IMPLAN Pro: Modeling Capital Expenditures

Introduction:

Capital Expenditures can be a source of confusion when it comes to modeling an Industry and interpreting the line-items in a spending pattern. This article address concerns of Capital Expenditures that are not construction related.

Detailed Information:

Investment Verses Operational Expenditures

Spending patterns in IMPLAN include only the annually reoccurring operational expenditures

• One time investments of durable goods are not accounted for (although their maintenance is) in the spending pattern. 
• Because these expenditures are periodic, they cannot be accounted for as part of the annual expenditures and thus must be considered in a separate Activity.

Anything which must be depreciated shows up as an investment in final demand, and thus is not included in the Industry Spending Pattern.

• • A purchase that has to be depreciated is considered an investment. Equipment purchases that support daily operations (e.g., office supplies, computer parts that represent repair and maintenance), are included in the production functions and do not need to be run separately.
  • Separate Investment Spending Patterns are available for a number of Industries. 
    
    • Construction expenditures should be modeled in the appropriate construction Sector.
  • No information for Capital Expenditures by Industry is available. However if you are trying to estimate a value:
    
    • Relationships between Output and Investment could be derived from the Census "Annual Survey of Manufacturers" data sets.
    • Table 5. Capital Expenditures for Plant & Equipment by Industry Group and Industries contains the investment data.
    • You can relate that to Annual Employment or Sales (as a proxy for output) from the same source.
    • Investment is sensitive to the business cycle so you may wish to average over a number of years

In Summary:

• • The IMPLAN Multipliers do not capture the effects of investment.
  • Investment  can be captured but it must be modeled in a separate impact.

Understanding Capital Entries in the SAM

 What information is provided in the SAM by the Capital (column) payments to the various SAM rows?

• • Capital payments to Commodities (IxC SAM) or Industries (IxI SAM) and to Imports are for investments in goods and services.
    • Capital is also a source of the commodities - for instance, the commodity "used and second hand goods" is "produced" when capital goods are broken down and sold for parts.
    • Payments by Industry to Capital only show up in the Industry by Industry formulation and represents the purchase of used, second hand and scrap commodities.
  • Capital payments to Institutions (households and government) represent borrowing by those institutions.
  • The data do not exist in IMPLAN to separate out the amount of investment by a specific industry.

Usage:

Locating Investment Spending Patterns

BEA Investment Spending Patterns by Industry type are located at:

• • Activity Options > Import > From Another Model,
  • Direct the file structure back to the IMPLAN User Data folder
  • Select the Utilities folder.
  • InvestmentPatterns_for_BEAIndustry_MIG_Lib440.impbd
  • Choose the spending pattern for the most representative Industry.

Modeling Investments

If the investment is the purchase of new equipment, and you know what equipment was purchased and how much was spent, you can use an Industry Change Activity applied to the appropriate manufacturing Sector

• • Be sure to set LPP to SAM Model Value unless you are sure the equipment was manufactured locally.
  • Apply Margins (Please see the Related Article section on the topic of Margining: When You Know What Was Purchased)
  • then setting the LPP for the retail or wholesale sector - wherever the equipment was purchased - to 1.00). For infrastructure improvement, you could use the Industry Spending Pattern for sector 39-Maintenance and repair construction of nonresidential structures.

If you have no idea in which Industry the investment will be spent, you can import a general capital investment spending pattern

• • The generic capital investment spending pattern spend the funds according to the investments that already took place in that region and data year.
  • Go to Activity Options > Import > Institution Spending Pattern > Capital

Q: I'm conducting an impact analysis of a public transit agency based on their operating and maintenance expenses. These expenses include non-cash expenditures such as depreciation. For purpose of the analysis, should depreciation be excluded or not?

Since government agencies may need to report expected equipment replacement costs (depreciation) in planning for future expenses and setting user price or for estimates for statistical purposes for federal reporting. If desired, these can be modeled by:

• • Importing one of the government investment patterns
  • Activity Options > Import > From Another Model,
  • Direct the file structure back to the IMPLAN User Data folder
  • Select the Utilities folder.
  • Programs_PatternsNoPayroll_for_SLGovt_MIG_Lib440.impdb
  • Choose the spending pattern for the most representative Industry.
  • Use the depreciation amount as the Activity Level.

When estimating investments by Employment, here are some considerations:

• • The real economic impact revolves the operation of the investment, for which there is no good average.
  • Consider three examples:
    • Paper mill - this is a huge capital investment relative to the direct employment - probably several million per operational employee.
  • • Hot dog cart - the required investment per hot dog vendor is probably several thousand.
    • "Investing" in a residential mansion. If already built the only investment impact is the realtor's commission and any financing fees. The only operational impact is the annual household expenditures of the new immigrant.
  •  Thus it is vital to determine what the investment is in and what the eventual operation will look like.

Creating a Capital Multiplier

A generic investment on the local economy of a $1 million of capital investment can be found by:

• • Importing a Capital Spending Pattern (Activity Options > Import > Institution Spending Pattern)
  • Setting the Activity Level to 1,000,000.
    • Importing the capital institution gives an average spending for all types of private investment.
    • The data comes from the BEA's capital flow matrix.
  • The initial expenditure amount divided by the total will yield your Multiplier.
  • However, once the investment is made, the more important impact is of annual operation of the new investment which requires you to know what type of activity the investment would yield.

The same pattern would apply to calculating a Multiplier from one of the BEA Industry specific spending patterns.

Related Articles:

Using the Local Purchase Percentage Field

Margining: When You Know What Was Purchased

Basics of Analysis-by-Parts