Catalog

	Table of Contents
p. 21 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 A. General Considerations B. Role of World Prices C. Economic Prices of Traded Goods and Services D. Economic Prices of Nontraded Goods and Services E. The Economic Price of Labor F. The Economic Price of Land G. Bringing Economic Prices To A Common Base H. Conversion Factors I. Economic Viability: A Procedure 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 XVII. Others

Guidelines for the Economic Analysis of Projects : VII. Valuation of Economic Costs and Benefits

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H. Conversion Factors

105. Conversion factors can be calculated and used when testing the economic viability of a project. A conversion factor is the ratio between the economic price value and the financial value for a project output or input. This ratio can be applied to the constant price financial values in project analysis to derive the corresponding economic values. Conversion factors can be calculated for

• specific project items, for example, the main outputs and inputs;
• groups of typical items, such as, petrochemicals or grains; and
• the economy as a whole, as in the SERF or standard conversion factor.

Specific conversion factors can be calculated to convert financial values into economic values using the domestic market price numeraire or the world market price numeraire.

106. Where the domestic price numeraire is being used, no adjustment for economic values is necessary for the outputs of indirectly productive projects, where an economic value has been attributed based on the willingness to pay or the willingness to accept compensation; or for nontraded inputs valued in the same way. For economic analysis using the world market price numeraire, the willingness to pay or willingness to accept values should be adjusted by the standard conversion factor to bring them in line with other items in the economic resource flow.

107. Conversion factors for groups of products, as well as the SERF and the standard conversion factor, are often estimated using only an adjustment for net trade taxes. This approach generally underestimates the difference between the domestic market and border price equivalent values. The corresponding group conversion factors are minimum estimates, together with the SERF, using the domestic price numeraire, or maximum estimates, along with the standard conversion factor, using the world price numeraire. Results of economic viability analysis can be tested through higher (domestic price numeraire) or lower (world price numeraire) values of the SERF and the standard conversion factor, respectively, and conversion factors for groups of products.

108. Several nontraded inputs occur in nearly all projects: construction, transport, water, power, distribution, and financial services are the most obvious. It may be desirable to calculate specific conversion factors for these commonly occurring inputs on a country basis so that consistent values are used across different projects in a country. Where the supply of these nontraded inputs is being expanded, specific conversion factors can be calculated through a cost breakdown at financial prices. The cost breakdown should include the proportion of the financial value spent on surplus labor, scarce labor, net taxes to government, traded items, and domestic resources. Such a cost structure can be used to estimate a conversion factor for the item if there also exists an estimate of the SERF and SWRFs for the different categories of labor, or a standard conversion factor and adjusted SWRFs for the labor categories (see Table 4).

109. Table 4 illustrates the importance of two national parameters, the SERF (or standard conversion factor) and the SWRF. The SERF and standard conversion factor are estimated at the national level. There are different approaches to estimating a SERF/standard conversion factor, including the use of semi-input-output methods, or an estimate of the sustainable trade balance (see Appendix 16). The SWRF may differ from project to project for different types of labor and should be estimated on a project basis. Moreover the opportunity cost of surplus or scarce labor in physical terms may differ between projectsin one region it may be represented by paddy, in another it may be represented by livestock products. Specific conversion factors for different labor categories can also be used in the above procedure if they can be estimated.