Cost-benefit analysis applications in public sector decision-making

CBA in Public Sector

According to Riley, what are the main steps of a CBA?

The CBA process entails:

Computation of social costs and benefits

Sensitivity assessment of the occurring events

Discounting the long-term value of benefits: social costs and benefits accumulate over time. Many people would like to have the benefits immediately rather than later -- thus, there is a need to discount the value of the future benefits.

Comparison of social costs and benefits to establish the total rate of return.

Comparison of rate of return to be expected from different initiatives -- governments often have limited funds to use for different departments, thus, they often face the difficult choice of selecting the projects to be done first and the ones which should be postponed (Riley, 2006).

Go through each objection cited by Riley for using CBA for environmental impact and discuss whether it would be true for constructing a new City public swimming pool. Explain your rationale

The swimming pool development is not really an environmental project, so the arguments made by Riley can be used to determine if they hold for this one. This is owing to the fact that the cost and benefits of the development can easily be evaluated. A cost benefit analysis can easily be done since all the stakeholders can be determined, complete with their associated benefits. There are three main stakeholders in the project, namely: the city council -- whose benefits include satisfying a public need and funding the cost of the development; the city residents who will benefit from swimming at the pool; and the contractors, who will build the facility.

Based on your reading of How Effective is CBA for Public Sector Decision Making? (Sadiana), discuss what is meant by the step "sensitivity for uncertainty" in Figure 2.2 on page 5? What sensitivities is the author talking about?

Sensitivity relates to an approximation of the potential benefits in millions and how plausible the estimation is. If one is reasonably certain that the estimated benefits will be accrued -- then what is the degree of uncertainty relaying to the real values of the cost and benefits? According to Saltelli (2002), sensitivity denotes the uncertainty associated with the occurrence of a set system deliverable (either in dollars or benefits) that can be ascribed to various sources of uncertainty at the beginning of a process. It focuses on the quantification and propagation of uncertainty.

Why implementing a comprehensive model is difficult? Do you agree or disagree and why?

It is very difficult to implement a comprehensive model in practice. This is owing to the fact that many public sector problems or issues cannot be easily defined, and also because the values and goals of different departments may be conflicting. Other factors that make it difficult to implement comprehensive models include: limited funds and resources; limited time; lack of proper techniques in assessing alternatives; and conflicting interests among politicians or special interest groups (Sudiana, 2001). These factors plus many others make it difficult to implement comprehensive models in public organizations.

I agree that it is difficult to implement comprehensive models. This is because organizations are complex and many of them have different structures. Opponents of the comprehensive model contend that it is impractical and based on illogical assumptions. This is somewhat true considering the fact that problems in the public sector are often ill defined and complicated. However, the real problem lies in assuming that the process implied by the model is linear and that it cannot be used in complex ordinary or social problems. This might be due to the varied characteristics of public organizations. Some of the organizations are more convergent and others more divergent, while others might be more stable than others or lacking strong data bases. These differences and others between organizations, might heavily affect the policymaking process of any organization (Head, 2008).

Pick one of the four sub-topics (ethical, political, or methodological issues or practicality) and Summarize key points from literature section

Convert to Measurable Goals

One of the approaches that most companies successfully utilize in the quantification of intangible benefits is the conversion of the benefit to a closely linked tangible advantage. For instance, enhanced client satisfaction can be classified as an intangible advantage. A company can convert this intangible benefit into a reduction in business lost to the unpleased clients and come up with an exit survey to determine why clients left.

Cost Benefit Analysis

In the decision making process, companies utilize cost benefit analysis for quantification of the impact of intangible benefits and costs. Managers need to distinguish a range of both intangible and tangible benefits and costs to a specific project or decision and allocate a figure within a range to every item, as a sign of its significance.

Value Analysis

Here, a value is allocated to the intangible variables by the managers. This approach could be expensive and quite time consuming, given that managers need to basically envision the benefits through developing a prototype system for the system that they wish to quantify. The prototype is utilized by the managers to establish both utility and monetary measurements of the intangible benefits.

Negotiation and Imputation

In the negotiation and imputation approach, managers normally conduct quantification of the intangible benefits using subjective judgment. Managers allocate a specific value on particular resources that they utilize by answering the question, "Is this worth $x dollars to you?" The dollar value rises until the manager quits saying the word yes. A manager or consultant from a different department compiles and gets an average of the values; the obtained average value becomes the value of the intangibles (Wright, 2016).

In your own words, explain net present value. If you were explaining the concept to one of your teenage children (assuming you had one or more), what example would you use to explain it to them in terms that they would understand?

Net Present Value

Net present value is defined as the present value of the cash flows at the needed return rate of one's project compared to one's initial investment.

Example to Explain NPV

Would you rather have an income of one thousand pounds today or would you rather have the same income (one thousand pounds) in the future, say in three years? The answer to this question is probably now. This is attributed to the reason that having one thousand pounds in three years time is not likely to purchase as many goods and services as it does now (due to inflation). Another reason is because one thousand pounds put into a savings account now shall earn interest.