A back of the napkin economic develpment business case

Chalk this up to the “inside the mind of a madmen segment” – here is my Ipod list for my dog walking this week:
– Rossini’s The Barber of Seville opera ( you gotta like Figaro)
– A weeks worth of The Dennis Miller Show archives
– The audio version of From October to Brest-Litovsk by Trotzky – downloaded from LibriVox Audiobooks
– CBC’s The House, Ideas and The Best of the Current podcasts

Now on to my thought of the day.

Students, here is the 101 version of how to do an economic development business case. Our model today involves an opportunity cost analysis of building a $2 billion nuclear power plant for the purpose of selling electricity to the Americans. Please note that all figures included in this business case are entirely hypothetical.

Capital cost: $2 billion
Ongoing operating costs: $80 million
Annual interest and principal payments on debt: $120 million
Ongoing revenue from exported electricity: $265 million

Model #1

Sell all that electricity into the U.S. at a wholesale rate (well below the retail rate charged to residential and even most business customers).

Economic benefit to the province: $265M – $120M – $80M = $65 million net economic benefit (to be used either to lower rates here to as a surplus to be plowed into general tax revenues)

Plus:

Roughly another $15 million in taxes paid by the 500 estimated, high salaried workers.

So, the economic benefit to the province from the $2 billion a year, is roughly about $80 million – or about a 4% return on the two billion invested.

Model #2

All the same assumptions above except the power rate is lowered even further such that there is no margin for NB Power – just the covering of operating/amortization costs. Then this incentive rate is used to attract 100 data centres employing an average of 100 workers at an average salary of $70,000/year.

Economic benefit to the province: no net economic benefit from the sale of the power (just cost recovery)

Plus:

Roughly another $200 million in taxes paid by the 10,000 estimated, high salaried workers (and the corporate and local taxes).

So, the economic benefit to the province from the $2 billion a year, is roughly about $200 million – or about a 10% return on the two billion invested.

Plus: you reverse your population decline, you can site these data centres around the province, etc.

Model #3

I am not going to do this one but you think it through. The government invests the $2 billion over 10 years into another sector – say biotechnology – through setting up university research, building infrastructure, attracting talent, etc. and attracts X companies paying Y salaries.

I think you get my point this morning. When government is looking at large scale investments into economic development generating infrastructure they would be well advised to think through the alternatives.

Obviously, there are broader considerations such as “would data centres come here even with cheap power” or “the additional cost to government of 10,000 new residents” or “could we attract workers” or, on the positive side, what would be the economic multiplier of the 10,000 high paid workers in the economy (not included in the $200 million above)?

But you get my point. When ever government is looking at a large scale spending projects, it should evaluate the opportunity cost of that investment and align it with the large goals of its administration.

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0 Responses to A back of the napkin economic develpment business case

  1. Anonymous says:

    you are assuming no spin off benefits from the workers and you are assuming govt is the one paying for the nuclear plant. ON the latter, i think you are seriously mistaken.

  2. David Campbell says:

    Again, this is a simplistic version of what I think needs to be done when these things are being considered. As for who pays for the nuclear plant, obviously if someone other than NB Power pays for it than it just becomes a private sector investment model – unrelated to my blog. But if the private sector pays for the plant than leases it to NB Power, than exactly the same model is in play with some tweaking of the cash flows.