-I51,5 OoWIc9& *dams Economic Development Institute *;14,P of The World Bank Public Disclosure Authorized The Economic Evaluation of Projects Papersfrom a Curriculum Development Workshiop Public Disclosure Authorized Edited by David G. Davies Public Disclosure Authorized Public Disclosure Authorized EDI LEARNING RESOURCES SERIES EDI LFARNNG RESOURCESSERIES The Economic Evaluation of Projects Papersfrom a Curriculum Development Workshop Edited by David G. Davies The World Bank Washington, D. C. / 1996 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing July 1996 The Economic Development Institute (EDI) was established by the World Bank in 1955 to train officials concemed with development planning, policymaking, investment analysis, and project implementation in member developing countries. At present the substance of the EDI's work emphasizes macroeconomic and sectoral economic policy analysis. Through a variety of courses, seminars, and workshops, most of which are given overseas in cooperation with local institutions, the EDI seeks to sharpen analytical skills used in policy analysis and to broaden understanding of the experience of individual countries with economic development. Although the EDI's publications are designed to support its training activities, many are of interest to a much broader audience. EDI materials, including any findings, interpretations, and conclusions, are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Because of the informality of this series and to make the publication available with the least possible delay, the manuscript has not been edited as fully as would be the case with a more formal document, and the World Bank accepts no responsibility for errors. Some sources cited in this book may be informal documents that are not readily available. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center Inc., Suite 910, Rosewood Drive, Danvers, Massachusetts 01923, U. S. A. The backlist of publications by the World Bank is shown in the annual Index of Publications, which is available from Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, Banque mondiale, 66, avenue d'lena, 75116 Paris, France. At the time of writing, David G. Davies was principal economist in the Studies and Training Design Division of the World Bank's Economic Development Institute. Libraryof CongressCataloging-in-PublicatIon Data The economic evaluation of projects: papers from a curriculum developmentworkshop / edited by DavidG. Davies. p. cm.-(EDI learning resources series, ISSN 1020-3842) Includes bibliographical references. ISBN 0-8213-3325-9 1, Economic development projects-Evaluation-Study and teaching -Developing countries-Congresses. 2. Community development personnel-Training of-Developing countries-Congresses. 1. Davies, David G. II. Series. HC59.72.E44E28 1996 338.9'1' 072-dc2O 95-19178 CIP Contents Foreword v Renewing Efforts in Project Evaluation: Workshop Summary David G. Davies 1. Evaluation and the New Development Agenda 11 RobertPicciotto 2. On Training in Project Evaluation 17 Henry Bruton 3. Reflections on Social Project Evaluation 23 Arnold Harberger 4. Project Evaluation for the Next Decade 51 Arnold Harberger 5. Notes on Some Issues in Social Project Evaluation 71 Arnold Harberger 6. The Role of EDI in Project Training for Developing-Country Managers 83 William Ward 7. The Appraisal of Investment Projects: A Training Approach 97 Glenn P. Jenkins iii Foreword The chapters in this volume were first commissioned as papers for a curriculum devel- opment workshop on Economic Analysis of Projects organized by the EconomicDevelop- ment Institute of the World Bank. They are now being published for a wider distribu- tion to World Bank staff and to others who are interested in updating the teaching and practice of economic analysis. The quality of project evaluation is a matter of ongoing concem within the World Bank. Although the EDI and the World Bank operating departments have made pio- neering efforts to refine project evaluation methodologies and to make them more prac- tical and useful tools, recent studies of Bank project appraisals have shown that there remains considerable room for improvement. The Bank has addressed this challenge by providing stronger incentives for sound economic analysis through management and review processes, better guidelines and in- structions, and systematic staff training. Although EDI's primary focus is on the dis- semination of policy lessons, the Institute continues to support learning activities in project analysis and management in collaboration with partner training institutes in the developing world. This book presents a simplified approach to project evaluation which the Bank is adopting, including how project evaluation should be modified to take into account cur- rent economic situations in most countries. The volume highlights issues that arise in applying this methodology and how to resolve them. The two chapters that discuss approaches to teaching economic analysis will be of interest to educators and trainers. Vinod Thomas, Director Economic Development Institute v Renewing Efforts in Project Evaluation:Workshop Summary David G. Davies The papers in this volume were contributions to EDI's Curriculum Development Workshop on the Economic Analysis of Projects, held in Washington, D.C. on October 8-9, 1992. The substance of the papers and the workshop's proceedings and conclusions have helped EDI in its curriculum development and publications efforts. They should be of considerable interest to practicing project economists, and are therefore being put into this form for wider distribution. The workshop was prompted by a need to respond to a demand from World Bank staff and new member countries for training in project analysis. The workshop's objectives were to re-examine the content of the curriculum and to review the state of the art of teaching courses. Important considerations were (a) that EDI teaching and Bank practice be consistent and contribute to the establishment of standard practices and terminology that people who make investment decisions in member countries can understand easily, and (b) that EDI re-establish its leadership position in devising effective and efficient pedagogical designs for teaching the subject to professionals. To achieve these objectives, EDI commissioned four papers by Arnold Harberger (ProjectEvaluation for the Next Decadeand Notes on Some Issues in SocialProject Evaluation), Glenn Jenkins (The Appraisalof Investment Projects:A TrainingApproach), and William Ward (The Role of EDI in Project Training for Developing-CountryManagers). Because the two papers by Harberger were written as follow-up and companion pieces to a previous paper by the same author, the earlier paper, Reflections on SocialProject Evaluation (Harberger 1985), is reprinted here. The workshop opening remarks by Robert Picciotto, director general of the Bank's Operations Evaluation Department, and the written comments on the workshop by Henry Bruton of Williams College were valuable products of the workshop, and are therefore included in this set of papers. The papers and opening remarks provided a substantial basis for the workshop's discussions and were further enriched by contributions by, among others, John Besant- Jones, Henry Bruton, George Psacharopoulos, Joanne Salop, and Lyn Squire. While there was considerable debate, which is sunmnarized below, a consensus emerged with respect to the substance of practical project evaluation. These conclusions are as follows: 1 2 David G. Davies * The use of economic surplus as the sole measure in formal project evaluation means that a great burden is placed on separate analyses of the social and macroeconomic contexts of the project. Some implications are that - Projects should be identified, evaluated, and considered only if they can be shown to contribute to a strategic plan or strategic vision. This substantially reduces the amount of resources required for evaluation and links the project to its larger macroeconomic setting. - Part of a strategic plan or vision involves establishing incentive systems that will govern the kinds of projects that the private sector will invest in. These incentive systems will include fiscal incentives as well as incentives resulting from infrastructure investments and regulatory changes. Decisions are required about how the project will take these matters into account. - As investment projects are invariably complemented by organizational changes, institutional development, and other activities, assurance is needed that these complementary activities take place and are appropriately timed. - The recurrent costs to the government of the project should be evaluated independently in the context