Gainers and Losers

A project’s net stream of benefits and, hence, its NPV, is based on the assumption that the project functions as designed. The extent to which it does so depends not only on the quality of the design, but also on the incentives facing the various agents responsible for project implementation and on the costs and benefits that various groups in the society are likely to derive or incur from the project. The sustainability of a project relates intimately to its financial viability and to the distribution of project benefits. If the project requires monetary transfers for viability, analysts should estimate the magnitude and timing of the transfers.

In particular, the project’s fiscal impact is of crucial importance: one of the common causes of unsatisfactory performance in World Bank-financed projects is insufficient counterpart funds. Moreover, groups that derive a benefit from the project will have an interest in its success, and those who lose because of it will likely oppose it. The intensity with which gainers defend the project and losers attack it is related to the size of the respective benefits and costs. Thus, in assessing a project’s sustainability, it is helpful to identify (a) the various agents responsible for project implementation, assessing whether each has the incentives required to make the project work as designed, and (b) the various groups likely to gain or lose from the project.

This section provides tools that are helpful in these endeavors.

We begin at the difference between economic and financial prices and economic and financial flows. These differences represent rents or monetary flows that accrue to someone other than the project entity. Taxes represent monetary flows accruing to the government, but not to the project entity. Subsidies are transfers in the other direction, from the government to the project entity. We can identify winners and losers by decomposing the shadow prices used in economic analysis and showing exactly how and why financial and economic prices differ. We can also use the tools ofiation economic analysis to assess the project’s fiscal impact, shed light on whether the project should be a public or a private sector project, and decide if the

project is likely to contribute to the country’s welfare.

To illustrate how one uses the tools of economic analysis to answer these questions, we turn to two examples. The first is a typical private sector project included to show, among other things, how the tools help us decide that the private sector should undertake the project. The example also shows a good identification of the incremental costs and benefits of the project and of its fiscal impact. The second example is based on a World Bank project in the education sector and shows the application of most of the tools developed in this blog.