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Guidelines for the Economic Analysis of Projects : VII. Valuation of Economic Costs and Benefits
F. The Economic Price of Land88. All projects involve some use of land. Even where land has no financial cost, its economic value should be estimated and included in the calculation of economic viability. The demand price for land does not always give an accurate reflection of the economic value of land because supply cannot be expanded and land can be held for speculative, as well as productive, purposes or to meet immediate needs. The value of land is best determined through its opportunity costwhat it would have been used to produce without the project. In a relatively competitive land rental market, land rent is generally a good estimate of the opportunity cost. Where relevant, the economic costs of resettlement should be included in the cost of land, if such costs are not included already in the project costs. 89. For rehabilitation and improvement projects, the same area of land may be included as in the original project. Here the economic price of land will be included in the without-project net output estimates. However, for new and expansion projects, the economic price of land needs to also include the opportunity cost of land undergoing a change of use. The alternative net output from the land undergoing a change of use, at economic prices, will differ from project to project. 90. For new projects in rural areas, the opportunity cost of the land will be the net agricultural output foregone, measured at economic prices. This opportunity cost should be estimated on an annual basis. Over the life of the project there may be an increasing or decreasing trend in agricultural productivity, which should be incorporated into the opportunity cost estimate. A similar approach can be used for city-edge land, where agricultural uses are displaced by infrastructure, industrial, or housing projects. In this context, owing to greater access to urban markets and facilities, the future opportunity cost is likely to considerably exceed the present productivity of the land. 91. The same principle can be applied, but with greater complexity, in the city center context; for example, when road construction displaces housing, offices, commercial and industrial activities, and recreational uses. The extent of land use change for each type of activity can be calculated and valued accordingly, considering the lost production at economic prices for directly productive industrial and commercial activities; the cost savings through relocation of indirectly productive activities; and the willingness to pay for recreational and other public amenities. The economic cost of land also includes the opportunity cost of land used for the resiting of the displaced activities, which may be at other city-edge locations. 92. Many countries are implementing a series of special export or development zones. Here the opportunity cost of the land may change dramatically over a short period of time. Previously, relatively unused, poor agricultural land could be transformed through infrastructure investment into highly valued land for industrial, financial, or commercial purposes. Where land markets develop or where rents are set on a competitive basis, the market price of the land can be used to estimate its productive value in this context. In addition to the opportunity cost of land use, the costs of land development should also be included as an economic cost of the project (see Appendix 13). 93. Many natural resources, such as land, are depletable. When a natural resource is depletable, its economic cost will comprise both its opportunity cost in terms of benefits foregone from its best alternative use and its scarcity rent. While the consequences of land degradation represent an increasing threat to agricultural production, other natural resources, such as groundwater, are closer to exhaustion. In the case of groundwater, the finite capacity of aquifers means that when withdrawal rates exceed the rate of recharge, an alternative water source must eventually be found. The higher future cost of obtaining water implies a scarcity rent or depletion premium (see Appendix 6). Even in the case of surface water, scarcity rent is relevant when pricing raw water. When a water utility approaches its legal entitlement from a river source, it has to find an additional source if it is to meet growing demand. Typically, only higher cost sources are left, and this in itself implies a scarcity rent. If, on the other hand, a water utility is able to purchase new water rights on the open market, the scarcity rent becomes an explicit part of the price paid for raw water, and the market price of raw water is equal to its economic price. Similar considerations apply in valuing other depletable national resources, such as mineral deposits or national fish stocks. 94. Many Bank-funded projects involve resettlement of people and economic activities. Sometimes resettlement may be a major component of project planning and costs; other times it may affect only a small number of people and activities. Generally resettlement cannot expect to recreate exactly the living conditions or income opportunities that are displaced. Resettlement itself should be seen as a development subproject, requiring its own institutional structure and financial resources. There will be economic costs, both direct and in terms of lost output, as well as potential benefits that can be identified by analyzing the situation with and without resettlement (see Appendix 14).
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