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2023 | Buch

Project Analysis in Developing Countries

Cost Benefit Analysis for Development

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This updated new edition explores the techniques used to assess the economic impact of projects in developing countries. Blending an academic understanding of economics and development with an accessible style and practical advice, the costs and benefits of investment projects, an important mechanism for economic development, are assessed to ensure that resource allocation is as productive as possible. New material has been added, particularly on the environmental impact of projects, the role of the discount rate in decision-taking, the application of techniques to estimate willingness to pay for benefit estimation and the quantification of health impacts.

Although the basic techniques of project analysis were developed many decades ago, they remain highly relevant to address current concerns, such as population growth, urbanisation, pressure on physical infrastructure, inequality, and the climate crisis. This book aims to provide an accessible overview, drawn from extensive practical experience, of project analysis in developing countries. It will be relevant to students, researchers, and practitioners interested in development economics.

Inhaltsverzeichnis

Frontmatter
Chapter 1. Introduction
Abstract
Project analysis involves estimating and comparing the beneficial effects of an investment with its costs. Such a comparison is done within a broader economic framework that provides the basis on which full costs and benefits are identified and valued. Project analysis originated more than 60 years ago, the main ideas developing simultaneously in different places. The last 40 years has witnessed an extensive application of project analysis methods, particularly in developing countries. This introductory chapter provides a brief outline of the basic ideas of project analysis and situates them in the broader process of project planning.
Steve Curry, John Weiss
Chapter 2. Main Features of Projects, Resource Statements and Financial Statements
Abstract
A project involves the commitment of resources now to obtain extra resources in the future. Projects can be analysed from different points of view. This chapter begins by explaining some basic differences between project resource statements and project financial statements, and the prices used in drawing them up. A project statement includes all the inflows and outflows of a project according to the time period in which they occur. It involves the use of certain conventions about the valuation of resources and the time-frame into which they are put. These conventions can be applied to different types of projects. This chapter also includes a brief outline of different types of projects and the conventions used in drawing up the corresponding project statements.
Steve Curry, John Weiss
Chapter 3. Project Criteria
Abstract
The construction of resource statements and the application of discounting are basic tools of project analysis. However, the purpose of project analysis is to facilitate decision-taking on proposed projects. This chapter outlines the criteria used for taking project decisions. It restricts itself to comparisons using discounted values of benefits and costs. Use of project criteria for decision-taking will be illustrated in two contexts. The first is when a decision is required about a single project proposal. A project resource statement is constructed to represent the effects of the project. Using an appropriate discount rate, a decision is required whether to proceed with the proposal or not.
Steve Curry, John Weiss
Chapter 4. Theory Behind Economic Analysis of Projects
Abstract
Economic and financial analysis are similar techniques in that they rely on the decision criteria outlined in Chap. 3. Both analyses are in monetary terms, usually in constant prices, they both apply a discount rate to allow for the effect of time, and they both are based on a with- versus without-project comparison. These are standard procedures of a discounted cash flow analysis. The key difference between them is in the definition of benefits and costs. In both, opportunity cost (i.e. the benefits that would have been created by using the resources committed to a project somewhere else) must define costs. However, because benefits are measured differently, they will be different between the two approaches.
Steve Curry, John Weiss
Chapter 5. The Domestic Price System of Economic Analysis
Abstract
Chapter 4 discussed the need to assess projects from a national point of view and explained the framework behind the procedures of economic valuation. This chapter extends the earlier discussion to show in detail how a project can be analysed using a domestic price numeraire—what we term using the domestic price system. The chapter first elaborates on the distinction between traded and non-traded goods or services produced or used by projects. It then turns to the treatment of the factors of production—labour, land, and capital—used by projects. The exchange rate for converting between foreign and national currencies is clarified, and a further analysis of the use of trade efficiency as a criterion for economic assessment is explained.
Steve Curry, John Weiss
Chapter 6. The World Price System of Economic Analysis
Abstract
Chapter 5 discussed how all outputs and inputs in a project analysis can be valued at economic prices using what we have termed the domestic price numeraire. Economic analyses can be carried out using different units of account or numeraire. As with distance, which can be measured in miles or kilometres, the choice of different units makes the same calculation appear different, but provided the same information and equal accuracy are used, the results will be directly equivalent. This chapter shows how world prices can be a reference point for economic valuation in what we term a world price system or valuation at the world price level.
Steve Curry, John Weiss
Chapter 7. Estimating Willingness to Pay
Abstract
The chapter discusses the procedures for valuing outputs from projects in non-traded sectors. Much public expenditure is now focused on economic and social infrastructure, which by their nature cannot be traded internationally. Hence, this is an area of great practical concern. As pointed out earlier, the treatment of their benefits is less straightforward than where traded output is involved, as it relies on an estimate of value in the domestic, not the international market, and is based on what consumers are willing to pay. This requires a way of approximating the demand curve for the good or service involved. The chapter discusses ways of doing this, focusing particularly on survey approaches. In addition, there will be projects from sectors where output is not sold in a market, such as environmental projects, and from sectors like health and education, where valuing benefits on the basis of individual consumer decisions is controversial. The case of benefits in transport, education, and health are discussed in Chap. 10, and that of environmental effects in Chap. 11.
Steve Curry, John Weiss
Chapter 8. Choice of Discount Rate
Abstract
Up to this point, there has been no discussion of the discount rate, and the project examples have mostly employed a relatively high discount rate (such as 10% or 12%). Such rates are typically associated with a rate used as a rationing device for scarce investment funds in an opportunity cost approach to discounting. Arguably, the discount rate is the single most important parameter in project economic analysis since it allows comparison of benefits and costs at different points in time and also provides the means through which a project can be tested (either with a positive NPV at that discount rate or an IRR above that rate) for viability. However, there are different ways in which the choice of discount rate can be approached.
Steve Curry, John Weiss
Chapter 9. Allowing for Uncertainty
Abstract
The techniques of project analysis have been considered so far as if the basic data, which they use, is known with certainty. However, both technical and economic information is used in the form of forecasts, and is subject to considerable uncertainty. It is possible to conceive of different values, based on experience, for the fundamental technical relations in any productive process, and for the project costs and benefits at either financial or economic prices. For most project data, a range of values can be found or predicted, yielding the possibility of different conclusions in the application of project worth measures.
Steve Curry, John Weiss
Chapter 10. Benefit Valuation in Different Sectors
Abstract
The earlier chapters have discussed the principles behind economic analysis of projects, and Chap. 7 has given a detailed discussion of estimating willingness to pay. Chapter 11 looks at valuation approaches for environmental effects, which are now highly relevant elements that need to be incorporated in a full analysis. This chapter looks at projects from sectors where the public sector is active in most economies. Benefits need to be estimated differently in each to allow for the varying types of project effects. The principle of valuation in terms of the incremental-non-incremental distinction remains relevant, although the application of these principles differs between sectors. Simplified examples are discussed from three sectors—transport, education, and health. Each sector is predominantly non-traded and for projects in these sectors, how benefits are treated is by far the most important issue in their economic analysis. The Appendices give three examples of practical applications of economic analysis in these sectors; at the same time, they illustrate practical shortcuts that are used frequently.
Steve Curry, John Weiss
Chapter 11. Project Analysis and Environmental Effects
Abstract
This chapter addresses how the environmental effects of projects can be incorporated in project analysis. It begins by briefly discussing the basis for environmental values used in project economics before explaining the main approaches in the literature for putting numerical values on these effects. These values need to be incorporated in a project resource statement and like other effects in the future need to be given a value in the present. How to discount environmental effects has been a topic of considerable debate and the chapter reviews the main alternatives for doing so.
Steve Curry, John Weiss
Chapter 12. Financial Analysis of Projects
Abstract
The techniques discussed in the earlier chapters apply to analyses in both economic and financial terms and both types of analysis are required. While this book focuses principally on economic analysis, the economic viability of projects depends on the financial sustainability of the management unit implementing and operating the project. The economic benefits will occur only if the financial resources are available to undertake the investment and maintain project operations. Project analysis at economic prices to judge whether an investment is worthwhile must be accompanied by an analysis at financial prices. For revenue generating projects, the financial return of the project must be compared with its financial obligations in order to assess its financial sustainability. Financial sustainability is taken up in the first section of this chapter.
Steve Curry, John Weiss
Chapter 13. Income Distribution Effects of Projects
Abstract
Projects can be analysed from different perspectives. So far, the discussion has focused primarily on their effects in terms of resource use. Projects are assessed on the efficiency with which they use existing resources—an acceptable project being one which generates more total national income than could be obtained by committing the same resources elsewhere.
Steve Curry, John Weiss
Chapter 14. Conclusions
Abstract
The previous chapters have outlined and discussed the main features of project analysis, particularly relating to the economic analysis of projects. This has included a full discussion of the ways in which economic prices can be applied in project analysis using different numeraires, as well as broader issues relating to the environmental and distributional effects of projects. The focus has been to combine theoretical discussions with practical illustrations. In many instances there remains a major gap between research studies which develop best-practice techniques drawn from the academic literature and what is feasible in practical project applications. It is important to stress that project economic analysis was developed principally to avoid accepting projects that were not economically justified. This included cases where financial analysis would approve the wrong projects, for example because they were financially attractive simply because of the protection from imports offered to domestic producers, or financially unattractive because the environmental benefits they provided did not generate revenue for the project. In all cases, the purpose is to arrive at better project decisions and to improve the effectiveness of investments, rather than offering rigorous technical solutions to the problem of valuation of project effects. In short, project economic analysis is intended to offer a pragmatic solution to the question of whether the benefits of a project are an adequate return on its costs. Project analysis has continued to develop in the last decades but at the same time there remain limitations also. This concluding chapter outlines some of the remaining limitations whilst referring to the more recent developments covered in the preceding chapters.
Steve Curry, John Weiss
Backmatter
Metadaten
Titel
Project Analysis in Developing Countries
verfasst von
Steve Curry
John Weiss
Copyright-Jahr
2023
Electronic ISBN
978-3-031-40014-8
Print ISBN
978-3-031-40013-1
DOI
https://doi.org/10.1007/978-3-031-40014-8