Summervile’s history regarding PPP projects
Capital budgeting is used to determine whether a long-term investment intangible assets, is worth the deployment of cash through the particular combination of debt and equity (Iossa, & Martimort, 2015). While most literature focuses on capital budgeting in private contexts, in PPP projects, capital budgeting is used to determine the financial and economic equilibrium which involves ensuring that the public authority can afford the projected cash flows while simultaneously reimbursing private investors for their costs. From a public sector perspective, capital budgeting is critical to understand the most feasible and appropriate investment among alternatives. Through conducting a comprehensive financial analysis of a project’s costs and benefits, a public authority can adjust the contract to extract maximum value from the market in addition to reducing information asymmetry during the procurement and implementation process (Iossa, & Martimort, 2015). The current report will evaluate Summervile’s history regarding PPP projects, assess the financial and economic viability of the proposed boutique hotel, and provide justification for choosing to vote against the project. Don't use plagiarised sources.Get your custom essay just from $11/page
To ensure optimal outcomes for the public, private partnerships, governments should ground their capital investment plans on an objective evaluation of economic capacity towards pursuing their investment goals, assess costs and benefits of such investments, affordability, and degree of a priority compared to alternative projects (Buso, Marty, & Tran, 2017). However, Summervile has a poor history with PPP projects due to the government’s failure to conduct due diligence. The town purchased the Historic Berry House and Teacher for $700,000 with an additional $90,600 in refurbishment costs. While all residents surveyed agreed it would have been a good venue for major functions, the town council sold it four years later for $300,00 due to continued losses. The council also spent $3.5 million of the hospitality tax funds to purchase a little-used public parking garage. Funding was through a $4.9 million municipal bond whose repayments have depleted the hospitality tax. The state department has a similar poor record of PPPs. South Carolina Electric and Gas (SCE & G) had a project to develop a $9 billion nuclear power plant whose failure resulted in higher consumption rates. As part of their takeover bid, Dominion power needs to pay $1.3 billion to existing consumers for their unwitting role in the debacle. An evaluation of all these projects showed that the authorities involved did not conduct due diligence analysis on the financial and economic viability of their infrastructure projects. While the Historic Berry House was perceived as a good venue for functions, demand had not been established which meant that all assumptions were hypothetical. The purchase of a low-traffic parking space follows a similar pattern where decision makers did not consider the future cash flow from the investment. Furthermore, the currently proposed Dorchester Hotel has limited support from the town’s residents and administrators with the mayor as the primary proponent.
A valuation analysis of the proposed construction of boutique hotel shows that it is not suited to Summervile’s current economic and financial status. Construction would require significant financial commitments from the government, $3.75 million gap loan for 24 months for private development, while $5.2 million would go towards public improvements. The council would have to pay $600,000 annually for 20 years although this is expected to be offset by a projected increase in annual revenue by $600,000 in addition to 60 new jobs. While some people have expressed a need for conferencing facilities, the 10,000-square-foot specification exceeds the town’s needs. Furthermore, the 179 parking spaces and condominium units are unlikely to experience full utilization leading to opportunity costs. The NPV shows that the project’ future incomes would have little benefits to the community. Therefore, Bailey should vote no as the project places undue strain on public finances.
References
Buso, M., Marty, F., & Tran, P. T. (2017). Public-private partnerships from budget constraints: Looking for debt hiding?. International Journal of Industrial Organization, 51, 56-84.
Iossa, E., & Martimort, D. (2015). The simple microeconomics of public‐private partnerships. Journal of Public Economic Theory, 17(1), 4-48.