Postgraduate Diploma in

Agricultural Risk Finance

Unit 4A: Introduction to Economic &
Financial Appraisal of Projects
Pkalangwa@gmail.com

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 Agenda
• Introduction
• Identification of benefits and costs
• Valuation of benefits and costs
• Cash flows and social Analysis
• Comparing benefits and costs Economic
analysis methodology
• Financial analysis methodology
• The concept and application of economic
and social benefits
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 Introduction
• The main objective of conducting a
project economic analysis is to help
not only assess the sustainability of
investment projects but also to inform
the design and select projects that can
contribute to a sustainable
improvement in the welfare of project
beneficiaries, and the country as a
whole.

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 IDENTIFYING PROJECT COSTS AND
BENEFITS
• Economic analysis of agricultural projects is
undertaken to compare costs with benefits and
determine which among alternative projects have
an acceptable return.
• The costs and benefits of a proposed project
therefore must be identified. Furthermore, once
costs and benefits are known, they must be
priced, and their economic values determined. All
of this is obvious enough, but frequently it is
tricky business.

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 Economic Analysis
• Economic analysis is a means to help bring
about a better allocation of resources that can
lead to enhanced incomes for investment or
consumption purposes.
• Best undertaken at the early stages of the
project cycle to determine the best
investment vs alternatives

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 Introduction

• Assessments help in the Preparatory work required to deliver a

project e.g.
✓ Advice on conceptual development and project structuring
✓ Advice on project preparation e.g. cost-benefit analysis, financial analysis,
environmental issues, procurement
planning.
✓ Review of documentation: feasibility studies, technical
design, tender documents.
✓ Advice on compliance with local law (environmental,
competition and others) and conformity with government policies

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 General Cost Benefit Analysis Structure

STRUCTURE OF CBA
1. Option and Feasibility Analysis
How can an objective be achieved? Are the selected options
feasible?

2. Financial Analysis
CBA main Does the project need cofinancing? How much money is
necessary to implement the option selected?
elements
3. Economic Analysis
Is the project worth cofinancing? What is the impact on
the area where the project is going to be implemented?

4. Risk Analysis
Which are the most likely financial and economic results?
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Sequence of CBA – Agricultural
projects

 Strategic approach and definition of objectives

 Project identification and Option Analysis
 Financial Projections
 Economic Analysis
 Risk and Sensitivity analysis
 Conclusions and presentation of results

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 Option Analysis and Selection
Assessment of existing
structures/status

Identification of problems
(How/Why objectives are not met)

Identification of options
(What can we do to meet
objectives) National
Project policy
Objectives Objectives
First screening and shortlist
Multicriteria analysis

Comparison of retained options

(technical and economic)

Selection of
preferred option

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 Financial Analysis
 To establish the level of financial self-sufficiency, financial
performance and sustainability of the project
➢ Projections of financial flows of the project for without (baseline)
and with project scenarios:
✓ Total planned investment (including residual value)
✓ Revenues (demand evolution and tariff increases)
✓ Operating and maintenance costs (also estimate cost savings)
➢ Reference period e.g 30 years
➢ Financial discount rate set at e.g 5%
➢ Project impact = Difference between with and without scenario

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 Economic Analysis
 To establish if the project has a positive net contribution to society
(NPV>0, B/C ratio positive)
➢ Similarly to financial analysis comparisons between benefits and
costs, but:
✓Costs measured in term of “opportunity” foregone
✓Benefits reflects both saving in costs and external benefits not
valued by financial prices
➢ Incremental impact on society = Difference between with and
without ‘economic’ scenario

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 Economic Analysis

➢ Identifying benefits
✓Benefits from improved access to the resource
✓Benefits from improved quality of the resource (use and non use
values)
✓Resource costs savings
✓Other benefits difficult to monetise

➢ Adjusting costs
✓Converting financial prices into economic prices
✓Add negative externalities

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 THANK YOU!
Pkalangwa@gmail.com

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