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    Guidelines for the Economic Analysis of Projects
    Guidelines for the Economic Analysis of Projects
    Guidelines for the Economic Analysis of Projects
    Ebook263 pages3 hours

    Guidelines for the Economic Analysis of Projects

    By Asian Development Bank

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    About this ebook

    Project economic analysis is a tool used by the Asian Development Bank (ADB) to ensure that ADB operations comply with its Charter. The guidelines in this publication are a revised version of the 1997 edition. The revision responds to the changing development context and ADB operational priorities, and aims to address the recommendations of the ADB Quality-at-Entry Assessments for more methodological work on project economic analysis. The revised guidelines provide general principles for the conduct of project economic analysis, and should be read together with handbooks, technical reports, and other reference materials published by ADB dealing with sector-specific project economic analysis in detail.
    LanguageEnglish
    PublisherAsian Development Bank
    Release dateMar 1, 2017
    ISBN9789292577643
    Guidelines for the Economic Analysis of Projects

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      Guidelines for the Economic Analysis of Projects - Asian Development Bank

      GUIDELINES

      FOR THE ECONOMIC ANALYSIS OF PROJECTS

      Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

      © 2017 Asian Development Bank

      6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines

      Tel +63 2 632 4444; Fax +63 2 636 2444

      www.adb.org; openaccess.adb.org

      Some rights reserved. Published in 2017.

      Printed in the Philippines.

      ISBN 978-92-9257-763-6 (Print), 978-92-9257-764-3 (e-ISBN)

      Publication Stock No. TIM178607-2

      http://dx.doi.org/10.22617/TIM178607-2

      Cataloging-In-Publication Data

      Asian Development Bank.

      Guidelines for the economic analysis of projects.

      Mandaluyong City, Philippines: Asian Development Bank, 2017.

      1. Economic analysis of projects. 2. Cost-benefit analysis.

      I. Asian Development Bank.

      The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent.

      ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned.

      By making any designation of or reference to a particular territory or geographic area, or by using the term country in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area.

      This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) https://creativecommons.org/licenses/by/3.0/igo/. By using the content of this publication, you agree to be bound by the terms of this license.

      This CC license does not apply to non-ADB copyright materials in this publication. If the material is attributed to another source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the material.

      Attribution—In acknowledging ADB as the source, please be sure to include all of the following information:

      Author. Year of publication. Title of the material. © Asian Development Bank [and/or Publisher]. URL. Available under a CC BY 3.0 IGO license.

      Translations—Any translations you create should carry the following disclaimer:

      Originally published by the Asian Development Bank in English under the title [title] © [Year of publication] Asian Development Bank. All rights reserved. The quality of this translation and its coherence with the original text is the sole responsibility of the [translator]. The English original of this work is the only official version.

      Adaptations—Any adaptations you create should carry the following disclaimer:

      This is an adaptation of an original Work © Asian Development Bank [Year]. The views expressed here are those of the authors and do not necessarily reflect the views and policies of ADB or its Board of Governors or the governments they represent. ADB does not endorse this work or guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use.

      Please contact pubsmarketing@adb.org if you have questions or comments with respect to content, or if you wish to obtain copyright permission for your intended use that does not fall within these terms, or for permission to use the ADB logo.

      Notes:

      In this publication, $ refers to US dollars.

      Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda

      CONTENTS

      TABLES AND FIGURES

      FOREWORD

      The Agreement Establishing the Asian Development Bank (ADB), also known as ADB Charter, requires that investment decisions on all loans made, guaranteed, or participated in by ADB are based on economic and efficiency considerations. Project economic analysis plays an important role in ensuring that the mandate of the Charter is met.

      To ensure consistency in the approach to project economic analysis and to assist ADB staff and consultants with methodology, ADB issues guidelines for the conduct of project economic analysis. Such guidelines were last issued in 1997.

      This publication presents revised guidelines. The revision responds to the changing development context and ADB operational priorities, as well as the recommendation for more methodological work in project economic analysis to support operational departments by ADB’s Quality-at-Entry Assessments in recent years.

      The revised guidelines incorporate a number of changes from the 1997 edition. First, the minimum required economic internal rate of return for investment decisions has been revised. Second, several issues that have emerged or become more important since the adoption of the 1997 edition are introduced, including economic analysis under various financing modalities, the treatment of the social cost of carbon, and economic analysis of regional economic cooperation projects. Third, a new chapter on benefit valuation by sector has been added, which details the method for valuing project benefits in major sectors of ADB operations. Fourth, appendixes have been updated. And fifth, the presentation of the guidelines has been made less technical and more user-friendly.

      The guidelines provide general principles for the conduct of project economic analysis. The appendixes provide illustrations of their application. From time to time, ADB has published handbooks, technical reports, and other reference materials on project economic analysis which discuss sector-specific economic analysis in detail. The guidelines should be read together with those reference materials.

      It is hoped that the revised guidelines will assist ADB staff and consultants to assess economic viability of bank operations for better quality-at-entry and greater development effectiveness.

      Juzhong Zhuang

      Deputy Chief Economist and Deputy Director General

      Economic Research and Regional Cooperation Department

      Asian Development Bank

      ACKNOWLEDGMENTS

      The revision of the guidelines was carried out by a team of staff of Economic Research and Regional Cooperation Department (ERCD). Juzhong Zhuang, ERCD’s Deputy Chief Economist and Deputy Director General, led the team and took the overall responsibility in redrafting the main text and appendices, supported by Kee-Yung Nam, Utsav Kumar, and Maria Rowena M. Cham as core team members. Edimon Ginting, Director of Economic Analysis and Operational Support Division (EREA), and Cyn-Young Park, former EREA Director, provided coordination and support. Shang-Jin Wei, former Chief Economist and Director General of ERCD, provided guidance and inputs at various stages. Other EREA staff, including David Anthony Raitzer, Sakiko Tanaka, Valerie A. Mercer-Blackman, and Kaukab H. Naqvi, provided inputs to various chapters and appendices. Jindra Nuella Samson and Lilibeth Poot provided technical support. Aleli A. Rosario assisted in organizing the workshop for the finalization of the revised guidelines held in June 2016. Maria Melissa Gregorio-Dela Paz, Roslyn Perez and Gee Ann Carol D. Burac provided administrative and secretarial support.

      The revision was supported by a number of ADB consultants. John Weiss, Emeritus Professor of Development Economics of University of Bradford, served as the lead consultant. Benoit Laplante provided inputs to economic valuation of nonmarket impacts. Damaris Yarcia supported the review of the social discount rate. Copy-editing was done by Tuesday Soriano, proofreading by Roslyn Perez and Ma. Regina Sibal; layout, cover design, and typesetting by Joe Mark Ganaban.

      The revision of the guidelines benefited from valuable comments received from peer reviewers. Internal peer reviewers were David Dole and Muhammad Ehsan Khan. External peer reviewers included Glenn Jenkins, Queen’s University and Eastern Mediterranean University; James Laird, Institute for Transport Studies, University of Leeds; and Ginés De Rus Mendoza, University of Las Palmas de Gran Canaria.

      Detailed comments received during various rounds of interdepartmental reviews and ADB-wide consultations, in particular from departments of Central and West Asia, East Asia, Southeast Asia, South Asia, Pacific, Private Sector Operations, Sustainable Development and Climate Change, Strategy and Policy, Operations Services and Financial Management, and Independent Evaluation; Office of General Counsel; and various sector and thematic groups, are gratefully acknowledged.

      The team highly appreciates valuable feedback from participants at the finalization workshop, including ADB staff, external peer reviewers, and development partners from African Development Bank, European Investment Bank, Inter-American Development Bank, and World Bank, in particular, in the areas of social discount rate and social cost of carbon.

      ABBREVIATIONS

      I. INTRODUCTION

      1. The Agreement Establishing the Asian Development Bank (ADB Charter) requires staff to take the necessary measures to ensure that the proceeds of any loan made, guaranteed or participated in by the Bank are used only for the purposes for which the loan was granted and with due attention to considerations of economy and efficiency (Article 14.11). It also states that only economic considerations shall be relevant to their decisions (Article 36.2).¹ Project economic analysis is a key tool to ensure that ADB operations comply with the mandate of the ADB Charter and contribute to the broad objectives of poverty reduction, inclusive economic growth, environmental sustainability, and regional integration.

      2. Project economic analysis aims to ensure that scarce resources are allocated efficiently, and investment brings benefits to a country and raises the welfare of its citizens. All resource inputs used by a project have an opportunity cost because, without the project, they could create value elsewhere in the economy. An economically viable project requires that, first, it represents the least-cost or most efficient option to achieve the intended project outcomes; second, it generates an economic surplus above its opportunity cost; and third, it will have sufficient funds and the necessary institutional structure for successful operation and maintenance. ADB’s development mandate also requires that an ADB-financed project distribute benefits and costs in a way consistent with its intended development objectives and that it can internalize the environmental effects.

      3. The guidelines outlined in this publication set a general approach to the economic analysis of projects for application by ADB. They are a revised version of the edition published in 1997. The revisions respond to the findings of ADB’s economic analysis retrospectives and

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