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RE: Training on Model to Determine Whether P2 Projects WillMake Money



The two models noted in this exchange are BEN, for economic benefit, and
PROJECT, for SEPs.  They are shells, as you note, and the point of my
comment was just that - consider your input.

Since the beginning, P2 professionals have talked about the importance
of understanding the net present value of an investment, because if you
can capture that it might help in justifying the upfront costs.  But
it's also potentially useful in comparing alternatives.

If you know you want to stop using chemical X, and you have identified 5
alternatives, the company may want to use NPV to help decide between
them.  We at MA OTA recognized both of these values a long time ago, as
did NEWMOA, and we hired a financial specialist to train us in doing
NPV.  We found, frankly, that we could not turn P2 or environmental
engineers into financial specialists who would do net present value on
P2 options, so we kept a financial analyst on staff for years, to help
the businesses we worked with do just that.  

Now, PROJECT is out there.  It lets anyone do it with the touch of a
button.  

But my point - partly made with the intent to prevent such venting - was
that PROJECT is a shell, as stated, and you still have to come up with
all the good information to put into it.  What that means is, without
that big picture, PROJECT will give you a wrong answer because it will
be incomplete.  But with enough of that big picture information, you
should revel in your ability to get a quick NPV - painlessly, and
without having to pay for a financial analyst on staff.

I apologize for bringing up BEN, I mixed them up.  But since I did -
there's an interesting P2 angle there.  You run BEN (again, its quality
depends on the information input) to see what your penalty should be.
You can run two BENs and make a deal with the violator to settle on
condition that they do P2.  Here's how it works.  Normally you run one
BEN, using conventional treatment/control as "what they should have
spent money on and didn't".  But if you can come up with a P2
alternative, run another BEN with the estimated costs and savings of
that.  Maybe it comes up with a way lower cost, because it's P2 and has
savings.  If so, then when you go to the negotiating table, you say,
assuming you should have thrown on that control equipment ten years ago,
you avoided $500,000 we have recapture now with penalties.  But if we
assume you could have been smart enough ten years ago to switch to an
aqueous cleaning system, you would have spent over the ten year period
only $100,000.  Would you like to only owe us 100,000 in economic
benefit? (This is over and above whatever the gravity-based penalty is).
If you would like us to take the lower amount, then you have to agree to
put in the aqueous system (in an enforceable settlement agreement - with
stipulated penalties for not implementing).

While at EPA Region 1 I proposed this approach and it was circulated.  I
don't know if anyone has done it!

-----Original Message-----
From: Callahan, Mike [mailto:Mike.Callahan@jacobs.com] 
Sent: Friday, February 06, 2004 3:12 PM
To: P2Tech
Subject: FW: Training on Model to Determine Whether P2 Projects WillMake
Money


Is it just me or do others find this exchange confusing?  I fail to see
how a simple tax benefit and NPV calculation represents a "model" of any
major benefit to the P2 community.  Let's take the example mentioned
below.  I clean up someone's environmental mess and it costs $100,000
over two years. Due to tax write-offs and NPV, the actual cost is more
on the order of $50,000.  So what?  I'm still out $50,000.  And if
spending this money puts me in the red, then any tax write-off is
worthless.

The discussion also seems to imply that the model can account for
intangible benefits provided the user inputs this data.  So, this isn't
really a model. It cannot predict or guide the user in establishing the
values for input. While it may be helpful to be reminded of these
intangible factors, they are most often ignored because no one has the
data for input.  Maybe all of these modeling efforts should be referred
to as "shells" since they most often designed to format and analyze the
data one already possesses.

However, I'm very intrigued by the stated intent of the model to
estimate economic benefit gained through noncompliance.  Did the EPA
actually fund a project to quantify the benefit to be gained by not
complying with regulations?  That would be great.  Maybe it would have
cost burden imposed by compliance with all regulations compared to the
avoided costs for ignoring regulations compared to the imposed fines for
those who get caught.  Maybe some 20/80 rule applies where 100 percent
compliance is an undue burden but some lesser level of compliance is an
optimum.  One could also factor in the nature of compliance such as
reporting issues versus waste management.

Thanks all for letting me vent.

Mike Callahan


-----Original Message-----
From: owner-p2tech@great-lakes.net
[mailto:owner-p2tech@great-lakes.net]On Behalf Of Reibstein, Rick (ENV)
Sent: Friday, February 06, 2004 11:08 AM
To: Libber.Jonathan@epamail.epa.gov; Reibstein, Rick (ENV)
Cc: Becky Lockart; p2tech@great-lakes.net; parry@terrachord.com
Subject: RE: Training on Model to Determine Whether P2 Projects Will
Make Money


Johnathan is of course right, I was going too fast and mixed up the BEN
software with PROJECT for SEPs.  His response shows how worthwhile it
would be to take this class with him, because he knows how to input the
considerations I've noted.  I have found that unless you understand how
PROJECT works and think about it carefully, and think about the big
picture of what you are doing carefully, you press that button and get a
quick and simple - and wrong - answer.  It can be a misleading or
powerful tool.  I encourage you all to think about how to make the cost
comparisons you want to make and then use Johnathan as your resource to
figure out how to make PROJECT work in the way you need it to.

-----Original Message-----
From: Libber.Jonathan@epamail.epa.gov
[mailto:Libber.Jonathan@epamail.epa.gov] 
Sent: Friday, February 06, 2004 1:45 PM
To: Reibstein, Rick (ENV)
Cc: Becky Lockart; p2tech@great-lakes.net; parry@terrachord.com
Subject: RE: Training on Model to Determine Whether P2 Projects Will
Make Money






As the godfather of the computer models, let me weigh in on a few
issues.  My comments are in red.  I would just note that although you
are welcome to download the PROJECT model from the website, the user
manual was created before we knew the model could help with P2 projects.
So the user manual is devoid of any reference to P2.  I would also note
that I am working from home today.  You are welcome to call here until
about 3:30 Eastern Time at 410 262-1054.

Jonathan Libber (2248-A)
U.S. EPA
1200 Pennsylvania Ave. NW
Washington, DC 20460
Ph: (202) 564-6102
Fax: (202) 564-0010


 

                      "Reibstein, Rick

                      (ENV)"                   To:       Becky Lockart

                      <Rick.Reibstein@s
<Becky.Lockart@epa.state.il.us>,                      
                      tate.ma.us>               p2tech@great-lakes.net

                                               cc:
parry@terrachord.com, Jonathan               
                      02/06/2004 12:49          Libber/DC/USEPA/US@EPA

                      PM                       Subject:  RE: Training on
Model to Determine Whether   
                                                P2 Projects Will Make
Money                           
 





This tool, (PROJECT), was developed for estimating economic benefit
gained through noncompliance.  It was actually developed to figure out
what the out of pocket costs are for Supplemental Environmental Projects
(SEP's).  If a company is willing to clean up a spill on some adjacent
land for which he is not responsible. that SEP would need to be
evaluated.  If the SEP costs $100,000 and will not be completed until
2006, the $100,000 would be first reduced for tax effects, which would
reduce the out of pocket costs by about 40% to $60,000.  Then those
would get further reduced because the dollars incurred in 2006 are
significantly less than 2004 dollars.  So the net-present, after-tax
value of the SEP is probably closer to $55,000.  It is also a great tool
for P2 professionals, because it gives a very quick determination of the
net present value of an investment and you can use it to compare
alternative investments.  Sometimes, however, the relevant comparison is
with existing practice, in which investments have already been made.  So
you may have to do a little digging for a fair comparison.  PROJECT just
determines if the P2 project will lose money, break even or make money.
If PROJECT yields a negative number, that means the project saves enough
money to pay off all the investors and still make money on top of that.
A 0 value means the project breaks even, and a positive value means that
the project is losing money.  It may be important to think about how
much useful life there is in the existing  equipment and project your
comparison out far enough to compare the two on the basis of useful
life.  It may be that there will be savings that will result if you
discontinue the existing project, such as freed up space, (and some that
are simply sunk costs and will not turn into opportunities).  Some of
these savings can be accounted for in PROJECT. If the P2 project would
mean there would be O&M savings of $10,000 year, then you would adjust
your annual expense entry in PROJECT by taking $10,000 off.  Investments
you made in the old process might serve the alternative, such as
material transfer equipment.  Maybe, if you got rid of the old process,
you might be able to sell some of the equipment, such as a VOC capture
system you wouldn't need anymore.  PROJECT won't tell you any of that
unless you put it in, and you have to think carefully about how to put
it in. Because the scrapped equipment is fully depreciated, and the
PROJECT capital costs are not, you would just subtract the money from
the scrapped equipment from the final PROJECT result.

You can direct any questions to our HELPLINE at 888 326-6778 or me.  I
will be making a presentation in Baltimore on April 19th.

-----Original Message-----
From: Becky Lockart [mailto:Becky.Lockart@epa.state.il.us]
Sent: Friday, February 06, 2004 11:19 AM
To: p2tech@great-lakes.net
Cc: parry@terrachord.com
Subject: Training on Model to Determine Whether P2 Projects Will Make
Money


There will be a training session at the upcoming National Environmental
Assistance Summit on software developed by USEPA to determine whether P2
projects will make money.  This is a great tool for P2 assistance
providers to use when showing the economics of a P2 project.

The training will be April 19th from 1:00 p.m. - 5:00 p.m.  The cost is
$20.

For more information and to register go to
(http://www.p2.org/summit2004/Agenda.cfm)


Becky Lockart
Pollution Prevention Specialist
Office of Pollution Prevention
Illinois Environmental Protection Agency
1021 North Grand Avenue East
P.O. Box 19276
Springfield, IL  62794-9276
217/524-9642 (voice)
217/557-2125 (fax)
Becky.Lockart@epa.state.il.us

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