that a basic principle of cost allocation is to distribute equitably the savings obtained
for the different purposes among the relevant responsible organisations. Therefore,
the cost apportionment of a multipurpose project equitably among the several
relevant organisations responsible for the purposes served is called cost allocation.
So, if there are several beneficiaries from a project, it is important that the cost
allocation is properly done so that no beneficiary feels benefitting less than its
financial contribution to the project. Giglio and Wrightington (1972) argue that the
problem might become more complicated when some beneficiaries negotiating in
the right quarters manage to obtain subsidies thereby decreasing their own contribution. For example, the irrigation sector often receives subsidies, related to food
production, etc.
In order to encourage people using wood fuel to shift towards gas, government
provides subsidies on equipment (heaters, cookers) running on gas fuel. The idea
behind giving the subsidy is to conserve forests and the environment. Once the habit
of using gas equipment has been created, should the subsidy continue? Those people
who use electric cookers, may also switch to gas cookers, simply because of the
subsidy. Thus, a subsidy provision will probably involve more participants in the
multipurpose project, with the drawback that the users do not appreciate the full
opportunity cost of the project thus leading to inefficiencies (Kemper et al. 2003).
Sometimes, participants are given subsidies to participate in the multipurpose project
by receiving a portion of their separable costs.
19.1.2 Background
It has been a general principle that the State can finance projects providing public
benefits (i.e. benefits to society) and should not finance projects with private benefits.
The latter projects should use non-State funds for implementation. If there are
projects which provide benefits to both the public and the private sector, it is
judicious that the contribution from government and from non-government users
be established, somehow, on their proportion of the overall benefit.
While the “Beneficiary Pays Principle” (BPP) looks logical and fair, it presents
three main challenges:
(1) What are the costs corresponding to each user and purpose?
(2) What benefits can be categorised as private or public?
(3) How can costs be allocated?
19.1.3 Applications of BPP in Infrastructure
Examples of multipurpose projects include:
1. Dam to supply water for domestic use, irrigation and hydropower to three
different agencies plus a road on the dam crest, still for another agency.
19.1 The Need for Cost Allocation
537
for the different purposes among the relevant responsible organisations. Therefore,
the cost apportionment of a multipurpose project equitably among the several
relevant organisations responsible for the purposes served is called cost allocation.
So, if there are several beneficiaries from a project, it is important that the cost
allocation is properly done so that no beneficiary feels benefitting less than its
financial contribution to the project. Giglio and Wrightington (1972) argue that the
problem might become more complicated when some beneficiaries negotiating in
the right quarters manage to obtain subsidies thereby decreasing their own contribution. For example, the irrigation sector often receives subsidies, related to food
production, etc.
In order to encourage people using wood fuel to shift towards gas, government
provides subsidies on equipment (heaters, cookers) running on gas fuel. The idea
behind giving the subsidy is to conserve forests and the environment. Once the habit
of using gas equipment has been created, should the subsidy continue? Those people
who use electric cookers, may also switch to gas cookers, simply because of the
subsidy. Thus, a subsidy provision will probably involve more participants in the
multipurpose project, with the drawback that the users do not appreciate the full
opportunity cost of the project thus leading to inefficiencies (Kemper et al. 2003).
Sometimes, participants are given subsidies to participate in the multipurpose project
by receiving a portion of their separable costs.
19.1.2 Background
It has been a general principle that the State can finance projects providing public
benefits (i.e. benefits to society) and should not finance projects with private benefits.
The latter projects should use non-State funds for implementation. If there are
projects which provide benefits to both the public and the private sector, it is
judicious that the contribution from government and from non-government users
be established, somehow, on their proportion of the overall benefit.
While the “Beneficiary Pays Principle” (BPP) looks logical and fair, it presents
three main challenges:
(1) What are the costs corresponding to each user and purpose?
(2) What benefits can be categorised as private or public?
(3) How can costs be allocated?
19.1.3 Applications of BPP in Infrastructure
Examples of multipurpose projects include:
1. Dam to supply water for domestic use, irrigation and hydropower to three
different agencies plus a road on the dam crest, still for another agency.
19.1 The Need for Cost Allocation
537