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TOPIC 5. PROJECT APPRAISAL AND SOCIAL COST BENEFIT ANALYSIS. 1. Introduction. How should public expenditure programs be appraised? Formal economic analyses (based on net present values) tend to be inadequate

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Topic 5

TOPIC 5

PROJECT APPRAISAL AND SOCIAL COST BENEFIT ANALYSIS

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Introduction

Introduction

  • How should public expenditure programs be appraised?

  • Formal economic analyses (based on net present values) tend to be inadequate

  • Because the anticipated objectives of public programs are often broader than pure market concerns.

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  • donors may have expressed additional objectives

  • such as local capacity-building, employment generation, as well as encouraging advocacy on disability issues.

  • How do we quantify these additional goals to assess the economic viability of the donor investment?

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  • The standard approach used in such analyses are developed from social cost-benefit analysis (Thirlwall, 2003).

  • Social cost-benefit analysis is often viewed as the public expenditure equivalent of net-present value methods used in evaluating private investments.

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  • In general, any project appraisal must distinguish between three components: financial, economic, and social appraisal

  • Financial appraisal examines the financial flows generated by the project itself, and the direct costs of the project measured at market prices.

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2. Economic appraisal adjusts costs and benefits to take account of costs and benefits to the economy at large, including the indirect effects of the project that are not captured by the price mechanism.

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3. Social appraisal examines the distributional consequences of project choices, both intertemporal concerns (i.e. effects over a period of time, today versus the future);

  • and also intratemporal concerns (e.g. concerns between groups in society at a specific point in time).

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  • the assessments are often concerned with intermediate or appropriate technologies targeted at communities in developing countries.

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  • A comprehensive project appraisal should therefore examine both the engineering feasibility, the economic viability of the proposed investment, as well as the social impacts on society as a whole


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  • Project appraisal or project planning must be viewed as a process of decision-making over time, or the project cycle

  • starting with project identification, and proceeding through various stages of various feasibility studies (for example, engineering, financial, social etc),

  • then the investment phase, and finally project evaluation.

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Economic appraisal

Economic appraisal

  • is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits

  • denominated in monetary terms or for which a monetary equivalent can be estimated.

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  • Economic Appraisal is a key tool for achieving value for money and satisfying requirements for decision accountability.

  • It is a systematic process for examining alternative uses of resources, focusing on assessment of needs, objectives, options, costs, benefits, risks, funding, affordability and other factors relevant to decisions.

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  • The main types of economic appraisal are:

  • Cost-benefit analysis

  • Cost-effectiveness analysis

  • Scoring and weighting

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  • Economic Appraisal is a methodology designed to asset in defining problems and finding solutions that offer the best value for money (VFM).

  • This is especially important in relation to public expenditure and is often used as a vehicle for planning and approval of public investment relating to policies, programmes and projects.

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  • The principles of appraisal are applicable to all decisions, even those concerned with small expenditures.

  • However, the scope of appraisal can also be very wide.

  • Good economic appraisal leads to better decisions and VFM.

  • It facilitates good project management and it is vital to decision-making and accountability.

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Cost benefit analysis cba

Cost-Benefit Analysis (CBA)

  • A method of comparing the cost of a program with its expected benefits in dollars (or other currency).

  • The benefit-to-cost ratio is a measure of total return expected per unit of money spent.

  • This analysis generally excludes consideration of factors that are not measured ultimately in economic terms.

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History

History

  • The development of cost-benefit analysis (CBA) can be traced back to the 19th century engineer and economist, Jules Dupuit.

  • He was both an engineer and economist

  • And this is fitting since cost-benefit analyses seemed to be favored by those seeking to justify civil engineering projects.

  • During the 1930s, the U.S. Corps of Engineers relied upon CBA as a way to prioritize projects to the nation’s waterways.

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  • The study of CBA in economics was not embraced until the 1950s

  • The Pareto Principle and the Kaldor-Hicks efficiency models are theories related to CBA.

  • These theories attempt to explain efficiency or progress in terms of gains and losses, benefits and costs, respectively, among competing constituencies.

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Principal use

Principal Use

  • CBA is often used as a way to measure “initial and ongoing expenses vs. expected return.”

  • Measuring expenses vs. return can inform planners as to whether the expected result does more good than the costs associated with attaining that result

  • The focus of CBA is heavily geared towards calculating benefits and costs in monetary terms

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  • The analysis tries to associate monetary values with “less tangible” effects such as people’s emotional welfare or environmental quality

  • Six principles for the conduct of cost analysis;

  • Analytical perspective

  • Conduct inquiry with a clear understanding of who pays the costs and who benefits from the initiative under review

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2. Beneficial values: Itemize the expected benefits that will accrue

3. Cost components: Detail the component costs

  • these may include start-up and ongoing costs associated with interventions

    4. Discounting

  • Remember that costs and benefits may arise at different points

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  • typically, benefits arrive after costs and possibly some time later.

  • There may be a need to discount for this,

  • with the passage of time costs may rise,

    5. Sensitivity analysis

  • To ensure that the impact of different options and the benefits at different points in time is explored

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6. Efficiency measurement

  • Summarize the best option(s) in ways that demonstrate the benefits/cost savings over alternatives

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Advantages

Advantages

  • The advantage of CBA is that it gives planners a method to try

  • and “put all relevant costs and benefits on a common temporal footing” in order to help people make informed decisions.

  • It provides people with an understanding as to the economic costs of decisions,

  • and allows arguments to be made for or against a change based upon economic considerations.

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Shortcomings

Shortcomings

  • The downside of CBA is that it is used to measure effects that may be difficult, or improper, to measure in financial terms.

  • For example in health care, cost is not always understood in financial terms, and good value is not always represented as a comparison of purchases within a budget limit

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  • Before embarking upon a cost-benefit analysis, it is important to “clearly define what is meant by ‘cost’ and ‘benefit’…costs and benefits may not simply be financial.

  • Terms such as shadow prices always involve normative judgement.

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Cost effectiveness analysis cea

Cost-effectiveness analysis (CEA)

  • is a form of economic analysis that compares the relative expenditure (costs) and outcomes (effects) of two or more courses of action

  • Cost-effectiveness analysis is often used where a full cost-benefit analysis is inappropriate

  • e.g. the problem is to determine how best to comply with a legal requirement.

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  • Cost-effectiveness analysis was developed in the military,

  • CEA was first applied to health care in the mid-1960s and was introduced to clinicians in 1977

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The basics of cea

The Basics of CEA

  • CEA is a technique for comparing the relative value of various clinical strategies.

  • In its most common form, a new strategy is compared with current practice (the "low-cost alternative") in the calculation of the cost-effectiveness ratio

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The cost effectiveness ratio

the cost-effectiveness ratio

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  • The result might be considered as the "price" of the additional outcome purchased by switching from current practice to the new strategy (e.g., $10,000 per life year).

  • If the price is low enough, the new strategy is considered "cost-effective

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  • It's important to carefully consider exactly what that statement means.

  • If a strategy is dubbed "cost-effective" and the term is used as its creators intended, it means that the new strategy is a good value.

  • Note that being cost-effective does not mean that the strategy saves money,

  • and just because a strategy saves money doesn't mean that it is cost-effective.

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  • Also note that the very notion of cost-effective requires a value judgment—what you think is a good price for an additional outcome, someone else may not

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Social appraisal annex for a project submission

SOCIAL APPRAISAL ANNEX FOR A PROJECT SUBMISSION

  • In most cases it is necessary to supplement a social appraisal annex with the project evaluation report being submitted

  • The preparation of those parts of the document which deal with social issues in

    appraisal, is the responsibility of the

    social development adviser


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  • The content and structure of the annexes vary very considerably but good practice includes the following elements:

  • A social, contextual analysis at the project goal and purpose levels;

  • An explicit linkage between identified social issues and elements of the project design;


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3.A discussion of the intended poverty reduction outcomes of the project, including identification of which groups among the poor and excluded will benefit and how;

4. An assessment of the extent to which the project strengthens the framework for supporting human rights (gender equality) and people’s capacity to realize those rights;


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5. A description of how project outcomes could influence wider social development policies.


Conclusions

Conclusions

  • After considering the three components: financial, economic, and social appraisal,

  • All possible alternative projects could be compared and the most viable one will be chosen

  • But experiences in the real world show different stories


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  • Where most public projects are chosen through political process and not through project appraisal and evaluation

  • But it is good to know that whenever such governments are ready, there are appropriate tools that can be used to help them make the choice more wisely, and benefit the people and the world


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  • The end


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