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p. 50 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 8 : General Methodology for Building Up Project Statements

1. A summary project statement of economic costs and benefits is required as the basis for project decisions. Both costs and benefits should be valued at constant economic prices. The statement needs to be drawn up for each subproject, for each project alternative, and for a project as a whole. The statement will differ between projects. However, some common conventions are used to represent the different types of cost and benefit over the life of the project.

I. Investment Costs

2. Investment costs include initial investments to implement the project, replacement investments during the life of the project, and the residual value of investment assets at the end of the project. Initial investments are generally broken down into subcategories, such as land preparation, buildings and construction, equipment, vehicles, and other costs included in the initial investments, such as environmental mitigation and monitoring. Physical contingencies included in the initial investments for economic analysis should be allocated to these different categories. The initial investments may be concentrated in a single project year, or more generally scheduled over more than one year according to the project phasing and implementation schedule.

3. Associated with each subcategory of investment is a replacement period in years. On the assumption of normal maintenance activities, this replacement period indicates when the relevant assets will be worn out and will therefore need replacing. Replacement investments are entered in the project statement in the last year of use of the current assets, when commitments to new resources have to be made.

4. The whole project statement will be drawn up to cover the implementation period of major investments and a certain number of operating years. The number of operating years to include in the statement can be determined by

• the market life of the projectthe years over which the project benefits will occur or the output is demanded;
• the technical life of the major investment assets and the number of years of normal operation before the assets are fully worn out;
• the economic life of the same assetsthe number of years after which it is worth reinvesting to obtain the benefits of reduced operating and maintenance costs even if the assets are not fully worn out.

For some major economic infrastructure projects with particularly long lives, such as dams or railways, the project period may include 20-25 years of operation with the remaining life of assets represented by a residual value.

5. Different types of investment asset have different replacement periods. For whatever project period is decided upon, some assets will not be fully worn out at the end of the project period. The remaining value of the assetstheir residual valueis entered as a negative investment cost at the end of the project. It is calculated as the proportion of the replacement period still remaining for a particular subcategory, times the value of the assets concerned. If it is envisaged that the remaining assets would be sold when operations cease, this would take some time and the residual value is entered in the year after the last operating year. If it is envisaged that the project will continue in some form at the end of the project period, the residual value is entered in the last operating year, to represent a stream of further benefits discounted to the end of the present project.

6. Table 1, Part A, illustrates the construction of an investment schedule for a processing project with an implementation period of two years and an operating period of 20 years based on the estimated market life of the output. It includes the initial investments, the replacement investments at intervals, and the residual values of project assets at the end of the project life.

II. Working Capital

7. The treatment of working capital in project statements has been illustrated in Appendix 5. The processing project holds large initial stocks of raw materials at some times of the year, and no initial stocks at others. The supply is seasonal. An annual average amount for initial stocks and final stocks of output is included in Table 1, Part B, related to the capacity utilization of the assets. A residual value is included at the end of the project life.

III. Annual Costs and Benefits

8. The supply of raw materials for the processing project builds up over two years from the end of implementation. Capacity utilization is 50 percent in the first operating year, and then 100 percent thereafter. Most annual costs (materials, utilities, and labor) are variable and increase with capacity utilization. Overhead costs are fixed. The annual costs include an estimate for the opportunity cost of land; half the land is taken over in the first implementation year, and the other half in the second year of implementation. The annual costs are totaled for each year of the project, as shown in Table 1, Part C.

9. The processing project will be able to offer a better price for the local raw materials. It may take over some supplies at present going to local small scale processors. However, most of the output will be from additional material supplies. The incremental output is built up with capacity utilization as in Table 1, Part D.

IV. Net Benefits

10. The investment, working capital, and annual costs are subtracted from the incremental output for each year of the project life, as in Table 1, Part E. The net economic benefits are negative in the two implementation years, and in the later year in which the major equipment is replaced. They are low in the first operating year when the project is at less than full capacity utilization, and are high in the final year where they include the residual value of investment and working capital costs. Such a statement provides the basis on which a decision can be taken as to whether the future net benefits are a sufficient return for the earlier net costs.

Table 1. Processing Project Resource Statement (Economic Prices)

Click to enlarge table

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