Economic Analysis of Investment Operations: Analytical Tools and Practical Applications (WBI Development Studies)

Contents......Page 4
Foreword......Page 12
Acknowledgments......Page 14
Glossary......Page 16
Introduction......Page 26
1. An Overview of Economic Analysis......Page 30
Rationale for Public Sector Involvement......Page 31
Questions That Economic Analysis Should Answer......Page 32
2. Conceptual Framework......Page 38
Economic Opportunity Costs......Page 39
Risk Analysis......Page 41
The Process of Economic Analysis......Page 43
Transparency......Page 45
With and Without Comparisons......Page 46
Private Sector Counterfactual......Page 48
Separable Components......Page 50
4. Getting the Flows Right: Identifying Costs and Benefits......Page 54
Sunk Costs......Page 56
Interest during Construction......Page 57
Transfer Payments......Page 58
The China Agricultural Support Services Project:An Example......Page 59
Externalities......Page 61
Consumer Surplus......Page 62
Numeraire and Price Level......Page 66
Economic Analysis and Inflation......Page 70
Financial Analysis and Inflation: A Digression......Page 71
Valuation of Inputs and Outputs......Page 73
Tradable and Nontradable Goods......Page 74
Valuation of Tradable Goods......Page 75
Shadow Exchange Rate......Page 78
Premium on Foreign Exchange......Page 79
Other Sources of Premiums......Page 81
Valuation of Nontradable Goods and Services......Page 82
Conversion Factors......Page 85
Marginal Cost of Public Funds......Page 86
6. Valuing Environmental Externalities......Page 88
Project Boundaries and Time Horizon......Page 90
Valuation of Environmental Impacts......Page 91
Preventing and Mitigating Environmental Impacts......Page 99
7. Cost-Effectiveness......Page 102
Relating Costs to Benefits: Cost-Effectiveness Analysis......Page 103
Assessing Unit Costs......Page 106
Relating Costs to Benefits: Weighted Cost-Effectiveness......Page 107
Comparing Options with Subjective Outcomes......Page 109
Some Important Caveats......Page 110
Categories of Project Costs......Page 112
Organizing and Presenting the Cost Data......Page 114
Relating Costs to Benefits: Cost-Benefit Analysis......Page 115
Appendix 8A. Computing Rates of Return to Educationby Level......Page 123
The Steps of Economic Analysis......Page 128
An Immunization Example: A Child ImmunizationProgram......Page 130
Value of Life......Page 146
Appendix 9A. Examples of Measures of Performance......Page 147
Appendix 9B. Examples of Potential Benefits from HealthProjects......Page 148
10. Economic Evaluation of Transport Projects......Page 150
Conceptual Framework......Page 151
Normal, Generated, and Diverted Traffic......Page 153
Time Savings......Page 155
Accident Reduction......Page 160
Producer Surplus or Net National IncomeApproach......Page 161
Intermodal Effects......Page 166
Timing......Page 167
The Highway Development Model......Page 169
Fiscal Impact......Page 170
Sensitivity Analysis......Page 172
Switching Values......Page 174
Selection of Variables and Depth of Analysis......Page 175
Presentation of Sensitivity Analysis......Page 176
Shortcomings of Sensitivity Analysis......Page 177
NPV versus Best Estimates......Page 178
Monte Carlo Simulation and Risk Analysis......Page 180
Assigning Probability Distributions of ProjectComponents......Page 181
Assigning Correlations among Project Components......Page 184
A Hypothetical Example: Advantages of Estimating ExpectedNPV and Assessing Risk......Page 185
Risk Neutrality and Government Decisionmaking......Page 189
When the NPV Criterion Is Inadequate......Page 193
12. Gainers and Losers......Page 196
Dani’s Clinic......Page 197
Republic of Mauritius: Higher and Technical EducationProject......Page 200
Conclusions......Page 216
Appendix 12A: Estimation of the Shadow Exchange Rate......Page 218
Employment Rates......Page 221
Incremental Income for MBAs......Page 222
Appendix 1A: Rationale for Public Provision......Page 228
Natural Monopolies......Page 230
Externalities......Page 231
Public Goods......Page 232
Asymmetric Information and Incomplete Markets......Page 234
Merit Goods......Page 238
Distribution of Costs and Benefits......Page 239
Summary......Page 241
Discounting and Compounding Techniques......Page 244
The Mechanics of Discounting and Compounding......Page 245
Internal Rate of Return......Page 246
Comparison of Mutually Exclusive Alternatives......Page 248
Conceptual Framework......Page 251
Traded Goods......Page 256
Nontraded, but Tradable Goods......Page 258
Nontradable Goods......Page 259
The Shadow Exchange Rate......Page 260
Quantitative Restrictions......Page 264
The Opportunity Cost of Capital......Page 267
Boxes......Page 8