Appendix
Executive Summary
- Introduction
- Methodology
- Benefit and Cost Categories
- Forecasting Methodology and Decision Criteria
- Assumption
- Analysis
- Project Analysis (commentary and summary of base case results)
- Sensitivity Analysis
- Evaluating the project
- Risk Analysis
- Conclusion/Recommendation
Executive Summary
The cost benefit analysis is the fundamental appraisal tool under the public spending sector. The paper provides an approach by which the cost incurred in e-government project is compared against the expected benefits so that the government can be able to decide the optimum action. The cost of the project is regarded to all the money that is spent by the government, to start the project and maintain and operate the project as well. On the other hand, the project benefits are the profit and welfares that the government will create to the members of the public.
Therefore, the paper spreads out the principles of the Cost Benefit Analysis to be able to identify the main technical issues that are needed to estimate the costs and benefits. The paper also outlines the risk assessment and performance indicators of the Cost Benefit Analysis. All this techniques are integrated with the Cost Benefit Analysis to provide a clear balance of costs and benefits of the project. The Cost benefit Analysis therefore, can be regarded as a scale that is used to weigh the cost against the benefit of the project. If the cost weighs more, the project should not be launched. However, if the opposite is bound to happen the project is therefore considered as viable.
- Introduction
In the development trend, the positive result from hype application of e-Government investments by the developed countries have been embraced by various countries globally. However, this initiative does not always yield the same results which are based on the economic efficiency. These initiatives are polarized mainly by the lobby groups and international pressure or pride. Therefore, before any government launches the e-Government project, it should consider the assessment of the project’s economic value and timeliness. The cost benefit analysis of the e-Government investment is therefore considered crucial (Fountain & Jane 2001).
Throughout the last few years, the initiative in the e-Government has been improving and spreading rapidly in the developed countries. After conducting several experiments at the beginning of the project, more complex and better government portal and website have been established. This has consequently developed new and improved customer satisfaction in the economy at a reduced cost. However, similar to the e-business, the governments usually face challenges such as overestimating of the benefits and fail to identify the risks that are associated to such projects. As a result, the governments establish such initiatives with regard to non-economic reasons such pressure from IT departments, vision to deliver web-based services or need to embrace the new technology.
As the developing countries’ government plan to launch various investments in the e-government initiatives, they have to consider conducting cost benefit analysis to be able to catch up with the developed countries. The cost benefit analysis will help them to reduce cost and attain efficiency improvements. The “follow the leader” approach have been used by these governments instead of “think globally, act locally” notion. Consequently a problem of inefficiency and unsoundness investments and poor allocation of scarce location in the subject country have been triggered.
The purpose of this paper is to provide a manageable selection methodology for evaluating the cost, benefits and opportunities associated with the e-government initiatives in the developing countries.
- Methodology
- Benefit and Cost Categories
- Costs
Cost associated with the e-government investment can be categorized into two three main categories. These categories include:-
- Internal investments that are incurred when moving the information management and computerized database.
This is prerequisite to the success of digital delivery of the public services. The public administration incurs large expenses in employing human resources skilled in the IT sector, performing overlapping tasks and storing of the numerous databases. These expenses include hardware and software expenses, work processing and organizational restructuring data digitalization and personnel.
- Implementation cost that is involved in designing and building an e-government portal
These are the investments capitals that are associated with the development of the e-government, which are usually very high but much lower than the precondition internal investments. These costs are incurred in software and hardware implementation, creation of the websites and integration and migration between on-line and off-line services.
- Operation costs that are incurred in maintenance cost and portal administration
The cost benefit analysis is more focused on the operational costs associated with the processing of the incoming requests or the filled applications. Therefore, the cost of administration and maintenance of the website includes support and maintenance of the database, updating, upgrading and modernization of the websites and the databases. Other costs are incurred in marketing and advertising, security issues, reaching the “universal access” and educating the public about the systems.
- Benefits
Similar to the categorization of the costs associated with e-government investment, benefits are also categorized into three groups. These categories includes;-
- Benefits to the government agency
The government agency is able to deliver services at reduced cost since the agency incur little delivery costs. This results to the efficiency of the government agencies since delivery time is shortened, there is little crowding in the government agency offices. The other benefit is that there is improved and faster collection of the government revenues. The e-government investment will also allow automation, integration and development of the new services and creates opportunities of new revenues.
- Benefit to the public/local population
The members of the public and businesses are able to save on the compliance costs such as travel costs, verification of the task completion, and repetitive entry of information among others these initiatives strive to increase responsiveness to the public by reducing the process steps, users’ confusion and redundancy. This leads to more self-services hence customer satisfaction.
- Mutual benefits
Generally, there are mutual benefits that are as a result of the e-government initiatives. These benefits includes;-
- Decrease of bureaucracy hence transparency
- More interaction and feedback due to improved relationship between the government and the members of the public
- Increase in internet penetration rates due to high value web content that offer additional incentives for the public to use the web.
- Forecasting Methodology and Decision Criteria
The purpose of forecasting methodology and decision criteria is to provide selection criteria that assist in determining the opportunity brought about by the e-government investments in the developing countries. For this purpose the NPV (Net Present Value) method is used to account for the net benefit generated by the project during its lifetime. The NPV method is effective since it shows the financial and the economic value of the project.
However, the use of NPV in the government operation is more difficult than business organization since government projects are more complex. The use of this complicated methodology is affected by the inconsistency of data and lack of coordination in the developing countries. Therefore, the NPV method is simplified to yield effective and better results.
Thus the steps in the simplified NPV methodology involves
Establish a time frame
- Quantify benefits
- Determine costs
- Determine terminal value
- Determine discount rate (r)
- Discounts based on time of occurrence and determine NPV: NPV = (B1 – C1) / (1+r) 1
Where; B is benefit
C is the cost
r is the interest rate
With i=0 - n (n being the project life span)
- Assumption
In cost estimation, it is assumed the there is no investment costs incurred. This is because there is no available data about this kind of investment. We have also assumed that there will be no integration with the previous database or digitization. The media coverage for the incentive is also assumed to satisfy the marketing needs.
10% of the project’s political risk is assumed to be abandoned after the general election benefiting the discount year by 10%. The execution risk is assumed to increase the cost of deployment by 5 percent. The other risks are assumed to be zero.
On the benefit analysis, it is assumed that
There is population of 1.5 million taxpayers
- 10 percent average internet penetration and about 150 likely users
- The average total taxer per individual is $ 200 with average wage of $2000 which is equivalent to $1 per hour.
- There are 100 full time service representative clients that are dealing with the tax payment
- Analysis
- Project Analysis (commentary and summary of base case results)
In most developing countries, e-tax is considered among the first initiatives of the e-governments that have a tendency to go beyond the levels of publishing online information. Paying taxes through electronic methods presents with many benefits. This includes the elimination of long queues outside offices in local administrations, contributes to effective interaction between the citizens and governments agencies and reduces bureaucracy. The electronic tax system ensures that it collects taxes from all individual and parties for a higher generation of income in a country.
The e-tax system creates a portal that enables the payment of taxes efficient and effective through the internet. The portal helps the tax-payers to know the exact amount that they are supposed to pay and about all their current debts that are needed by the financial administration of the various governments. The tax-payer after payment is issued with a confirmation receipt that has a digital and electronic signature to prof that he actually settled the taxes as required by the law.
The confirmation receipt must identify the tax-payer as he is registered in the database of the financial administration. It also reflects the number of transactions, all beneficiaries and detailed information about all charges that occur on payments. The e-tax prototype system ensures that it protects and maintains the privacy and confidentiality of all kind of data that is found in the database of the financial administration. The banks that are in-charge are also made aware of the e-tax prototype system to enhance a smooth operation and implementation in the government. The e-tax system is part of activities that are part and parcel of the operations that entails the running of electronic governments.
- Sensitivity Analysis
Cost-benefit analysis
This is an estimation of the value of implementing the project in a city among the developed countries.
Key Variable 1
Costs
In costs, i took an assumption that there were no internal investments costs because data concerning such investments could not be found. Other assumptions made include: the portal will not be integrated with the databases that existed in the past, the media coverage aims at making the people familiar with the marketing needs and lastly, the education amongst the masses will be carried out at a later stage so that it can raise awareness about the existing and implementation of the e-tax system (Harvey 1995).
The analysis of costs includes: Pre-implementation-this is about the internal investments required for infrastructure and the work-process design of the system, the costs of implementation of the portal and lastly the operational costs that is required in the administration of the portal and the costs that are needed for the maintenance.
As assumption about the pilot program comes in due to the level of security that the information upholds and the project managers will assume that it has already been carried out.
Basing my estimation with the pilot program, the software is intended to costs about $100,000.
Key Variable 2
Benefits
Assumptions
Out of 2.5 million people in the city, 1.5 million are taxpayers.
The next three years will indicate a 10% average internet penetration attracting more than 150,000 individuals
A tax payer will pay $200 annually
Customer services will be given full time and it will deal with traditional tax payments.
Therefore:
The delivery times will be reduced from an hour per head to half an hour. When you multiply this by 150,000 users, the government will have saved an average of $75,000 per year. If you make an assumption and say that 33% of the population will operate the e-tax system after they comes out of job there will be an indication of additional savings of a total of $25,000 in each year.
A reduction of personnel by 10% and this will lead to an outcome of more than $25,000 saved annually.
It will also lead to a faster revenue collection where 5 % of the tax collected. In an instance where taxes are collected a month late, an interest of 1% leads to a savings of more than $15,000 annually.
E-tax will also do away with crowded offices where individuals make long queues to pay the taxes. The system is also free from significant advertising revenues.
- Evaluating the project
I settled on a 3years time frame and assumed that the startup cost had a terminal value of 20% and a discount rate of 20%.
The NPV of e-tax is -72
The analysis that was carried out reflected a negative economic value in the city that the program was implemented. This means that the recommendations that are discussed below must be put into practice so that the impact that comes with the project can be improved to profitable measures.
The assumption made is that in the three years, there will be no political and execution risks and any other form of risks will be zero. Recommendations are necessary in the improvement of the project (Jane 2001).
- Risk Analysis
I undertook a risk assessment that analyzed all forms of risks that can affect the operations of the e-government. The risks include
Political risk
This is a scenario where the project will not be properly implemented due to lack of political support. The agencies involved may not fully participate in the implementation process and this causes problems. Lack of enough allocation of funds and a change of government may affect the program.
Organizational risk
The changes in the work-processes may lead to a change of duties, tasks and responsibilities in employees and this may lead to problems within the organization. This goes hand to hand with resistance from a section of employees who are against change.
User-risk
The users may not embrace the new methods of delivery and this steers the low adoption rates due to the lack of internet access, slow connections, lack of computer operation skills, issues concerning security of privacy and the payment methods available.
Technological risk
Technology warrants changes and this places organization to adapt to the new standards and protocols that present themselves with time. The websites that were designed few years ago will be considered outdated and there will be need to create new ones. Other fields also experiences major changes that are required in the implementation. The high costs of modernizing the existing systems through upgrading may lead to failure of the system.
Vendor risk
The government outsources the hardware and software components from either local or multinational firms which mostly show a shorter life span. Since most of the IT companies are in this risk they create a gap after their products and services are eliminated in the market. Vendor risk increases the costs in maintenance and costs.
Execution risk
This can be defined as the failure of the managers to gather the employees and the funds, problems meet deadlines, budget exceeds and the issues arising from cash flows. A lot of money will be spent in the planning, leadership and sustained initiatives and this will increase costs of building the e-government portal.
- Conclusion/Recommendation
Three basic recommendations will serve for the benefits of the organization. This include: developing a detailed rigorous analysis, evaluation of the project during and after implementation and taking actions that are aimed at improving the impact in the e-government projects(Stewart 2001).
The planning stage seems to be essential since it will come with the required data needed to evaluate the project. The agencies must come up with objectives that are well detailed so that they can access successful criteria to determine projects.
Proper evaluation will create the space for adjusting and improving on the processes that present in the program. In cost reduction, the following steps must be undertaken: leapfrogging, sticking to the impact-maximizing actions, focusing on services encountered in the large business an s lastly, devising loyalty based contracts which will avoid sunken costs and risks encountered in the project.
References
Brealey, Richard A.; Myers, Stewart C.; (2001)“Principles of Corporate Finance”, McGraw Hill,
December
McKinsey & Company, Inc. (Copeland, Tom; Koller, Tim; Murrin, Jack), (2002). “Valuation”, Jon Wiley & Sons, Inc
The Brookings Task Force on the Internet, (2001) “The Economic Payoff of the Internet Revolution”, Brookings Institution Press,
Fountain, Jane E., (2001) “Building the Virtual State: Information Technology and Institutional Change”, Brookings Institution Press
Rosen, Harvey S., (1995). “Public Finance”, Richard D.Inrwin Inc.,
