Lecture Notes ECON 437/837: ECONOMIC COST-BENEFIT ANALYSIS Lecture Nine

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Lecture Notes

ECON 437/837: ECONOMIC COST-BENEFIT ANALYSIS

Lecture Nine

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STAKEHOLDERSTAKEHOLDER

IMPACTS IMPACTS

OF PROJECTSOF PROJECTS

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Assess Stakeholder Impacts of Projects

• A comparison between economic and financial values tells us who wins and who loses from a specific project, i.e., the Stakeholders.

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For Each Input and Output Variable:

• Economic = Financial + Stakeholder Impacts

– Example of a non-traded good with a sales tax:

• Economic Value = Financial Value + Change in Government Tax Revenues + Increase in Consumer Benefits

– Loss in Profits to other producers

• Taken over all variables and time periods of project (using a common discount rate)

- NPV economic = NPV financial + PV Stakeholder Impacts

Note: Stakeholder Impacts are often called externalities of project

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General Relationship

NPVECOeco = NPVFIN

eco + PVEXTeco

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1. Identify the externalities.

2. Measure the net impact of the externalities in each market as the real economic values of resource flows less the real financial values of resource flows.

3. Measure the values of the various externalities throughout the life of the project and calculate their present values by using the economic discount rate.

Stakeholder Analysis is composed of six distinct steps

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Stakeholder Analysis is composed of six distinct steps (cont’d)

4. Allocate the externalities across the various stakeholders of the project.

5. Summarize the distribution of the project’s externalities and net benefits according to the key stakeholders in society.

6. Reconcile the economic and financial resource flow statements with the distributional impacts.

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Financial, Economic and Distributive Effects of Project to Supply Non-Tradable Goods with No Distortions

Financial Value of Output = QsCBQd or P1 (Qd -Qs)

Economic Value of Output = QsCABQd

Difference (Economic - Financial) = CAB

CAB = P1P0AB -P1P0AC = Gain in Consumer Surplus - Loss in Producer Surplus

Economic Value = Financial Value + Gain in Consumer Surplus - Loss in Producer Surplus = Financial Value + Distributive Impacts

QdQ0Qs

S

Q

C

A

B

S + Project

P1

P0

P

D

E

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Financial, Economic and Distributive Effects of Project to Supply Non-Tradable Goods with Unit Tax

CAB = PS1PS

0AB – PS1PS

0AC

Since PS1PS

0AB = Pd1Pd

0EF Therefore, CAB = Pd1Pd

0EF – PS1PS

0AC

= Gain in Consumer Surplus - Loss in Producer Surplus

Economic Value of Output = Financial Value of Output + Change in Gov. Tax Revenues

+ Increases in Consumer Surplus - Loss in Producer Surplus

Q

Qd

S

Q0

C B

S + Project

QS

P

P d1

P(P0+T) =d0

Ps1

s0P

E

F

A

D1D0

Financial Value of Output= QsCBQd

Economic Value of Output= QsCAQ0+ Q0ABQd +AEFB

Increase in Government Revenue= AEFB

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Measuring Distributive Impact from Financial and Economic Values of Inputs with Tariffs

Financial Cost of Importable Goods = Qd1CFQd

2

Economic Cost of Importable Goods = Qd1GHQd

2*[1+(Ee/Em - 1)]

where (Ee/Em - 1) = Foreign Exchange Premium (FEP)

Financial Cost - Economic Cost = GCFH – Qd1GHQd

2*(Ee/Em - 1)

= Gain in Tariff Revenues to Government – Loss in Government Revenues due to foreign exchange premium on additional use of foreign exchange

Q

AH

D + Project

PCIF=Pw

Q

P

PCIF(1+t)=PW(1+t)

D

G

CB F

d2

S

s0

Q s1

d1

d0

Q Q

E

Q

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Examples

– Who benefits from worker transportation?

– Why was the Makar Port built?

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Basic Facts

• Factory currently employs 20 workers. These workers take taxis every day at

a cost of $1.00.

• Factory wants to employ 40 workers, but can not recruit any additional

worker without either subsidizing transportation or paying higher wages.

• The proposal is to buy a bus for a total of $25,000 including $5,000 of import

tariff. The bus is expected to have a value of $10,000 in year 5.

- The bus will operate for 250 days per year.

- The charge per person/day on the bus will be 40 cents.

- A driver will be hired to operate and maintain the bus at a wage of $10.00

per day.

- The cost of oil and gas will be $2.00 per day.

- The spare parts bill is expected to be $100 per year.

- No income taxes are levied on the income of public enterprise.

Workers Transportation Case

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Workers Transportation Case (cont’d)

• The economic opportunity cost of employing the driver is equal to

approximately 80% of his wage.

• The conversion factor for oil and gas is estimated to be 0.60 because of

the high taxes imposed on their purchase price.

• Spare parts have a tariff and taxes on them that are equal to 25 percent of

their CIF price. Thus, the spare parts conversion factor is equal to 0.80.

• The ratio of the economic exchange rate to the market exchange rate is

equal to 1.

• The financial discount rate is equal to 6%, and the economic discount rate

is equal to 10%.

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Table 1: Financial Appraisal

PV @10% 0 1 2 3 4 5

Cash Inflows

Receipts $16,679 4,000 4,000 4,000 4,000 4,000 0 Final in use values $6,209 0 0 0 0 0 10,000Total Inflows 4,000 4,000 4,000 4,000 4,000 10,000

Cash OutflowsCapital Expenditures Bus purchase 20,000 20,000 Tariff on Bus 5,000 5,000Operating Expenses Labor 10,425 2,500 2,500 2,500 2,500 2,500 0 Fuel 2,085 500 500 500 500 500 0 Spare parts 417 100 100 100 100 100 0Total Outflows 37,927 28,100 3,100 3,100 3,100 3,100 0

Net Cash Flow -15,038 -24,100 900 900 900 900 10,000

NPV Financial at 6% -13,509NPV Financial at 10% -15,038

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Measurement of Economic Benefits

Financial Revenue/person/day = $0.40

Economic Benefits/person/day

= [(20*$1.0+20*($1+$0.40)/2]/40 = $0.85

Conversion Factor = 0.85/0.40 = 2.125

20 40 # of workers

0.40

1.00

$/day

Demand for workers’ transportation

Net Benefitto workers

Net Benefitto workers

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Table 2: Economic Appraisal

Conversion Factor PV at 10% 0 1 2 3 4 5Cash Inflows Receipts 2.125 35,444 8,500 8,500 8,500 8,500 8,500 0 Final in use values 0.8 4,967 0 0 0 0 0 8000TOTAL INFLOWS 40,411 8,500 8,500 8,500 8,500 8,500 8,000

Cash OutflowsCapital Expenditures Bus purchase 1 20000 20000 Tariff on Bus 0 0 0Operating Expenses Labor 0.8 8,340 2000 2000 2000 2000 2000 0 Fuel 0.6 1,251 300 300 300 300 300 0 Spare parts 0.8 334 80 80 80 80 80 0Total Outflows 29,924 22,380 2,380 2,380 2,380 2,380 -

Net Cash Flow 10,487 (13,880) 6,120 6,120 6,120 6,120 8,000

NPV Economic at 10% 10,487


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Table 3: Distribution of Net Benefits of the Externalities to Stakeholders


Reconciliation of Financial, Economic, and Distributive Analysis

NPV Financial + SUM of PV of externalitiesat economic discount rate at economic discount rate at economic discount rate

10,487 -15,038 25,525

NPV Economic =

PV Externalities

@10% Government Workers Driver Receipts 18,764 18,764 Final in use values (1,242) -1,242TOTAL INFLOWS

CASH OUTFLOWSCapital Expenditures Bus purchase 0 Tariff on Bus (5,000) 5,000Operating Expenses Driver (2,085) 2,085 Fuel (834) 834 Spare parts (83) 83 Total Externalities/Distribution 25,525 4,676 18,764 2,085

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Port Rehabilitation and Expansion: The Makar Port Project in the Philippines

Basic Facts:

• Makar Port, located in General Santos City at the northern side of

Sarangani Bay, a well-protected bay in Mindanao, lies along the main

north-south trading axis which skirts Mindanao on its western shore.

• The objectives of the project are to increase the capacity and improve the

efficiency of cargo handling facilities at the port to accommodate future

flows.

• The project will cost approximately 635 million pesos (about US$23.5

million).

• 75% of the total project cost will be provided as a grant by the US Agency

for International Development (USAID) and the other 25% will be

provided from counterpart contribution by the Philippine government.

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Project Outcome (with Project)

• Deterministic case appeared good with partial financial analysis:

- NPV Financial (with Project) = 10.76 million pesos

• Analysis shows project provide a negative economic performance (-105.58 million pesos)

• Project was implemented

Port Rehabilitation and Expansion: The Makar Port Project (cont’d)

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Port Rehabilitation and Expansion: The Makar Port Project (Cont’d)

Incremental Financial-Economic Analysis

Note: Exchange rate in the Philippines in Year 1 is 27 pesos/US dollar (1994).

NPV (Total Investment Point of View)

NPV (Economic Point of View)

With Project (000s of Pesos)

10,760

(105,576)

Without Project (000s of Pesos)

19,453

25,683

Incremental (000s of Pesos)

(8,693)

(131,259)

NPV (Total Investment Point of View)

NPV (Economic Point of View)

With Project (000s of Pesos)

10,760

(105,576)

Without Project (000s of Pesos)

19,453

25,683

Incremental (000s of Pesos)

(8,693)

(131,259)

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Financial Analysis-- Incremental Financial Cash Flow Statement (Real) --

(thousands Peso)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 10 Year 15 Year 16RECEIPTS

Port Revenues - local - - - - 1,359 2,276 6,895 8,120 - - foreign - - - - 216 243 425 452 -Total port revenues - - - - 1,576 2,519 7,319 8,572 -Rental income from - Container Yard I - 3,000 3,000 3,000 3,000 3,000 3,000 3,000 - - Container Yard II - - - - 1,000 2,000 6,000 9,000 -Other Income 69 69 69 69 69 69 69 69 -USAID Grant and Gov. Contribution 22,148 155,088 219,215 79,719 - - - - -Liquidation Values: - - - - - - - - 340,810Total Cash Receipts 22,217 158,157 222,284 82,788 5,645 7,588 16,388 20,641 340,810EXPENDITURES

Investment cost - non tradable 22,631 103,995 153,285 49,006 - - - - - - tradable 2,758 93,124 139,002 57,285 - - - - -Operating Cost: - - - - 9,017 9,017 9,017 9,017 -Loss of rental income 1,100 1,100 1,100 1,100 1,100 1,100 1,100 1,100 -Change in Cash balance - - - - 79 54 64 19 (390)Change in Accounts Receivable - - - - 158 109 128 38 (779)Change in Accounts Payable - - - - (1,353) (123) (123) (123) 1,230Total Expenditures 26,489 198,219 293,386 107,392 9,001 10,157 10,186 10,051 61NET CASH FLOW (4,272) (40,063) (71,103) (24,604) (3,356) (2,569) 6,202 10,589 340,750

NET PRESENT VALUE (at 9%) (8,693).

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Economic Benefits of the Makar Port Project

• Additional port revenue from expansion in traffic including foreign exchange premium.

• Additional rental income from containers yards.• Reduction in waiting time of ships.• Reduction in animal weight loss from waiting on

ship.

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Economic Analysis-- Incremental Economic Net Benefit Flow Statement --

(thousands Peso)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 10 Year 15 Year 16RECEIPTS:Port revenues - local - - - - 1,359 2,276 6,895 8,120 - - foreign - - - - 249 280 488 520 -Total Port Revenues - - - - 1,608 2,556 7,383 8,639 -Benefit to ship owners due to reduction in ships' waiting time - - - 25,484 31,264 33,539 35,444 36,491 -Benefit to shippers due to reduction in animal weight loss - - - - 13,331 13,906 16,204 19,715 -Rental income from - Container Yard I - 3,000 3,000 3,000 3,000 3,000 3,000 3,000 - - Container Yard II - 0 0 0 1,000 2,000 6,000 9,000 -Other Income 69 69 69 69 69 69 69 69 -USAID Grant and Gov. Contribution - - - - - - - - -Liquidation Values: - - - - - - - - 316,916Total Cash Receipts 69 3,069 3,069 28,553 50,272 55,070 68,100 76,914 316,916EXPENDITURES:Investment cost - non tradable 21,818 96,550 141,822 45,422 - - - - - - tradable 2,596 87,515 130,373 54,059 - - - - -Operating Cost: - - - - 9,044 9,044 9,044 9,044 -Loss of rental income from term. shed 1,100 1,100 1,100 1,100 1,100 1,100 1,100 1,100 -Change in Cash balance - - - - 80 55 65 20 (397)Change in Accounts Receivable - - - - 160 111 130 39 (793)Change in Accounts Payable - - - - (1,329) (121) (121) (121) 1,208Total Expenditures 25,514 185,165 273,295 100,581 9,056 10,190 10,219 10,082 19NET CASH FLOW (25,445) (182,096) (270,226) (72,028) 41,216 44,880 57,881 66,832 316,898NET PRESENT VALUE (at 10.3%) (131,259) INTERNAL RATE OF RETURN 5.88%

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Stakeholder Analysis(thousands Peso)

(A) (B) (C) (D) (E)

PV Financial at PV Economic at PV of

Economic Discount Economic Discount Externalities Shipowners/ITEM Rate of 10.3% Rate of 10.3% (B - A) Government Shippers

RECEIPTS:Total Port Revenues 25,677 25,928 250 250 -Benefit to ship owners/shippers due to reduction in ships' waiting time - 187,684 187,684 - 187,684Benefit to livestock shippers due to reduction in animal wt. loss - 77,025 77,025 - 77,025Rental income from - Container Yard I 22,100 22,100 - - - - Container Yard II 23,895 23,895 - - -Other Income 577 577 - - -USAID Grant 404,200 - (404,200) (404,200) -Liquidation Values: 81,587 75,867 (5,720) (5,720) -Total Cash Receipts 558,037 413,076 (144,961) (409,670) 264,709EXPENDITURES:

Investment cost - nontradable 280,673 260,925 (19,749) (19,749) - - tradable 245,332 230,517 (14,815) (14,815) -Operating Cost: 44,000 44,135 135 135 -Loss of rental income from term. shed 9,203 9,203 - - -Change in Cash balance 223 227 4 4 -Change in Accounts Receivable 446 454 8 8 -Change in Accounts Payable (1,145) (1,126) 20 20 -Total Expenditures 578,732 544,335 (34,397) (34,397) -NET CASH FLOW (20,695) (131,259) (110,564) (375,272) 264,709

Allocation of Externalities

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Stakeholder Analysis

• Key Question:– Why was this BAD project implemented?

The Philippines wasted 131.3 million pesos in order to transfer income to a few ship-owners/shippers.

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BASIC NEEDS BASIC NEEDS

ANALYSISANALYSIS

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Basic Needs Appraisal

1. Financial analysis considers the views of all those who have a financial interest in the project – owners, buyers, sellers.

2. Normally the economic appraisal evaluates additional consumption by the demanders’ willingness to pay, and any displacement of other suppliers by the economic value of resources saved by these suppliers.

3. The attainment of the basic needs of poorer members of the community may also generate an increase in the total satisfaction of other better off members of the community.

4. This public good externality needs to be included in the benefits of investments that lead to satisfying of the basic needs by disadvantaged members of the community.

Hierarchy of Minimum Basic Needs

• Survival Needs: food and nutrition, health, water and sanitation, and clothing

• Security Needs: shelter, peace, income, employment

• Enabling Needs: basic education and literacy, family care and psychosocial needs

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Basic Needs Externality Approach

• This is a practical approach for evaluating community wide externalities arising from the increased level of basic needs achievement by the less fortunate members of society.

• Basic needs externality (BNE) approach was introduced by Harberger (1984) to measure this social dimension of a project.

• The rationale for BNE approach is not just that the poor should have more income, but that they should have better nutrition, medical care, housing, education, etc.

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Figure 1: Basic Needs Externalities Associated With Each Decile of Poor

Typical Private Demand Curve of the 4th Decile

Typical Private Demand Curve of the 1st Decile

Typical Private Demand Curve of the 2nd Decile

Typical Private Demand Curve of the 3rd Decile

Basic Needs Externality

Price

Quantity per Family

PM

BNE1 BNE2

BNE3 X

Y0

Y0X is associated with a society that generates high basic needs externalities.Y1X is associated with a society that generates low basic needs externalities.

Y1

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Figure 2: Basic Need Externality Caused by Project Lowering Cost of Service

(Example: Potable Water Project Lowers Coping Cost)

Price

P0M


Basic Needs ExternalityTypical Private Demand Curve of the 4th Decile

Clean Water Consumption(Quantity per Family)

Q0 Q1

M

N

T

S

R

Type A Externality = MNST

P1M

Note: Quality of family health = f (quantity of clean water consumed)

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Figure 3: Basic Needs Externality Caused by Increased Demand due to the Income Effect of an Investment Project

D1

D1’

Typical Private Demand Curve of the 1st Decile (After the Income Change)


Typical Private Demand Curve of the 4th Decile

Basic Needs Externality

PM

MT

N

S

Type B Externality = MNST

Quantity per FamilyQ0 Q1

X

Y

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An Application of Basic Needs Externality Estimation:

Olifants-Sand Water Transfer Scheme

Basic Facts:

• The project considered here is “Olifants-Sand Water Transfer Scheme”, which can be best described as a regional bulk water supply system.

• It includes a raising of the existing Flag Boshielo (Arabie) dam by 5 meters, construction of the Rooipoort dam and the construction of the Water Transfer Scheme from Rooipoort to Polokwane via Lebowakgomo.

• The region affected is the Sekhukhune Cross Border District of Limpopo Province.

• This region has an unemployment rate of approximately 68%, compared to the average of 46% in Limpopo Province.

• Only about 40% of the households have access to the minimum water supply for drinking, cooking and critical hygiene of 25 liters per capita a day (l/c/d), which is set by the Reconstruction and Development Program of the National Government of South Africa.

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Olifants-Sand Water Transfer Scheme

• The economic analysis indicates that the project has a highly positive NPV.

• In the analysis of the basic needs externality, focus is on the improved availability of water and the incomes of the poorest households affected by the project, namely the rural communities.

• We assume that the health impact of consuming more clean water is primary due to its use for drinking, cooking and critical hygiene.

• The increased availability of potable water is accompanied by a dramatic fall in the costs of water for reasons that has an impact on health, thereby causing the total amount of consumption for these purposes to increase.

• With the present very low volumes of water consumption, it is estimated that approximately 80 percent of the incremental potable water provided to poor households by the project would be used for drinking, cooking and critical hygiene.

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Present Value of Basic Needs Externality from Increased Consumption of Water by Poor* due to Lower Prices

Types of ConsumerPV of volume of increased

water consumption (million cubic meters)b

PV of Externality (Millions of Rand)

Olifants Rural Centersa 52.66 80.04

Lebalelo Rural 15.65 23.79

Total(Poor communities with water shortages)

68.31(20.77% of Total Demand)

103.83

Note: *The poor are defined as those in the bottom 40 percent of the income distribution. The two rural communities included in this analysis fall well below this threshold.aProportion of total increment water used for drinking, cooking and critical hygiene = 80%. The economic cost of supply is estimated to be equal to R1.9 per M3. Value of basic needs externality of target consumption for Olifants Rural can be estimated as R1.9*52.66*0.80 m. bThe water volumes are taken from the demand analysis of Cambridge Resources International, Evaluation of the Olifants-Sand WaterTransfer Scheme in the Limpopo Province of South Africa, Cambridge, MA, (2004).

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Stakeholder Impacts on Earnings of the Olifants-Sand Water Transfer Scheme in the Northern Province of South Africa

StakeholderPresent Value of Impact

(millions of Rand)

Lebowakgomo Area 74.0

Rural Users 338.7

Mining 271.7

Polokwane 26.6

Irrigation 77.0

Labor 13.2

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Basic Needs Externality from Improved Housing, Nutrition, Health, Education of Poor* from

Increased Real Income

StakeholderValue of Impact

(millions of Rand)(1)

Basic needs externality 30% premium

(2)

Rural Areas Usersa 338.7 76.21

Laborb 10.56 2.38

Total 423.26 78.59

Note: *The poor are defined as those in the bottom 40 percent of the income distribution.aPoor receive 100% of income change; proportion of income spent on basic needs = 75%; basic needs externality = 30% of value of additional private expenditures on basic needs.bPoor receive 80% (suppose 80% are the unskilled labor) of income change; proportion of income spent on basic needs = 75%; basic needs externality = 30% of value of additional private expenditures on basic needs.

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Importance of Basic Needs Externalities

Present Value (Millions of Rand)

PV basic needs externality due to price effect 103.83

PV basic needs externality due to income effect 78.59

Total basic needs externality 182.42

PV total cost of project 714.1

Ratio of basic needs externality to total investment costs 25.55%

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Magnitude of Government Assistance

• NPV of the net economic benefits of a private sector project is positive.

• NPV of the net financial cash flow is negative. However, the government may want to assist the project since its positive economic NPV will increase the well-being of all people in society.

• The government should offer the project the smaller amount required for the project to be undertaken or the value of the positive net economic externalities generated by the project.

ECONOMIC ASPECTS OF ECONOMIC ASPECTS OF

FOREIGN FINANCIFOREIGN FINANCINGNG

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Questions to be addressed

At the project level, how do we account for the economic cost of foreign financing?

A. Case where all financing is incremental.B. Case where all financing is non-incremental.

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Marginal Economic Cost Of Foreign Financing

S if

MCC

i’f

Q0 Q1

D0f

D0f + B

B

A

%

%MEC0

i 0f

E D

%MEC’

Quantity of Foreign

Borrowing

Negative externality from foreign financing

= ABCD

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MC : Marginal economic cost of funds

rf : real cost of foreign financing

tw : effective withholding tax rate

: ratio of [total foreign debt whose interest rate is responsive to changes in the current amount of foreign borrowing] to [total stock of foreign financing]

fs : the supply elasticity of foreign funds to a

country with respect to the cost of funds the country pays for its foreign financing

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Incremental Foreign Investment• In an open economy, the net economic benefits from the project are going

to be shared by:

– the government (g)

– other residents of the country (p)

– foreigners (f)

• The NPV of an investment project, using the economic cost of funds, can be expressed as:

NPVe = Bg+ Bp + Bf – Cg – Cp – Cf

• If the project financed from foreign sources is entirely incremental, the net benefits of the project accrued to the host country will be:

NPVe host

= NPVe + (1+)(Cf – Bf)

where stands for the foreign exchange premium.

45

Non-Incremental Foreign Investment

• When none of the foreign investment is incremental to the host country, the opportunity cost of the investment for the foreigners is the stream of benefits that they would have received from the alternative investment forgone.

• Let the stream of dividends, interest and loan repayments, discounted at the EOCK that actually flows from the project to foreigners be (Bf

t), t=0….n

• Let the stream of benefits that foreigner would have been paid by the alternative investments within the host country if this project not undertaken be (Baf

t), t=0….n.

• Thus, the net cost to the host country will be measure by Bf

t - Baf

t.

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Non-Incremental Foreign Investment (cont’d)

• We can estimate parameter Z, which is the the ratio of the present value (discounted at rf

%) of the stream of foreign equity and debt invested in the project to the present value of the actual stream of the foreign dividends, debt repayment and interest received.

• rf refers to the normal rate of return to the

total foreign capital in the host country.

47


PV (foreign equity + foreign debt) at rf discount rate

PV (foreign dividend + foreign interest + foreign repayment) for project at rf discount rate

Z =

•If Z = 1, the foreign investment owners will receive a normal return (rf).

•If Z > 1, then foreigners would be earning less than a rf % return

by investing in the project.

•If Z < 1, then foreigners would be earning more than a rf % real

return.

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•By multiplying this ratio (Z) by the actual stream of

dividends, debt repayment, and interest received by

foreigners from the project, we can estimate the stream of

payments to foreigners that is sufficient to generate a

normal rate of return to the foreigners. Baft = (Z)(Bf

t), t=0…n.

Thus, the stream of additional economic costs created by

foreign financing is Eft = (Bf

t – Baft), t=0,1,..

•The total adjustment is to subtract (1+)PV(Ef) using the economic opportunity cost of capital as the discount rate.

NPVe host

= NPVe – (1 + )PV(Ef)

Financial NPV of Utility to Percentage Change in Tariff Structure: A case in Panama

Tariff Structure FNPV@15% (000 Balboas)

-40% -2,058

-25% 27,999

-20% 37,229

-15% 46,066

-10% 54,508

-5% 62,556

0% 70,210

5% 77,470

10% 84,336

Z =.1242, PV(Ef) @9.3% = -142,109 49

50

Sensitivity of Economic NPV to Change in Water Tariffs

If accounting for foreign financing, then the Economic NPV: 10,406 – 142,109 = - 131,703

NPV econ @ 9.3% = 10,406

Change in Water Tariffs (percent)

Economic NPV(B thousands)

-15% 53,658

-10% 45,766

-5% 37,495

0% 28,845

5% 19,815

10% 10,406

15% 618

20% -9,549

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Stakeholder Analysis without taking account of foreign financing

PV economic flow=

PV fin. flow+

PV externalities@ econ. d.r. @ econ. d.r. @ econ. d.r.

10,406 140,178 - 129,772

Pe = Pf + Ei

NPVee = NPVf

e + PVe (EXTi)

52

Project Net Benefits without Accounting for Foreign Financing (thousand Balboas)

Government MeteredCustomers(also w/oproject)

Metered Customers

(unmetered with 24-hour supply

w/o project)

Commercial & Industrial Customers

-24,260

Metered Customers

(unmetered with intermittent water

and cope with tanks w/o project)

Non-revenue

consumers w/o project

Metered Customers (unmetered

with intermittent

water and don’t cope with tanks

w/o project)

UnmeteredCustomers

W/ o project

5,594 -107,258 27,678 -2,244

SUM EXT. = -129,772

- 1,568 -18,227 -9,486NPV ExternalitiesEconomic @d.r. 9.3%

NPV ExternalitiesEconomic @d.r. 9.3%

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Stakeholder Analysis with Taking Account of Foreign Financing

PV economic flow=

PV fin. flow+

PV externalities@ econ. d.r. @ econ. d.r. @ econ. d.r.

-131,703 140,178 - 271,881

Pe = Pf + Ei

NPVee = NPVf

e + PVe (EXTi)

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Project Net benefits with Accounting for Foreign Financing (thousand Balboas)

Government MeteredCustomers(also w/oproject)

Metered Customers

(unmetered with 24-hour supply

w/o project)

Commercial & Industrial Customers

-24,260

Metered Customers

(unmetered with intermittent water

and cope with tanks w/o project)

Non-revenue

consumers w/o project

Metered Customers (unmetered

with intermittent

water and don’t cope with tanks

w/o project)

UnmeteredCustomers

W/ o project

5,594 -107,258 27,678 -2,244

SUM EXT. = -271,881

- 1,568 -18,227 -9,486NPV ExternalitiesEconomic @d.r. 9.3%

NPV ExternalitiesEconomic @d.r. 9.3%

Loss to

Economy from

foreign financing

-142,109

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Concluding Remarks

• In the vast majority of cases, a project that is being financed from foreign sources will be simply reallocating the total amount of foreign investment available to the country.

• Public-Private partnerships that are carried out either through non-arms-length arrangements or by suboptimal risk management will generate either large wealth transfers or payments to foreign entities.

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Concluding Remarks (cont’d)

• Such transfers to foreigners are always an economic cost, but if a necessary compensation for special risks associated with the foreign financing they are an economic cost to host country.

• Guarantees that are provided by the government to domestic investors may alter behavior and help or hurt a project.

• Triggering of the guarantee is essentially a transfer from the government to the domestic or foreign financial institutions. In case of foreign investment it is guaranteeing the value of the economic cost of the investment.

Lecture Notes ECON 437/837: ECONOMIC COST-BENEFIT ANALYSIS Lecture Nine

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