INTRODUCTION
- WHAT IS A PROJECT? WHAT IS EVALUATING A PROJECT?
- WHY EVALUATE A PROJECT? HOW TO EVALUATE A PROJECT? PRIVATE COST-BENEFIT ANALYSIS VS. COST-EFFECTIVENESS SOCIAL ANALYSIS WHAT IS A PROJECT?
THE LAW
Any intervention limited in time that involves the application of public resources in order to expand, improve and modernize the capacity that produces goods or provides services, the benefits of which are independent of other projects.
WHAT IS A PROJECT?
It is a set of activities or actions, with a certain chronological order, that seeks to satisfy a need or solve a previously identified problem. It is temporary and aims at the generation or transfer of capacities or creates permanent activities after its execution.
WHAT IS EVALUATING A PROJECT?
It is making a judgment about the advisability of executing one project instead of another.
It is the comparison between costs and benefits, to determine the viability of a project.
It is to analyze whether the project meets the need or solves the problem posed, efficiently and effectively.
WHY EVALUATE A PROJECT?
Because there are multiple project alternatives and reject bad projects.
Because there is a need to allocate scarce resources to multiple needs.
To extract lessons and conclusions
(ex-post evaluation).
HOW TO EVALUATE?
IDENTIFY COSTS AND BENEFITS:
- Define the “optimized situation without project”
- Analyze for an evaluation horizon, the costs and benefits of each of the alternatives “with project”; in relation to costs and benefits for the
“no project optimized” situation
NOTE: "The value of a benefit can never exceed the cost of obtaining the same benefit through another
alternative action or project"
MEASURE COSTS AND BENEFITS:
- Units of measure or standards are required
VALUE COSTS AND BENEFITS:
- Market prices are the pattern to value private costs and benefits
- Social prices or shadow prices are used in social evaluation
USE A SELECTION CRITERIA
- NPV, IRR, Benefit-cost ratio, Recovery period, etc.
COST BENEFIT ANALYSIS
Establish relationships Establish Cause-effect rate Discount
(Identification of the Evaluate problem)
Intertemporally Determine the Project
and its alternatives Define project viability Determine the relevant Cost and Benefit Flows
COST BENEFIT ANALYSIS
PRIVATE VS. SOCIAL
It is based on flows Use social prices benefits and costs for calculating flows private prices of benefits and costs
takes into account only what you interested in analyzing relevant to project from the executing unit of the perspective of the entire project company
It allows us to analyze the It is pertinent for financial sustainability to make decisions about the public investment project
SOCIAL VAN = PRIVATE VAN + EXTERNALITIES
EFECTIVITY COST
The Cost-Effectiveness methodology relates the achievement of a project objective with the least cost alternative.
HOW DOES THE COST-EFFECTIVENESS METHODOLOGY WORK?
Establish outcome indicators.
Consider the total cost of the project. They include operation and maintenance costs and is estimated as an annuity.
Determine the Cost-Effectiveness of the project.
The results are compared between the different alternatives.
PROJECT LIFE CYCLE
PROFILE
PREFACTIBILITY
FEASIBILITY FINAL
DESIGN EXECUTION PROFILE
It should not demand a large amount of resources (time and money).
It requires the participation of technicians specialized in the subject.
You must have a rough estimate of the costs and benefits attributable to it.
As many alternatives as possible must be defined and analyzed.
PREFACTIBILITY
It can be based on secondary information, however this will depend on the size of the investment.
It requires an interaction between technical preparation and its economic evaluation.
Emphasis should be placed on the analysis of viable alternatives established at the profile level.
FEASIBILITY
It includes the same as prefeasibility, but with greater depth and less expected range of variation in the amounts of costs and benefits. Requires the participation of specialists and primary sources of information (demand study and market analysis).
Further engineering support studies are carried out (Soil Study, Water Balance, etc.), reaching more refined designs than for prefeasibility (Plans).
FINAL DESIGN
Engineering detail design or pre-operational preparation phase.
EXECUTION
Project implementation or construction phase.
STAGES OR PHASES OF A PROJECT
PREINVESTMENT: Associated phase sustentatorios studies both engineering and economic evaluation and financial
INVESTMENT execution or construction period of the works
OPERATION: Implementation of the project begins to perceive the benefits of investment
GENERAL CONCEPTS
PROJECT EVALUATION
CRITERIA OF SELECTION ALTERNATIVES
NET PRESENT VALUE
BENEFIT RELATION COST RECOVERY PERIOD
- Simple
- Discounted
INTERNAL RATE OF RETURN
NET PRESENT VALUE (VAN)
NET PRESENT VALUE (NPV)
NPV measures changes in wealth
Rule of acceptance or rejection of projects
- If VAN> 0 ====> The project is viable
- If VAN <0 ====> The project is not viable
Se used to compare between alternative projects
If there is a budget constraint, it can also be used to prioritize within a portfolio of projects
SELECTION CRITERIA
(Continued)
Benefit-Cost Ratio Criterion
- Compare the current value of costs with the
current value of benefits
R = VAB
VAC
- If R> 1 ====> The project is acceptable
- If R <1 ====> The project is rejected
SELECTION CRITERIA
(Continued)
Recovery Period
• There are two variants, one that takes the net benefits undiscounted and the other that takes the net benefits discounted
• It is calculated in how many years the investment is recovered and the project is rewarded for doing it in less time.
SELECTION CRITERIA (Continued)
Internal Rate of Return
- It is that rate that makes the NPV equal to zero
n
Σ (Bt - Ct) = 0 t = 0 (1 + k) t
- If k> r ====> The project is viable
- If K <r ====> The project is rejected.
LIFETIME OF ASSETS
ACCOUNTING DEFINITION: It is related to the duration of the asset on the basis of which the calculation of annual depreciation is established.
ECONOMIC DEFINITION: When the
benefit of replacing the asset is greater than the cost of maintaining it, the useful life of said asset ends.
EVALUATION PERIOD OR ECONOMIC LIFE OF THE PROJECTS It
can be related to the periods of useful life of the most important investment components.
A period in which the project reaches a certain level of maturity in the generation of benefits can be taken as a reference.
There could be a combination of the two previous proposals.
OPTIMAL SIZE
Projects are almost never restricted by technological factors to a certain scale or capacity
The economic analysis should aim to find the scale of the project that maximizes the NPV
If there are no mathematical problems due to fluctuation in the sign of project flows, the concept of Internal Marginal Rate of
Return may also be applied.
OPTIMAL TIME
If the NPV value of an alternative to postpone is greater than that of the original project, then it is postponed. the project and so on. PROJECT
SEPARABILITY If parts that are mutually exclusive are found within a project, it is necessary to evaluate these parts separately. Integral Projects Case Important in investment by stages. The incremental investment and incremental net benefits of the next stage must be taken. SUBSTITUIBILITY AND COMPLEMENTARITY OF PROJECTS
VANI + VANII = Independent
VANI + II Substitutes
VANI + VANII> Complementary
VANI + II
VANI + VANII <VPBI + II
SUSTAINABILITY
Refers to the possibility that the project will generate the expected benefits throughout its life.
- Management capacity is analyzed.
- Necessary institutionality.
- Availability of resources for operation and maintenance.
- Participation of beneficiaries.
PREPARATION OF PROFILES FOR PROJECTS
Identification
Module Formulation
Module Evaluation
Module Identification Module
Problem Definition
- Characteristics of the problem.
- Population and affected area.
- Socio-economic and cultural characteristics of the affected population.
- Attempt at previous solutions.
- Possibilities and limitations to implement the solution to the problem.
Identification Module
Analysis of Objectives
The definition of objectives will be based on the definition of the means and ends tree. The solution to the central problem constitutes the central objective or purpose of the project.
Identification Module
Approach of Alternatives
From the analysis of objectives, it is possible to define what would be the alternative solutions to the problem. The means-ends tree is used.
PROBLEM ANALYSIS
HOW TO ELABORATE THE PROBLEM TREE
1st. Step: Identify the main problems in the situation that is being analyzed
. 2nd. Step: Formulate in a few words the central problem
3rd. Step: Identify and Record the causes of the central problem
4th. Step: Identify and Record the effects of the central problem
5th. Step: Develop a diagram showing cause
and effect relationships in the form of a problem tree
6th. Step: Review the complete scheme and verify its validity and integrity
IMPORTANT
Formulate the problem (perceived by those involved) as a negative state.
Identify only existing problems - not possible or potential ones.
A problem is not the absence of a solution - it is an existing negative state.
Example:
Incorrect: No drinking water.
Correct: Children suffer from chronic diarrhea.
The importance of a problem is not determined by its location in the problem tree.
OBJECTIVE ANALYSIS
HOW TO DEVELOP THE OBJECTIVE TREE
1st Step: Formulate all the conditions of the problem tree in the form of positive conditions that are:
a) desired and
b) achievable in practice.
2nd. Step: Examine the established means-ends relationships and ensure the validity and integrity of the scheme.
3rd. Step: If necessary:
a) modify the formulations;
b) add new objectives if they are relevant and necessary to achieve the proposed objective at the next higher level
c) eliminate objectives that are not effective or necessary.
ALTERNATIVE ANALYSIS
It is a set of techniques to:
• Identify alternative solutions that may become project strategies.
• Select one or more potential project strategies.
• Decide the strategy to be adopted by the project.
HOW TO PERFORM THE ANALYSIS OF ALTERNATIVES
1st. Step: Identify the objectives to exclude - because they are not desirable or feasible
2nd. Step: Identify different means and ends relationships as possible alternative strategies for the project or project components.
3rd. Step: Select the alternative that -in your opinion- represents the best strategy for the project. Use criteria such as:
a) Available resources b) probability of achieving the objectives
c) Political feasibility d) cost-benefit analysis
e) Social risks f) project horizon
g) Lasting impact h) among others
Formulation Module
Project horizon
Will be determined based on the nature of the project. The economic life of the PIP (maturity period) or the principal asset could be used.
Example of a small irrigation where the most important component is the irrigation channels. (30 year horizon) Demand Analysis
Formulation Module
The main characteristics of the demand will be described, as well as the variables that influence it. On this basis, projections will be made on the Project Horizon.
The demand is constituted by the water requirements, according to the cultivation card that has been sown. Offer Analysis
Formulation Module It is analyzed which are the forms of provision of the good or service that exist and if they are sufficient to cover the demand or it is required to increase them. If there is any form of supply, such as the use of wells or river water. Formulation Module Costs "Without Project"
All costs of production or provision of the good or service that currently exist and their projection in the Project Horizon will be taken.
If there is already agriculture on these lands to irrigate, the production costs that producers currently incur must be taken into account. If there was not, the cost without project may be zero. Cost
Formulation Module
“With Project”
A cost projection will be made for the different project alternatives. These will include investment and operation and maintenance costs.
All production costs that will be incurred to achieve higher levels of productivity and production must be recorded. Investment is included. Incremental Costs
Formulation Module
They are the result of the comparison between “with project” costs and “with project” costs. These are the costs that can be effectively attributed to the project. “No Project” Benefits
Evaluation Module The benefits derived from satisfying current and projected demand will be estimated. It takes into account what would have been obtained from the sale, product of the harvest, in the absence of the project. That is, with current levels of productivity and production. Benefits Evaluation Module "With Project" A projection of the benefits will be made for the different alternatives of the project. The new sales volume is projected, as a result of an improvement in productivity and production in the irrigated lands.
Evaluation Module
Incremental Benefits
They are the result of the comparison between the benefits “with project” and the benefits “with project”. These are the costs that can be effectively attributed to the project.
Evaluation Module
Economic Evaluation The evaluation
criteria are applied as the case may be.
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