A quantitative socio-economic analysis using net present value (NPV) requires the analyst to:
- Carry out a normal cash flow analysis using capital and operating costs and revenues, as described in Section 6.2. to calculate a NPV or financial internal rate of return (IRR) in the normal way;
- Adjust the revenue flows to ‘economic values’ by:
- estimating the economic benefits received by recipients of the project’s output/ services over and above the price they pay for the services;
- using this information to derive an ‘economic valuation factor (EVF)’, and
- using the EVF as a multiplier to convert the project’s financial revenue streams into economic benefit streams. The methodology for calculating EVFs can be found in the Practice Note Economic Evaluation Factor.
- Adjust the costs using ‘shadow prices’ which reflect the economic value of the various cost items, such as skilled and unskilled labour, imported technology, etc., and eliminate taxes (which are not a cost to the economy) [1];
- Recalculate the project’s NPV or IRR using the adjusted economic values to calculate the economic performance – e.g., an economic NPV or IRR.
Table C provides a detailed checklist for assessing benefits for projects, if the project lends itself to such an analysis, and assisting with deriving the required inputs for the economic evaluation above. It requires on-the-ground investigations, which can be a component of a demand study. Only the questions relevant to the case under consideration need be answered.
Source: A rural ICT toolkit for Africa, Andrew Dymond, Sonja Oestmann, infoDev 2003 (updated)
In principle, UAS projects with a positive economic NPV but which have a negative financial NPV (i.e., needing subsidy for financial sustainability) should be added to the pool of projects to be offered for subsidy. They may be arranged in order of benefit to cost (benefit to subsidy) ratio or economic NPV, or in any other strategic way.
Projects with negative economic NPV at the desired minimum rate of return (i.e., the cost of capital) should not be undertaken, as their returns in terms of development and economic benefits to the wider economy are likely to be marginal.
End notes
- For the purpose of simplification, the methodology used in this Toolkit does not deal with shadow pricing of costs (which are often a somewhat academic exercise).