The use of one structure to provide more than one service makes possible the
provision of services at less than the total cost of separate structures for each service.
A common example is the construction of a dam which provides for water storage. It
has a given cost. Given that the use of the same structure (or even a larger one) has
brought savings because purposes are being achieved by the use of the combined
structure, it seems acceptable that a basic principle of cost allocation is to distribute
equitably the savings obtained for the different purposes among the relevant responsible organisations. This is the underlying principle of cost allocation for infrastructure investment. This chapter explains the different methods available to calculate
cost apportionment, and presents worked examples of application.
19.1 The Need for Cost Allocation
19.1.1 Introduction to the BPP Principle
While it is very clear who should pay for a project when there only one beneficiary, it is
less obvious who bears what costs when there are several beneficiary organisations.
And, in what proportions do they do so? Should the sharing be effected in equal
proportions (as per number of organisations) or in pro-rata to benefits obtained or
something else? This distribution of costs among beneficiaries is called the cost allocation process. The joint cost is the cost of features, which serve more than one purpose.
Thus, the main issue about the process of cost allocation revolves around the sharing of
joint costs among the different beneficiaries. It is considered essential to share these costs
equitably among the beneficiaries by using a suitable cost allocation method.
Society expects that the polluter will pay (polluter pays principle) to compensate
for damages to the environment. A corollary is that the beneficiary should pay for the
benefits received. The consequence of this principle is that if a project’s costs exceed
its benefits, nobody will be interested in funding or implementing such a project. The
“Beneficiary Pays Principle” (BPP) is thus a good way of ensuring proper investment in the right direction.
The surplus of benefits over costs will be one of the drivers for implementing the
project. However, if there are several beneficiaries, one of them may receive most of
the surplus over benefits, while the others receive benefits barely exceeding their
own contribution. Just imagine somebody going to the restaurant with his friends.
He barely eats anything, and yet has to contribute an equal share of the food bill.
Most likely, next time, he will find some excuse for not coming to the restaurant.
The use of one structure to provide more than one service makes possible the
provision of services at less than the total cost of separate structures for each service.
A common example is the construction of a dam which provides for water storage. It
has a given cost. If with this same structure (and water available) it is possible to
generate hydroelectricity, should the latter organisation pay for half of the dam cost
(two users), or in proportion to revenue generated (or profit earned)? Given that the
use of the same structure (or even a larger one) has brought savings because several
purposes are being achieved by the use of the combined structure, it seems acceptable
536
19 Cost Allocation for Infrastructure Implementation
provision of services at less than the total cost of separate structures for each service.
A common example is the construction of a dam which provides for water storage. It
has a given cost. Given that the use of the same structure (or even a larger one) has
brought savings because purposes are being achieved by the use of the combined
structure, it seems acceptable that a basic principle of cost allocation is to distribute
equitably the savings obtained for the different purposes among the relevant responsible organisations. This is the underlying principle of cost allocation for infrastructure investment. This chapter explains the different methods available to calculate
cost apportionment, and presents worked examples of application.
19.1 The Need for Cost Allocation
19.1.1 Introduction to the BPP Principle
While it is very clear who should pay for a project when there only one beneficiary, it is
less obvious who bears what costs when there are several beneficiary organisations.
And, in what proportions do they do so? Should the sharing be effected in equal
proportions (as per number of organisations) or in pro-rata to benefits obtained or
something else? This distribution of costs among beneficiaries is called the cost allocation process. The joint cost is the cost of features, which serve more than one purpose.
Thus, the main issue about the process of cost allocation revolves around the sharing of
joint costs among the different beneficiaries. It is considered essential to share these costs
equitably among the beneficiaries by using a suitable cost allocation method.
Society expects that the polluter will pay (polluter pays principle) to compensate
for damages to the environment. A corollary is that the beneficiary should pay for the
benefits received. The consequence of this principle is that if a project’s costs exceed
its benefits, nobody will be interested in funding or implementing such a project. The
“Beneficiary Pays Principle” (BPP) is thus a good way of ensuring proper investment in the right direction.
The surplus of benefits over costs will be one of the drivers for implementing the
project. However, if there are several beneficiaries, one of them may receive most of
the surplus over benefits, while the others receive benefits barely exceeding their
own contribution. Just imagine somebody going to the restaurant with his friends.
He barely eats anything, and yet has to contribute an equal share of the food bill.
Most likely, next time, he will find some excuse for not coming to the restaurant.
The use of one structure to provide more than one service makes possible the
provision of services at less than the total cost of separate structures for each service.
A common example is the construction of a dam which provides for water storage. It
has a given cost. If with this same structure (and water available) it is possible to
generate hydroelectricity, should the latter organisation pay for half of the dam cost
(two users), or in proportion to revenue generated (or profit earned)? Given that the
use of the same structure (or even a larger one) has brought savings because several
purposes are being achieved by the use of the combined structure, it seems acceptable
536
19 Cost Allocation for Infrastructure Implementation