Cost-Benefit Analysis, Research Paper Example

Introduction

In an effort to improve water quality in the Ottawa River, the City of Ottawa is considering options to reduce combined sewer overflows (CSO’s) into the river. Therefore, this issue would appear to present a classic case in which cost-benefit analysis should be used to determine which option maximizes net benefits. It appears the older pipes in the city are combined with the storm water runoff in one pipe which is not able to handle the capacity. When the heavy rain comes the treatment facility cannot handle the load from the older and newer neighborhoods. In order to prevent overflow into the homes of the neighborhoods the overflow is sent into the Ottawa River. Hence, the water quality is severely damaged. The city plans to spend between $40 billion to $2.2 million to eliminate this pollution overflow problem. It is obvious the representation of the adequacy of the elimination of the problems will be in proportion to the amount of money invested. Hence, a cost-benefit analysis would be in the best interest of the city to determine which avenue to determine which option maximizes net benefits. For the purposes of this long term essay I will provide the city with three options or recommendations ranking each with the maximum net benefit proposed. Further I will recommend according to the cost-benefit analysis how it is recommended that the city proceed to eliminate the overflow into the Ottawa River which will in turn take care of the over capacity issue at the water treatment plant. Reducing sewerage discharge will be relied upon non-market methods to estimate monetary values.

“Using the EVRI and the benefits transfer approach appropriately will yield significant time and cost savings as compared to the time and resource intensive process of designing, testing and implementing a new valuation study. Beyond its role in facilitating defensible benefits transfers, the EVRI can assist in the design of new valuation studies since it contains concise, detailed and easily accessed information about the methods and approaches taken in existing valuation studies. In the long run, the EVRI will illustrate the gaps in the body of valuation research with respect to environmental goods and services and different parts of the world.” (“Environmental Value Reference Inventory”). The six basis categories of study for a proper economic evaluation study are:

• “The study reference which includes the basis bibliographic information.” (“EVRI”).
• “The study are and population characteristics which includes the basic information of the site location and the population of the site data.” (“EVRI”).
• “The study methods which include the technical methods to conduct the studies including the specific techniques used to arrive at the data.” (“EVRI”).
• “The estimated values which include the monetary values as well as the specific units of measures used to arrive at the data of the study.” (“EVRI”)
• Any alternative summary language which includes the study in various languages such as French, English and Spanish. Some studies are also provided in Dutch and Russian.

Estimations

A discount ratio of 2.5% was used to make the following calculations for cost analysis:

Present Value of Benefit-Cost under Option A

The PV was calculated as follows:

PV = R₀ + R₁/(1+r) + R₂/(1+r)² +….+ R_T/(1+r)^T

PV = (Return in Tth period)/(1+r)^T

PV for benefit A = Return after 5 years/ (1+0.03)⁵

After plugging in the values above here are the results

PV for benefit A = 3.67458.987/(1+0.03)⁵

PV for benefit A = $2.278569 million

Option A – PV of Cost = 15 + 15/(1+0.03) +  15/(1+0.03)² + 15/(1+0.03)³ 15/(1+0.03)⁴

Option A – PV of Cost = $61.8567436 million

Benefit-Cost Ratio =1.98865490/46.60517865

A- Benefit-Cost Ratio = 0.0768906

Present Value of Benefit-Cost under from Option B

PV for benefit B = Return after 5 years/ (1+0.03)⁶

PV for benefit B = 254789.729/(1+0.03)⁶

PV for benefit B = $4.77867789 million

Assuming that the cost is evenly spread over the six years of implementation, cost per year comes to be $42.8 million (2010-2015).

Option B – PV of Cost = 41.9 + 33.9 /(1+0.03) +  41.9 /(1+0.03)² + 41.9 /(1+0.03)³ + 33.9 /(1+0.03)⁴ + 41.9 /(1+0.03)⁵

Option B – PV of Cost = 135.2576699 million

B- Benefit-Cost Ratio = 3.14517627 /139.1931549 = 0.039353990

Present Value of Benefit-Cost under Option C

PV for benefit C = Return after 50 years/ (1+0.03)⁵⁰

PV for benefit C = 3782640.786/(1+0.03)⁵⁰

PV for benefit C = $636,864.6738

Assuming that the cost of $3.8 billion is evenly spread over the fifty years of implementation, cost per year comes to be $41 million (2010-2060).

Option C – PV of Cost = 37+ 44/(1+0.03) +  37/(1+0.03)² + 37/(1+0.03)³ + 37/(1+0.03)⁴ +….+ 37/(1+0.03)⁵⁰

Let x = 1/(1.03) = 1.01

Using Geometric series summation:

Option C – PV of Cost = 39(1-x ⁽ⁿ⁺¹⁾)/(1-x)

Option C – PV of Cost = 39(1-0.97 ⁽⁵⁰⁺¹⁾)/(1-0.97)

Option C – PV of Cost = 1.286079896 billion

C- Benefit-Cost Ratio = 612,864.2289/1166.072905 = 0.000762177

Ranking of options with respect to Benefit-Cost Ratio

The Project and Projected Cost-Benefit Analysis

The EVRI and Ottawa River Commission proposed over seventeen different combinations that could reduce the E-coli contamination/pollution in the river by nearly 70%. Following are the three proposals that are likely to be most efficient and successful according to ecologists and economist considering technical applications and cost effective analysis provided by the EVRI in combination of the Environmental Protection Agency.

Discussion of the Cost-Analysis Rankings

Since the original piping and sewer system of the City of Ottawa, Canada was built with a one system piping to handle all waters, sewerage and storm waters there was a need to make separation of the sewerage system. There has since been a separate system of sanitary pipelines to handle the sewerage and storm waters. The problem is that only approximately 63% of the city has undergone such change due to various reasons including costs, inability to make changes due to residency, etc. Government regulations have since required the City of Ottowa to meet certain guidelines according to the of the Environment’s Procedure F-5-5. The most important factor to consider when meeting these guidelines is controlling the amount of overflows into the rivers.

Once Real Time Control (ORAP Project 1) is put in place the City of Ottawa is expected to be in full compliance of the new policy.  Project 3 and 5 present a goal to bring the cities sewerage and non-compliance issue fully into compliance with the numeric criterion set by the province of Canada. This allows a maximum of two overflow events during the swimming season, during the average year.

The following represents the anticipated implementation time for each ranked scenario:

Time to implement programs of cost-benefit analysis plan

Project 1 would entail the combination of an automated sewerage plant and some storage facilities for overflow. Underground storage tanks would be built in order to hold polluted sewerage until it could be treated and then discharged into the rivers. This would prevent overflow into the rivers whilst housing temporary sewer holdings for the sewerage and rain overflow. This would severely prevent beach closure due to pollution. Because forecasters predict a 35% increase in precipitation in the coming year there is a need to do something with this overflow. The bare minimum requirements should be accomplished in time for the upcoming precipitation but there is a long way to accomplish this goal.

Project 5 offers an approximate 45,000 m3 storage facility for sewer system and the overflow to prevent overflows during the wet weather periods of the year. The anticipated storage areas would be sufficient to allow the sewer separation and real time controls to take care of the control of the storm water during the heavy rainfall precipitation months in Canada. Once the waters are sufficiently treated at the sewer systems they can be safely returned back into the Ottawa River. This storage would facilitate the compliance of no more than two overflows per annual year. These storage tanks would be larger than the storage tanks in proposed Project 1. However the combination of Project 1 and Project 5 would facilitate a stronger elimination of sewer problems and overflows to the river due to the technological advances of treating the water and providing overflow protection. The use of advanced automated controls would aid in this development along with the larger storage tanks implemented underground. The disadvantage of this plan is that it does not address the issues of the downtown piping which is over one hundred years old. Some alternative plan needs to be incorporated to tackle this issue; however this will be a costly measure that will take many years to accomplish. The City needs a temporary fix and a short term plan such as a two to five year permanent plan to establish permanent compliance according to policies of the government.

Project 3 is a long term plan that incorporates the neighborhoods and subdivision revisions of piping and sewerage revamping in order to establish new boundaries for elimination of sewerage and overflow problems. This being the most costly plan with the longest time frame of over thirty years is not the most plausible means to help the City of Ottawa with their immediate needs. Some of the anticipated options to consider when revamping the system are:

• Disconnecting the sewer lines in the city
• Installation of new sewer lateral lines to homes in the city including streets
• Sump pumps in the basements are not available for use in all areas
• Including the use of centrifuges to remove sediment before discharging water into the river

Eventually when completed this would eliminate all overflow issues but there might still be a problem with E-coli unless the water treatment plants are technically advanced such as automation devices. Because this project would take years to complete, there would be a need for a temporary solution where monies would have to be invested in order to accommodate the residents and look towards a future permanent goal. There would be a cost-analysis procured to estimate the return on the investment since the anticipated cost is much greater than the costs associated with the combination of Project 1 and Project 3.

It is in my opinion that a combination of Project 1 and Project 3 would serve the same purpose at a lower cost-analysis and the net return would be much greater in a very lesser period of time hence benefiting the community as well as the residents.

Issues to Consider When Making the Decision

My chosen strategy shows there is much work to be accomplished. Achieving the goals set out here requires the collective support of private and public sectors, voluntary organizations, labor, research centers and academic institutions. “Success depends on the people of Ottawa, who have the skills, resources and creativity to achieve these goals. Ottawa’s leading economic partners include The Ottawa Partnership (TOP), economic agencies (OCRI, OLSC, and OTCA), chambers of commerce, business improvement areas, Ottawa Federation of Agriculture, business and professional associations including cluster groups, and educational institutions. These economic partners already have a track record of collaboration, often with City involvement. Their successful partnerships will be the foundation for new collaborative ventures.” (“Economic Strategy, 2010).

The plan will be implemented with the help of the business, research and planning committees. In any case the goal of the city will be to implement a plan that will be most effective whilst considering the costs associated with such implementation.

The city plans to makes its strategies open to the public to review regularly and ad input. This will be accomplished through monthly meetings and public facilitation of onsite collaboration between engineers and workers. Supervisors plan to take input from the technical advisors.

“The next step is development of tactical plans to implement the Economic Strategy. The progress of all Ottawa 20/20 plans will be assessed every year in a Report Card that will be based on quantitative and qualitative indicators. This will allow all stakeholders to keep a watchful eye on the cumulative effects of change. It will also allow us to determine whether public spending is serving real needs and achieving the desired results. The Ottawa 20/20 plans will be reviewed every five years to assess whether amendments are necessary.” (“Economic Strategy, 2010”).

The city plans to monitor its progress against the progress of other cities that have implemented similar plans and ensure they are on track with the time frame and quality of the work accomplished. They are very positive for accountability of the project.

“Evaluate progress in improving business climate, promoting the rural economy and supporting knowledge and skills development, and by benchmarking Ottawa’s status against similar cities nationally and internationally.” (“Economic Strategy, 2010”).

Performance indicators for data sources will be used to monitor progress Here are the possible indicators:

• Prosperity: Lower employment rates in the city. Improvements in wages per person and household income. Shareholders should expect healthy returns.
• Equity/disparity: The gap between the rich and poor should reduce. (based on average household income). “Increase in equity-opportunity, community quality and participation-regardless of where people live. Reduction in the employment gap between foreign-trained professionals and Canadian-born and trained professionals.” (“Economic Strategy, 2010”).
• Sustainability: The city hopes to employ better educated workers and hopes to make the bottom line larger for the profitability of the city and it’s employed.
• Quality of life: Health care and affordability of housing should improve in the city.

The City of Ottawa’s Economic Vision

It is the goal of the Economic Strategy to achieve improved opulence for Ottawa through fair and prosperous growth. Prosperity is created through the incorporation of high quality jobs, increased communal and financial equity, and increased investment in the basics that support our economy: people, place and knowledge. The City of Ottawa plans to use its new tools of vision to create a more prosperous and advantageous community for all.

These plans will depend on the public sector, politicians, community hospitals, volunteer organizations as well as universities in and near the city.

Consultants gave rise to the following positive strategies to make this plan happen:

• “Invest in people and place”
• “Share knowledge and ideas”
• “Link innovation to the marketplace”
• “Strengthen industry clusters and entrepreneurship”
• “Promote Ottawa to the world” (“Economic Strategy, 2010”).

Ottawa hopes to become ever so competitive in the local community as well as global world and to further attract and retain high-value jobs and companies; to enhance the quality of life of its residents and improve the environment.  Following is a preliminary list from the plan they want to put into action:

Immediate Priority Actions

There is an immediate need to implement the following into the Economic Strategy.

Strategic Direction 1: Invest in people and place

• There is an immediate need to increase two way communications between businesses, politicians and the residents of the community. [See policy 1.]
• There is a need to implement a regimented visitation plan where anyone can monitor the progress of the plan. [See policy 1.]
• Implement the Talent Plan recommendations. [See policies 2, 3 and 7.]

Strategic Direction 2: Share knowledge and ideas

• There is an immediate need to implement the Broadband Recommendations. [See policies 11, 12 and 13.]

Strategic Direction 3: Link innovation to the marketplace

• There should be a collaborative plan to link research and technology. [See policy 14.]
• The incubation capacity should be regularly reviewed and accessed. [See policy 15.]
• Take a look at business marketing plans and create a way for individual businesses to create their own effective marketing plans with minimal assistance. [See policy 17.]

Strategic Direction 4: Strengthen industry clusters and entrepreneurship

• Establish and support industry clusters and ensure they are properly maintained. [See policy 18.]
• Capture more revenue for the local economy by looking at probable supply-chain linkages between the industry clusters and local businesses, and between urban and rural businesses. [See policy 20.]
• Strengthen vitality of Main Street through use of business retention methods. [See policy 20.]

Strategic Direction 5: Promote Ottawa to the world

• Promote tourism through domestic and international marketing schemes. [See policies 23 and 25.]
• Ottawa Congress Center should gain more support from the city and the politicians because of its potential to bring revenue to the city.  [See policy 24.]

Conclusion

Through the use of various technical proposals and the support of the city, politicians, universities, volunteer agencies, etc Ottawa can change its image from a rural city into a new developing suburban city and possible international marketing city with just a few changes. The first issue on the agenda is taking care of the sewerage and overflow issues with regards to rainwater and storm causing over flowage. Next the community must collaborate its efforts and come together to promote the city to where it can be a contender in Canada. There is no need for the city to stay behind times with technology and the essentials such as sewerage and overflow. Change is made through progressive means of communities coming together. Support is gained through marketing schemes and bringing together the people that are most influential in the city. Numbers are important when wanting to make change happen. Change does not come overnight but it can come with preservation and determination. Let’s make Ottawa at the top of its caliber-make change happen!

References

Environmental Value Reference Inventory (2010) Retrieved April 25, 2010 from, https://www.evri.ca/Other/AboutEVRI.aspx#00

The Environmental Valuation Reference Inventory (EVRI) was developed by P. De Civita, F. Filion and J. Frehs of Environment Canada