Economic Analysis of Investment Operations

by Belli, Pedro; Anderson, Jock R.; Barnum, Howard Nelch; Dixon, John A.; Tan, Jee-Peng

• ISBN13: 9780821348505
• ISBN10: 0821348507
• Format: Paperback
• Copyright: 2000-10-01
• Publisher: World Bank

Summary

This books presents general principles and methodologies of quantitative risk analysis; provides theory and practice of how to evaluate health, transport and education projects and describes how to assess the environmental impact of projects. It looks at how the tools of cost benefit analysis can be applied from the point of view of the private sector, public sector, bankers, and the country as a whole. It encourages analysts to answer a number of key questions that are likely to increase success rather than simply describing techniques. This book as aimed at all concerned with resource allocation and is presented in an accessible fashion. It is required reading at World bank Institute courses.

Table of Contents

Foreword	xi
Acknowledgments	xiii
Glossary	xv
Introduction	xxv
An Overview of Economic Analysis	1	(8)
The Economic Setting	2	(1)
Rationale for Public Sector Involvement	2	(1)
Questions That Economic Analysis Should Answer	3	(6)
Conceptual Framework	9	(8)
Economic Opportunity Costs	10	(2)
Risk Analysis	12	(2)
The Process of Economic Analysis	14	(2)
Transparency	16	(1)
Consideration of Alternatives	17	(8)
With and Without Comparisons	17	(2)
Private Sector Counterfactual	19	(2)
Separable Components	21	(4)
Getting the Flows Right: Identifying Costs and Benefits	25	(12)
Cash Flow Analysis	27	(1)
Sunk Costs	27	(1)
Interest Payments and Repayment of Principal	28	(1)
Interest during Construction	28	(1)
Physical Contingencies	29	(1)
Transfer Payments	29	(1)
Donations and Contributions in Kind	30	(1)
The China Agricultural Support Services Project: An Example	30	(2)
Externalities	32	(1)
Consumer Surplus	33	(4)
Getting Prices Right	37	(22)
Numeraire and Price Level	37	(4)
Economic Analysis and Inflation	41	(1)
Financial Analysis and Inflation: A Digression	42	(2)
Market Prices versus Economic Costs	44	(1)
Valuation of Inputs and Outputs	44	(1)
Tradable and Nontradable Goods	45	(1)
Valuation of Tradable Goods	46	(3)
Shadow Exchange Rate	49	(1)
Premium on Foreign Exchange	50	(2)
Other Sources of Premiums	52	(1)
Valuation of Nontradable Goods and Services	53	(3)
Conversion Factors	56	(1)
Marginal Cost of Public Funds	57	(2)
Valuing Environmental Externalities	59	(14)
Environmental Externalities	61	(1)
Project Boundaries and Time Horizon	61	(1)
Valuation of Environmental Impacts	62	(8)
Preventing and Mitigating Environmental Impacts	70	(3)
Cost-Effectiveness	73	(10)
Relating Costs to Benefits: Cost-Effectiveness Analysis	74	(3)
Assessing Unit Costs	77	(1)
Relating Costs to Benefits: Weighted Cost-Effectiveness	78	(2)
Comparing Options with Subjective Outcomes	80	(1)
Some Important Caveats	81	(2)
Economic Evaluation of Education Projects	83	(16)
Categories of Project Costs	83	(2)
Organizing and Presenting the Cost Data	85	(1)
Relating Costs to Benefits: Cost-Benefit Analysis	86	(8)
Computing Rates of Return to Education by Level	94	(5)
Economic Evaluation of Health Projects	99	(22)
The Steps of Economic Analysis	99	(2)
An Immunization Example: A Child Immunization Program	101	(16)
Value of Life	117	(1)
Examples of Measures of Performance	118	(1)
Examples of Potential Benefits from Health Projects	119	(2)
Economic Evaluation of Transport Projects	121	(22)
Conceptual Framework	122	(2)
Forecasting Demand	124	(1)
Normal, Generated, and Diverted Traffic	124	(2)
Reduction of Vehicle Operating Costs	126	(1)
Time Savings	126	(5)
Accident Reduction	131	(1)
Producer Surplus or Net National Income Approach	132	(5)
Network Effects within a Mode	137	(1)
Intermodal Effects	137	(1)
Timing	138	(2)
Environmental Impact	140	(1)
The Highway Development Model	140	(1)
Gainers and Losers	141	(1)
Fiscal Impact	141	(2)
Risk and Sensitivity Analysis	143	(24)
Sensitivity Analysis	143	(2)
Switching Values	145	(1)
Selection of Variables and Depth of Analysis	146	(1)
Presentation of Sensitivity Analysis	147	(1)
Shortcomings of Sensitivity Analysis	148	(1)
The Expected Net Present Value Criterion	149	(1)
NPV versus Best Estimates	149	(2)
Products of Variables and Interactions among Project Components	151	(1)
Monte Carlo Simulation and Risk Analysis	151	(1)
Assigning Probability Distributions of Project Components	152	(3)
Assigning Correlations among Project Components	155	(1)
A Hypothetical Example: Advantages of Estimating Expected NPV and Assessing Risk	156	(4)
Risk Neutrality and Government Decisionmaking	160	(4)
When the NPV Criterion Is Inadequate	164	(3)
Gainers and Losers	167	(32)
Dani's Clinic	168	(3)
Republic of Mauritius: Higher and Technical Education Project	171	(16)
Conclusions	187	(2)
Estimation of the Shadow Exchange Rate	189	(3)
Key Assumptions	192	(7)
Employment Rates	192	(1)
Incremental Income for University Graduates	193	(1)
Incremental Income for PhDs	193	(1)
Incremental Income for MBAs	193	(6)
Appendix 1A: Rationale for Public Provision	199	(16)
Natural Monopolies	201	(1)
Externalities	202	(1)
Public Goods	203	(2)
Asymmetric Information and Incomplete Markets	205	(4)
Poverty Reduction	209	(1)
Merit Goods	209	(1)
Distribution of Costs and Benefits	210	(2)
Summary	212	(3)
Technical Appendix	215	(32)
Discounting and Compounding Techniques	215	(1)
The Mechanics of Discounting and Compounding	216	(1)
Net Present Value Criterion	217	(1)
Internal Rate of Return	217	(2)
Comparison of Mutually Exclusive Alternatives	219	(3)
Conceptual Framework	222	(5)
Traded Goods	227	(2)
Nontraded, but Tradable Goods	229	(1)
Nontradable Goods	230	(1)
The Shadow Exchange Rate	231	(4)
Quantitative Restrictions	235	(3)
The Opportunity Cost of Capital	238	(6)
The Shadow Wage Rate	244	(3)
References and Bibliography	247	(12)
Index	259