Economic Guidance Summary The Basis for BenefitCost Analysis

Economic Guidance Summary The Basis for Benefit-Cost Analysis in the Corps

Objective: The student will become familiar with the concepts outlined by the Principles & Guidelines and will be able to describe: n n Federal Objective System of Accounts General Measurement Approaches Discount Rates, Period of Analysis, Planning Horizon

Brief History of Economic Analysis n n n n n Flood Control Act of 1936—Section I Bureau of the Budget Circular A-47 (12/52) Green Book (5/58) Senate Document 97 (5/62) WRPA ’ 65 Principles & Standards (9/73) P&S Amended (8/74) NED Procedures (12/79) Principles & Guidelines (3/83)

Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies March 10, 1983

Principles The principles are intended to insure proper and consistent planning by federal agencies in the formulation and evaluation of water resource implementation studies.

Contents of the Statement of Principles n Purpose & Scope n Discount Rate n Federal Objective n Period of Analysis n State & Local Concerns n Risk and Uncertainty n International Concerns n Cost Allocation n Alternative Plans n Planning Guidelines n Plan Selection n Effective Date n Accounts

Guidelines n Standards and procedures, in the form of guidelines, have been issued to ensure consistency of Federal agency planning.

Selected Topics This Week n Federal Objective n Forecasting n Discount Rate n Risk and Uncertainty n Period of Analysis n Multiple Purpose n System of Accounts n Planning Process Projects n Evaluation Process by Purposes

Federal Objective n The Federal objective of water and related land resources planning is to contribute to national economic development consistent with protecting the Nation’s environment, pursuant to national environmental statutes, applicable executive orders, and other Federal planning requirements.

Four Accounts n National Economic Development n Environmental Quality n Regional Economic Development n Other Social Effects

Contents of Guidelines n Chapter I – Standards n Chapter II – National Economic Development (NED) Benefit Evaluation Procedures n Chapter III – Environmental Quality (EQ) Evaluation Procedures

NED Effects (National Economic Development) n Increase value of national outputs of goods and services n Output resulting from external economies n Value associated with use of un- or under -employed resources n Opportunity costs of resources used

NED Costs n Opportunity costs of resources used in plan n Implementation outlays n Associated costs n Other direct costs

General Measurement Standard n The value of goods and services is defined as the willingness of their users to pay for them.

WTP Measurement Techniques of Outputs With $ Values n Actual or simulated market price n Change in net income n Cost of the most likely alternative n Administratively established values

Outputs vs. Effects n Outputs are intended beneficial effects n Project purposes n Federal Interest n Typically NED and NER n Effects n Intended and unintended n Positive and negative n Tallies across all four accounts

Environmental Quality (EQ) Account n Displays non-monetary effects on ecological, cultural and aesthetic resources. n Positive and adverse effects of ecosystem restoration plans n Required to display

Evaluation Process for Ecosystem Outputs n Cost Effectiveness Compare Costs To Provide Envir Output Costs of Measure / Outputs ( e. g. , H. U) n Incremental Analysis Compare Cost Effective Measures Is Measure Worth It?

Regional Economic Development (RED) Account n Changes in the distribution of regional economic activity n Discretionary to display

RED Benefits n Regional income n Transfers n Regional employment n Transfers

Other Social Effects (OSE) n Urban and community impacts n Life, health and safety factors n Displacement n Long-term productivity n Energy requirements and energy conservation

Period of Analysis n Planning horizon n Same for all alternatives n Can vary from project-to-project n Lesser of 100 years or period of time over which plan accrues significant benefits or costs (Normally 50 years)

Planning Horizon Study Period of Analysis Construction Period Project Life

The Current Discount Rate for the Corps is 4 5/8% Rule of Thumb: With discount rates below 6%, a project will need $1 in Avg Annual Benefits for every $15 in project costs to produce a BCR>1.

Recent Enhancements n DE Presentations of Decision Documents n Report Summary n Planning Models Improvement Program n Peer Review n Planning in a Collaborative Environment n Combined Plans

DE Presentations n Additional accountability for quality of decision documents Better documentation and support of analysis n Ready to answer questions and participate in issue resolution n Ready to provide rationale for plan selection and final recommendation. n

Summary Report n Summary of key facts, issues and uncertainties n Provide input for report preparation on expected project performance n n Benefits Costs

Planning Models Improvement Program n Review, improve and validate analytical tools and models n Certification process based on peer support/review for technical soundness and usability n Economists will: n n Identify, in PMP, models/tools to be used for economic analysis Coordinate with PCXs for ITR/Certification Provide documentation for certification if proponent for a model Use certified models when available

Peer Review n To ensure the quality and credibility of Corps decision documents n n n Technical quality Independence of review Responsiveness Documentation Shared Lessons Learned n Scientific and engineering information underlying decisions and recommendations will be reviewed to ensure its technical quality.

Planning in a Collaborative Environment n Enhance collaborative approach to water resources management n n Watershed/system vs. site specific Multiple purposes / multiple partnerships n Fully utilize flexibility and authority of P&G n Evaluate, display and compare the full range of alternative plans effects across all 4 P&G accounts. n May select any candidate plan with net beneficial effects (based on 4 accounts) with ASA exemption. n Must identify NED Plan.

Combined Plans n Modern day multipurpose planning - strive to achieve environmental sustainability (EOPs) n “Seek balance and synergy among human development activities and natural systems by designing economic and environmental solutions that support and reinforce one another. ”, Environmental Operating Principles, March 2002 n Contribute to environmental sustainability as defined in EOP’s by formulating Combined NED/NER plans n Combined NED/NER Plan = Combined Plan

Summary: n Principles and Guidelines n Collaborative Planning n Federal Objective n 4 Accounts: NED, EQ, RED, OSE n Willingness To Pay n Discount Rates, Period of Analysis, Planning Horizon