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p. 10 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 A. General B. Identification and Quantification of Benefits C. Identification and Quantification of Costs 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 XVII. Others

Guidelines for the Economic Analysis of Projects : VI. Identification and Quantification of Costs and Benefits

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VI. Identification and Quantification of Costs and Benefits

A. General

34. There are four basic steps to analyzing the economic viability of a project:

• identify the economic costs and benefits;
• quantify the costs and benefits, as much as possible;
• value the costs and benefits; and
• compare the benefits with the costs.

The first two steps can generally be undertaken together. However, there will be some types of benefits, and sometimes costs, that cannot be quantified and valued for inclusion in the cost-benefit comparison. They will simply be stated alongside the results of the economic analysis.

35. To identify project costs and benefits, the situation without the project should be compared with the situation with the project. The without-project situation is not the same as the before-project situation. The without-project situation can sometimes be represented by the present levels of productivity of the relevant resources. However, present levels of productivity would frequently change without the project, and this should be taken into account in defining the without-project situation.

36. The comparison of without-project and with-project situations is at the heart of the estimation of net benefits for any project. While, in practice, appraisal reports provide a clear specification of the with-project situation, they frequently provide little analysis of the without-project situation. The without-project situation is often inaccurately described. The without-project situation is that which would prevail without the project. It is not the implementation of the next best project alternative, unless there is clear evidence to suggest that this is most likely to be the case. Similarly, the without-project situation is not the delayed implementation of the same project. In most cases, it is a modification of the existing circumstances. In comparing project alternatives, the without-project situation follows the same scenario, and provides the basis for comparing with-project net benefit flows for each project alternative.

37. Most projects or subprojects are regarded as marginal in the sense that they will not have any effect upon the prices of project inputs and outputs, and will not have a substantial impact on the government budget or the exchange rate. Additional factors will have to be taken into account in the case of large projects that have a considerable impact on the regional, national, or international economy.

38. An important distinction in identifying project benefits and costs is that between nonincremental and incremental output, and between incremental and nonincremental inputs. The distinction is important because nonincremental and incremental effects are valued in different ways. It should therefore be used in the identification and quantification of project effects. Nonincremental outputs are project outputs that substitute for existing production. For example, a new hydropower plant may in part substitute for existing coal-fired generation. Incremental outputs are project outputs that expand supply to meet new demands, for example, the growing demand for electricity as generation and transmission costs decline. Incremental inputs are project demands that are met by an increase in total supply of the input, for example, where an increase in demand for water is met by an overall expansion of the water supply system. Nonincremental inputs are project demands that are met not by an expansion of overall supply but from existing supplies, that is, by competing supplies away from existing producers. Each project will exhibit different degrees of nonincremental and incremental effects for both outputs and inputs. Part of the process of forecasting involves analyzing these effects for the main project outputs and inputs.

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