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	Table of Contents
p. 45 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 3 : The Project Framework

1. The first step in economic analysis of projects is to define the economic rationale of a project and, in doing so, to establish its objectives. For some projects, especially those that may have multiple outcomes which cannot be adequately valued, these are best defined in a logical framework setting out the objectives of the project at the input, output, purpose, and sector goal levels. In this way, the project can be more precisely defined and the important relationships on which the success of the project depends, both internally and externally, better understood.

2. Projects are conceptualized as hierarchical causal structures. They are seen as being made up of a series of means-ends relationships, beginning with input-output linkages, continuing with output-purpose linkages, and ending with purpose-goal linkages. If specified inputs are provided on time, then outputs are produced. If there is demand for project outputs, then the project purpose is achieved. If the project purpose is achieved, it will contribute to the achievement of sector goals. The external conditions on which these linkages are based can be stated as assumptions. The internal project linkages and the external conditions are the basis on which project risks can be enumerated.

3. The Project Framework integrates the evaluation of the economic and social effects of projects and provides a common framework to evaluate directly and indirectly productive projects. The Project Framework encourages clarification of the economic logic underpinning project design: whether the project represents an appropriate role for the government or whether a policy change or institutional change might be broader reaching and more sustainable than a proposed project investment.

4. The feasibility of applying economic analysis can be shown in terms of the Project Framework. The following table shows the extent to which project inputs, outputs, effects, and impact can be identified, quantified, and valued by project type: directly productive or indirectly productive.

5. The main difference between directly productive and indirectly productive projects for economic analysis is in the valuation of project outputs and effects. For directly productive projects operating in a relatively competitive market environment, the economic effects of purpose level achievements can be measured in terms of incremental income. In the case of indirectly productive projects, on the other hand, the best that can be expected is to be able to value project effects indirectly, in terms of the project's impact on the market value of the product for which the project produces an intermediate input or on the cost of an alternative in terms of cost savings.¹ Contingent valuation and benefit transfer techniques are also useful in quantifying and valuing the outputs and effects of indirectly productive projects.

6. The approach to and reliability of economic analysis therefore vary, depending on whether the project is directly productive or not. There are related sectoral similarities and differences in applying economic analysis. Directly productive projects, typically in agriculture and industry, lie at one end of a continuum for the direct application of project analysis. Indirectly productive projects in education, population, health, and human nutrition lie at the other, along with projects aimed at environmental quality management, institutional change, and public sector organizational development and improvement. Infrastructure projects lie somewhere in the middle, depending on their specific production and consumption characteristics.

7. The reach of economic analysis widens with the project producing a private good type service and operating in a competitive market environment. Infrastructure services, for example, differ substantially in their economic characteristics, across sectors, within sectors, and between technologies. Infrastructure projects producing private services, such as telecommunications, urban transport, and rail transport, are subject to financial analysis on which economic analysis can be based and with which it can be compared. However, those infrastructure services producing public good type services or common property type services, such as urban sewerage, wastewater treatment, rural roads, and rural water supplies, are more difficult to analyze from both the economic and the financial point of view. Although the public sector has dominated the production of infrastructure services, the potential for competitive markets for these services is higher now than previously. Technological innovation has reduced economies of scale, resulting in the break-up of natural monopolies. Competition can also be enhanced through contestability arrangements and competition for the market. Regulatory innovation enables unbundling of services to enhance competition. These changes influence the approach to be used in the economic analysis of public, private, and hybrid projects.

8. In the case of public utility projects producing private good type services, project outputs are sold on noncompetitive markets and financial analysis can be undertaken and, for purposes of economic analysis, supplemented by cost savings on displaced alternative sources of supply and consumer surplus with and without the project. Markets, whether competitive or not, do not often exist through which to directly value purpose level achievement for indirectly productive projects.

9. The application of the Project Framework approach to project design provides a conceptual framework for both the economic and social analysis of directly and indirectly productive projects. An integrated framework ensures transparency and accountability, and promotes the efficient use of resources.

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¹ There can be difficulties in quantifying the effects of alternative ways of achieving project effects. In the case of health projects, for example, to quantify the full loss of healthy life, the index DALY (disability adjusted life years) was estimated to compare the relative cost of health care investments.

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