Step 9. Economic and Financial Analyses

The following guidelines apply:

• The life of the proposed works, and the residual value at the end of the life, need to be determined. Guidance for sector-specific works is given in Part II, Chapters 18 to 26.
• The economic and financial analyses shall compare the benefits and costs of the project alternatives (the “with project” case) over the project life against projected conditions if no project were implemented (the “without project” case). Careful analysis is needed to define both cases.
• For economic analysis, nominal costs and benefits shall be converted to an economic basis by removing taxes and duties and applying shadow prices where appropriate.
• The construction cost, O&M cost, safety cost etc. shall be calculated over the construction and operating life of the project to generate the cost stream.
• Benefits shall be calculated over the operating life of the project to generate the benefit stream.
• Both cost and benefit streams shall be discounted and converted into present values using the discount rate specified by HMG/N. PWD Part II Procedural Directives, Chapter 2 Feasibility Studies, January 2002 2 - 7.
• The economic indicators normally used to evaluate and compare alternatives are economic internal rate of return (EIRR), benefit-cost ratio (B/C), net present value (NPV) and incremental NPV.
• Where there is uncertainty on cost and benefit streams, sensitivity analyses shall be carried out for 20% increase in construction costs, 100% increase in maintenance cost, 20% reduction in user costs, 30% reduction in growth of benefits or as specified in the TOR.
• For commercial projects, a financial analysis shall also be done using nominal costs and benefits.