June 19, 1998
How could agencies improve benefit assessment and ranking of investments? Is there a problem of misallocating resources by selecting projects of less merit than others?
Private investment decisions are made by ranking potential projects by their expected rate of return, and undertaking those with the highest return above their cost of funds. Government investments do not generally earn a financial return; their "return" is in the form of benefits that are harder to measure. However, there are well-developed approaches to assessing the benefits of such investments and comparing them with cost. OMB Circular A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, (October 1992) provides instruction for such analyses. Benefit/cost analysis is a key step in the planning phase set forth in the Capital Programming Guide, and an analysis of the project's total life-cycle costs and benefits, including the total budget authority required for the asset "should be included" in the budget justification. For infrastructure investments, Executive Order 12893 requires similar economic analysis.
Implementation of this guidance still leaves much to be desired. Although analysis of investment projects is done in some areas -- water projects, defense procurement, and transportation infrastructure -- in many areas, analyses are only infrequently done, and they are even less frequently disseminated. Getting them usually requires a timely special request to the agency. Decisions to allocate resources for investment are often made without benefit of such studies or even in the face of unfavorable benefit/cost study results.
Of course, analysis is intended to inform decision making, but not supplant it. There will undoubtedly be cases where decisions cannot await a thorough analysis or do not merit a costly study. There will also be cases where equity or political concerns suggest funding projects or programs that might not pass a strict benefit-cost test. However, by better informing decision makers and the public, such studies make it more likely that scarce taxpayer resources will be used more effectively.
2. Increase the visibility of the analyses by posting them on the Internet, so that the public, press, and Congress would have ready access to them. Summarize and compare the results of these analyses the Budget and/or Analytical Perspectives.
3. To ensure that resource allocation decisions are based on comparisons, not just among investments, but with other expenditures, subject other programs and tax expenditures to benefit/cost analysis. The attractiveness of investing in a capital project with a 2:1 benefit-cost ratio depends, in part, on whether the marginal non-capital spending activity has a benefit-cost ratio of 1:1 or 3:1. As a start, the focus might be on new programs or spending initiatives where funding would increase by $50 million or more in a year. Eventually the requirement for economic analysis could be extended to programs with large but stable funding.
4. Encourage CBO and GAO to assemble and critique such analyses and provide them to Congressional Committees as related decisions are under consideration. Encourage them to undertake benefit/cost analyses themselves.
5. Encourage Congress to review benefit/cost analyses before making appropriations decisions and to consider whether procedures might be introduced to question initiatives that are presented without appropriate accompanying analysis.