Cost Benefit Analysis for Public E-services Investment Projects

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1 Cost Beefit Aalysis for Public E-services Ivestmet Projects DRD. LUCIAN PĂUNA Departmet of Ecoomic Cyberetics Academy of Ecoomic Studies Bucharest, Adria Carstea 75, bl. 35, ap. 39, sector 3 paualucia@yahoo.com DRD. LORELAI - VIORELA SACAL Departmet of Ecoomic Cyberetics Academy of Ecoomic Studies Bucharest, Ramicu Valcea 22A, bl. 7, ap. 29, sector 3 lorelaisacal@yahoo.com PROF. DR. ION DOBRE Departmet of Ecoomic Cyberetics Academy of Ecoomic Studies Bucharest io.dobre@csie.ase.ro DRD. BOGDAN SACAL Departmet of Ecoomic Cyberetics Academy of Ecoomic Studies Bucharest secs43@yahoo.com Abstract: Cost-beefit aalysis is cosidered to be oe of the most efficiet tools i order to quatifiy the eccessity ad oportuity of a ivestmet project. The mai advatage of this method is that it ca be very easily utilised i practical situatios. Nevertheless usig cost-beefit aalysis has to take ito accout the specific elemets of the aalyzed project i order to ascertai the appropriate coclusios. Public e-services ivestmet projects are a special type of ivestmet projects that do ot geerate ay icomes ad are subject to o-reimbursable fudig from existig fiacig programs. These particularities imply some adaptatios to the classic cost-beefit aalysis methodology. Key words: cost-beefit aalysis, Europea fuds, public e-services, o-reimbursable fudig. 1 Itroductio I 2007 Romaia joied the Europea Uio ad started to beefit from the o-reimbursable Europea fuds i order to reduce the gap betwee its ecoomy ad those of the other member states i the EU. Oe of the areas where the gap is most sigificat is the Iformatio Techology ad Commuicatio (IT&C) domai. This area is idetified ad fiaced by the Icrease of the Ecoomic Competitiveess Operatioal Sectorial Program (POS CCE). This fiacig program idetifies a Prioritary Axis i order to fiace the IT&C ivestmet projects: Prioritary Axis 3 Iformatio techology ad commuicatios for the public ad private sector. This fiacig axis, through its three major itervetio domais, it supports the ecoomic competitiveess ad promotes the iteractio betwee the public sector ad eterprises/ citizes by capitalizig o the IT&C potetial. The e-services ivestmet projects are fiaced by the Major Domai of Itervetio 2 The ISBN:

2 developmet ad icrease of the efficiecy of the electroic public services. There are four categories of projects idetified to be fiaced, so there are four fiacig operatios. The objective of these fiacig operatios is to make available services by usig electroic meas ad to create beefits both for the users ad for the public etity that provides the services. 2. Problem Formulatio Oe of the most iterestig regulatios is the oe preseted regardig the e-govermet ivestmets. These ivestmet projects that are fiaced by the Operatio 1 Support for the implemetatio of e- govermet solutios (icludig e-admiistratio) ad provisio of broadbad coectios, have to provide at least oe public service for the citizes/ busiess eterprises/ public admiistratio at a miimal level of sophisticatio 3. The five possible levels of sophisticatio are: Postig iformatio olie; Uidirectioal iteractio: the existece of olie forms to be dowloaded; Bi-directioal iteractio: the possibility to trasmit olie the filled forms; Complete electroic trasactios, icludig delivery ad/ or paymet; Persoalizatio ad pro-activity it reflects the degree to which the available olie services respod to the users eeds. The 5 th level of sophisticatio icludes two ew cocepts: The pro-active delivery of services, which meas that the public admiistratio takes actio i order to improve o the quality of the provided services ad o the attitude towards the user. Pro-activity examples: raisig awareess i the users regardig certai measures which they have to take, precompletio of some of the form s fields with data already existet i the public admiistratio s databases; The automatic delivery of the service: the public authorities automatically deliver certai ecoomic or social services that are rightfully due to the citize/busiess eterprise, without them eedig to request these services. This fiacig operatio has two mai objectives that must be addressed simultaeously: To deliver o-lie public services to the citizes/ busiess eterprises/ public admiistratios; To icrease by usig IT&C meas the effectiveess of the public istitutio s iteral processes which cotribute to the provisio of the fore metioed services. Regardless of the fiacig operatios, which essetially meas regardless of the type of e-service provided, the dossier that comprises the specific documetatio i order to obtai o-reimbursable fudig icludes a feasibility study with a costbeefit aalysis chapter. The cost-beefit aalysis of a e-services ivestmet project implies the followig steps: 1. The idetificatio of the ivestmet ad defiitio of the correspodig objectives, icludig the specificatio of the referece iterval; 2. The optios aalysis; 3. The fiacial aalysis; 4. The ecoomic aalysis; 5. The sesitivity aalysis; 6. The risk aalysis. The cost-beefit aalysis structure is regulated by the Govermet Decisio o. 28/2008 regardig the approval of the techical ad ecoomical documetatio s cotet-framework for public ivestmets, ad of the structure ad methodology for the geeral estimate for ivestmet objects ad itervetio work, ad later detailed by Order o. 863/2008. The legally regulated structure for the cost-beefit aalysis is based o the structure provided by the Workig Documet o. 4 of the EC, but a major differece is that this Europea documet metios the use of the cost-beefit aalysis for major ifrastructure projects. The major projects are cosidered those projects whose values are larger tha 25 M.Euro or 50 M.Euro for the evirometal projects. The Romaia legislatio, as well as the Romaia Europea fud maagemet authorities, failed to capture this essetial recommedatio, ad impose i most cases the cost-beefit aalysis regardless of the project s specificatios. This is also the case of the IT&C ivestmet projects. This situatio geerated the ecessity for establishig a methodology for the cost-beefit aalysis for projects which do ot eed this aalysis. 2.1 Cost-beefit aalysis theory Cost beefit aalysis is typically used by govermets to evaluate the desirability of a give itervetio. It is a aalysis of the cost effectiveess of differet alteratives i order to see whether the beefits outweigh the costs. The aim is to gauge the efficiecy of the itervetio relative to the status quo. The costs ad beefits of the ISBN:

3 impacts of a itervetio are evaluated i terms of the public's willigess to pay for them (beefits) or willigess to pay to avoid them (costs). Iputs are typically measured i terms of opportuity costs - the value i their best alterative use. The process ivolves moetary value of iitial ad ogoig expeses vs. expected retur. Costructig plausible measures of the costs ad beefits of specific actios is ofte very difficult. I practice, aalysts try to estimate costs ad beefits either by usig survey methods or by drawig ifereces from market behavior. The accuracy of the outcome of a cost beefit aalysis depeds o how accurately costs ad beefits have bee estimated. Aother challege to cost beefit aalysis comes from determiig which costs should be icluded i a aalysis (the sigificat cost drivers). This is ofte cotroversial because orgaizatios or iterest groups may thik that some costs should be icluded or excluded from a study. CFi (1) NPV = I0+ + VR i i= 1 (1 + r) Accordig to the accepted theoretical, the costbeefit aalysis ca be performed by usig oe of the followig relatioships: If the implemetatio of the projects is already fiished or has a very short term: CFi VR (2) NPV = I0+ +, where: i i= 1 (1 + r) (1 + r) i - the evaluatio period; - the forecastig period; I - the ivestmet value (ot discouted); 0 CF - the cash-flow value i period i (ot i discouted); r - the discout factor; VR - the residual value (ot discouted). If the implemetatio of the project is spread over more tha 1 period: m Ik CFi VR (3) NPV = + m +, i k= 1 (1 + r) i= m+ 1 (1 + r) (1 + r) where: k - the implemetatio period; m - the total implemetatio period; i - the evaluatio period; - the forecastig period; I - the ivestmet value i period k (ot k discouted); CF - the cash-flow value i period i (ot i discouted); r - the discout factor; VR - the residual value (ot discouted). Usig oe of the preseted calculatio relatioships, oe ca calcule the Net Preset Value of the Project. If the obtaied value is positive, the evaluated project is worth implemetig, but a further aalysis is eeded usig aother idicator, the Iteral Retability Rate (IRR). IRR is calculated as the discout factor that makes the NPV equal to zero. If the NPV value is positive, the IRR is larger tha the discout factor employed i the aalysis. This idicator ca be compared to a target value, ad it the obtaied value is larger tha the target value, tha the project is worth implemetig. These two idicators are ot the oly oes that are used to decide, but due to their large iformatioal value, are two of the key idicators take ito cosideratio. 3. Problem Solutio The cost-beefit aalysis for e-govermet projects implies a adaptatio of the give regulatios, alterative which is preseted i detail i this chapter. There is also a umeric example preseted. The first stage of the aalysis is the idetificatio of the give project ad the defiitio of its objectives, also specifyig the referece iterval for the aalysis. E-services projects are projects that aim to implemet a itegrated iformatics system by a public service provider. This system will provide olie public services to the users ad will esure a icrease i the efficiecy of the iteral data processes associated to these services. By correctly idetifyig the project to be implemeted, the defied objectives of this project are also specified: To provide public services usig electroic meas; To facilitate the access of the users to the public services provided by the implemetig public service provider; To icrease the efficiecy of the activity of the public service provider. Choosig a appropriate referece iterval for the cost-beefit aalysis is a very importat step. I this case, the referece iterval is cosidered to be 10 years after the implemetatio of the project. This iterval is cosidered to be sufficiet for observig the fiacial coordiates of the project. The ext step i the cost-beefit aalysis is the optio aalysis. This aalysis starts with the idetificatio of the existig/ possible optios. The optios are essetially differet ways to esure the fulfillmet of the aouced objectives of the project. The choice of the optios to be aalyzed ISBN:

4 implies takig ito accout possible ad probable scearios, some of which are preseted ext: The first optio to be cosidered is ot to implemet the project, which meas that the situatio remais uchaged for the etire referece iterval, o costs or beefits beig produced; The implemetatio of the project with oreimbursable fiacig, ad i this case there ca be take ito accout the various techical ad fuctioal alteratives; The implemetatio of the project without the o-reimbursable fiacig. The differece betwee the last two optios resides i the fiacial costrait placed upo the implemetig public authority/ istitutio/ admiistratio. It is obvious that for the optio that implies the o-reimbursable fudig the fiacial performace idicators will take values correspodig to a much more favourable outcome. The idetified optios will the be aalyzed by usig a decisio criterio like the followig: The lowest cost; The most advatageous techically; The most advatageous ecoomically. The first two decisio criteria imply the oedimesioal aalysis of the optios by comparig them to each other cosiderig their respective characteristic, be it the ivestmet cost, or the techical performaces of the aalyzed system. The latter criterio makes possible a complex aalysis of the cosidered optios. Cosiderig the most advatageous ecoomically criterio oe, the decisio-maker defies certai decisioal characteristics that represet his view o the ecoomical value of a aalyzed optio. These characteristics ca be either miimal or maximal ad each oe has a associated importace coefficiet that quatifies its subjective importace. Each alterative is scored/ valued by the decisio-maker takig ito cosideratio each defied characteristic. Next, the scores are ormalized usig the followig formulas, i order i esure the possibility to summate them for each of the optios: Miimum criterio (4) P(i,j) = (Vmax(i) V(i,j)) * P(i) / (Vmax(i) Vmi(i)), where: P(i,j) = the score for criterio i of optio j; P(i) = total poits associated to criterio i; Vmax(i) = maximal value for criterio i; Vmi(i) = miimal value for criterio i; V(i,j) = value associated to criterio i for optio j. Maximum criterio (5) P(i,j) = P(i) - (Vmax(i) V(i,j)) * P(i) / (Vmax(i) Vmi(i)), where: P(i,j) = the score for criterio i of optio j; P(i) = total poits associated to criterio i; Vmax(i) = maximal value for criterio i; Vmi(i) = miimal value for criterio i; V(i,j) = value associated to criterio i for optio j. The obtaied scores are summated ad the total scores are compared. The chose optio has highest score, this optio beig the oe that is the most advatageous ecoomically for the decisio-maker. The chose optio is the subjected to a fiacial aalysis i order to determie the fiacial performace idicators. Based o these idicators oe ca justify the ecessity ad opportuity of the project. The fiacial aalysis implies the estimatio of the beefits ad costs ad based o these estimatios the et cash-flows ca be calculated. The idicators to be determied are: Net Preset Value; Iteral Rate of Retur; Beefit/Cost Ratio. Aalyzig the values of these idicators, oe ca draw coclusios regardig the ecessity ad opportuity of the ivestmet: If NPV<0 this meas that oe the cosidered time iterval the ivestmet is ot a profitable oe, but if we are talkig about e-govermet ivestmet projects that do ot geerate ay icomes, oe ca coclude that the ivestmet is i dire eed of o-reimbursable fudig; If IRR has a smaller value tha the discout rate, which is implicit if NPV<0, the coclusio is similar; If the Beefit/Cost Ratio is larger tha 1, the the opportuity of the ivestmet overweighs the associated costs, makig this ivestmet a very attractive oe. The ext step i the cost-beefit aalysis is the ecoomic aalysis, which aims to exted the coclusios formulated earlier based o the fiacial performace idicators. The fiacial aalysis is exteded by applyig certai fiscal, exteralities related ad shadow-prices related correctios. For e-services ivestmets this ecoomic aalysis is ot eeded ad should ot be performed because these projects are ot major ifrastructural projects ad do ot geerate ay additioal icomes. Rather oe ca perform a aalysis o the social ad ecoomic impact of the project, also describig the promotio methods based o the target audiece. This descriptio is essetially a qualitative ecoomic aalysis, highlightig the relevat social aspects. ISBN:

5 The project s key factors are idetified i the sesitivity aalysis, ad for these key factors the fiacial performace idicators are recalculated i order to assess the impact of their variace. If a modificatio of the key factors by 1% iduces a modificatio of the idicators by more tha 5%, those factors are critical variables of the project. The absece of ay critical variables idicates a stable ad well structured project. The risk aalysis refers to idicatig the problematic areas of the project, aspects which ca result i ot implemetig the project withi the expected time or costs. The risks that have to be highlighted are: exceedig the expected costs, exteral depedecies, maagemet risks. Followig this qualitative aalysis oe ca perform a more quatitative aalysis that requires the idetificatio of the probability distributios for the critical variables of the project. The example preseted i this chapter will show how the cost-beefit aalysis ca be performed for public e-services ivestmet projects. The optio aalysis ad the fiacial aalysis will be preseted i detail, these steps beig the oes where the aalysis is quite specific. The umeric example for the cost-beefit aalysis starts with the secod step, the optio aalysis. The followig optios/alteratives are take ito cosideratio: Optio 1 the project is ot implemeted, the situatio remaiig as it is. I this case there are o costs, but also o beefits. The umber of implemeted e-services i this case is 0; Optio 2 the project is implemeted usig the Techical Sceario 1 ad beefits from the oreimbursable fudig. The Techical Sceario 1 is a sceario where the implemeted system has slightly less features, but is also cheaper. The umber of implemeted e-services i this case is 6. The ecoomic coordiates of this optio are: o Total Project Value = ,00 lei; o Subsystem 1 = ,00 lei; o Subsystem 2 = ,00 lei; o Project Value cosiderig the oreimbursable fudig = ,00 lei Optio 3 the project is implemeted usig the Techical Sceario 2 ad beefits from the oreimbursable fudig. The Techical Sceario 2 is a sceario where the implemeted system has all the requested features, but is also more expesive. The umber of implemeted e- services i this case is 8. The ecoomic coordiates of this optio are: o Total Project Value = ,00 lei; o Subsystem 1 = ,00 lei; o Subsystem 2 = ,00 lei; o Project Value cosiderig the oreimbursable fudig = ,00 lei Optio 4 the project is implemeted usig the Techical Sceario 1 ad does t beefit from the o-reimbursable fudig. The Techical Sceario 1 is a oe where the system has slightly less features, but is also cheaper. The umber of implemeted e-services i this case is 6. The coordiates of this optio are: o Total Project Value = ,00 lei; o Subsystem 1 = ,00 lei; o Subsystem 2 = ,00 lei; Before movig o to the fiacial aalysis the preseted optio have to be compared i order to determie which optio is the best for the decisiomaker, i this case the implemetig public etity. Each alterative is scored/ valued by the decisio-maker takig ito accout some subjectively defied characteristic. They ca be: The umber of implemeted public services, which is a positive impact idicator ad it reflects i a maximal decisio criterio. The cost of subsystem 1, which is a egative impact idicator ad it reflects i a miimal decisio criterio. The cost of subsystem 2, which is a egative impact idicator ad it reflects i a miimal decisio criterio. The cost of project, which is a egative impact idicator ad it reflects i a miimal decisio criterio. The project s cost is computed as the geeral social cost, comprised of the public etity s ow fiacig effort ad the value of the atioal cotributio. The values for the four cosidered criteria are: Scorig criteria Implemeted services subsystem 1 subsystem 2 Total project value UM Idicator values No Lei 0 219, , Lei Mii Lei Table 1. The scores obtaied for the four optios usig the defied characteristics are as follows: Scorig criteria Implemeted services subsystem 1 subsystem 2 Total project value Importace Idicator values Coefficiet Table 2. ISBN:

6 After cocludig the optio aalysis, Optio 2 is the recommeded alterative for the project based o the decisio-maker s profile. This is obviously the best alterative, a altertive that has the lowest cost possible ad yet the most of beefits that are worth payig for. This result is perfectly justified cosiderig the followig aspects: This alterative has the lowest cost while also geeratig some of the desired beefits; Comparig Optio 2, with the o-reimbursable fudig, to Optio 4, it is obvious that the oreimbursable fudig brigs very serious beefits, especially at cost level; The project holds importat beefits for the implemetig etity ad its employees. The results of this aalysis could have bee very differet by cosiderig differet decisio criteria or modifyig the importace coefficiets associated to the criteria. The ext step i the cost-beefit aalysis is the fiacial aalysis. The goal of this aalysis is to compute the three idicators that will base the coclusios regardig the selected optio: Net Preset Value, Iteral Rate of Retur ad Beefit/Cost Ratio. The public e-services ivestmet projects do ot geerate ay suplimetary moetary icomes. This is the case because these projects are essetially basic ifrastructure ad they are ecessary because they cotribute to a better quality of life. Usually at this poit, the icomes ad the costs are determied, but sice this projects geerates o suplimetary icomes, the costs will be suported from the public etity s budget. This meas that i order to compute the fiacial performace idicators we ca igore the icomes ad costs. The followig calculatios are made: Net Preset Value: It s a idicator that quatifies the project overall value o the chose referece iterval (10 years). The utilised formula is: (6) NPV = -IV + NIF +RV, where: NPV = Net preset value; IV = Ivestmet value; NIF = Net icome flux (which is 0); RV = Residual value. The followig assumptios are made: o The discout factor is cosidered to be 5%; o The residual value is cosidered to be 30% of the total actualised value of the ivestmet: (7) IV 30% RV = = = lei 10 (1+ 5%) 1, 6289 The Net Preset Value is: (8) NPV = = lei Iteral Rate of Retur The Iteral Rate of Retur is essetially the value of the discout rate that makes the NPV to be zero. Because the project does t geerate ay et icomes, this idicator should t be computed sice for ay value assiged to the discout rate the Net Icome Flux will be zero. Beefit/Cost Ratio Because the project does t geerate ay et icomes, this idicator ca t be computed. The coclusio that ca be draw is that the project is ecessary but ca t be realised without the o-reimbursable fudig. The ecoomic aalysis aims to exted the coclusios formulated earlier based o the fiacial performace idicators. For e-services ivestmets this ecoomic aalysis is ot eeded ad should ot be performed because these projects are ot major ifrastructural projects ad do ot geerate ay additioal icomes. Rather oe ca perform a aalysis o the social ad ecoomic impact of the project, also describig the promotio methods based o the target audiece. This descriptio is essetially a qualitative ecoomic aalysis, highlightig the relevat social aspects. 4. Coclusios The purpose of the cost-beefit aalysis resides i the eed to assess the ecessity ad opportuity of a ivestmet project. Eve though there is a geerally accepted methodology for performig such a aalysis, applyig i real life this methodology requires quite a great deal of effort. Cosidered to be oe of the most efficiet tools for aalyzig a ivestmet project, the cost-beefit aalysis was legally regulated, i order to take advatage of its beefits, without cosiderig its purpose ad essece. This is why, whe usig the cost-beefit aalysis to aalyze a public e-services ivestmet, the specifics of the projects eed to be take ito cosideratio with the outmost care. The preseted methodology ca be exteded ad utilized for ay ivestmet project that aims to creatig ad/or improvig olie services. Refereces [1] Boardma A E; Greeberg D H; Viig A R; Weimer W L (2004) Cost-beefit aalysis: cocepts ad practice Secod Editio, Ed. Arc [2] *** (2009) Ghidul Solicitatului - A3-O321; [3] *** (2006) - Workig Documet o.4: Guidace o the Methodology for carryig out Cost-Beefit Aalysis ( ISBN:

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