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p. 4 of 6 BACK | NEXT Foreword I. Introduction II. Economic Analysis in 2003: An Overview III. Project Rationale and Analysis of Alternatives: Further Assessment IV. Further Improving EREA's Service Delivery V. Conclusions and Recommendations

Economic Analysis Retrospective: 2003 Update

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III. Project Rationale And Analysis of Alternatives: Further Assessment

Retro 2002 provided a detailed assessment of the practices of project rationale and alternative analysis, and concluded that this part of economic analysis was a weak link in the analytical chain. As noted in the above, the analysis of these two areas remains weak. This section provides a further critical assessment, focusing on two aspects. First, it identifies key weaknesses in articulation of project rationale and alternative analysis. Second, it highlights the two most critical reasons why such analytical weaknesses remain and, accordingly, makes suggestions for addressing them.

The continuing attention to the issue of project rationale and analysis of alternatives is mainly due to its significance on two accounts. First, from the development viewpoint, unless a project has a clear rationale and represents the most effective means to address the real problem, its effectiveness is in doubt. And second, from an analytical perspective, a project proposal silent on rationale or alternatives implicitly assumes that it does the right thing, does it the right way, so that it will add value. Is this true? How so? Compared to what? Economic analysis questions this implicit assumption and examines critically whether and how projects bring value. Of course, in this analytical process, economic analysis itself also adds value to project design.

Major Weaknesses

As highlighted in Retro 2002, articulating the role of public sector involvement and choice of the form of aid is part of the broadly defined analysis of alternatives. Based on project proposals reviewed in 2003 and in the previous year, the following set of major weaknesses is noted.

First, many project proposals do not clearly demonstrate why public sector involvement is called for. All ADB-supported public sector operations must have some economic rationale. The nature of the economic rationale needs to be explicitly and clearly stated. Government involvement can generally be established where there are identifiable failures in the market, which arise in the case of public goods, externalities and imperfect information, or to redistribute income, wealth, or benefits from public expenditure.

In articulating the economic rationale of a project on either efficiency or equity grounds, government failure also has to be considered. Government failure can be worse than market failure. Indeed a number of ADB supported projects appear to aim at addressing the failures of government in producing, financing, and regulating the provision of public services. Establishing a clear economic rationale becomes all the more significant in such cases.

Second, many project proposals do not explicitly indicate why a particular form of aid is adopted. What is the basis for choosing a particular instrument for supporting an operation among all available instruments (for example, investment loan, sector loan, policy loan, technical assistance, policy dialogue)? After the form of aid is determined at country programming, the appropriateness of the modality does not seem to have been critically reexamined at the time of project preparation. This highlights the importance of economic and sector work preceding project preparation.

Third, where alternatives are considered, they refer primarily to technical, structural and capital investment options. Other plausible non-structural options are not explicitly considered. For example, one option for reducing flood damage is to move people and property out of harm’s way; another is to ensure that people living in floodplain are aware and bear the full costs of the risks they face. Detailed analysis of policy, institutional, or investment alternatives can take place only during a feasibility study, but such analyses are not well done, and sometimes are ignored completely. Furthermore, when alternatives are considered at PPTA or an earlier stage, the reasons for choosing a particular investment over other investment alternatives are not discussed in the final project document.

Finally, there are cases where project proposals do not distinguish rationale, objective, and justification. The three terms are often used interchangeably. Box 2 provides a brief clarification on the three terms. From the perspective of economic analysis, the three notions seek to address distinctly different analytical and operational concerns.

Box 2. Project Rationale, Objective and Justification: Which is Which?

Rationale – why the government should do this, and why the private sector will not. In the ADB context, it also includes the mode of foreign assistance—why a project loan is the best choice of assistance, relative to a sector or policy loan. Objective – the expected or intended outcome of the project. The objective of a new road, for example, could be to reduce transportation costs. Justification – whether the project is worth doing. A project could have a clear objective and a sound rationale, but still not be justified if the costs exceed the benefits.

Source: EREA staff.

Likely Reasons for the Weaknesses and Some Suggestions for Improvement

There may be many reasons why project rationale is often not well established and alternative forms of aid and government interventions are not fully considered. Two critical ones are noted below. Suggestions for improvement are also proposed. The idea is simple: first, focus on problems, and then look for solutions. Reversing the problem-solving sequence is the cause of these weaknesses. Solutions are proposed before problems are clearly understood.

INSUFFICIENT PROBLEM ANALYSIS. A primary factor in the analytical weakness of project rationale and alternative analysis seems to be lack of prior and critical analysis of problems and the real causes of the problems. For example, in urban and rural water supply and sanitation, the poor state of these basic services is commonly identified as the social problem. Improving quality and quantity of basic services is often stated as the objective of many projects in the sector. But what are the real causes of the problem? Why have the quality and quantity of basic public services deteriorated? Are they merely due to lack of capital investment for capacity expansion, or lack of adequate operations and maintenance for the existing capacity? What about institutional, organizational or incentive concerns with public service providers, or other public policy concerns? And what about demand-side causes?

Lack of critical problem analysis likely leads to projects that only address some symptoms and effects of the problem rather than its real causes. Also, lack of clear identification of the real causes of a problem could result in proposing inappropriate solutions. IND: Second Renewable Energy Project proposal is a case in point. The stated objective of the project was to alleviate power shortages by financing environmentally friendly energy projects. However, the proposal failed to note that much of the demandsupply gap was caused by inefficient energy policies, and therefore, there may be other ways to bring demand and supply into balance. Nor did it explain the role of the public sector when there was growing investment by the private sector in renewable energy.

Problem analysis takes place at the sector and project level. At sector level, careful sector studies assess critical constraints to sector development, including policies, institutions, and investment; investigate the real causes and related market and government failures; and then identify plausible options to address the real causes with well-specified objectives at the sector level. Problem analysis at project level in turn will reexamine a project concept, sharpen the problem definition, and explore options to address the problem at hand.

VIE: Central Highland Health Project presents a good example showing that prior sector studies and further project analysis effectively support project preparation. A comprehensive study on Human Capital of the Poor in Vietnam was carried out in 2001, which assessed trends in the health and education status of the poor during the reforms, and identified supply- and demand-side constraints that the poor face in seeking such services. The study found increasing inequality in health care and education provision, and proposed public sector operations on equity grounds. Project analysis identified options to achieve the project’s objective of improving the poor’s access to health services.

Prior sector studies are critical to developing future projects with sound objectives and economic rationales. This point is well understood, but often is not followed. Project proposals enter country programs without prior sector studies. In reviewing CSPs/CSP Updates in 2003, EREA found that many project concept papers did not specify clearly the objectives, with economic rationale vaguely defined or not indicated at all.

TAKING INVESTMENT SOLUTIONS FOR GRANTED. A second set of causes of insufficient attention to alternative analysis is that investment solutions are taken for granted. All too often proposals for PPTA studies state as their objective, “to prepare an investment project suitable for ADB financing.” This is followed by a broad description of the scope of the ensuing project. PPTA implementation, at best, will result in identifying a couple of technical alternatives within the broadly defined scope. Non-investment solutions are unlikely to be considered. A broad analysis of alternatives should occur during prior economic and sector work. Often though, a thorough analysis of investment and non-investment options can occur only during a feasibility study.

There is nothing fundamentally wrong with this project preparation practice, of course, if it has been clearly demonstrated that lack of investment is the real cause of a problem. However, as noted earlier, many project concepts are based on insufficient problem analysis, and so it has not been established that lack of investment is the real cause. In such cases, it would be worthwhile to go back and to examine further the nature of the problem and its real causes.

When investment solutions are taken for granted, nonstructural options are often not explored. When considered, they become add-ons to investmentfocused projects. It is common that investment projects resort to including small components of consulting services, technical assistance, and capacity building, as an after-thought in an attempt to address the real causes. By not seriously considering different options and only faint-heartedly including some noninvestment elements, the error of omission could well turn into an error of commission.

As noted above, the key to improving the analysis of project rationale and project alternatives is to change the perspective from one that focuses on investments to one that focuses on addressing the underlying problems. This perspective change helps to appreciate the real value of public service-related investments and also to reorient the focus of subsequent analysis. For example, BAN: Participatory Livestock Development Project is no longer viewed just as a series of small technical packages to be adopted by farmers, though increased adoption rates are a key objective. The real problem the project addresses is the need to improve the efficiency of service delivery, by exploring alternative approaches and determining their comparative efficiency and effectiveness. PAK: Sindh Social Service Delivery Program is not merely about throwing money at social problems. It is about building capacity at local community level to ensure that basic public services are timely and effectively provided, and analyzing alternative ways to build local capacity.

Exploring and documenting the pros and cons of all plausible options has another important value added—to enable the decision-makers to make more informed decisions. For example, UZB: Amu Zhang Irrigation Rehabilitation Project proposes to rehabilitate upland irrigation system for grain production, with the project objective of reducing rural poverty among upland farmers. The cost of the rehabilitation option is large. Of course, there may be other and possibly cheaper ways to achieve the poverty reduction objective through, for example, relocating upland farmers, or encouraging crop diversification. But rehabilitation is the government’s preferred option. By assessing and presenting the costs and benefits of the two alternatives, the government at least can understand the cost implications of their preference. In the NEP: Kathmandu Valley Water Authority Project, the original draft RRP presented only one alternative for improving management of water supply in Kathmandu. The revised RRP discussed two additional options of meeting the objective of efficient management of Water Authority. This enriches the information content for decision-making.

ADDITIONAL CONSIDERATIONS. At project preparation stage, moving away from the investment-solutions-only mentality has immediate implications for PPTA design and implementation. In addition to redefining the problems and examining the real causes, the PPTA team needs to be creative and cast a wide net in order to identify all the plausible alternatives. This is to be done by all team members of the PPTA team, including economists during the initial analytical stage of PPTA implementation. Engaging economists at an early stage of PPTA implementation helps in improving cause and effect analyses, demand analysis, identification of alternatives and economic rationale identification. Economists often are called in at later stages, to perform a perfunctory cost-benefit analysis of the already decided project option(s).

Quality of problem and options analysis varies across RRPs. Even if RRPs include a reasonably good discussion of problems in a sector, the link between problems identified and the proposed intervention (how it is going to tackle the problems) is not always clearly discussed. In this respect, inclusion of problem tree diagram would be useful to clarify the causal links. Although the New Business Processes indicated this requirement, it is typically not done in practice. In addition, the RRP may be revised to include specific sections on Economic Rationale of the Project and Consideration of Alternatives including the choice of operational modalities.

Finally, there may be need to review the purpose of all project decision meetings. Currently, at these meetings, Management pays a lot of attention to development impact or monitoring indicators. Retro 2003 makes it clear that unless a project demonstrates itself clearly as addressing the real cause of a development problem and doing it the right way, there will be no point in talking about development impact or monitoring indicators. Therefore, project decision meetings should also be the venue where Management and senior staff verify the economic rationale and alternatives to investment solutions, and thereby establish that the project design maximizes value-added.

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