Financial, Economic and Distributional Analysis - Centre ...

More documents

Recommendations

Info

Financial, Economic and Distributional Analysis 139financial and economic analyses, and environmental and socio-economic assessments. So for a $1billion dam some $10-$20 million may be spent, whereas for a $100 million dam it would be $1-$2million. Only a very small fraction of the total study expenditures is usually allocated to the financialand economic evaluations.Compared to assessments performed on behalf of private-sector developers, once governmentagencies become involved directly, the perspective of the assessments tends to widen. In theory, theassessment of a project for a public-sector organisation should be performed from the viewpoint of thecountry as a whole, in terms of the project’s contribution to meeting national economic and socialobjectives. In practice, this is more likely to occur when the local sponsoring organisation itself has abroad mandate (e.g. the national planning agency). However, when the local organisation has a singlefocus (e.g. the power utility or the Department of Irrigation), the perspective often remains narrow.An assessment conducted for a public-sector organisation includes the same processes and methods asthose described in the previous section for private-sector developers. However, more externalities areusually considered by public-sector agencies, and those are frequently treated in more detail. Theretends to be more emphasis on determining the economic efficiency, as opposed to the financialviability, of the project, although financial viability remains a prerequisite for project funding andsustainability.10.3.3 Multilateral Agencies: The World Bank and the Asian DevelopmentBankThe WCD survey of large dam appraisal documents of the World Bank and the Asian DevelopmentBank appraisal documents provide a series of observations on the actual practice of the multi-lateraldevelopment banks as regards options assessment and appraisal of projects.Options AssessmentFor the sample, quantitative options assessment (or identification and analysis of project alternatives)through least cost analysis (LCA) was undertaken in 76% of the entire sample of 55 projects. Allwater supply projects and majority of hydropower projects (90%) were subjected to LCA, on the basisof least-cost expansion programs. In addition, a number of hydropower projects dating from the 1980swere also examined using the equalizing discount rate (EDR) as an indicator. 63For irrigation and multi-purpose projects, options assessment was not as explicit. Appraisals havemainly cited the project as one of the priorities in the countries’ national/regional development plansor were subjected to needs assessment and/or various feasibility studies. Exceptions are two multipurposeprojects (China’s Zhejiang Shanxi Water Supply, 1997, and Korea’s Andong Dam Multi-Purpose Development, 1971).Multi-criteria analysis at the options assessment stage was also performed in a few cases. Oneexample is the Lao PDR’s Nam Leuk Hydropower Project (1996) which was selected on the basis ofthree main criteria: the generation cost per kWh, the lead time to commercial operation, and theenvironmental impact. Environmental and social impacts were also given due considerationparticularly in the 1990s as evidenced by the Lao PDR’s Theun-Hinboun Hydropower project (1994)which was selected over the top-ranked Nam Theun 2 (which was itself delayed on environmentalgrounds because of the potential impact of its large reservoir). Also, for Nepal’s Kali Gandaki “A”Hydroelectric Project (1996), the dam height was selected to avoid inundation of the “holy rock” andbazar upstream of the river.Other applied methodologies during options assessment include present worth analysis (Malaysia’sBatang Ai Hydropower, 1981) and levelized cost analysis (China’s Hunan Lingjintan Hydropower,1994, and Fujian Mianhuatan Hydropower, 1995).This is a working paper prepared for the World Commission on Dams as part of its information gathering activities. The views, conclusions,and recommendations contained in the working paper are not to be taken to represent the views of the Commission
Financial, Economic and Distributional Analysis 140AppraisalIn the final evaluation stage of the appraisal, CBA was the main decision-making framework (75% ofall projects) and is supplemented by DCF analysis (49%). The EIRR was the main decision-makingcriterion, with NPV and benefit-cost ratio calculated only in six projects (1989 to 1995) and twoprojects from the 1990s, respectively.CBA practice was prevalent in both institutions since the 1970s (64%) and 1980s (79%). However,during this period (up to the 1980s) little effort was made to conduct proper CBA. The assumptionmade was that the FIRR provides a minimum estimate of the EIRR. If any adjustments were made,these concerned only the removal of taxes and subsidies, particularly with earlier projects. ThePhilippines’ Sixth Mindanao Power (1979) cited the difficulty in deriving conversion factors with areasonable degree of accuracy. Moreover, since benefits were valued at tariff, the true EIRR wasobviously higher than the FIRR. In the 1990s, all sample projects have been subjected to CBA.Adjustments to financial flows involving input and output distortions, transfer payments, shadowexchange rate, and shadow wage rate were more commonly undertaken.On the other hand, DCF analysis was undertaken in only half of the sample projects, mainly forsectors involving project revenues, i.e., all sectors except irrigation. FIRR was the main decisioncriterion, supplemented by NPV or payback period in only a few cases. DCF analysis was morewidely practiced in the ADB than in the WB, at 72% vs. 23%. In the WB, emphasis was placed moreon analysis of the project owner’s financial capability to sustain operations than DCF analysis. On theother hand, DCF analysis complemented LCA in Nepal’s Kulekhani Hydroelectric project (1975) andKenya’s Kamburu Hydroelectric project (1971) in the absence of CBA.CBA was conducted for all irrigation projects, particularly because irrigation projects were notgenerally subjected to LCA. Multi-purpose projects followed at 92%. All five ADB multi-purposeprojects were subjected to CBA while 86% of World Bank projects received this treatment.Of the ADB sample, 13 out of 16 hydropower projects used both CBA and DCF for decision-making.One project used only CBA. Indonesia’s Garung Hydroelectric (1975) and Power XVIII (1983), andMalaysia’s Batang Ai Hydropower (1981) relied only on DCF analysis, as the FIRR, especially ifrobust, was considered as the minimum estimate of the EIRR. Since the conversion of financial coststo economic costs involved only the adjustments for transfer payments and since benefits were valuedat average tariffs rather than willingness to pay (WTP) estimates, the perceived marginal differencebetween the EIRR and the FIRR precluded efforts for a more rigorous economic analysis.For the ADB irrigation projects, there was an explicit distinction between financial analysis andeconomic analysis. For Indonesia’s Sempor Dam and Irrigation (1971), economic costs also includedthe value of crops and properties lost due to inundation. For Thailand’s Medium Scale IrrigationPackage (1981), the economic cost included the opportunity cost of incremental water diversionswhich was equated with the economic value of reduced electricity generation.10.3.4 Public Sector Projects in Developed CountriesThe assessment of a large dam or water resource project that will be built by a public-sectororganisation in a developed country is typically funded by the organisation itself. Staff employed bythe organisation often undertake the analysis, the resources available are frequently considerablygreater than for assessments carried out in developing countries, and the data available are usually ofgreater quantity and better quality.Moreover, more effective environmental and other project approval regulations usually exist, andaffected groups tend to be more empowered politically, either directly or through special interestgroups. Also, very importantly, there is more likely to be a prescribed process for conducting suchassessments, and a quasi-independent regulatory agency is likely to be in place to ensure that theThis is a working paper prepared for the World Commission on Dams as part of its information gathering activities. The views, conclusions,and recommendations contained in the working paper are not to be taken to represent the views of the Commission
Page 1 and 2:
Thematic ReviewEconomic and Financi
Page 3 and 4:
Financial, Economic and Distributio
Page 5 and 6:
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24:
Page 25 and 26:
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
Page 35 and 36:
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Page 47 and 48:
Page 49 and 50:
Page 51 and 52:
Page 53 and 54:
Page 55 and 56:
Page 57 and 58:
Page 59 and 60:
Page 61 and 62:
Page 63 and 64:
Page 65 and 66:
Page 67 and 68:
Page 69 and 70:
Page 71 and 72:
Page 73 and 74:
Page 75 and 76:
Page 77 and 78:
Page 79 and 80:
Page 81:
Page 84 and 85:
Page 86 and 87:
Page 88 and 89:
Page 90 and 91:
Page 92 and 93:
Page 94 and 95:
Page 96 and 97:
Page 98 and 99:
Page 100 and 101:
Page 102 and 103:
Page 104 and 105:
Page 106 and 107:
Page 108 and 109:
Page 110 and 111:
Page 112 and 113: Financial, Economic and Distributio
Page 200: Financial, Economic and Distributio
show all

Financial, Economic and Distributional Analysis - Centre ...

Create successful ePaper yourself

Delete template?

Save as template?