis
of response
Feedback
No
Consensus
reached?
Yes
Statistical group
consensus
Figure 2: Factors (G’s) and Sub-factors (O’s)
Rating Procedure
44
Rate factors
and
subfactors
Introduce
panel to
plans
Conduct a
Delphi Round
no
yes
no
yes
End
Rating
Statistical analysis
of results
no
yes
Description of Area & Alternatives
45
 An 11 KM six lane road along the waterfront of Tel
Aviv-Jaffa in Israel aimed to provide easy
accessibility and improve tourism and commerce
along the strip.
 A team of planners developed 5 alternative plans that
are based on 6 lanes but differ in their setting and
the degree of corollary development.
 Each alternative had to address the relationship
between open space & beaches, and residential &
commercial land uses.
The Alternatives
46
1.
2.
3.
4.
5.
Improvement to the existing road, modifying the northern section, and
constructing a new one-way, three lanes replacing the promenade on the
southern part.
Widening the existing road into 6 lanes-2 way road and improve the existing
promenade by closing an abutting street. This plan requires demolition of
many existing structures.
Construction of an elevated roadway over the major existing thoroughfare
with ground level and elevated sections guiding in opposite directions.
Widening the beach by 75-90 meters create commercial and open space
development. In the northern section, the small beachfront road is widened
for traffic and an elevated promenade permits free access to the beach. It
will entail widening of the small beachfront and elimination of existing
promenade.
Expansion of plan 4 to include the widening of the area for similar
development in the northern section.
Figure 3: Tel Aviv/ Jaffa Seashore Development Program:
Plan 1
47
Figure 4: Tel Aviv/Jaffa Seashore Development Program:
Plan 2
48
Figure 5: Tel Aviv/Jaffa Seashore Development Program:
Plan 3
49
Figure 6: Tel Aviv/Jaffa Seashore Development Program:
Plan 4
50
Figure 7: Tel Aviv/Jaffa Seashore Development Program:
Plan 5
51
Table 1: Cost-Revenue Analysis
52
10 % Discount Rate
13% Discount Rate
Costs
Revenues
Net
Costs
Ranking
Costs
Revenues
Net
Costs
Ranking
Plan 1
0.8*
-
.8
I
0.8
-
.8
I
Plan 2
38.8
-
38.8
V
34.2
-
34.2
V
Plan 3
40.2
20.8
19.4
IV
31.4
17.2
14.2
IV
Plan 4
39.4
22.0
17.4
III
31.0
21.8
9.2
III
Plan 5
49.6
28.4
12.2
II
31.4
0
27.2
4.2
II
* In millions of dollars
53
Table 3: Final Score of Qualitative Analysis
54
Table 4: Comparison of Qualitative and Quantitative
Analysis
55
10%
Discount
Rate
13%
Discount
Rate
Quantitative
Ranking
Qualitative
Rating
Qualitative
Ranking
Net Income
Plan 1
0.8*
0.8
I
40.25
V
Plan 2
38.8
34.2
V
45.65
IV
Plan 3
19.4
14.2
IV
49.60
III
Plan 4
17.4
9.2
III
65.16
I
Plan 5
12.2
4.2
II
62.48
II
* In millions of dollars
Figure 9: Final Ratings of Alternative Plans
56
Quantitative Analysis
Plan 1
0.8
Plan 5
12.2
High
Ranking
Plan 2
38.8
Plan 3
19.4
Low
Ranking
Plan 4
17.4
Qualitative Analysis
Plan 4
65.16
Plan 5
62.48
Plan 3
49.6
Plan 2
45.62
Plan 1
40.25
The Analysis
57
 The quantitative analysis included the direct costs of
marine and reclamation work, construction, road
building and surfacing, and municipal utilities provision.
The revenues include land sales for private construction,
increase in value of buildings, and other real estate as
affected by the road. Conservative estimates were
imputed for both revenues and costs.
 The qualitative analysis included multiplication of the
panelists’ weights by the objective measures for the goals
and objectives. All goals were grouped and weights
assigned of 100, and same procedure was held for the
objectives of each goal. The final weight for each
objective was the multiplication of the weight for the
appropriate goal by the weight derived for that objective.
Findings
58
 Alternative 1 was selected as the preferred by the
quantitative analysis while alternative 4 by the
qualitative analysis. The selection of alternative 4 over
alternative 1 would involve higher cost of $8.4M in
present value at DR of 13%, and 16.6M at 10%.
 It is difficult to choose between alternatives 4 & 5 since 4
is ranked higher in the qualitative analysis but lower in
the quantitative analysis. The solution is to see what
changes can be made in these two alternatives to reach a
decisive preference.
 The other solution is to conduct a sensitivity analysis to
determine which of the alternatives provide more stable
outcome.