Planning & Evaluation of Public Programs

Planning & Evaluation of Public Programs Dr. Simon Hakim, Director Center for Competitive Government And Professor of Economics Temple University www.fox.temple.edu/ccg hakim@temple.edu

Contents 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 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 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 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 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 Government 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 Physical Enviro. Resources Public Policy Instruments: Public Expenditures Regulations Fiscal Instruments Forceof Govt. Organization

Evaluation of Public Programs: Social Cost-Benefit Analysis 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 Cost Benefit Analysis under unified measures for all objectives. Goals Achievement Matrix Balance Sheet of Development Cost Revenue Analysis Check List of Criteria Investment Appraisal Cost Minimization

Historical Background 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 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 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. Where, 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 Or, Weaknesses of using the “traditional” C-B model: No consideration of intangibles. Only variables that are expressed in $ terms can be included. 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 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 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) 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) 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 DPV($) A 0 IRR/DR (%) DPV0 R0 R*

DPV VS. IRR: The Regular Outcome DPV (net benefits in $M) Project B Project A IRR (%)

DPV VS. IRR: Example DPV($B) Project B 2.0 1.6 Project A 510 20 IRR(%)

DPV VS. IRR: Example Assume two projects where conduct of one prohibits the conduct 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 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 Q b

Measurement of User’s Benefits 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 R P S R1 P1 Demand E 0 Q Q1 Q(number of trips)

Case Study Existing ferry boat service across a river is replaced by a railway bridge. 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 II III I Q

Case Study (Continued 1) 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) 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 Round Problem identification Panel selection Evaluation of option Statistical analysis of response Feedback Consensus reached? Statistical group consensus Yes No

Figure 2: Factors (G’s) and Sub-factors (O’s) Rating Procedure Rate factors and subfactors Introduce panel to plans Conduct a Delphi Round Statistical analysis of results no no no yes yes yes End Rating

Description of Area & Alternatives 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 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

Figure 4: Tel Aviv/Jaffa Seashore Development Program: Plan 2

Planning & Evaluation of Public Programs