ECONOMIC ANALYSIS OF - World Bank

HANDBOOK ON ECONOMIC ANALYSIS OF INVESTMENT OPERATIONS

Pedro Belli Jock Anderson Howard Barnum

John Dixon Jee-Peng Tan

Operational Core Services Network Learning and Leadership Center

January 26, 1998

Acknowledgments

This Handbook is the product of a team effort. Jock Anderson contributed to the chapter on risk analysis, Howard Barnum to the chapter on the assessment of health projects, John Dixon to the chapter on environmental externalities, and Jee-Peng Tan to the chapter on the assessment of education projects. George Psacharopoulos provided very valuable inputs on the assessment of education projects. Rodrigo Archondo-Callao, Shanta Deverajan, Colin A. Gannon, Pablo Guerrero, Kenneth M. Gwilliam, Ian G. Heggie, David Hughart, Howard Jones, Ulrich Lachler, Julio Linares, Ricardo Martin, Roberto Mosse, A. Mead Over, David A. Phillips, Anandarup Ray, Robert Schneider, Zmarak Shalizi, Sethaput Suthiwart-Narueput, Lyn Squire, Alfred Thieme, Ulrich Thumm, Herman van der Tak, William A. Ward, and Kenneth Watson provided insightful comments. We owe a major intellectual debt to Arnold A. Harberger; through his writings over the years he not only provided the theoretical underpinnings of the approach but also commented on several versions of the manuscript. We are also thankful to Glenn Jenkins for kindly granting permission to use case materials that he has developed for use at Harvard University. Many thanks also go to Patricia Rogers, for her editorial services, and to Toneema Haq and Kristyn Schrader for their assistance in writing various illustrative boxes, manipulating large amounts of unwieldy data, and skillfully putting the manuscript together. Any errors are entirely my responsibility.

Pedro Belli January 26, 1998

Contents

Introduction ...................................................................................................................1 Organization of the Handbook .........................................................................................1

Chapter 1. An overview of Economic Analysis.............................................................3 Purpose of Economic Analysis .........................................................................................3 The Economic Setting......................................................................................................3 Rationale for Public Sector Involvement...........................................................................3 Other Aspects of Project Analysis ....................................................................................4 Fungibility........................................................................................................................4 The Questions that Economic Analysis Should Answer ....................................................5

What is the objective of the project? .....................................................................5 What will happen if the project is undertaken? What if it is not?...........................5 Is the project the best alternative?.........................................................................5 Are there any separable components? How good are they? ..................................6 Winners and losers: Who enjoys the music? Who pays the piper?........................6 What is the project's fiscal impact? .......................................................................6 Is the project financially sustainable?.....................................................................6 What is the project's environmental impact? .........................................................6 Techniques for assessment: Is the project worthwhile?.........................................7 Is this a risky project?...........................................................................................7 The Process of Economic analysis ....................................................................................7 Transparency ...................................................................................................................8

Chapter 2. Rationale for Public Provision ....................................................................9 General Considerations ..................................................................................................10 Market Failures..............................................................................................................10

Natural Monopolies............................................................................................10 Externalities .......................................................................................................11 Public Goods......................................................................................................12 Asymmetric Information and Incomplete Markets...............................................13 Other Grounds for Public Intervention ...........................................................................16 Poverty Reduction..............................................................................................16 Merit Goods.......................................................................................................16 Distribution of Externalities............................................................................................16 Summary ...............................................................................................................18

Chapter 3. Numeraire, Price Level, and Real vs. Nominal Prices..............................20 Numeraire and Price Level .............................................................................................20 Real Prices vs. Nominal Prices .......................................................................................22

Constant Prices vs. Real Prices ...........................................................................22 Real and Nominal Returns ..................................................................................23 Profitability of Individual Project Entities............................................................24

Chapter 4. Consideration of Alternatives ...................................................................25 "With" and Without" Comparisons.................................................................................25 Private Sector Counterfactual.........................................................................................27 Separable Components...................................................................................................28

Chapter 5. Getting the Flow Right: Identifying Costs and Benefits..........................29 Cash Flow Analysis........................................................................................................30 Sunk Costs ...............................................................................................................30 Interest Payments and Repayment of Principal................................................................30 Interest during Construction...........................................................................................31 Physical Contingencies ...................................................................................................31 Transfer Payments..........................................................................................................31

Taxes vs User Charges .......................................................................................32 Subsidies ............................................................................................................32 Donations and Contributions in Kind..............................................................................32 The China Agricultural Support Services Project: An Example......................................32 Externalities..... ..............................................................................................................33 Consumer Surplus..........................................................................................................34 Measuring Consumer Surplus .............................................................................34 Net Benefits Profile ............................................................................................35

Chapter 6. Getting the Prices Right: Market Prices vs. Economic Costs................37 Valuation of Inputs and Outputs.....................................................................................37 Tradeable and Nontradeable Goods................................................................................37 Valuation of Tradeable Goods........................................................................................38 Shadow Exchange Rate..................................................................................................41 Premium on Foreign Exchange.......................................................................................41 Other Sources of Premia ................................................................................................43 Valuation on Nontradeable Goods and Services .............................................................43

Material Inputs ...................................................................................................43 Land...................................................................................................................43 Wages ................................................................................................................44 Conversion Factors ........................................................................................................45 Marginal Cost of Public Funds .......................................................................................46

Chapter 7. Valuing Environmental Externalities ......................................................47 Externalities ...................................................................................................................47 Environmental Externalities............................................................................................48 Project Boundaries and Time Horizon............................................................................49 Valuation of Environmental Impacts...............................................................................49

Loss in Productivity............................................................................................51 Dose-Response...................................................................................................52 Measuring Intangibles.........................................................................................54 Shadow Project ..................................................................................................55 Preventing and Mitigating Environmental Impacts..........................................................56

Chapter 8. Cost Effectiveness.....................................................................................57 Relating Costs to Benefits: Cost-Effectiveness Analysis.................................................57

Cost-Effectiveness in Health ...............................................................................58 Assessing Unit Costs......................................................................................................60 Relating Costs to Benefits: Weighted Cost-Effectiveness...............................................61 Application in Education ................................................................................................61 Application in Health .....................................................................................................62 Comparing Options with Subjective Outcomes...............................................................62 Some Important Caveats ................................................................................................63

Chapter 9. Assessment of Education Projects ...........................................................64 Categories of Project Costs............................................................................................64

Organizing and Presenting the Cost Data ............................................................65 Relating Costs to Benefits: Cost-Benefit Analysis..........................................................66

Evaluating Investments with In-School Benefits..................................................66 Evaluating Investments with Out-of-School Benefits ..........................................68 Incorporating the Value of Externalities..............................................................72 Annex 9A. Computing Rates of Return to Education by Level .......................................74

Chapter 10. Economic Evaluation of Health Projects...............................................77 The Steps of Economic Analysis ....................................................................................78 An Immunization Example .............................................................................................78

Identifying and Quantifying the Effects ...............................................................79 Displacement of Existing Activities.....................................................................80 Is a Life Saved Today as Valuable as a Life Saved Tomorrow?...........................80 Effectiveness ......................................................................................................81 Cost Effectiveness ..............................................................................................83 Weighted Cost-Effectiveness ..............................................................................84 Cost-Benefit Analysis.....................................................................................................88 Value of Life..................................................................................................................91 Annex 10A. Examples of Measures of Performance ......................................................92 Annex 10B. Examples of Potential Benefits from Health Projects ..................................93

Chapter 11. Economic Evaluation of Transport Projects .........................................94 Introduction ................................................................................................................... 94 Forecasting Demand ......................................................................................................95 Normal, Generated, and Diverted Traffic........................................................................95 Reduction of Vehicle Operating Costs............................................................................98 Time Savings .................................................................................................................99 The Value of Working Time...........................................................................................99 The Value of Non-Working Time.................................................................................100 Walking and Waiting Time...........................................................................................100 Freight Traffic..............................................................................................................100 The Value of Time over Time ......................................................................................101 Default Values .............................................................................................................101 Accident Reduction......................................................................................................102 Estimating the Incidence of Accidents ..........................................................................102

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download