Economic Analysis Concepts

Questions & Decisions (1)

• Is the project justified ?- Are benefits

greater than costs?
• Which is the best investment if we have a
set of mutually exclusive alternatives?
• If funds are limited, how should different
schemes be ranked?
• When should the road be built or
upgraded?
2
 Questions & Decisions (2)

• What standard of construction should

be used?
• What standard and frequency of road
maintenance is optimal?
• Should staged construction be used?
• Are complementary investments
required?

3
 Appraisal Framework

• All appraisals need a framework or

model for:

a) Forecasting changes
b) Evaluating those changes

4
 Components of Economic Analysis (1)

• Costs and benefits are measured in money

terms
• Road construction and maintenance costs
are compared with estimates of the direct
primary benefits going to road users and
road agency
• Secondary benefits are usually ignored
• Economic prices are used in constant terms

5
 Components of Economic Analysis (2)

• Costs and Benefits are forecast over

the planning time horizon (usually
between 10 and 20 years)
• Future Benefits are valued less as
time progresses using the planning
discount rate
• Costs and Benefits are compared
using decision criteria such as NPV,
IRR, etc.
6
 Economic and Financial Prices

The cost to the economy of road

rehabilitation and maintenance may differ
from the financial cost because of :
• taxes and duties
• shortage of foreign exchange
• under-employment

The Government will usually be concerned with

ECONOMIC costs.
Contractors will usually be concerned with
FINANCIAL costs.
7
 Use of Economic Prices

In an Economic Appraisal we use ECONOMIC

(or SHADOW) prices NOT FINANCIAL prices

Adjust financial prices as follows:

• Exclude all taxes and duties and subsidies
• Use the planning discount rate not financial market rate
• If overvalued exchange rate then value imports and
exports more highly
• Use the opportunity cost of labor
• Standard Conversion Factors are now widely used for
road construction costs

8
 Benefits from Road Investment

Changes in transport costs occur because of

:
• Lower road roughness
• Shorter trip distance
• Faster speeds
• Reduced chance of impassability
• Reduced traffickability problems
• Change in mode
9
 Project Costs

• Management (including design and

supervision)
• Labor
• Equipment
• Materials
• Land, Resettlement, Environment

10
 Primary Effects (1)

• Reduced vehicle operating costs (VOC)

• fuel and lubricants
• vehicle maintenance
• depreciation and interest
• Tire wear
• Crew time
• overheads

• Reduced journey time

• drivers, passengers and goods

11
 Primary Effects (2)

• Changes in road maintenance costs

• Changes in accident rates
• Increased travel
• Environmental effects
• Change in value of goods moved

12
 Secondary Effects

• Changes in agricultural output

• Changes in services
• Changes in industrial output
• Changes in consumers behavior
• Changes in land values
• Changes in income

13
 Consumers’ Surplus Approach

• Captures primary benefits

• Advantages: Simple, cost based, traffic
approach dependent on predicting
changes in traffic
• Disadvantages: May not address critical
factors promoting either rural
development or social access

14
 Normal and Generated Traffic Benefits

Transport cost savings to

Total Benefits = Normal traffic and growth

Cost +
C1 Additional benefits to
Generated traffic

C2
Demand Curve
(Price Elasticity of Demand)

T1 T2 Traffic

Normal Generated
15
 Generated Traffic Benefits

Traffic induced by the road investment are

traditionally valued at:

Half the difference in transport costs

Hence total generated transport cost benefits

= Generated Traffic Volume x Change in
Transport Costs per km x Distance x 1/2

16
 Producers’ Surplus Approach
• Captures secondary benefits
• Advantages: Draws attention to changes in
agricultural output (key economic activity in rural
areas)
• Disadvantages: No reliable way of predicting response
- impact studies give widely different answers
- it could be based on agricultural supply price
elasticities but this is almost never done; it requires
very careful examination to use.
• For most projects benefits are just invented !

17
 Producers’ Surplus

Price & Costs per Unit

of Output Increased
Farmgate Price
P2
P1

Lower Input Costs

Output O1 O2
18
 Coverage and Double Counting

• Any economic analysis should be designed

to give maximum coverage of benefits
• But we must avoid double counting. Do not
add primary and secondary benefits (e.g.
changes in land values added to changes in
transport costs)
• In a competitive economy the consumers’
surplus approach (used in HDM) should be
adequate

19
 Economic Comparisons

• Economic analysis involves a comparison of

“With” and “Without” project cases
• Forecasts are made of traffic, road condition,
VOC and road maintenance effects for BOTH
scenarios
• An unrealistic “Without” case (i.e. with little
maintenance) can give a false result
• A range of “With investment” cases should be
analyzed to find the best solution
20
 Traffic Categories
• Normal traffic: Existing traffic and growth that would
occur on road, with and without the investment
• Diverted traffic: Traffic diverted from another road with
same origin and destination to as the project road as a
result of the investment
• Generated traffic: Traffic associated with existing users
of the road driving more frequently or driving further
than before
• Induced traffic: Traffic attracted to the project road due
to increased economic activity in the road’s zone of
influence brought about by the project
21
 Benefits from Road Investment

Transport cost savings for existing (or normal)

traffic = Normal Traffic Volume x Change in
Transport Costs per km x Distance

Main changes in cost from:

a) change in transport MODE
b) reduced journey TIME
c) reduced VOCs

22
 Benefits of Upgrading to a
Motorable Track

Headloading

C1

Track
Costs
Improved
road

C2
C3
T1 Traffic T2 T3
23
 Cost Effectiveness Against
Standard of Road

95% of year, access established

Marginal productivity

99% of year, access established

Maintenance for roughness reduction

0 Maintenance expenditure $/km

24
 Development Benefits

Development benefits arise from a

combination of increased traffic and
reduced transport costs.

Benefits may also include :

• Increased agricultural production
• Increased service provision
• Increased industrial activity

25
 Estimating Benefits
Normal traffic benefits: tripsN * d1 * (VOC1- VOC2)

Diverted traffic benefits: tripsD * ((d1 * VOC1)-(d2*VOC2))

Generated and Induced traffic benefits: tripsG * d2 * (VOC1-

VOC2)/2

d1 = existing road length d2 new road length

VOC1 = vehicle operating costs per km “without” investment
VOC2 = vehicle operating costs per km “with” investment

VOC data relates to each road section and its condition at the
time

26
 Economic Decision Criteria (1)

• Net Present Value

NPV = (B1- C1)/(1 + r) + (B2- C2)/ (1 + r)2 + …+ (Bn- Cn)/(1 + r )n

• Internal Rate of Return

To calculate IRR, solve for r, such that NPV =
0

B1, B2…Bn = Benefits in years 1, 2 … n

C1, C2…Cn = Costs in years 1, 2 …. n
r = Planning discount rate
n = Planning time horizon

27
 Economic Decision Criteria (2)

• Net Present Value/ Investment Cost

NPV/ C = NPV/Ci

• First Year Rate of Return

FYRR = (B1- C1) / Ci
B1 , C1 = Benefits and Costs in year 1
after construction
Ci = Road investment costs

• Payback Period
28
 Economic Decision Criteria (3)

NPV IRR3 NPV/C FYRR

Project economic validity V.Good V.Good V.Good Poor
Mutually exclusive projects V.Good Poor Good Poor
Project timing Fair Poor Poor Good
Project screening 1 Poor V.Good Good Poor
Under budget constraint 2 Fair Poor V.Good Poor

Notes:
1. check for robustness to changes in key variables (sensitivity analysis)
2. with incremental analysis
3. IRR may be indeterminate with NONE or MANY solutions.

29
 Present Value Calculation

Period Flow
0 A0 PV(A0) = A0
1
2
3
4
5 A5 PV(A5) = A5 / (1 + i ) ^ 5
6
7

PV(Aj) = Aj / (1+ i ) ^ j
PV(Aj) = Present Value of Aj
Aj = Amount at year j
i = Discount rate
j = Year
30
 Present Value at 12.0% Discount Rate

1.00 in Year 1 = 1.00 in Year 1

Year 2 0.89
Year 3 0.80
Year 4 0.71
1.00 in Year 5 = 0.64 in Year 1
Year 6 0.57
Year 7 0.51
Year 8 0.45
Year 9 0.40
1.00 in Year 1 0 = 0.36 in Year 1

1.00 in Year 15 = 0.20 in Year 1

1.00 in Year 20 = 0.12 in Year 1

31
 Discount Rate

• The discount rate is opportunity cost of

capital in the public sector, ie the rate of
return on marginal public sector investments
• The discount rate to be used will be given by
the planning authority responsible for the
project
• The World Bank traditionally has not
calculated a discount rate for each project
but has used 10 to 15 percent as a notional
opportunity cost of capital in developing
countries
32
 Discount Rate Versus Interest Rate

US discount rate around 4% 33

 NPV and IRR

• The Net Present Value (NPV) of a

project alternative relative to the without
project alternative is the sum of the
discounted annual net benefits.

• The Internal Rate of Return (IRR) is the

discount rate at which the NPV is zero.

34
 NPV Decision Rule

1. If the NPV is positive, for the chosen

discount rate, then the alternative is
acceptable.
2. If the NPV is negative, for the chosen
discount rate, then the alternative is
unacceptable.
3. If the NPV is zero, for the chosen
discount rate, then the alternative is
indifferent to the without project alternative.

35
 NPV and IRR Calculation (1)

Discount Net
Rate (i) Discount Present
12.0% Rate (i) Present

Investments Profits Present 0.0% 7500

or or Net Value Present 3.0% 6326
Year Costs Benefits Benefits Factor Value 6.0% 5281
a b c d = c-b e = 1/(1+i)^a f = d*e 9.0% 4347
12.0% 3508
0 10000 0 -10000 1.0000 -10000 15.0% 2752
1 0 6500 6500 0.8929 5804 18.0% 2068
2 0 3000 3000 0.7972 2392 21.0% 1447
3 0 3000 3000 0.7118 2135 24.0% 881
4 0 5000 5000 0.6355 3178 27.0% 365
30.0% -109
33.0% -544
Total 10000 17500 7500 3508 36.0% -944
39.0% -1315
NPV = 3508 42.0% -1657
45.0% -1975
IRR = 29.3% 48.0% -2271

36
 NPV and IRR Calculation (2)
8000

6000 NPV at 12%

Discount Rate
Net Present Value (M$)

4000

2000
Internal Rate
of Return
0
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

-2000

-4000
Discount Rate (%)

37
 NPV Versus IRR
10000

8000
NPV at 12%
Discount Rate
6000
Net Present Value (M$)

4000
Internal Rate
2000
of Return

0
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

-2000

-4000
Discount Rate (%)
- The IRR and NPV will not necessarily rank the alternatives by the same order
- Always use NPV to compare project alternatives
38
 Multiples Rates of Return
Net
Year Benefits Multiple Rates of Return
0 -500
1 1150
2 -660 2.00
NPV at 12% 0.64
IRR #1 10%
IRR #2 20% 0.00
0% 5% 10% 15% 20% 25% 30% 35%
Discount
-2.00
Rate NPV
Net Present Value (M$)

0% -10.0
2% -6.9
-4.00
4% -4.4
6% -2.5
8% -1.0 -6.00
10% -0.0
12% 0.6
14% 0.9 -8.00
16% 0.9
18% 0.6
20% 0.0 -10.00
22% -0.8
24% -1.8
26% -3.0 -12.00
28% -4.4 Discount Rate (%)
30% -5.9 39
 No Rate of Return
Net
Year Benefits No Rate of Return
0 200
1 300
2 350 900
NPV at 12% 747
IRR #NUM! 800

700
Discount Net Present Value (M$)
Rate NPV 600
0% 850.0
2% 830.5 500
4% 812.1
6% 794.5 400
8% 777.8
10% 762.0
300
12% 746.9
14% 732.5
200
16% 718.7
18% 705.6
20% 693.1 100
22% 681.1
24% 669.6 0
26% 658.6 0% 5% 10% 15% 20% 25% 30% 35%
28% 648.0 Discount Rate (%)
30% 637.9 40
 Same Rate of Return

Net Benefits
Project Project
Year 1 2 Same Rate of Return
0 -1000 1000
1 1250 -1250 300
NPV at 12% 116 -116
IRR (%) 25% 25%
200
Discount Project Project Net Present Value (M$)
Rate 1 2
1% 238 -238 100

3% 214 -214
5% 190 -190
0
7% 168 -168 0% 5% 10% 15% 20% 25% 30% 35%
9% 147 -147
11% 126 -126 -100
13% 106 -106
15% 87 -87
17% 68 -68 -200
19% 50 -50
21% 33 -33
-300
23% 16 -16
25% 0 0 Discount Rate (%)
27% -16 16
Project 1 Project 2
29% -31 31
31% -46 46

41
 Incremental Rate of Return
Alternative A - Base
Investments Profits Present
or or Net Value Present
Year Costs Benefits Benefits Factor Value
NPV = 6.3
0 8 0 -8 1.00 -8.0 IRR = 100.0%
1 0 16 16 0.89 14.3 MIRR = 100.0%
B/C = 1.79

Alternative B - Base
Investments Profits Present
or or Net Value Present
Year Costs Benefits Benefits Factor Value
NPV = 7.1
0 100 0 -100 1.0000 -100.0 IRR = 20%
1 0 120 120 0.8929 107.1 MIRR = 20%
B/C = 1.07

Alternative B - Alternative A
Investments Profits Present
or or Net Value Present
Year Costs Benefits Benefits Factor Value
NPV = 0.86
0 92 0 -92 1.0000 -92 IRR = 13%
1 0 104 104 0.8929 93 MIRR = 13%
B/C = 1.01
42
 IRR Reinvestment Assumption
IRR IMPLICIT ASSUMPTION:
ALL CASH FLOW VALUES WILL EARN THE IRR INTEREST RATE

Discount
Rate (i)
12.0%
Future Value in Year 4
Investments Profits If You If You Receive
or or Net Invest at and Invest at
Year Costs Benefits Benefits 29.3% 29.3%
a b c d = c-b Interest Interest

0 10000 0 -10000 10000

1 0 6500 6500 12929 6500
2 0 3000 3000 16715 = 8404 3000
3 0 3000 3000 21611 10865 3879 3000
4 0 5000 5000 27940 14047 5015 3879 5000

NPV= 3508
Total 27940
IRR= 29.3%
43
 Modified Internal Rate of Return
Modified Internal Rate of Return Calculation

Financing Reinvestment
Rate (i) Rate (i)
12.0% 12.0%

Present Future Modified

Net Value Value Cash
Year Benefits of Costs of Benefits Flow
a d = c-b Costs at Year 0 Benefits at Year 4

0 -10000 10000 10000 0 0 -10000

1 6500 0 0 6500 9132 0
2 3000 0 0 3000 3763 0
3 3000 0 0 3000 3360 0
4 5000 0 0 5000 5000 21255

TOTAL 7500 10000 21255

NPV = 3508 3508

IRR = 29.3% 20.7%

MIRR = 20.7%
44
 Benefits X Cost

120

100

Alternative B
80
Benefits

60

40

20
Alternative A

0
0 20 40 60 80 100 120
Costs
45
 Net Benefits X Costs (Efficiency Frontier)

7
Alternative B
6
Net Benefits (NPV)

5
Alternative A

0
0 20 40 60 80 100 120
Costs
46
 Comparison of Alternatives
• When comparing project-alternatives,
the Net Present Value (NPV) is used
to select the optimal project-alternative
(alternative with highest NPV)
• The Internal Rate of Return (IRR) or
the B/C ratio are not recommended to
compare alternatives of a given project
Alternatives NPV
Projec 0.0
Optimal
t 3.7
Alternative:
6.7
Highest NPV
5.5
47
 Ranking Projects
• When comparing the economic priority
of different projects, a recommended
economic indicator is the NPV per
Investment ratio
Selected NPV/Investment
Alternative P
Project 8.4 R
s Overlay I
O
5.2 R
Reseal I
T
2.1 Y
Overlay 48
 Budget Constraints Simple Methodology
Selected NPV Investme NPV per
Projects nt Investme
Alternativ nt
e 16.8
P
2.0 8.4
R
Overlay
I
15.6
O
3.0 5.2
R
Reseal
I
20.0
Available Budget T
5.0 4.0
Y
Overlay
3.0
Budget 2.0
Constraint 1.5
Cut Off
Reseal
5.049
 Budget Constraints Optimization
Projects Alternatives NPV
Evaluates all possible
0.0
combinations of project-
3.7
alternatives to find the
6.7
combination that maximizes
5.5
the NPV of the overall
network for the given budget
0.0
constraint.
2.0
1.0 P = Number of projects
3.5 A = Number of alternatives
C = Number of possible
0.0 combinations
Available Budget 5.4 C=A^P
2.1
3.2
50
 HDM-4 Optimization Example (1)

Section 1
Option Cost NPV
A 2 4
B 5 7
C 7 8
Section 2
Option Cost NPV
A 1 3
B 3 6
C 5 8

What is the recommended program for a budget of 5?

51
 HDM-4 Optimization Example (2)

9
C
8
C
7
B B
6

4
A
dNPV/dCost
A
3

0
0 1 2 3 4 5 6 7 8
Cost

Section 1 Section 2
52
 HDM-4 Optimization Example (3)
18

16
1-C, 2-C
14 1-B, 2-C
12
1-A, 2-C
10

8
1-A, 2-B

6
1-A, 2-A
4

0
0 2 4 6 8 10 12 14
Cost
Combination of project alternatives Network
that maximizes the NPV of the
network 53
 Appraisals & Post Evaluations (1)

• An Appraisal is carried out before an

investment is made. Everything is
uncertain.
• A Post evaluation may be made say 5 years
after the investment. The investment is
known and 5yrs of with case are known.
The without case is unknown as is the
remainder of the with case.

54
 Appraisals & Post Evaluations (2)

• In Both Cases forecasting and

evaluation models are required to come
to an answer.
• Hence we can never be certain about
the viability of an investment !

55
 Sensitivity Analysis
• Consequences of changes on inputs

• Investment Costs (e.g. +15%)

• Traffic Growth Rate (e.g. = zero)
• Generate Traffic (e.g. = zero)
• Value of Time (e.g. = zero)
• A = Investment Costs Increase (e.g. +15%)
• B = Road User Benefits Decrease (e.g. -15%)
• C = A and B together
56
 Switching Values Analysis

• Inputs that yield a NPV equal to zero

• Investments Costs
• Normal Traffic
• Traffic Growth Rate
• Generate Traffic

• Investment Cost
• Road User Benefits

57
 Risk Analysis
•Inputs vary at the same time Country
Project
Africa Region
Road Management Initiative
Road Road from Point A to Point B

following some defined Option

Internal Rate of Return

2 Upgrade to ST

distributions Normal Traffic Minimum

Maximum
Upgrade Road to Surface Treatment Standard
4.2%
22.7%
35%
Average 11.9%
30% Standard Deviation 3.5%
Frequency Distribution

25%
Median 11.7%
Percentile 25% 9.4%
20%
Percentile 50% 11.7%
15% Percentile 75% 14.1%
10%
Probability that IRR is less than 12% 50%
5% Probability that IRR is greater than 12% 50%
0%
0.50
0.58
0.65
0.73
0.81
0.88
0.96
1.04
1.12
1.19
1.27
1.35
1.42
1.50
1.58
1.65
1.73
1.81
1.88
1.96
Multiplier Factor Upgrade Road to Surface Treatment Standard

8%

7%

Project Investment Costs 6%

Frequency Distribution
14% 5%

12%
4%
Frequency Distribution

10%
3%
8%

2%
6%

4% 1%

2% 0%
10.1%

14.2%
15.3%
16.3%

20.4%
21.4%
12.2%
13.2%

17.3%
18.3%
19.4%

22.4%
23.5%
24.5%
6.0%
7.1%
8.1%
9.1%
5.0%

11.2%
0%
0.50
0.58
0.65
0.73
0.81
0.88
0.96
1.04
1.12
1.19
1.27
1.35
1.42
1.50
1.58
1.65
1.73
1.81
1.88
1.96

Multiplier Factor Internal Rate of Return

58
 Rural Transport Infrastructure

Farm Household/ Village Market Center District Regional Capital/

Sub-village Headquarters Headquarters Port
Typical Transport
Infrastructure Path Path/Track Track/ Earth Road Earth Road/ Gravel 1-2 lane Gravel / ST 2 lane AC**
Road Road Road

Typical Traffic Porterage NMT NMT NMT >100VPD >1500VPD

0-5VPD 5-50VPD 20-200VPD
1-5Tkm 1-10 km 5-20 km 10-50 km 20-100 km 50-200 km
Share of Asset Value 40%
20%
0%
Share of Network Length
40%
20%
0%

O Community

Responsability Local Government

Provincial/Central Government

Type of Network
Rural Transport Infrastructure Trunk or Provincial Road

“Tracks” “Roads” “Highways”

59
 Rural Transport Infrastructure
Rural Transport Infrastructure Primary, Secondary and Municipal Roads
Road Network Tertiary Secondary Primary
Functional Classification Access Collector Arterial
Responsibility Community Local Government Regional & National
Municipal
% of Road Network N.A. +- 70% +- 10% +- 10%
1 to 2 earth or gravel 1.5 to 2 gravel or paved
Physical Characteristics tracks lanes lanes 2 or more paved lanes
Normally sections with Normally sections with Normally sections with Normally sections with
1 to 5 kms 5 to 20 kms 20 to 100 kms 50 to 200 kms
Traffic Characteristics Mostly NMT < 50 AADT + NMT 50-500 AADT > 500 AADT
Economic Evaluation No No Yes Yes
Social Evaluation Yes Yes Complimentary No
Financial Evaluation No No No Tolls
Technical Evaluation No Yes Yes Yes
Environmental Evaluation No Yes Yes Yes
Safety Evaluation No Yes Yes Yes

Focus on social evaluation (cost effectiveness

indices, community priorities and multi-criteria
analysis) 60
 Social Benefits: Why the Concern ?

• There is unease with conventional appraisal based primarily on

transport cost savings to traffic
• There is a strong desire at community and national levels for
better access and mobility which is frequently not matched by
standard measured economic benefits
• The ‘rich’ world governments subsidise rural transport. Should
the same happen for developing countries ?
• Isolation is a recognised characteristic of poverty
• There is a feeling that a minimum degree of access and
mobility is a ‘basic human right’
• Development has moved away from a narrow definition of
economic development towards concern with ‘livelihoods’ and
meeting ‘Millennium Development Goals’
• The issue is particularly important when roads are impassable
to motor traffic

61
 Economic & Social Benefits
• Consumers and producers surplus approaches are very
economic in orientation. Yet roads provide ‘social benefits’ –
including improved access to health and education facilities
and improved social mobility that cannot be easily translated
into conventional economic benefits. – Although they may
have important long term ‘economic’ consequences.
Improved health and education and more secure social
networks increase long term earning capabilities but so far
the economic forecasting framework does not include this.

• When roads are impassable to motorized traffic we know that

the quality of health care and schooling falls. Drug supply and
supervision drops. Likewise no NGO, government agency or
commercial enterprise will establish or support a service
which cannot guarantee all year round access.

62
 Indices and Ranking
• Widely used for feeder road planning; there are many
different approaches
e.g. i) cost of improvement / population
ii) estimated trips / cost

Advantages: Speed , simplicity, transparency, many factors

can be incorporated
Disadvantages: How do we value widely different factors ?
(adding up apples and pears); weightings are not stable ;
cannot easily address questions of road standards, timing
etc, ; possible double counting

63
 Example of Two Indices

i) Andhra Pradesh (India)

cost effectiveness = cost of upgrading/ population served

But – no measure of condition change and no importance to traffic

ii) Airey & Taylor

1st for impassable roads
rank = cost per head of establishing basic access

2nd when access is there:

estimated trips x access change

prioritization index = --------------------------------------------
rehabilitation cost per km

64
 Community Priorities

• Community priorities now often form an important part of

feeder road appraisal. It is possible just to ask communities
to rank the investments they prefer- both within the road
sector or between roads and other investments.
• Advantages: Community acceptability, use of community
knowledge
• Disadvantages: Sectional interest groups may dominate
voting, community knowledge of area or road impact may
be poor

65
 Cost Effectiveness Analysis (CEA)

• Compares the cost of interventions with its

predicted impacts and it is used where the
benefits cannot be measured in monetary
terms, or where the measurement is difficult
• It includes provisions that (a) the objectives of
the intervention are indicated and are clearly
part of a ampler program of objectives (such as
reduction of the poverty); and (b) the
intervention represents the smaller cost
alternative of obtaining the indicated objectives
• It produces effectiveness indicators, such as
Total Beneficiary Population per Investment or
Investment per Beneficiary Population

66
 CEA Comparison of Alternatives

• To compare project-alternatives, the investment

cost is used to select the optimal alternative
• The selected alternative is the one with the
lowest investment cost that will achieve the
objective of the program

Alternatives Investment
Project 2.0
Optimal
3.7
Alternative:
1.7
Lower Investment
5.5

67
 Projects Eligibility with CEA

• To assess if a project is eligible, an acceptable

effectiveness indicator threshold is defined
Investment per
Population Effectiveness
(U$/person) Indicator
Threshold
Projects Example
50

150 Eligible

Not Eligible
500
68
 Effectiveness Indicator Threshold

40 ?
Reasonable Non Reasonable
35
?
30 Evaluate Universe
Frequency of Projects

25
of Projects and
Available Budget
20

15

10

0
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950
Investment per Population (US$/person)
69
 Possible CEA Indicators

• Investment Cost per Total Beneficiary

Population
100 US$ per person
• Total Beneficiary Population per
Investment Cost
0.01 persons per US$
• Total Beneficiary Population per
Investment Cost in thousands of dollars
10 persons per 1,000 US$
• Etc.

70
 Options for Beneficiary Population

• Rural beneficiary population

o Effectiveness = (rural beneficiary population) /
Investment
• Poor beneficiary population
o Effectiveness = (poor beneficiary population) /
Investment
• Mixed beneficiary population
o Effectiveness = (poor persons + 0.3 non poor
persons) / Investment
• Etc.

71
 Total Beneficiary Population (1)

Total Beneficiary Population = Directly Benefited

Population + Indirectly Benefited Population

• The Directly Benefited Population is the one that lives

next on the road, defined for example to 2.0 km at
each side of the road, and the population in the ends
of the road, depending on its characteristics and the
use of the road
• The Indirectly Benefited Population is the population
that lives in other roads near the road in
consideration, who use the project road to arrive at
the main population center of the region or at a main
road
72
 Total Beneficiary Population (2)

Main
D Population
Center

B C E F

Village

For example, for the road section B-C:

Directly Benefited Population = Population along section B-C plus on
towns B and C
Indirectly Benefited Population = Population along section A-B plus on
town A 73
 Multi Criteria Analysis (MCA) (1)

• It adopts criteria such as traffic, proximity to

educative, health, and economic centers, etc.
• To each section, a number of the points is assigned
to each criteria that correspond to the fulfillment of
the criteria
• The added number of the points that each section
receives is computed simply adding the points
assigned for each criteria, or with the use of a more
complex formula, for example, weighting the criteria
by their perceived importance

74
 Multi Criteria Analysis (2)

• It produces a priority indicator

• The indicators used in a MCA reflect implicit
economic and subjective evaluations
• If the weights and the points are decided and
assigned on a participative way, the MCA has the
potential to be a good participative method for
planning based on implicit a socioeconomic
estimates
• Nevertheless, it tends to be applied by planning
consultants or in isolation without the consultation
with the users and communities affected by the
project
75
 Multi Criteria Analysis (3)

• The result of the MCA, is often,

unfortunately, not transparent, specially if
many factors are considered and a
complicated formula is also applied
• Therefore, if it is adopted, this method
must be used very carefully and to be
maintained simple, transparent, and
participative

76
 Multi Criteria Analysis Example (1)

• Level of poverty of the influence area (Low, Medium,

High)
• Potential for economic development of the influence
area (Low, Medium, High)
• Importance of the road given by local consultation
process (Low, Medium, High)
• Provision of access of social services of the road
(Low, Medium, High)
• Problems of transitability of the road (Low, Medium,
High)
• Functional classification level of the road (Low,
Medium, High)
• Existence of public transport (Low, Medium, High)
77
 Multi Criteria Analysis Example (2)
Priority Index
Functional Location on Basic
Population Poverty Agricultural Area Traffic Classification Network H

Beneficiary Percent Daily

Poverty A=4 B=3 Yes = 1
Population Factor Factor of Area of Factor Traffic Factor Factor Factor
Percent C=2 D=1 No = 0
per km Influence (AADT)

9,889 1.00 99% 1.00 0% - 20 0.25 1 0.33 1 1.00

520 0.05 99% 1.00 0% - 20 0.25 2 0.67 1 1.00
1,237 0.13 99% 1.00 0% - 15 0.19 2 0.67 1 1.00
564 0.06 97% 0.98 14% 0.25 80 1.00 3 1.00 1 1.00
344 0.03 97% 0.98 36% 0.64 15 0.19 3 1.00 1 1.00
503 0.05 97% 0.98 18% 0.32 35 0.44 3 1.00 1 1.00
ity Index
Environment
Health Centers Schools Public Transport Feasibility

Yes = 1 Yes = 1 Yes = 1 Yes = 1 Priority

Factor Factor Factor Factor
No = 0 No = 0 No = 0 No = 0 Index

0 - 0 - 1 1.00 1 1.00 5.6

0 - 0 - 1 1.00 1 1.00 5.0
0 - 0 - 1 1.00 1 1.00 5.0
0 - 1 1.00 1 1.00 1 1.00 7.3
0 - 1 1.00 1 1.00 1 1.00 6.8
0 - 1 1.00 1 1.00 1 1.00 6.8

Factor = Value / Maximum Value 78