Catalog

	Table of Contents
p. 3 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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III. The Economic Rationale of a Project

8. The application of economic logic should occur early in the project cycle, rather than simply at the appraisal stage. It should lead the analyst to ask whether the investment operation being analyzed represents an appropriate role for government or whether a policy change or institutional change might be broader reaching and more sustainable than a proposed physical investment. The analysis of investment operations and the analysis of policy-based alternatives can flow from the application of the same forms of economic logic.

9. The inadequacy of markets to produce what society wants provides the main rationale for Bank operations. Where financial returns are less than cost recovery, or revenues are nominal or nonexistent, there is a case for financing public projects. Because external benefits and costs are not a part of financial production decisions, too little output will tend to be produced where externalities are net benefits, and too much where they are net costs (see Appendix 2).

10. Many goods and services are still produced in relatively monopolized markets, both by the public sector and by the private sector. Bank assistance should be combined with development of a legal and regulatory framework that limits the effects of monopoly structures. The extent to which competitive market structures can be created or simulated depends on transactions costs. Transactions costs include the costs of negotiating and enforcing contracts, and the costs of collecting charges for goods and services provided. The Bank can assist with the introduction of new technologies and institutional arrangements which reduce transactions costs and increase accountability. In some sectors, the Bank will therefore achieve a longer term aim of ensuring sustainable private production of both private goods and public goods.

11. The Bank seeks to provide finance primarily for public and near-public goods, and for those elements, such as roads, irrigation systems or enterprise restructuring, which help to create the conditions under which a larger number of goods can be produced as private goods. The two common criteria used to distinguish between public and private goods are

• subtractability how much the consumption of a good or service by one person subtracts from the ability of others to use the good or service; and
• excludability the extent to which a potential user can be excluded if the user does not meet conditions set by the supplier.
• The Bank is also involved in reducing public bads such as environmental costs or poverty, and in funding some private sector developments where they can play a catalytic or demonstration role.

12. Bank operations must also cope with the consequences of nonmarket failure. Many projects, both private and public, underperform because they are not implemented and operated effectively and because the project benefits are captured by some groups, especially the nonpoor, and not by others. Nonmarket failure helps to explain why projects often yield higher costs and lower benefits than those forecast at appraisal. Bank projects and operations can reduce nonmarket failure through capacity building for strengthening organizational capacity, and for restructuring institutional roles in a sector.

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