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	Table of Contents
p. 55 of 74 BACK | NEXT I. Introduction II. Background III. The Economic Rationale of A Project IV. Macroeconomic and Sectoral Context V. An Integrated Approach To Economic Analysis VI. Identification and Quantification of Costs and Benefits VII. Valuation of Economic Costs and Benefits VIII. Large Projects, Linkages, and National Affordability IX. Least-Cost and Cost-Effective Analysis X. Investment Criteria: Economic Viability XI. Discount Rate XII. Uncertainty: Sensitivity and Risk Analysis XIII. Sustainability of Project Effects XIV. Distribution of Project Effects XV. Projects and Policies XVI. Appendices Appendix 1: Key Questions For The Economic Analysis of Projects Appendix 2: Project Economic Rationale: Market and Nonmarket Failures Appendix 3: The Project Framework Appendix 4: Identification and Measurement of Consumer Surplus Appendix 5: Treatment of Working Capital Appendix 6: Depletion Premium Appendix 7: The Use of Constant Prices In The Economic Analysis of Projects Appendix 8: General Methodology For Building Up Project Statements Appendix 9: Economic Evaluation of Project Output and Input Appendix 10: Economic Price of Traded Goods and Services Appendix 11: Valuation of Nontraded Outputs and Inputs Appendix 12: Shadow Wage Rate and The Shadow Water Rate Factor Appendix 13: The Economic Price of Land Appendix 14: Treatment of Resettlement Components of Projects Appendix 15: Calculating Economic Prices At The Domestic Market Price Or World Market Price Levels Appendix 16: Estimating The Shadow Exchange Rate Factor and The Standard (Or Average) Conversion Factor Appendix 17: Example of An Economic Rate of Return: An Irrigation Rehabilitation Project Appendix 18: Effect On Net Foreign Exchange and Budget Flows: An Example Appendix 19: Least-Cost Analysis and Choosing Between Alternatives Appendix 20: Estimating The Economic Opportunity Cost of Capital Appendix 21: The Treatment of Uncertainty In The Economic Analysis of Projects: Sensitivity and Risk Analysis Appendix 22: User Charges, Cost Recovery, and Demand Management: An Example For Piped Water Appendix 23: Financial Returns To Project Participants: An Illustration Appendix 24: Economic Evaluation of Environmental Impacts Appendix 25: Distribution of Project Effects Appendix 26: Impact On Poverty Reduction Appendix 27: Difference Between Economic and Financial Prices Appendix 28: Use of Economic Prices In Measuring Effective Protection Appendix 29: Exchange Rate Issues In Project Analysis XVII. Others

Guidelines for the Economic Analysis of Projects : XVI. Appendices

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Appendix 13 : The Economic Price of Land

1. Nearly all projects involve an additional use of land. Whether land is purchased or allocated to a project, it has an economic cost. The economic cost of land should be included in the project resource flow for calculating the economic internal rate of return (EIRR). Different values of the economic cost of land will be included in different project alternatives, for example, for different alignments of a road.

2. The first step in calculating the economic cost of land is to analyze the changes in land use that the project or project alternative will bring about. Some rehabilitation or updating projects may require no additional land and therefore no change in land use. Expansion or new projects will require a land allocation and therefore a change in land use. Where existing activities are displaced and not terminated, there will also be an indirect change in land use at the site to which they are relocated. A survey is therefore required for

• demarcation of the project full land requirement,
• demarcation of land required for relocation,
• identifying those areas where land use will not change, and
• identifying those areas where land use will change.

3. The change in land use as a result of a project is illustrated in Figure 1.

Area iii includes existing activities that will be incorporated into the project: there is no change in land use. The economic cost of land relates to area iv,a, the additional land required for the project from terminated activities, and area iv,b, where some activities on this land are to be relocated. Relocated activities may include household dwellings, agricultural activities, factories, and social facilities. There may also be some external effects of the project on land use, for example, consequential changes in land use neighboring the project area because of interrupted rights of way or because of induced economic changes.

4. The economic price of land is based on those areas where there will be a change in land use. The use of this land without the project provides the basis for its economic price. The without project situation should be based on the next best use of this land area. The basic measure to use as the cost of the land where use is changing is the output, net of all inputs, including labor and equipment, that would be produced on the land without the project. This opportunity cost of the land should be measured at shadow prices. Because of current trends or expected changes in the future, the opportunity cost per unit of land may change in the without project situation. Land productivity may increase where new agricultural methods can be anticipated or where infrastructure investments are planned. Land productivity may decline where, for example, soil erosion or exhaustion is occurring or where rainfall is becoming more scarce. The net output of the land in the without project situation should be estimated for each year of the project.

5. The opportunity cost of land will differ from place to place. In broad terms a distinction can be made between changing land use in rural areas, where agricultural production will be lost, in city areas, where a range of services and activities may be displaced, and in special development zones, where the production structure is changing rapidly.

6. In rural areas, changes in land use will result in lost agricultural production. The existing land use should be assessed and a land suitability analysis carried out for the best without project alternative. Commonly, a specific product or small number of products will be selected to represent the lost net output from the land. Estimates can be made on a per hectare basis and then projected onto the total land area. Where it is observed that agricultural techniques or cropping patterns are changing, an annual adjustment to the lost output per hectare can be made to reflect changing productivities. The cropping intensity, or number of harvests per year, will differ from place to place. The net benefits per harvest from the selected products are adjusted by the cropping intensity to give the annual loss of net output for the land area as a whole. A typical calculation can be summarized as

EPL_t = NB_o * CI * (1 + g)^t

where EPL_t = the economic price of land per hectare in year t,
NB_o = the net output or benefit in shadow prices per hectare per crop in year zero,
CI = the cropping intensity, and
g = the productivity growth factor (positive or negative).

This expression gives the opportunity cost or economic price of the land per hectare for each year of the project.

7. In city areas, for example, because of the construction of a new ring road, the effects are more complex. There may be several types of service or activity being displaced by the project. It is more likely that the displaced activities will be relocated where there are already existing activities, and so the opportunity cost of land in the project area and in the area of relocation can be equally complex. The economic price of the land is the summation of the several changes in land use measured according to the type of activity being displaced. Table 1 illustrates the possibilities for a road project in an urban area. It specifies the present or without project use of land, the areas of land where land use will change, the area of relocation for displaced activities, and the method of estimating the opportunity cost of the land occupied by different activities without the project.

8. These different types of land use can be discussed in turn. Factories will be relocated using the same area of land, displacing agricultural production. There may be efficiency improvements for the factories, but the economic price of the land is the agricultural production foregone. Commercial enterprises and housing will be relocated. However, the newly designed buildings will be more compact than the structures that will be displaced, and so less land is reassigned at the relocation site. The economic price of the land is given through lost agricultural production. Existing roads will be widened as part of the new road, and hence there is no change in land use for the existing road area. Some Government offices will be displaced. They will not be replaced. Existing functions will be fitted into existing Government premises nearby entailing no further loss of land. The cost of the associated land can be estimated through the cost difference in providing Government services. This cost difference may be negative, that is, the cost of providing services may be lower after displacement than before. A small amount of recreational area will be lost. It can be valued through an estimate of willingness to pay, measured through contingent valuation techniques where no revenues are collected for the recreational services that are being lost. Finally, the farmland, and the associated agricultural production, that is lost directly as a result of the road will not be compensated elsewhere. Those involved will be provided with other jobs. The economic price of land for the different effects of changes in land use should be measured in or converted to shadow prices.

9. In special development zones or greenfield sites, the purpose of development is to change the land use rapidly. Present land uses will not be a good indication of the future opportunity cost of the land. In principle, the economic price of the land for a new project in this situation can be estimated by considering the next best alternative use of the land after development of the site. However, such uses are likely to be similar to the project under assessment and the difference in their overall returns will become an indicator of project acceptability rather than a measure of the economic price of the land. In these circumstances, the purchase or lease price of the land can be used as an indicator of willingness to pay for use of a site.

10. The market for land can never be fully competitive because supply cannot be increased. Purchase or lease prices can be set through different means, for example, auctions, competitive bids, or negotiated prices. In general, auction prices will provide the best indication of willingness to pay. Where the economic price of land is estimated through its market price, a conversion factor has to be applied to convert the price to the appropriate price level.

11. Where the economic price is estimated through the annual lost production in agricultural or other activities, this is usually included in the project resource statement for each year. Occasionally, the stream of annual amounts is converted to a present value using the discount rate (12 percent). Where the economic price is estimated through an adjusted purchase or lease price, this will be included as a single payment in the first project year. It can also be annualized across the project years using the discount rate.

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