Consideration of Alternatives

Throughout the project cycle, from identification through appraisal, considering

alternatives is one of the most important steps in the evaluation process.

We make many important choices at an early stage when alternatives

are rejected or retained for more detailed study. The need to compare mutually

exclusive options is one of the principal reasons for applying economic

analysis from the early stages of the project cycle. The particular problem

that a project is designed to solve may have many solutions, some of which

may be optimal from a technical point of view, but not necessarily from an

economic one. Economic analysis can pinpoint the alternative that creates

the most net benefits to the economy from the use of the resources in question.

The project design, therefore, should be compared first and foremost

with the alternative of not doing the project at all. The comparison then continues,

with alternative designs involving differences in important aspects

such as the scale of the project, the choice of beneficiaries, the types of outputs

and services, the production technology, location, starting date, and the

sequencing of components.

With and Without Comparisons

Whatever the nature of the project, its implementation reduces the supply

of inputs and increases the supply of outputs available to the rest of the

economy. By examining the difference between the availability of inputs

and outputs with and without the project, the analyst identifies incremental

costs and benefits. This is not normally the same as a before and after

the project comparison. The with and without comparison attempts to

measure the incremental benefits arising from the project. The before and

after comparison, by contrast, fails to account for changes in production that would occur without the project, and thus may lead to an erroneous

statement of the benefits attributable to the project.

A change in output can take place if production is

already increasing or decreasing and would continue to do so even without

the project. Thus, if production without the project were to increase at 3 percent

per year, and with the project at 5 percent per year, the project’s contribution

would be a differential growth of 2 percent per year. A before and after

comparison would attribute not just the incremental benefit, but the entire 5

percent growth in production to the project. Of course, if production without

the project were to remain stagnant and production with the project were to

increase 5 percent per year, the before and after comparison would yield the

same result as the with and without comparison. Box 3.1 shows with and without

comparison of the costs and benefits of a highway rehabilitation project.

Sometimes a project competes with other projects and diverts demand

away from existing projects. For example, a hospital may provide services

to both patients who would have used existing facilities and those who

otherwise would not have had access to health care. The benefits from the

new hospital are overstated if the analyst counts as benefits the treatments

received by all the patients visiting the hospital, rather than the incremental

number of patients receiving treatment.