Economic Impact vs Feasibility

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The Problem

Most consulting firms use the term feasibility; they do so frequently. Planning firms, architectural firms, engineering firms, economic development firms, and so-called “research” firms use the term. Transportation agencies, economic development agencies, port authorities, transit authorities, environmental agencies, and countless other agencies at the local, state, and federal level use the term. Feasibility is thrown around from the board room to the boiler room; with every relationship we develop with clients and potential clients, the term feasibility is used. The problem, of course, is that so few people really understand feasibility—and this includes every group represented above and then some. In fact, in nearly 30 years of conducting large scale technical, financial, economic studies, only a handful of persons with whom I have dealt really understand feasibility, let alone how to determine feasibility; and unfortunately, this includes most consultants being paid to determine feasibility.

Feasibility is a simple construct in theory, but it is an arduous undertaking filled with complex issues requiring sophisticated techniques in reality. I was reminded of such this morning while reviewing the requirements mandated in an RFP for a feasibility study in the US transportation sector. In this case, the basic problem centered on the fact that the author of the RFP did not understand feasibility, as evidenced by the fact that the RFP only mandated that financial costs be estimated and analyzed. So, what is missing from the equation? Well, how can we determine feasibility when we only have one side of the equation? Feasibility, at least in terms of financial and economic feasibility, always requires one to leverage costs against benefits, yet the RFP does not request that the proposer estimate project benefits. As such, the winning firm will be forced to compare financial costs against, well, nothing. Thus, the study, at least as requested, has nothing to do with feasibility.

Of course, to top this off, as a review committee and their extensive team of attorneys, financial representatives, and administrators, along with an anxious public, listened intently to a complex presentation I was delivering earlier this week it became obvious that a voting member of the review committee did not understand feasibility. Thus, the presentation quickly became difficult for the reviewer(s) to follow given the lack of understanding between economic impact and feasibility.

Economic Impact vs Feasibility

The relationship between economic impact and feasibility as it relates to public infrastructure projects is analogous to the relationship between scientific validity and reliability. We can have reliability without validity, but we cannot have validity without reliability. Similarly, we can determine economic impact without feasibility, but we cannot determine feasibility without economic impact.

Economic impact assumes that at least one unidirectional relationship exists. To a large extent, economic impact also assumes that this relationship is causal. Of course, assuming that a relationship between two or more variables exists and that the relationship is causal is problematic, altogether, as we regularly find otherwise. Nonetheless, at least one independent variable has an impact (statistical effect) on a dependent variable – or, hopefully, variable A causes variable B (or variable B to do something). For example, most people assume that increasing infrastructure spending increases economic output (GDP, jobs, personal incomes, tax generation, and similar variables). Unfortunately, this is not always the case. Increased spending does not inherently lead to increased economic output. But I digress.

Somewhat conversely, feasibility compares the differences between two independent variables. In the private sector, for example, that comparison may be between profit and loss. In the public sector however, feasibility should result in the differences between financial costs and economic impacts. This in and of itself is a difficult undertaking because we are comparing unlike units. We are comparing the financial costs associated with implementing a large infrastructure project, such as construction costs, against the economic impacts of the project, such as the number of jobs that the project supposedly “creates,” or the capital outlay of a project verses increases in personal incomes or tax revenues. The two sides of the equation are not diametrically opposed but neither are they mutually congruent; thus, we are forced to develop rubrics through which comparisons can be rendered.

Along with comparing unlike units, causal relationships must be investigated, especially when using economic impact to justify project feasibility. Unfortunately, outside of Xicon Economics, we have never seen a firm or agency investigate causal relationships as they relate to estimating economic impact. Remaining with our presentation earlier this week, a port authority hoping to capture post-Panamax cargo requested that economic impact affiliated with port activities be estimated. All is well until these same estimates of economic output are eventually used to substantiate feasibility, such as harbor deepening, new terminal construction, or similar endeavor. Now, we must investigate causal relationships, and do so from a bidirectional perspective. For example, does port output cause, or at least Granger-cause, an increase in local GDP and tax generation; or conversely, does an increase in local GDP and tax generation cause an increase in port output?

impact

The same holds true for any public sector project; economic impact can be investigated from a unidirectional perspective, but feasibility most often must be investigated from a bidirectional perspective, and moreover, from a causal perspective. For example, assume a public agency is considering investing a billion dollars on a mass-transit system. One of the first question addressed must be, “Will the project cash flow?” In other words, will these monies be an actual investment or merely superfluous spending. Of course, this question becomes a comparison between cost and benefits, but for a public project, an entirely different dynamic must be considered, primarily on the benefit side of the equation, as noted previously.

Likely, until persons charged with estimating economic impact and feasibility actually understand economic impact and feasibility, we will be left to deal with what amounts to a crap shoot, with some infrastructure projects serving to increase economic output and others serving as a waste of tax dollars—by the billions. And billions of dollars is something we are currently a little shy of the US.

A point to ponder.

About the Author

Herbert M Barber, Jr, PhD, PhD is the chief executive officer of Xicon Economics, a highly specialized consulting firm with expertise in economics, research, and statistics. Dr. Barber is one of some ten experts in the world specializing in leveraging large economic endeavors in industry and infrastructure as a means of increasing financial and economic output in economies. Dr. Barber holds 5 earned academic degrees from Georgia Southern University, Florida State University, and Mississippi State University.


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