Economic Analysis Concepts
Questions & Decisions (1)
• Is the project justified ?- Are benefits
greater than costs?
• Which is the best investment if we have a
set of mutually exclusive alternatives?
• If funds are limited, how should different
schemes be ranked?
• When should the road be built or
upgraded?
2
Questions & Decisions (2)
• What standard of construction should
be used?
• What standard and frequency of road
maintenance is optimal?
• Should staged construction be used?
• Are complementary investments
required?
3
Appraisal Framework
• All appraisals need a framework
model for:
a) Forecasting changes
b) Evaluating those changes
4
or
Components of Economic Analysis (1)
• Costs and benefits are measured in
money terms
• Road construction and maintenance
costs are compared with estimates of the
direct primary benefits going to road
users and road agency
• Secondary benefits are usually ignored
• Economic prices are used in constant
terms
5
Components of Economic Analysis (2)
• Costs and Benefits are forecast over the
planning time horizon (usually between 10
and 20 years)
• Future Benefits are valued less as time
progresses using the planning discount
rate
• Costs and Benefits are compared using
decision criteria such as NPV, IRR, etc.
6
Economic and Financial Prices
The cost to the economy of road
rehabilitation and maintenance may differ
from the financial cost because of :
• taxes and duties
• shortage of foreign exchange
• under-employment
The Government will usually be concerned with
ECONOMIC costs.
Contractors will usually be concerned with
FINANCIAL costs.
7
Use of Economic Prices
In an Economic Appraisal we use ECONOMIC
(or SHADOW) prices NOT FINANCIAL prices
Adjust financial prices as follows:
• Exclude all taxes and duties and subsidies
• Use the planning discount rate not financial market rate
• If overvalued exchange rate then value imports and
exports more highly
• Use the opportunity cost of labor
• Standard Conversion Factors are now widely used for
road construction costs
8
Benefits from Road Investment
Changes in transport costs occur because of
:
• Lower road roughness
• Shorter trip distance
• Faster speeds
• Reduced chance of impassability
• Reduced traffickability problems
• Change in mode
9
Project Costs
• Management (including design and
supervision)
• Labor
• Equipment
• Materials
• Land, Resettlement, Environment
10
Primary Effects (1)
• Reduced vehicle operating costs (VOC)
fuel and lubricants
• vehicle maintenance
• depreciation and interest
• Tire wear
• Crew time
• overheads
Reduced journey time
• drivers, passengers and goods
•
•
11
Primary Effects (2)
• Changes in road maintenance costs
• Changes in accident rates
• Increased travel
• Environmental effects
• Change in value of goods moved
12
Secondary Effects
• Changes in agricultural output
• Changes in services
• Changes in industrial output
• Changes in consumers behavior
• Changes in land values
• Changes in income
13
Consumers’ Surplus Approach
• Captures primary benefits
• Advantages: Simple, cost based, traffic
•
approach dependent on predicting
changes in traffic
Disadvantages: May not address critical
factors promoting either rural
development or social access
14
Normal and Generated Traffic Benefits
Total Benefits
Transport cost savings to
Normal traffic and growth
=
Cost
+
Additional benefits to
Generated traffic
C1
C2
Demand Curve
(Price Elasticity of Demand)
T1
Normal
T2
Generated
15
Traffic
Generated Traffic Benefits
Traffic induced by the road investment are
traditionally valued at:
Half the difference in transport costs
Hence total generated transport cost benefits
= Generated Traffic Volume x Change in
Transport Costs per km x Distance x 1/2
16
Producers’ Surplus Approach
•
•
•
•
Captures secondary benefits
Advantages: Draws attention to changes in
agricultural output (key economic activity in rural
areas)
Disadvantages: No reliable way of predicting
response
- impact studies give widely different answers
- it could be based on agricultural supply price
elasticities but this is almost never done; it
requires very careful examination to use.
For most projects benefits are just invented !
17
Producers’ Surplus
Price & Costs per Unit
of Output
Increased
Farmgate Price
P2
P1
Lower Input Costs
Output
O1
18
O2
Coverage and Double Counting
• Any economic analysis should be designed
•
•
to give maximum coverage of benefits
But we must avoid double counting. Do not
add primary and secondary benefits (e.g.
changes in land values added to changes in
transport costs)
In a competitive economy the consumers’
surplus approach (used in HDM) should be
adequate
19
Economic Comparisons
• Economic analysis involves a comparison of
“With” and “Without” project cases
• Forecasts are made of traffic, road condition,
VOC and road maintenance effects for BOTH
scenarios
• An unrealistic “Without” case (i.e. with little
maintenance) can give a false result
• A range of
“With investment” cases should be
analyzed to find the best solution
20
Traffic Categories
•
Normal traffic: Existing traffic and growth that would
occur on road, with and without the investment
•
Diverted traffic: Traffic diverted from another road
with same origin and destination to as the project
road as a result of the investment
•
Generated traffic: Traffic associated with existing
users of the road driving more frequently or driving
further than before
•
Induced traffic: Traffic attracted to the project road
due to increased economic activity in the road’s
zone of influence brought about by the project
21
Benefits from Road Investment
Transport cost savings for existing (or normal)
traffic = Normal Traffic Volume x Change in
Transport Costs per km x Distance
Main changes in cost from:
a) change in transport MODE
b) reduced journey TIME
c) reduced VOCs
22
Benefits of Upgrading to a
Motorable Track
Headloading
C1
Track
Costs
Improved
road
C2
C3
T1
Traffic
23
T2
T3
Cost Effectiveness Against
Standard of Road
Marginal productivity
95% of year, access established
99% of year, access established
Maintenance for roughness reduction
0
Maintenance expenditure $/km
24
Development Benefits
Development benefits arise from a
combination of increased traffic and
reduced transport costs.
Benefits may also include :
• Increased agricultural production
• Increased service provision
• Increased industrial activity
25
Estimating Benefits
Normal traffic benefits:
tripsN * d1 * (VOC1- VOC2)
Diverted traffic benefits: tripsD * ((d1 * VOC1)-(d2*VOC2))
Generated and Induced traffic benefits: tripsG * d2 *
(VOC1- VOC2)/2
d1
= existing road length d2 new road length
VOC1 = vehicle operating costs per km “without”
investment
VOC2 = vehicle operating costs per km “with” investment
VOC data relates to each road section and its condition at
the time
26
Economic Decision Criteria (1)
•
Net Present Value
NPV = (B1- C1)/(1 + r) + (B2- C2)/ (1 + r)2 + …+ (Bn- Cn)/(1 + r )n
•
Internal Rate of Return
To calculate IRR, solve for r, such that NPV = 0
B1, B2…Bn = Benefits in years 1, 2 … n
C1, C2…Cn = Costs in years 1, 2 …. n
r
= Planning discount rate
n
= Planning time horizon
27
Economic Decision Criteria (2)
•
Net Present Value/ Investment Cost
NPV/ C = NPV/Ci
•
First Year Rate of Return
FYRR = (B1- C1) / Ci
B1 , C1 = Benefits and Costs in year 1 after
construction
Ci = Road investment costs
•
Payback Period
28
Economic Decision Criteria (3)
NPV
IRR3
NPV/C FYRR
Project economic validity
V.Good
V.Good
V.Good
Poor
Mutually exclusive projects
V.Good
Poor
Good
Poor
Project timing
Fair
Poor
Poor
Good
Project screening 1
Poor
V.Good
Good
Poor
Under budget constraint 2
Fair
Poor
V.Good
Poor
Notes:
1. check for robustness to changes in key variables (sensitivity analysis)
2. with incremental analysis
3. IRR may be indeterminate with NONE or MANY solutions.
29
Present Value Calculation
Period Flow
0
1
2
3
4
5
6
7
A0
PV(A0) = A0
A5
PV(A5) = A5 / (1 + i ) ^ 5
PV(Aj) = Aj / (1+ i ) ^ j
PV(Aj) = Present Value of Aj
Aj = Amount at year j
i = Discount rate
j = Year
30
Present Value at 12.0% Discount Rate
in
Year 1 =
Year 2
Year 3
Year 4
Year 5 =
Year 6
Year 7
Year 8
Year 9
Year 1 0 =
1.00 in Year 1
0.89
0.80
0.71
0.64 in Year 1
0.57
0.51
0.45
0.40
0.36 in Year 1
1.00
in
Year 15 =
0.20 in Year 1
1.00
in
Year 20 =
0.12
1.00
in
1.00
in
1.00
31
in Year 1
Discount Rate
•
•
•
The discount rate is opportunity cost of
capital in the public sector, ie the rate of
return on marginal public sector investments
The discount rate to be used will be given by
the planning authority responsible for the
project
The World Bank traditionally has not
calculated a discount rate for each project
but has used 10 to 15 percent as a notional
opportunity cost of capital in developing
countries
32
Discount Rate Versus Interest Rate
US discount rate around 4%
33
NPV and IRR
• The Net Present Value (NPV) of a
project alternative relative to the without
project alternative is the sum of the
discounted annual net benefits.
• The Internal Rate of Return (IRR) is the
discount rate at which the NPV is zero.
34
NPV Decision Rule
1. If the NPV is positive, for the
chosen discount rate, then the
alternative is acceptable.
2. If the NPV is negative, for the
chosen discount rate, then the
alternative is unacceptable.
3. If the NPV is zero, for the chosen
discount rate, then the alternative
is indifferent to the without project
alternative.
35
NPV and IRR Calculation (1)
Discount
Rate (i)
12.0%
Investments
Profits
or
or
Year
Costs Benefits
a
b
c
Discount
Rate (i)
Present
Net
Value
Benefits
Factor
d = c-b e = 1/(1+i)^a
Present
Value
f = d*e
-10000
5804
2392
2135
3178
0
1
2
3
4
10000
0
0
0
0
0
6500
3000
3000
5000
-10000
6500
3000
3000
5000
Total
10000
17500
7500
1.0000
0.8929
0.7972
0.7118
0.6355
3508
NPV =
3508
IRR =
29.3%
36
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
24.0%
27.0%
30.0%
33.0%
36.0%
39.0%
42.0%
45.0%
48.0%
Net
Present
Present
7500
6326
5281
4347
3508
2752
2068
1447
881
365
-109
-544
-944
-1315
-1657
-1975
-2271
NPV and IRR Calculation (2)
8000
NPV at 12%
Discount Rate
Net Present Value (M$)
6000
4000
Internal Rate
of Return
2000
0
0.0%
10.0%
20.0%
30.0%
-2000
-4000
Discount Rate (%)
37
40.0%
50.0%
60.0%
NPV Versus IRR
10000
Net Present Value (M$)
8000
NPV at 12%
Discount Rate
6000
4000
Internal Rate
of Return
2000
0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
-2000
-4000
Discount Rate (%)
- The IRR and NPV will not necessarily rank the alternatives by the same order
38
- Always use NPV to compare project alternatives
Multiples Rates of Return
Year
0
1
2
NPV at 12%
IRR #1
IRR #2
Net
Benefits
-500
1150
-660
0.64
10%
20%
Multiple Rates of Return
2.00
0.00
Discount
Rate
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
NPV
-10.0
-6.9
-4.4
-2.5
-1.0
-0.0
0.6
0.9
0.9
0.6
0.0
-0.8
-1.8
-3.0
-4.4
-5.9
Net Present Value (M$)
0%
5%
10%
15%
20%
-2.00
-4.00
-6.00
-8.00
-10.00
-12.00
Discount Rate (%)
39
25%
30%
35%
No Rate of Return
Year
0
1
2
NPV at 12%
IRR
Net
Benefits
200
300
350
747
#NUM!
No Rate of Return
900
800
Discount
Rate
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
NPV
850.0
830.5
812.1
794.5
777.8
762.0
746.9
732.5
718.7
705.6
693.1
681.1
669.6
658.6
648.0
637.9
Net Present Value (M$)
700
600
500
400
300
200
100
0
0%
5%
10%
15%
20%
Discount Rate (%)
40
25%
30%
35%
Same Rate of Return
Net Benefits
Project
Project
Year
1
2
0
-1000
1000
1
1250
-1250
NPV at 12% 116
-116
IRR (%)
25%
25%
Same Rate of Return
300
Project
1
238
214
190
168
147
126
106
87
68
50
33
16
0
-16
-31
-46
Project
2
-238
-214
-190
-168
-147
-126
-106
-87
-68
-50
-33
-16
0
16
31
46
Net Present Value (M$)
200
Discount
Rate
1%
3%
5%
7%
9%
11%
13%
15%
17%
19%
21%
23%
25%
27%
29%
31%
100
0
0%
5%
10%
15%
20%
25%
-100
-200
-300
Discount Rate (%)
Project 1
41
Project 2
30%
35%
Incremental Rate of Return
Alternative A - Base
Investments
Profits
or
or
Year
Costs Benefits
0
1
8
0
0
16
Alternative B - Base
Investments
Profits
or
or
Year
Costs Benefits
0
1
100
0
0
120
Alternative B - Alternative A
Investments
Profits
or
or
Year
Costs Benefits
0
1
92
0
0
104
Net
Benefits
-8
16
Net
Benefits
-100
120
Net
Benefits
-92
104
42
Present
Value
Factor
1.00
0.89
Present
Value
Factor
1.0000
0.8929
Present
Value
Factor
1.0000
0.8929
Present
Value
NPV =
6.3
-8.0 IRR = 100.0%
14.3 MIRR = 100.0%
B/C =
1.79
Present
Value
NPV =
-100.0 IRR =
107.1 MIRR =
B/C =
7.1
20%
20%
1.07
Present
Value
NPV =
-92 IRR =
93 MIRR =
B/C =
0.86
13%
13%
1.01
IRR Reinvestment Assumption
IRR IMPLICIT ASSUMPTION:
ALL CASH FLOW VALUES WILL EARN THE IRR INTEREST RATE
Discount
Rate (i)
12.0%
Investments Profits
or
or
Net
Year
Costs Benefits Benefits
a
b
c d = c-b
0
1
2
3
4
10000
0
0
0
0
0 -10000
6500
6500
3000
3000
3000
3000
5000
5000
NPV=
Future Value in Year 4
If You Receive
and Invest at
29.3%
Interest
If You
Invest at
29.3%
Interest
10000
12929
16715
21611
27940
=
6500
8404
10865
14047
3000
3879
5015
3000
3879
3508
Total 27940
IRR=
29.3%
43
5000
Modified Internal Rate of Return
Modified Internal Rate of Return Calculation
Financing
Rate (i)
12.0%
Year
a
0
1
2
3
4
Net
Benefits
d = c-b
-10000
6500
3000
3000
5000
TOTAL
7500
NPV =
IRR =
3508
29.3%
MIRR =
20.7%
Costs
10000
0
0
0
0
Reinvestment
Rate (i)
12.0%
Present
Value
of Costs
at Year 0 Benefits
10000
0
0
0
0
10000
0
6500
3000
3000
5000
Future
Value
of Benefits
at Year 4
0
9132
3763
3360
5000
Modified
Cash
Flow
-10000
0
0
0
21255
21255
3508
20.7%
44
Benefits X Cost
120
100
Alternative B
Benefits
80
60
40
20
Alternative A
0
0
20
40
60
Costs
45
80
100
120
Net Benefits X Costs (Efficiency Frontier)
8
7
Alternative B
Net Benefits (NPV)
6
5
Alternative A
4
3
2
1
0
0
20
40
60
Costs
46
80
100
120
Comparison of Alternatives
• When comparing project-alternatives,
•
the Net Present Value (NPV) is used
to select the optimal project-alternative
(alternative with highest NPV)
The Internal Rate of Return (IRR) or
the B/C ratio are not recommended to
compare alternatives of a given
project Alternatives NPV
Project
0.0
3.7
6.7
5.5
Optimal
Alternative:
Highest NPV
47
Ranking Projects
• When comparing the economic priority
of different projects, a recommended
economic indicator is the NPV per
Investment ratio
Selected Alternative
Projects
NPV/Investment
Overlay
8.4
Reseal
5.2
Overlay
2.1
48
P
R
I
O
R
I
T
Y
Budget Constraints Simple Methodology
Projects
Selected
NPV
Alternative
Available Budget
Investment
NPV per
Investment
Overlay
16.8
2.0
8.4
Reseal
15.6
3.0
5.2
Overlay
20.0
5.0
4.0
Reseal
3.0
2.0
1.5
Budget Constraint Cut Off
Overlay
5.0
49
10.0
0.5
P
R
I
O
R
I
T
Y
Budget Constraints Optimization
Projects Alternatives
NPV
0.0
3.7
6.7
5.5
Evaluates all possible
combinations of projectalternatives to find the
combination that maximizes
the NPV of the overall
network for the given budget
constraint.
0.0
2.0
1.0
3.5
Available Budget
P = Number of projects
A = Number of alternatives
C = Number of possible
combinations
0.0
5.4
2.1
3.2
C =A^P
50
HDM-4 Optimization Example (1)
Section 1
Option
Cost
NPV
2
5
7
4
7
8
Cost
1
3
5
NPV
A
B
C
Section 2
Option
A
B
C
3
6
8
What is the recommended program for a budget of 5?
51
HDM-4 Optimization Example (2)
dNPV/dCost
52
HDM-4 Optimization Example (3)
Combination of project alternatives
that maximizes the NPV of the
network
53
Appraisals & Post Evaluations (1)
• An Appraisal is carried out before an
•
investment is made. Everything is
uncertain.
A Post evaluation may be made say 5 years
after the investment. The investment is
known and 5yrs of with case are known.
The without case is unknown as is the
remainder of the with case.
54
Appraisals & Post Evaluations (2)
• In Both Cases forecasting and
•
evaluation models are required to come
to an answer.
Hence we can never be certain about
the viability of an investment !
55
Sensitivity Analysis
• Consequences of changes on inputs
• Investment Costs (e.g. +15%)
• Traffic Growth Rate (e.g. = zero)
• Generate Traffic (e.g. = zero)
• Value of Time (e.g. = zero)
• A = Investment Costs Increase (e.g. +15%)
• B = Road User Benefits Decrease (e.g. •
15%)
C = A and B together
56
Switching Values Analysis
• Inputs that yield a NPV equal to zero
• Investments Costs
• Normal Traffic
• Traffic Growth Rate
• Generate Traffic
• Investment Cost
• Road User Benefits
57
Risk Analysis
•Inputs vary at the same time
following some defined
distributions
Normal Traffic
35%
Frequency Distribution
30%
25%
20%
15%
10%
5%
Country
Project
Road
Option
Africa Region
Road Management Initiative
Road from Point A to Point B
2
Upgrade to ST
Internal Rate of Return
Upgrade Road to Surface Treatment Standard
Minimum
Maximum
Average
Standard Deviation
Median
Percentile
Percentile
Percentile
25%
50%
75%
4.2%
22.7%
11.9%
3.5%
11.7%
9.4%
11.7%
14.1%
Probability that IRR is less than
Probability that IRR is greater than
12%
12%
50%
50%
1.96
1.88
1.81
1.73
1.65
1.58
1.50
1.42
1.35
1.27
1.19
1.12
1.04
0.96
0.88
0.81
0.73
0.65
0.58
0.50
0%
Upgrade Road to Surface Treatment Standard
Multiplier Factor
8%
58
Internal Rate of Return
24.5%
23.5%
22.4%
21.4%
20.4%
19.4%
18.3%
17.3%
16.3%
1.96
1.88
1.81
1.73
1.65
1.58
1.50
1.42
1.35
1.27
1.19
1.04
0.96
0.88
0.81
0.73
0.65
0.58
1.12
Multiplier Factor
15.3%
0%
0%
14.2%
2%
13.2%
1%
5.0%
4%
12.2%
2%
11.2%
6%
3%
9.1%
8%
4%
10.1%
10%
0.50
Frequency Distribution
12%
5%
8.1%
14%
6%
7.1%
Project Investment Costs
6.0%
Frequency Distribution
7%
Rural Transport Infrastructure
Farm
Typical Transport
Infrastructure
Typical Traffic
Household/
Sub-village
Village
Market Center
District
Headquarters
Regional
Headquarters
Capital/
Port
Path
Path/Track
Track/ Earth Road
Earth Road/ Gravel
Road
1-2 lane Gravel / ST
Road
2 lane AC**
Road
Porterage
NMT
0-5VPD
1-10 km
NMT
5-50VPD
5-20 km
NMT
20-200VPD
10-50 km
>100VPD
>1500VPD
20-100 km
50-200 km
1-5Tkm
Share of Asset Value
40%
20%
0%
Share of Network Length
40%
20%
0%
O
Community
Local Government
Responsability
Type of Network
Provincial/Central Government
Rural Transport Infrastructure
“Tracks”
Trunk or Provincial Road
“Roads”
59
“Highways”
Rural Transport Infrastructure
Rural Transport Infrastructure
Road Network
Tertiary
Functional Classification
Responsibility
Community
Primary, Secondary and Municipal Roads
Secondary
Primary
Access
Collector
Arterial
Local Government
Regional &
National
Municipal
% of Road Network
Physical Characteristics
Traffic Characteristics
N.A.
+- 70%
+- 10%
+- 10%
1 to 2 earth or gravel 1.5 to 2 gravel or paved
tracks
lanes
lanes
2 or more paved lanes
Normally sections with Normally sections with Normally sections with Normally sections with
1 to 5 kms
5 to 20 kms
20 to 100 kms
50 to 200 kms
Mostly NMT
< 50 AADT + NMT
50-500 AADT
> 500 AADT
Economic Evaluation
No
No
Yes
Yes
Social Evaluation
Yes
Yes
Complimentary
No
Financial Evaluation
Technical Evaluation
No
No
No
Yes
No
Yes
Tolls
Yes
Environmental Evaluation
No
Yes
Yes
Yes
Safety Evaluation
No
Yes
Yes
Yes
Focus on social evaluation (cost effectiveness
indices, community priorities and multi-criteria
analysis)
60
Social Benefits: Why the Concern ?
•
•
•
•
•
•
•
There is unease with conventional appraisal based primarily on
transport cost savings to traffic
There is a strong desire at community and national levels for
better access and mobility which is frequently not matched by
standard measured economic benefits
The ‘rich’ world governments subsidise rural transport. Should
the same happen for developing countries ?
Isolation is a recognised characteristic of poverty
There is a feeling that a minimum degree of access and
mobility is a ‘basic human right’
Development has moved away from a narrow definition of
economic development towards concern with ‘livelihoods’ and
meeting ‘Millennium Development Goals’
The issue is particularly important when roads are impassable
to motor traffic
61
Economic & Social Benefits
•
Consumers and producers surplus approaches are very
economic in orientation. Yet roads provide ‘social
benefits’ – including improved access to health and
education facilities and improved social mobility that
cannot be easily translated into conventional economic
benefits. – Although they may have important long term
‘economic’ consequences. Improved health and
education and more secure social networks increase
long term earning capabilities but so far the economic
forecasting framework does not include this.
•
When roads are impassable to motorized traffic we know
that the quality of health care and schooling falls. Drug
supply and supervision drops. Likewise no NGO,
government agency or commercial enterprise will
establish or support a service which cannot guarantee
all year round access.
62
Indices and Ranking
•
Widely used for feeder road planning; there are
many different approaches
e.g. i) cost of improvement / population
ii) estimated trips / cost
Advantages: Speed , simplicity, transparency, many
factors can be incorporated
Disadvantages: How do we value widely different
factors ? (adding up apples and pears);
weightings are not stable ; cannot easily address
questions of road standards, timing etc, ; possible
double counting
63
Example of Two Indices
i) Andhra Pradesh (India)
cost effectiveness = cost of upgrading/ population served
But – no measure of condition change and no importance to traffic
ii) Airey & Taylor
1st for impassable roads
rank
= cost per head of establishing basic access
2nd when access is there:
prioritization index
estimated trips x access change
= -------------------------------------------rehabilitation cost per km
64
Community Priorities
•
•
•
Community priorities now often form an important
part of feeder road appraisal. It is possible just to
ask communities to rank the investments they
prefer- both within the road sector or between roads
and other investments.
Advantages: Community acceptability, use of
community knowledge
Disadvantages: Sectional interest groups may
dominate voting, community knowledge of area or
road impact may be poor
65
Cost Effectiveness Analysis (CEA)
•
•
•
Compares the cost of interventions with its
predicted impacts and it is used where the
benefits cannot be measured in monetary
terms, or where the measurement is difficult
It includes provisions that (a) the objectives of
the intervention are indicated and are clearly
part of a ampler program of objectives (such as
reduction of the poverty); and (b) the
intervention represents the smaller cost
alternative of obtaining the indicated objectives
It produces effectiveness indicators, such as
Total Beneficiary Population per Investment or
Investment per Beneficiary Population
66
CEA Comparison of Alternatives
•
•
To compare project-alternatives, the investment
cost is used to select the optimal alternative
The selected alternative is the one with the
lowest investment cost that will achieve the
objective of the program
Project
Alternatives Investment
2.0
Optimal Alternative:
3.7
Lower Investment
1.7
5.5
67
Projects Eligibility with CEA
•
To assess if a project is eligible, an acceptable
effectiveness indicator threshold is defined
Investment per
Population
(U$/person)
Projects
50
Effectiveness
Indicator
Threshold
Example
Eligible
150
Not Eligible
500
68
Effectiveness Indicator Threshold
?
40
Reasonable
Non Reasonable
35
?
Evaluate Universe
of Projects and
Available Budget
25
20
15
10
5
Investment per Population (US$/person)
69
0
95
0
90
0
85
0
80
0
75
0
70
0
65
0
60
0
55
0
50
0
45
0
40
0
35
0
30
0
25
0
20
0
15
10
0
0
0
50
Frequency of Projects
30
Possible CEA Indicators
•
•
•
•
Investment Cost per Total Beneficiary
Population
100 US$ per person
Total Beneficiary Population per
Investment Cost
0.01 persons per US$
Total Beneficiary Population per
Investment Cost in thousands of dollars
10 persons per 1,000 US$
Etc.
70
Options for Beneficiary Population
•
Rural beneficiary population
o Effectiveness = (rural beneficiary population) /
Investment
•
Poor beneficiary population
o Effectiveness = (poor beneficiary population) /
Investment
•
Mixed beneficiary population
o Effectiveness = (poor persons + 0.3 non poor
persons) / Investment
•
Etc.
71
Total Beneficiary Population (1)
Total Beneficiary Population = Directly Benefited
Population + Indirectly Benefited Population
•
•
The Directly Benefited Population is the one that
lives next on the road, defined for example to 2.0
km at each side of the road, and the population in
the ends of the road, depending on its
characteristics and the use of the road
The Indirectly Benefited Population is the population
that lives in other roads near the road in
consideration, who use the project road to arrive at
the main population center of the region or at a
main road
72
Total Beneficiary Population (2)
Main
D
Population
Center
B
C
E
F
A
Village
For example, for the road section B-C:
Directly Benefited Population = Population along section B-C plus on
towns B and C
Indirectly Benefited Population = Population along section A-B plus on
town A
73
Multi Criteria Analysis (MCA) (1)
•
•
•
It adopts criteria such as traffic, proximity to
educative, health, and economic centers, etc.
To each section, a number of the points is assigned
to each criteria that correspond to the fulfillment of
the criteria
The added number of the points that each section
receives is computed simply adding the points
assigned for each criteria, or with the use of a more
complex formula, for example, weighting the criteria
by their perceived importance
74
Multi Criteria Analysis (2)
•
•
•
•
It produces a priority indicator
The indicators used in a MCA reflect implicit
economic and subjective evaluations
If the weights and the points are decided and
assigned on a participative way, the MCA has the
potential to be a good participative method for
planning based on implicit a socioeconomic
estimates
Nevertheless, it tends to be applied by planning
consultants or in isolation without the consultation
with the users and communities affected by the
project
75
Multi Criteria Analysis (3)
•
•
The result of the MCA, is often,
unfortunately, not transparent, specially if
many factors are considered and a
complicated formula is also applied
Therefore, if it is adopted, this method
must be used very carefully and to be
maintained simple, transparent, and
participative
76
Multi Criteria Analysis Example (1)
•
•
•
•
•
•
•
Level of poverty of the influence area (Low, Medium,
High)
Potential for economic development of the influence
area (Low, Medium, High)
Importance of the road given by local consultation
process (Low, Medium, High)
Provision of access of social services of the road
(Low, Medium, High)
Problems of transitability of the road (Low, Medium,
High)
Functional classification level of the road (Low,
Medium, High)
Existence of public transport (Low, Medium, High)
77
Multi Criteria Analysis Example (2)
Population
Beneficiary
Population
per km
9,889
520
1,237
564
344
503
Agricultural Area
Poverty
Factor
1.00
0.05
0.13
0.06
0.03
0.05
Poverty
Percent
99%
99%
99%
97%
97%
97%
Factor
1.00
1.00
1.00
0.98
0.98
0.98
Percent
of Area of
Influence
Traffic
Daily
Traffic
(AADT)
Factor
0%
0%
0%
14%
36%
18%
Priority Index
Functional
Location on Basic
Classification
Network
0.25
0.64
0.32
20
20
15
80
15
35
Factor
0.25
0.25
0.19
1.00
0.19
0.44
A=4 B=3
C=2 D=1
1
2
2
3
3
3
Factor
0.33
0.67
0.67
1.00
1.00
1.00
ity Index
Health Centers
Yes = 1
No = 0
0
0
0
0
0
0
Factor
-
Public Transport
Schools
Yes = 1
No = 0
0
0
0
1
1
1
Factor
Yes = 1
No = 0
1.00
1.00
1.00
Factor = Value / Maximum Value
1
1
1
1
1
1
Factor
1.00
1.00
1.00
1.00
1.00
1.00
78
Environment
Feasibility
Yes = 1
No = 0
1
1
1
1
1
1
Factor
1.00
1.00
1.00
1.00
1.00
1.00
Priority
Index
5.6
5.0
5.0
7.3
6.8
6.8
Yes = 1
No = 0
1
1
1
1
1
1
Factor
1.00
1.00
1.00
1.00
1.00
1.00
H