Catalog

	Table of Contents
p. 4 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 XVII. Others

Guidelines for the Economic Analysis of Projects

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IV. Macroeconomic and Sectoral Context

13. Project proposals should be derived from, and placed in the context of, broader development objectives. These objectives may be explicitly stated in a government plan document, or implicitly given through a public investment program. They will form the basis of the Country Operational Strategy Study. A statement should be given of the main development objectives of a country to which a proposed project will contribute. This statement is separate from the classification of projects according to the Bank's own system of priorities, and includes the time period in which specific objectives are to be achieved or programs of investment are to be implemented.

14. There will be constraints to the achievement of development objectives and implementation of sector programs. At the sector level

• forecasts should be provided of future demands or needs for the type of output to be produced;
• existing sources of supply, the costs of supply, and intended investments should be outlined;
• a statement should be provided of the contribution of the proposed project to meeting sector demands or needs, and any cost reduction or technology innovation it may contribute; and
• a statement should be provided of the extent of direct government involvement as a supplier and the extent of government subsidy to the sector.

15. Many investments will work well only if there are complementary investments in related sectors or activities. For example, for an irrigation project to raise agricultural output, the appraisal report must elaborate the necessary extra requirements for transport and processing. Projects to improve urban services should consider the capacity of the existing systems to deliver additional power and water. Potential constraints in supplies, whether they can be overcome, and the necessary timing of complementary investments, must be considered.

16. Because a project takes place within a given macroeconomic and sector context, an investment project can be seen as an incremental change to an existing structure. In fact, the context may be more important than the project itself. Moreover, a project that is financially sound within one sector and macroeconomic context may be financially unsound in another. Thus policy changes may be as important as the physical investment to the achievement of development objectives.

17. The macroeconomic and sector context will result in differences between financial and economic prices. The policy context that affects financial and economic prices can be analyzed on a country basis by determining

• how levels for the key macroeconomic parametersexchange rate, interest rates, and wagesare determined;
• the impact of microeconomic policies, such as import quotas, rationing schemes, and special financial incentives, on a particular investment;
• which border policies, such as import duties and export subsidies, will affect project outputs and inputs and how; and
• what are the existing market structures, such as the degree of monopoly supply and pricing for public utilities and other inputs, and the degree of competition for project outputs.

18. Brief statements on each of these four factors will focus attention on the macroeconomic and sector framework. Where any of the factors are deemed very significant, then the efficiency of project investments is likely to be reduced as consumers and suppliers respond to distorted prices. In addition, substantial differences between financial and economic prices as a result of any of these four factors can be a prelude to policy changes that increase the risk of project investments. Therefore, the statement of the macroeconomic and sector context should be accompanied by a statement on whether the intended investment project and associated policy dialogue are likely to facilitate adjustments in the framework or are likely to bolster resistance to change.

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