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Assessing Financial and Economic Impacts: A Guide to Informed Decision-Making

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1.0 Introduction

I. Introduction: Why Assess Economic Impact?

Local economic development involves a myriad of tasks and responsibilities for economic development officers (EDOs), community planners, council members and others who influence the outcome of local economic development decisions. Increasingly, one of these tasks is determining whether or not to pursue specific development projects, which can range from construction of recreation facilities, a new manufacturing plant or housing, to special events and redevelopment of downtown or waterfront areas.

Making decisions about growth in a community is often the single largest issue for planning and economic development. Growth has been viewed as healthy and desirable for our communities because it often leads to additional jobs; increased income for residents; a broader tax base; and the enhancement of cultural amenities such as libraries and parks.

However, communities are increasingly aware that development associated with growth may also be accompanied by costs such as increased expenditures for public services and infrastructure, traffic congestion, consumption of natural resources, and loss of open space and or unique cultural attributes. Decisions about development and spending on municipal initiatives need to be made with a clear understanding of the consequences of those decisions on the financial health of the municipal corporation, and the community as a whole.

Benefits of Financial and Economic Impact Assessment

Encourages responsive and informed decision-making
Addresses the range of financial and economic impacts associated with a proposed development
Promotes fairness and consistency in the development process
Identifies financial and economic resource needs and constraints

Financial and economic impact assessments are essential tools in identifying the potential consequences of municipal decisions. Sometimes they reveal unforeseen costs to the municipality, while other times they may reveal benefits, including spin-off effects, which would not have been identified without the analysis. They can be used any time decisions need to be made about a large project. This could include capital budgeting, funding proposals, specific development proposals, and resource allocation decisions. They can also be used to assess the impact of planning and economic development policy decisions.

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II. Who Is This Guide Written For?

This Guide is written specifically for economic development officers, as well as municipal staff and other community decision-makers. It provides an overview of the relevance of financial and economic impact assessments, outlines how to construct these assessments and the information (data) you will need to construct them, and illustrates through case studies how the assessment process works for different types of projects.

The Guide will be especially useful for those who would like a basic understanding of how to assess economic and financial impacts, and the ability to determine when a more comprehensive analysis is needed. This Guide is also designed to help readers to be able to critically review impact studies prepared by others or claims put forward in project proposals.

III. Assessing Financial and Economic Impacts

In order to adapt successfully to the changing world, municipalities must plan carefully and use their resources wisely. Municipalities need to understand the potential impacts of both public sector and private sector initiatives on municipal budgets and the local economy.

Financial and economic impacts are interrelated; in most cases, they must be considered in conjunction with each other to provide an accurate assessment of the net impact of the development on the community. For example, a project may be shown to have a combined "net positive" financial and economic impact even though the immediate or short-term impact on the local municipal budget is negative. Similarly, a project may be expected to create many jobs and raise incomes in the community, but only with financial costs to the community that outweigh the employment and income gains.

Economic and Financial Impact Assessment are complementary, yet distinct processes, as illustrated below:

Financial vs. Economic Analysis

Financial Impact

A financial impact analysis identifies changes in demands for government utilities and services resulting from some action and estimates the revenues and costs to local governments to provide these services.

Economic Impact

An economic impact analysis traces the flows of spending associated with a project to identify changes in sales, income and jobs.

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Assessing the Net Economic Benefits of Development

Two-headed arrow

Financial Impact Assessment, or
Impacts on the Public Sector

A financial impact analysis identifies changes in demands for government utilities and services resulting from a project and estimates the revenues and costs to local governments associated with providing these services.

Will municipal revenues from taxes, direct fees and other sources cover the added costs for infrastructure and government services required by the project ?

Economic Impact Assessment, or
Impacts on the Economy of the Community

An economic impact analysis traces the flows of spending associated with a project in a community to identify changes in sales, income and jobs.

What is the contribution of the project to the economy of the community ?

It is often very difficult to capture all the costs and benefits of a decision. For example, when purchasing a new car, we may have a clear understanding of immediate costs, such as the purchase price of the car, but other costs are harder to predict, such as maintenance expenses and parking fees. These may require some assumptions or estimates on our part. There are also some costs that we cannot feasibly estimate at all, such as the extra cost to society of the pollution our car will generate, and the wear and tear on roads that we will cause with the car.

In the same way, it can be very difficult to accurately assess all the costs and benefits of a large project in a municipality. Any kind of economic analysis will require making certain assumptions about the community and the project. These include assumptions about conditions that will exist without the project ("baseline conditions"), such as population growth, the skills of the local labour force or the industry mix in the local economy. There may also be assumptions about the project, such as the projected labour needs or volume of municipal services needed each year. It is important to recognize that changing the assumptions could mean a significant difference in the results of the assessment.

Assumptions need to be tested to determine the degree to which they affect the outcome of any financial or economic impact analysis. If simple assumptions significantly change the results, there may be a need to obtain more information in order to eliminate some of the assumptions, or reconsider the method of analysis to reduce the impacts of the assumptions.

For example, if an assumption is that each visitor to a facility will spend $100, and the financial/economic impact calculation then shows a positive result, it would be important to determine at what spending level the results would change to a negative consequence. In this example, if the break even point is at $50 per person, then more reliance can be placed on the analysis than in a situation where $100 per person expenditure is just above the break even point.

Another consideration in selecting the methodology for an impact assessment is the level of resources available to conduct the analysis. Increasing the accuracy of an impact study typically involves using more detailed or in-depth analytical methods, which in turn implies greater investment of time and money for data collection and analysis. A balance must be struck between what a community can afford to spend on the analysis and the desired level of accuracy. Often an understanding of the direction (i.e. positive or negative) of the impact is sufficient to assist the decision-making process.

When comparing different project alternatives, it is advisable to conduct a preliminary analysis to get a rough idea of how close the alternatives are in terms of potential impact. If the preliminary assessment of different project alternatives suggests that the best alternative (for investment or resource allocation) is substantially superior to the next best alternative, then it may take only rough computations to confirm that superiority. However, if the preliminary assessment suggests the alternative projects have very similar impacts, you may need to use a more in depth methodology to provide a more accurate measure of the potential costs and benefits of each alternative.

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IV. Impact Assessments and the Planning Process in Ontario

Development - especially that which is large, unique or potentially precedent-setting - may have a substantial impact on a community's financial, environmental and cultural resources. While this document deals only with financial impacts and economic impacts, a thorough assessment of private and public initiatives involves many other considerations, and usually occurs within a mandated approval process.

In the Province of Ontario, the planning process provides the primary controls for development. As a result, all proposals for land use changes must meet the requirements of the Ontario Planning Act and the Provincial Policy Statement. In addition, there are other Provincially-mandated processes that projects may be subject to, such as the Environmental Assessment Act. As such, financial/economic impact analyses are often integrated with other approval processes or analyses in order to inform the decision-making process.

	When/Why Assessment Needed	Nature of Assessment	Skills Needed	Relevant Legislation
Fiscal Impacts	Dependent on scale of project, requirement for municipal expenditure or provision of new services	Assessment of costs and revenues to the municipal government.	Understanding of municipal finance, economic and accounting skills	Municipal Act Development Charges Act
Economic Impacts	Needed to determine whether the proposed investment will benefit local residents, in terms of jobs and income. Should be combined with fiscal impact assessment to determine overall net benefit	To determine the level of employment and income that will be generated by an investment/project or lost by the closure/departure of a local firm	Economics, community development and planning skills.	Planning Act
Environmental Impacts	Required by Environmental Assessment Act, necessary to determine if elements of the natural environment will be impacted.	Understanding of potential changes to natural features, fish and wildlife.	Variety of environmental specialists with an understanding of botany, biology, hydrogeology, and other similar areas.	Environmental Assessment Act Aggregate Resources Act Beds of Navigable Waters Act Ontario Water Resources Act Environmental Protection Act Fish and Wildlife Conservation Act Lakes and Rivers Improvement Act Niagara Escarpment Act Oak Ridges Moraine Conservation Act
Traffic Impacts	Will determine if there is a need for new transportation facilities and the impact on existing roads. Usually done for relatively large scale projects.	Analysis of new traffic generated by a project and compared to the capacity of the existing transportation network.	Traffic engineering.	Highway Traffic Act Environmental Assessment Act

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V. When Should a Financial and/or Economic Assessment Be Conducted?

In short – do it early in the process. Financial and/or economic impact analyses should be considered as soon as a development or project is proposed, and well before substantial investment has been committed. If a planning approval is required, the financial impact and/or economic impact analyses should be undertaken as part of the background work conducted by municipal staff to inform the public and the decision of Council. Often such studies are carried out and/or paid for by the proponent of a development.

Financial impact and/or economic impact analyses of public sector projects should be carried out early in the process of capital budgeting, so that priorities can be established. Such analyses particularly lend themselves to a comparison of several initiatives, allowing Council to understand the relative costs and benefits of different options.

VI. Where to Get More Information

Usually the proponent of a proposal or project can provide much of the information needed to carry out an assessment. In addition, there are many other good sources of data and examples of financial and economic impact assessments available on the web and in hard copy. Current sources are noted in Section Four of this document, and direct links are provided where available.

Continue to Section 2: Financial Impact Assessment

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Assessing Financial and Economic Impacts: A Guide to Informed Decision-Making

1.0 Introduction

I. Introduction: Why Assess Economic Impact?

II. Who Is This Guide Written For?

III. Assessing Financial and Economic Impacts

Assessing the Net Economic Benefits of Development

IV. Impact Assessments and the Planning Process in Ontario

V. When Should a Financial and/or Economic Assessment Be Conducted?

VI. Where to Get More Information

Links to Other Sections