Below are a few notes to answer some of the questions arising in emails and class, and partcularly for on line students:
Assignment 2 Description
The second assignment will continue with the case study from Assignment 1 and will look at all of the tools studied and their application to this case study. This will include a description of the financial and economic analysis, social cost benefit analysis and other evaluation methods and other factors that need to be considered in the planning of projects and programs and how they could be applied to the case study. Reflecting on all evaluation methods learnt and applied the students will need to conclude on the evaluation methods that best apply to the case study. (Only) For the Cost Benefit Analysis you will need to base you analysis on a Scenario (this is attached below).
The case study – ‘the KALAHI – Comprehensive and Integrated Delivery of Social Services (CIDDS) Project’ – in the Philippines is funded by the World Bank. It is comprehensively outlined in the attached report and includes Water, Roads, Schools, Health and Day Care which are all important elements of planning and implementation for change in the urban environment (as the focus of this course):‘ Measuring Costs and Benefits of Community Driven Development, The KALAHI-CIDDS Project, Philippines (2007)’ as attached,
So as a starting point let’s look again what the case study document provides in the way of evaluation methods, as this is the key focus of the assignment question. Reading over the Executive Summary: PURPOSE AND SCOPE OF ANALYSIS it states:
The project development objective of KALAHI-CIDSS is to strengthen the participation of local communities in barangay governance and develop their capacity to design, implement, and manage development activities that reduce poverty. Ideally, therefore, economic analysis should focus on the valuation of benefits of these development investments. While it is too early in the project cycle to make this kind of assessment, it is possible to make preliminary inferences (using 2003 baseline survey data) of how these investments might be associated with expected benefits, such as a closer match between demand and supply and the better operation and maintenance of projects.
The main focus of this analysis is, however, the economic impacts of the Project. It looks at the costs and benefits of seven major subproject (SP) categories that cover 1,175 completed and ongoing subprojects (e.g., domestic water supply [both pump and gravity], roads construction and improvement, elementary school buildings, barangay health centers, and day care centers). These seven major categories accounted for 82 percent of total subproject costs.
For economic analyses of the project as a whole, and for each of the major subproject categories, the general methodology and parameters used in this report follow the World Bank’s Handbook on Economic Analysis of Investment Operations (1998a) and the Philippines National Economic Development Authority (NEDA) ICC Guidelines on Project Evaluation (2001)
So what does this tell us for the assignment? The case study document focuses on an economic impact of the project in an early stage in the project cycle i.e. a full economic analysis has not been completed and key costs and benefits have been identified but not fully quantified (‘valued’) nor applied through a detail cost benefit methodology, so similarly the report is not a cost-benefit analysis either.
As you are being asked in the assignment to ‘conclude on the evaluation methods that best apply to the case study’ the answers are not all in the report and you will need to think through what you think will work best and why. However the report is a starting point which has identified some of the ‘economic impacts’ of the project and you should reference where some of its findings you think it will add clarity to your assignment.
The Executive Summary as above makes reference to the ‘World Bank’s Handbook on Economic Analysis of Investment Operations (1998a)’ a copy attached, for the basis of its ‘economic analyses of the project as a whole, and for each of the major subproject categories, the general methodology and parameters’, so I would suggesting having a look at the Handbook and referencing it in your assignment. I would also suggest a quick review of Chapter 1. An Overview of Economic Analysis, the detail and Bank language is not as important for the purposes of the course and assignment as a fundamental understanding of what an economic analysis is hoping to achieve. In the context of these World Bank Guidelines it is based firstly on a financial analysis (the basis of which is in the case study report) and economic analysis (basis also in the case study). Does the report answer each of the key questions as posed in the World Bank Guidelines and if so adequately in your opinion?
So far in looking here at just the Executive Summary we have identified three terms that we have been looking at this semester – Financial Analysis, Economic Analysis and Cost Benefit Analysis. So the assignment should look at these terms as a starting point, going back to the question as given – ‘This will include a description of the financial and economic analysis, social cost benefit analysis and other evaluation methods and other factors that need to be considered in the planning of projects and programs and how they could be applied to the case study’.
So I would suggest after a brief introduction to what you intend to cover and how in the assignment (above even that at the very top I recommend copying and pasting the question as given – this all helps if you want to look back at the assignment in the future you are clear on what your asked to answer and it is all in the one document) then to have a heading ‘Financial Analysis’ outline a very brief definition of what it is taken from one of the four documents as attached (preferably more than one source and vary them I suggest) so it is clear you know what the term means and then a few paragraphs on how useful the method/tool is for application for the case study and assessment if it is a method/tool that is one of the an ‘evaluation methods that best apply to the case study’.
For example is we look at Financial and then Economic Analysis it is mentioned in all of the four attached references e.g. Guide to cost-benefit analysis of investment projects, European Union Guidelines (1997) Section 2.4 Financial Analysis on pages 19- 29. Don’t worry too much about the complexity of terms used here and in the other sources as these are documents for practioners just be clear on the fundamentals.
The purpose of the financial analysis is to use the project’s cash flow forecasts in order to calculate suitable return rates, specifically the financial internal rate of return (FRR) on investment (FRR/C) and own capital (FRR/K) and the corresponding financial net present value (FNPV). While the CBA encompasses more than just the consideration of the financial returns of a project, most of project data on costs and benefits is provided by financial analysis.
This analysis provides the examiner with essential information on inputs and outputs, their prices and the overall timing structure of revenues and expenditures. The financial analysis is made up of a series of tables that collect the financial flows of the investment, broken down by total investment (Tab. 2.1), operating costs and revenue (Tab. 2.2), sources of financing (Tab. 2.3) and cash flow analysis for financial sustainability (Tab. 2.4).
Or if we look at the Commonwealth of Australia (2006) Handbook of Cost-Benefit Analysis, Department of Finance and Administration, as attached under section 6.1 What is financial evaluation? On page 28:
A financial evaluation attempts to determine the net financial benefit (or loss) to an agency rather than the net benefit (or loss) to the economy or society. Financial evaluations are only concerned with cash flows in and out of the organisation. With financial evaluation, the comparison is between the cash receipts and the cash expenditures of an activity, which in turn yields a net cash flow. Therefore, a financial evaluation is essentially a straightforward cash flow analysis. In a financial evaluation, no account is taken of external costs or benefits.
As a few pointers as discussed in class, use the language of the above and the other sources for the definition and objective and pull out the key points to answer the question as given e.g. financial analysis would be useful in the case study by identifying cash flows from the project so that the project sponsors (principally The World Bank and the Government of The Philippines) can assess the financial internal rate of return of the project. So then you should define ‘FIRR’ (it is again in the readings) and you should think why would this be of value to these agencies?
Again in the readings it is explains that FIRR allows comparison of one project against another, allows changes to be made to project design improve FIRRs and vary timing of expenditure and returns and helps ensure financial sustainability of the project. Just note in the assignment that the higher the FIRR of return the higher the flow of financial returns from the investment in the project i.e. FIRR of 20% means the project is paying back 20% on top of the money put into the project, surely it is better getting 20% more on investment than only getting say 10% (this should help you answer the analysis on the Scenario as well and I would recommend mentioning this point here).
Similarly relating this back to the question as given, the direct costs of providing facilities can be readily calculated and compared. In the KALAHI-CIDSS Project, Philippines the ‘Economic cost of construction’ e.g new roads – is calculated at P2,163,617.11.
The project was then able to calculate ‘Average Direct Unit Cost Estimates for SPs (monetary values in PHP)’ comparisons were made with similar infrastructure projects implemented by other government agencies of the Philippines. the KALAHI – Comprehensive and Integrated Delivery of Social Services (CIDDS) Project’ Paper No. 102 / January 2007, Page 28 to assess cost effectiveness. By then averaging costs in units such as number of schools, square metres of class rooms, km of road, length of pipe, number of students, litres of water the economic efficiency of project components can be calculated and compared to other similar infrastructure provision by other agencies e.g. note the significant costs savings the project envisages over other Government facilities – over 80% in some cases!