B6.  ECONOMIC ANALYSIS

The economic feasibility of any proposed project is evaluated by calculating whether the value of the resources created by the investment is greater than the value of the resources consumed. Similar to the financial analysis cost-benefit analysis is used for the economic analysis as shown in Section B5. The main difference between the two is in the way the benefits are identified and in the valuation of both costs and benefits.

Economic Viability Indicators

•  Economic Internal Rate of Return

•  Economic Net Present Value on the project

•  Benefit-Cost Ratio

The EIRR is the return on the resources invested and is compared with the SDR, which measures the economic opportunity cost of alternative investments. The SDR used here is 15% as currently set by ICC. If the EIRR is greater than the SDR, the project is considered economically feasible. The ENPV is the economic value of a series of future payments using the SDR as the discount rate. The SDR is currently estimated by the ICC at 15 percent. If the ENPV is greater than zero, then the project is feasible.

The BCR is the oldest measure of estimating economic feasibility. It is equal to the ratio of the sum of the present value of the benefits divided by the sum of the present value of the costs. If it is greater than 1, the project is feasible. The greater the value, the more desirable the project becomes.

Resources Used

•  Net Resource Investment

•  Net Operation and Maintenance

The economic value of the resources consumed is not always exactly the same as their market price. For example, if the cost of the steel to be used in constructing the facility in the FIRR includes taxes, the tax component of the cost is not included in the economic analysis because it is not part of the real resource cost of the steel (even if it is an important monetary cost) since it is merely a transfer payment. In another case, the market price of a resource may be affected by market distortions such as in the case of labor and foreign exchange. In which case, economists use shadow prices for monetary prices to capture the real value of the resource consumed. The concepts on price adjustment are covered in Volume I of this Manual.

However, at this level of feasibility we have not been able to make a detailed breakdown of the investment costs into materials (both domestic and imported) and labor to make the required adjustment. Some conservative assumptions were made, however, to estimate the real resource cost of the investment, namely:

a.  The labor component was assumed to be 30 percent of the total cost (excluding capitalized interest). Forty percent was assumed to be unskilled labor, valued at 0:6, which is the ICC shadow wage rate for unskilled labor.

b.  The remaining 70 percent for materials was multiplied by 0.9 to adjust the value added tax.

For accuracy of the economic analysis the foreign exchange component of the project cost should be identified and shadow priced by 120 percent, which is the ICC prescribed rate. In this analysis however, it was assumed that all materials are locally sourced.

Although we cannot directly measure the increased economic activity that will occur as a result of this sample project, proxies exist which will allow us to estimate the value-added from the facility. The proxies used for this analysis are shown below:

Benefit Proxy:

•  Rent from Special Modules

•  Public Time Savings

•  Employment Generation

The main economic benefits of the project are generated from the logistical efficiency of the proximity of the government offices to each other. Although improved efficiency is only a partial measure of the value of improved government service, it is still a real gain. This study assumes that there will be a 25 percent reduction in trips for an average of 2,000 transactions a week which would result in three hour time savings, in addition to reduced round trip transportation costs.

The project also generates benefits from the new productive activities generated by record keeping, data processing, and telecommunication functions. Although the economic impact of these new enterprises is difficult to estimate, it is at least as large as the rent.

Other benefits include employment generation from the new economic activity. In this regard the project's contribution to the net reduction of unemployment in the influence area is attributed as it benefit.