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.

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Environmental Impact

Most transportation projects generate environmental externalities. Roads, in particular, have sizable direct or indirect environmental impacts. These impacts may be particularly profound in the case of roads that penetrate virgin lands, and analysts need to take them into account to the extent possible in the calculation of the costs and benefits of transport projects.

New roads may have direct environmental impacts along the construction routes and indirect impacts through the improved access they provide. The indirect effects may be more serious than those directly related to the project, because access may encourage deforestation, result in the loss of fertile soil, and reduce the levels of plants and wildlife. Higher traffic volume also increases air pollution, noise, vibration, and construction of aesthetically displeasing structures.

Mitigating environmental impacts is costly, and environmental benefits do not have infinite value. Therefore, the costs and benefits of measures that reduce environmental impacts need to be assessed.

The Highway Development Model

As the preceding discussion indicates, selecting the optimal alternative in transportation projects can be a very complex task. The analysts must consider numerous options, namely,

          • The baseline data and projections of traffic flows with and without  the project

• The project’s impact on generated demand

• The project’s impact on existing services.

          Even in relatively straightforward projects, such as roads, they have a wide range of options to consider, including

          • The design of the road

— Whether or not to pave

— How thick the pavement should be

— How wide and how straight the road should be

• Limitations on vehicle size and weights

• Limitations on access.

Each of these factors affects vehicle operating costs, time savings, accident rates, environmental impacts, and, therefore, the costs and benefits of roads. Several computer models are available to help calculate road benefits under different conditions and savings resulting from road improvements. The Highway Design and Maintenance Standard Model III  is a computer program the World Bank developed to analyze the total transport costs of alternative road improvement and maintenance strategies. The program assesses the total annual costs of road construction, maintenance, vehicle operation, and travel time costs over the life of a project as a function of road design, maintenance standards, and other variables. The program compares the cost and benefit streams of alternative strategies, including different timing and staging options, and assesses the strategy that yields the highest net benefits to society, subject to a budget constraint.

Analysts can use the HDM III to compare the costs and benefits of different policies; estimate total costs for alternative project designs; and to test the sensitivity of the results to changes in the basic assumptions, including unit costs, traffic growth, and value of time. The model does not endogenously calculate accidents and environmental impacts, but these may be added exogenously. The model also does not incorporate demand reactions to changes in prices.

Gainers and Losers

A rural road may be intended to benefit producers, but the actual benefits may accrue to truckers, middlemen, or consumers; therefore, the analyst should carefully assess the distribution of benefits from transportation projects. Improving a port may reduce turnaround time for ships, but the distribution of the benefits will depend on the degree of competition in shipping and on the pricing policy of the port authority.

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