Guidelines for the Economic Analysis of Projects

1 ASIAN DEVELOPMENT BANKGUIDELINES For thE Economic Analysis oF ProJECtSASIAN DEVELOPMENT BANKGUIDELINES For thE Economic Analysis oF Projects Creative Commons Attribution IGO license (CC BY IGO) 2017 Asian Development Bank6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, PhilippinesTel +63 2 632 4444; Fax +63 2 636 ; rights reserved. Published in in the 978-92-9257-763-6 (Print), 978-92-9257-764-3 (e-ISBN)Publication Stock No. TIM178607-2 Cataloging-In-Publication DataAsian Development Bank. Guidelines for the Economic Analysis of Projects . Mandaluyong City, Philippines: Asian Development Bank, Economic Analysis of Projects . 2. Cost-benefit Asian Development views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of theAsian Development Bank (ADB) or its Board of Governors or the governments they does not guarantee the accuracy of the data included in this publication and accepts no responsibility for anyconsequence of their use.

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5 1II. SCoPE oF ProJECt Economic Analysis ..2A. Key Areas of Economic Analysis ..2B. Difference between Economic Analysis and Financial Evaluation ..7C. Economic Analysis and Financing Modalities ..9D. Design and Monitoring Framework ..12 III. IDENtIFICAtIoN oF ProJECt bENEFItS AND CoStS ..13A. With and Without Project Scenarios, Constant Prices, and Project Life ..13B. Identification of Benefits ..14C. Identification of Costs ..18IV. Economic VALUAtIoN oF bENEFItS AND CoStS ..21A. Economic Prices of Traded Goods and Services ..21B. Economic Prices of Nontraded Goods and Services ..24C. The Economic Price of Labor ..25D. The Economic Prices of Land and Natural Shadow Exchange Rate: Bringing Economic Prices to a Common Base.

6 28F. Conversion Factors ..29V. bENEFIt VALUAtIoN IN DIFFErENt SECtorS ..31A. Transport ..31B. Power ..34ivContentsC. Water ..36D. Urban Development ..38E. Agriculture and Natural Resources Management ..40F. Environmental Protection and Conservation ..42G. Climate Change and Greenhouse Gas Emissions ..43H. Education ..44I. Health ..45J. Regional Cooperation ..46VI. INVEStMENt DECISIoNS AND CrItErIA ..47A. Discounting and Indicators of Economic Viability ..47B. Project Alternatives ..49C. Investment Decisions ..50 VII. SENSItIVItY AND rISk Analysis ..53A. Sensitivity Analysis ..54B. Risk Analysis .

7 55 VIII. ProJECt SUStAINAbILItY ..56A. Financial and Institutional Sustainability ..56B. Environmental Sustainability ..57IX. DIStrIbUtIoN Analysis ..57vContentsAPPENDIXES1 Reference Materials on Project Economic Analysis in ADB ..592 Use of Constant Prices in the Economic Analysis of Projects ..613 Method for Constructing a Project Statement ..634 Consumer Surplus and Gross Project Economic Benefits ..685 Methods for Valuing Nonmarket Impacts ..736 Treatment of Working Capital ..787 Examples of Deriving Economic Prices ..828 Illustrations of Estimating the Shadow Wage Rate ..909 Economic Price of Land and Treatment of Resettlement ..9210 Depletion Premium.

8 9611 Use of Domestic Price Numeraire ..9812 Illustration of Estimating the Shadow Exchange Using Conversion Factors: A Water Project Example ..10814 Examples of Benefit Transfer Method ..11415 Distribution Analysis of Regional Cooperation Projects ..11616 Estimating the Economic Rate of Return: Irrigation Rehabilitation Project ..12517 Illustration of Least-Cost and Cost-Effectiveness Analysis ..13018 Estimating the National Economic Discount Rate ..13619 Treatment of Uncertainty: Sensitivity and Risk Analysis ..14120 Distribution of Project Effects ..147 TablES aNd FigurESTable 1 Economic Prices of Project Outputs and Inputs ..22 Table 2 Border Parity Prices.

9 23 Table 3 Cost and Benefit Categories and Conversion Factors Using Domestic Price Numeraire ..30 Table A2 Commodity Price Projections in Current and Constant Prices ..61 Table A3 Project Statement ..66 Table A6 Calculation of Changes in Working Capital ..80 Table Illustration of Export Product: Palm Oil ..83 Table Illustration of Import Substitute Product: Pump ..84 Table Illustration of Import Product: Truck ..85 Table Illustration of Economic Cost per Kilometer of Minibus Service: Nonincremental Output ..86 Table Weighted Average Economic Price per Kilometer of Passenger Journey for Bus Services ..87 Table Illustration of Economic Price for a Power Project.

10 88 Table Illustration of Economic Price for a Nonincremental Water Supply Project ..89 Table A8 Illustration of Shadow Wage ..90 Table A9 Possible Urban Land-Use Changes of a Road Project ..93 Table A10 Depletion Premium for Natural Gas: Data ..97 Table Deriving Economic Value Using Domestic Price Numeraire ..99 Table Structure of Railway Project Costs and Benefits ..99 Table Project Economic Statement, National Currency, and Domestic Price Level ..101 Table A12 Trade Data for the Philippines and the Shadow Exchange Rate Factor ..106 Table Water Project Data in Financial Prices ..108 Table Cost and Benefit Breakdown ..110 Table Disaggregation by Category.