C6. ECONOMIC ANALYSIS

The economic feasibility of any proposed project is evaluated by weighing the value of the resources created by the investment against the value of the resources consumed. The mathematical tools used for the economic analysis are similar to the tools used for the financial analysis shown. The difference lies in the way costs and benefits are measured. In economic analysis, the project costs and benefits are translated to their equivalent economic values.

Economic Viability Indicators

• Economic Internal Rate of Return

• Economic Net Present Value on the project

• Benefit-Cost Ratio

If the EIRR is greater than the social opportunity cost capital or SDR, the project is economically feasible. The SDR is the benchmark against which feasible potential projects are ranked. The SDR is currently set by NEDA at 15 percent.

The NPV is the difference between the summation of the discounted stream of costs and the summation of the discount stream of economic benefits. If the NPV is greater or equal to 0, then the project is feasible.

The BCR is the most traditional measure for estimating economic feasibility. It is equal to the present value of the stream of future benefits divided by the present value of the stream of future costs. If its value is greater than 1, the project is feasible. The higher the value the more desirable the project becomes.

It is important to note that the value of the resources consumed is not always exactly the same as the cost of the investment. For example, if the cost of the steel to be used in constructing the facility 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). In this case shadow prices are used to translate the real value of the resources consumed.

At this stage, it is not possible to breakdown the investment cost in detailed into materials (both domestic and imported) and labor to make the necessary adjustment. Some conservative assumptions are made to estimate the real resource cost of the investment. The labor component is assumed to be 30 percent of the total cost (excluding capitalized interest).

Unskilled labor is assumed to be 40 percent of total labor. It is valued at 0.6, the NEDA shadow rate for unskilled labor. The remaining 70 percent is multiplied by 0.9 to adjust for the value added tax. For materials and equipment we reduce the cost by 20 percent for the imported component to compensate for the effects of import duties.

Although we cannot directly measure the resources that would be created as a result of this 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 Proxies

• Net Health Benefits

• Net Time Savings

The net health benefits accruing to improved water supply are difficult to isolate for a number of reasons. First, improving water supply alone without significantly changing the sanitation and hygiene conditions of the city will not significantly decrease the mortality rate. It is also difficult to Quantifying the impact on family members of lost wages the opportunity cost of spent time nursing a sick relative. The long term effects of the loss of a head of household are also difficult to quantify.

Nevertheless, some attempt has been made to quantify the savings resulting from to improved health and a reduction in mortality by measuring foregone wages and the cost of medical care. Health benefits may appear small because only parts of the benefits have been measured.

Savings in required time to transport water are significant and other additional savings could have been calculated as well. Other quantifiable benefits include savings in fuel required to boil water from an unsecured source. The time saved to transport water is assumed to be a 45 minutes per household per day, valued at the shadow price of labor.