The objective of the evaluation of Public Investment Projects is to determine the net benefit on the welfare of society throughout the project evaluation horizon and, with this, to recommend the acceptance, postponement, restructuring or rejection of the evaluated alternative investments.
manual-of-identification-formulation-evaluation-projects-management-natural-resourcesIn our legal system, Law No. 27293, Law of the National Public Investment System, requires the observance of the Project Cycle by all Entities and Companies of the Non-Financial Public Sector. Likewise, the phases included in the Project Cycle are defined, which includes the elaboration of the profile, pre-feasibility study, feasibility study, technical file, execution and ex post evaluation of Public Investment Projects.
Public Investment Projects are born as an investment idea and evolve through various stages (Profile, Pre-feasibility, Feasibility) in which they are analyzed at increasing levels of accuracy and complexity. At each of these levels it is evaluated whether the project is suitable for the country and it is decided whether it is convenient to assign additional resources to study it in greater depth. These analysis stages conclude with the authorization or not of its execution.
According to the foregoing, the objective of the Methodological Manuals within the National Public Investment System is to guide the use of the specific techniques used in the preparation and evaluation of Public Investment Projects. Likewise, it is expected that the widespread use of the Methodological Manuals will make it possible to homogenize criteria among public officials who are responsible for identifying, preparing and evaluating public investment alternatives.
An important complement to the use of the manuals is the use of homogeneous evaluation parameters for all Sectors. The value of the factors and their manner of use are specified in the General Directive of the National Public Investment System and in the Chief Resolutions published by the Investment Office for this purpose. The valuation of the various goods and services that intervene in the calculation of benefits and costs must be made based on the use of the social discount rate, the social price of the currency and the social price of labor, among others. Likewise, the mentioned flows must be expressed in real soles in soles of the month or base year in which the project evaluation is carried out,which is not limiting for the information to be additionally expressed in other currencies or in nominal soles.
The registration mechanism through which the National Public Investment System operates at the pre-investment level is the Project Bank, which incorporates the registration of all Public Investment Projects for which a profile, pre-feasibility study or study has been prepared. feasibility. In accordance with the provisions of the General Directive of the National Public Investment System, all Project Formulation Units must proceed to fill out or update the Project Bank Registration Form on the basis of the information and analysis resulting from the identification, formulation and evaluation of the project.
MODULE I
Identification of Natural Resources Management Projects
The identification process constitutes the first stage in the preparation of a Project Profile.
The purpose of this module is to identify the central problem to be solved, the causes that provoke it, and the effects derived from it. Based on the results obtained, we will proceed to outline alternative solutions to the central problem, through the elimination or control of the causes that produce it.
Direct consultation with the population affected by the problem is the main source of information that is used when defining the project idea. There are cases, however, in which the project idea arises from public officials who maintain contact with the communities that face the problem. In either case, the participation of the population constitutes a fundamental factor for the preparation of the pre-investment studies (development of the project idea). At the Profile level, this participation will be fundamentally associated with the task of collecting information and in many cases will involve only key informants (representatives of the communities to which the potential beneficiaries belong, for example). At the pre-feasibility level,It will be necessary to have a more direct and active participation of potential beneficiaries, that is, not only at the level of information collection that allows more accurate estimates of project costs and income, but also at the level of proposals and analysis of relevance of the project's actions in solving the problem.
It should be emphasized that the project teams should pay special attention in the selection of key informants (in the case of Profiles) and / or potential beneficiaries (in the case of Pre-feasibility studies) who will be consulted, ensuring the participation of women due to the They play an important role in the economic - productive sphere of rural households, especially with regard to livestock activity.
TASK 1
Identify the Central Problem
The first task is to identify the problem that the project aims to solve (or with the solution that the project aims to contribute). Some problems addressed by the Natural Resources Management projects are related to the deforestation of vast areas and the low yields of crops in certain areas of agricultural use, caused by soil erosion.
Step 1: Raise the central problem to be solved
The first step consists of presenting a first delimitation of the problem to be solved.
At this level, it is important to discern between the central problem that directly affects the well-being of the inhabitants of a community and that can be addressed with the execution of a public investment project, and the problems that are related to or derived from it, but which are too general to be served by a single investment project. For example, the problem of low income (poverty) constitutes a priority problem that must be addressed by the Government through multisectoral programs and policies, complex and comprehensive alternative solutions, but it does not constitute a problem to be addressed with the execution of a investment project. A public investment project, in this context, could be aimed at increasing the yields of crops or breeding in the area, reducing production losses,or to improve the links of producers with the market for the sale of their product. In other words, to attend to a specific production problem through which it simultaneously contributes to improving the income level of the beneficiary population.
A question that can guide the identification of the problem in this sense is to which area of the life of the community or of the affected population does this problem belong (economic - productive, political, education, health, etc.) ?; And in case of belonging to the economic - productive sphere, which is the sector that is responsible for addressing this problem? In this sense, the natural resource management project must address problems in the economic - productive sphere, and be executed from the Agrarian Sector.
Likewise, it is important to avoid confusing the problem to be treated with the cause that must be controlled. In this regard, let us remember that a public investment project aims to solve a problem by eliminating or controlling the critical cause (or one of the critical causes) that generates it. Therefore, the identified problem must admit the search for critical causes, among which one (s) can be chosen that can be controlled through the execution of an investment project.
Based on the above, the identification of a problem can be guided by two criteria:
• It must be specific enough to be served by a public investment project (sector) and not require a multisectoral program.
• It must be sufficiently general to admit various solution alternatives, outlined from the identification of its critical causes.
Below is an example that will be developed throughout the manual.
According to INRENA, the department of Huancavelica (which has the highest poverty levels in the country) presents moderate and severe degrees of erosion in a high percentage of agricultural land. This level of erosion increasingly affects the yields of the crops produced in the department, especially those of 6 micro-basins that belong to the provinces of Angaraes and Tayacaja.
In this regard, it is planned to design a project to increase the yield of crops in these micro-basins. In accordance with the recommendations outlined above in relation to the identification of the problem, we can conclude that the problem to be addressed is that of low yields (problem of the economic-productive sphere, which must be addressed by the Agricultural Sector), being the erosion of soils one of its possible critical causes.
The low-yield problem meets the two conditions already stated: it is specific enough to be addressed by a public investment project, and it is general enough to admit various alternative solutions.
It is important to emphasize that the purpose of public investment projects is to contribute to solving the central problem through the elimination or control of the critical causes that generate it. In the framework of the example presented above: the project would seek to contribute to solving the problem of low yields, through the control of soil erosion, which would constitute one of the critical causes that generate it.
Step 2: Determine the geographical area affected by the central problem
The second step to follow is to determine the area affected by the central problem referred to above, which can be delimited according to the political or geographical demarcation of the area (District, Province, Department; Valley, Cuenca, Microbasin).
In this regard, it is important to emphasize the distinction between the area affected by the problem and the area to be served by the project, which may or may not coincide. In the specific case of Natural Resource Management Projects, the geographic characteristics of the affected area will be decisive in defining the area that will benefit from the project's services. In Module 2 this topic will be taken up again, when defining the geographic area to be served by the project.
In the previous example, the affected area includes the micro-basins of Sicra, Opamayo, Huanchuy, Colcabamba, Salcabamba and Ñahuintambo, located in the districts of Seclla, Ccochacasa, Anchonga, Lircay, Ahuaycha, Pampas, Salcabamba, Huaribamba, Colcabamba and Acosbamba, in the provinces of Angaraes and Tayacaja, Department of Huancavelica.
Step 3: Determine the population affected by the problem
Having presented a first definition of the problem and the affected geographic area, the next step is to estimate the population that is being affected by the problem. This estimate can be made from various sources, at different levels of aggregation. At the profile and pre-feasibility level, it will be sufficient to make an estimate at the district level.
In the previous example, according to the 1994 Agricultural Census, the affected population, that is, the population of the districts of Seclla, Ccochacasa, Anchonga, Lircay, Ahuaycha, Pampas, Salcabamba, Huaribamba, Colcabamba and Acosbamba, would amount to approximately 16,000 producers. agricultural.
Step 4: Definition of the central problem to be solved
Based on the information obtained in the previous steps, the problem (s) to be solved with the execution of the project will be concisely defined.
In Format 1 of Annex 1 of the Manual, the information obtained after the development of Task 1 will be presented. First, the geographical area affected by the problem (s) must be delimited. Second, the problem to be solved shall be concisely defined, indicating the number of people who are directly affected by it.
TASK 2
Prepare the Causes and Effects Tree
Once the problem to be solved has been identified (in our example, the low yield of crops in the affected area), we proceed to draw up a tree of causes and effects directly related to the problem.
The first objective of this section is to identify the critical causes underlying the identified problem, as well as to show the importance of the critical cause to be eliminated or controlled in the degree of severity of the problem.
The identification of the critical causes of the problems to be solved constitutes a fundamental aspect in the justification of the State intervention through an investment project. As we mentioned earlier, state intervention is justified when the private sector does not spontaneously provide in optimal quantities some necessary good and / or service. This situation occurs, typically, in the case of public goods and private goods that generate significant externalities.
The second objective of this section is to define the direct effects of the problem.
At the end of this exercise we will have a kind of map of the problem that will serve as a basis for outlining alternative solutions.
Step 1: Develop a list of possible critical causes of the problem
The first step in building the cause and effect tree is to identify the critical causes of the problem. Generally, some of these causes are outlined in the identification process previously carried out; however, it is necessary to rethink the problem in order to identify other causes that may be decisively influencing its emergence.
A useful alternative to identify critical causes is to carry out a “brainstorming”, that is, make a list of possible causes that may be generating the problem. For this, it will be necessary to carry out one or more reconnaissance visits to the affected area to identify key productive or marketing aspects in the search for the critical causes of the problem. Likewise, it will be useful to have the opinion of experts on the subject, who report on the critical causes that usually generate the problem (in the case studied, those critical causes that usually cause low yields) in areas similar to the one in which we interested.
In the previous example, a preliminary list of the possible causes of the central problem is the following:
• Poor supervision of the labor employed in the agricultural units of the area.
• Inadequate irrigation techniques.
• Overgrazing.
• Steep slopes
• The crops grown in the affected area are not very profitable.
• Low soil fertility.
• Inadequate means of communication.
• Droughts or Frosts.
• Erosion of soils.
• Deforestation.
• Inadequate crop rotation.
• Intensification of land use.
• Insufficient or inappropriate use of fertilizers (organic or chemical).
Step 2: Eliminate the causes that are not critical or transcend the scope of the problem
The list prepared will be refined according to the following criteria:
• Aspects that are not considered critical in generating the problem (labor supervision problems are not considered important because the agricultural units are relatively small, showing an average of one hectare per productive unit).
• Aspects that are not directly related to the problem (unprofitable crops (related to problems of low sales prices) is a cause of low income, but is not directly related to the problem of low yields; inadequate communication channels that make it difficult to market the products).
• Aspects over which it is not possible to exercise direct control (droughts, frosts).
Step 3: Identify the relationships between the causes directly related to the problem
Having identified the causes related to the central problem and whose control, through concrete actions, is possible, it is necessary to find the causal relationships that exist between them.
Some of the causes identified in the previous step may indirectly affect the central problem, these are the so-called indirect or second-level causes that influence the emergence of the problem through its effect on the direct causes. The direct or first-level causes, for their part, are directly responsible for the generation of the problem.
A procedure that can help in the recognition of the “causality between the causes” consists in asking in each case why does this happen? If the answer is found in the list prepared, different levels of causality will have been identified.
In the example, the critical causes of the problem (direct or first-level causes) are:
• Soil erosion
• Low soil fertility
1. In turn, the main causes of soil erosion (indirect or second-level causes) are:
• Inadequate irrigation techniques used by producers
• Deforestation
• Overgrazing
• Steep slopes
2. The main causes of the low soil fertility are:
• Inadequate crop rotation
• Intensification of land use
• Insufficient or inappropriate use of fertilizers (organic or chemical)
It is important to take into account that a second-level cause can contribute to generating more than one first-level cause, in which case the double causal relationship should be made explicit in the cause tree.
Step 4: Build the preliminary cause tree
This step consists of building the cause tree based on the exercise of identifying direct and indirect critical causes of the problem. The preliminary cause tree should be shown in Format 2.
The tree of causes corresponding to the example developed is shown below.
Preliminary Cause Tree
Step 5: Eliminate the causes of the problem that are not considered relevant
The next step consists of eliminating the causes that are not considered relevant in the project design process, that is, those causes that will not be controlled by the actions of a Project of NRM.
In our example, low soil fertility will not be considered within the actions carried out by the project.
Preliminary Cause Tree
It should be emphasized that the elimination of these causes is carried out in order to clearly identify the critical cause whose elimination or control will allow the partial or total solution of the central problem, previously identified. However, despite not being variables controlled by the project, they should not be forgotten during the formulation process.
Step 6: Demonstrate the importance of the critical cause that will be controlled by the project
In order to guarantee the solution of the problem by controlling the critical cause addressed by the project (despite not controlling the other causes identified), the show the importance of said cause in generating the problem. This information must be included in Form 3 of Annex 1.
In the example that has been developed, some data showing the importance of soil erosion in the yield level could be obtained from the following sources:
• From the National Erosion Map of the National Institute of Natural Resources (1997) - such as the percentage of lands in the department that present different intensities of erosive processes (very light, light, light to moderate, moderate, moderate to severe and severe, of erosive processes).
• From feasibility studies previously prepared for areas that present erosive processes of similar intensity and comparable crops - in this case, for example, the estimate of the five-year percentage drops calculated in the Feasibility Study of the Natural Resources Management Project was adopted. for the Alleviation of Poverty in the Sierra - II, in the case of potatoes (the main crop in the area). Below is the estimated evolution of potato yields for the next 20 years, in case soil erosion is not controlled:
Step 7: Identify the effects of the problem
The effects of the problem are those that characterize the situation that would exist if the project was not executed, that is, if the current order of things remained unchanged.
In this regard, it is important to distinguish between effects that can currently be observed and that are a consequence of the problem in its current magnitude, and those potential effects that are not yet observed but that with a high probability will arise if the current problem situation continues. Both kinds of effects must be considered.
A simple alternative to identify the main effects that would be generated if the problem persists, is to carry out a “brainstorming”, that is, to draw up a list of possible effects that could be generated or deepened as a consequence of the problem.
In the example, a preliminary list of the effects of the problem is the following:
• Fall in the income of agricultural producers
• Partial abandonment of land due to a reduction in the working capital available for the next harvest
• Migration
• Decrease in the degree of integration to the market because the cost per unit of product is higher (that is, the proportion of subsistence agriculture increases)
• Abandonment of agricultural activity (due to its low profitability)
• Socio-economic delay of the communities in the affected area
The effects of The problem currently observed is the low income of producers and the growing disintegration of the market.
Step 8: Identify the relationships between the effects of the problem
Like the causes of the problem, the effects identified can be direct or indirect, depending on their relationship to the problem in its current magnitude.
Ordering the effects identified in the previous step, we will have:
1. Direct effects of the problem:
• Fall in the income of agricultural producers
• Decrease in the degree of integration to the market because the cost per unit of product is higher (that is, the proportion of subsistence agriculture increases)
2. Indirect effects of the problem, derived from the fall in income of agricultural producers:
• Partial abandonment of land due to the reduction in working capital available for the next harvest
• Migration
• Abandonment of agricultural activity (due to its low profitability)
All of the above constitutes a brake on the socio-economic development of the communities affected by the problem.
Step 9: Build the tree of direct and indirect effects of the problem
The next step is to build the tree of effects based on the information obtained so far.
Below we show the tree of effects of the erosion control example developed so far.
Effects Tree
Step 10: Build the tree of causes - effects
The last step of this second task consists of bringing together the tree of causes (Step 5) and the tree of effects (Step 9) in the same diagram.
The causes and effects tree corresponding to the exercise performed is shown below.
The tree of causes and effects should be shown in Format 4.
Tree of Causes and Effects of the Central Problem
TASK 3
Prepare the Objectives Tree or Means and Ends Tree
Task 3 is intended to guide the identification of objectives, means and ends of the project.
In the previous section, we obtained a map of the central problem that the project aims to solve, that is, we identified the main social and economic limitations that underlie the problem, as well as the current and potential effects that are generated as a result of the existing problem. In this section, it is intended, based on the previous mapping exercise of the problematic situation (negative), to carry out a mapping exercise of the opposite situation, that is, of the desired situation (positive). In this way we will ensure that we adequately define the general and specific objectives that should guide the project design.
Step 1: Define the central purposes or objectives
The simplest way to define the objectives is through the identification of the desired situation, that is, the problem situation solved.
In our example, the central purposes or objectives of the project would be given by the solution of the identified problem. That is to say:
Step 2: Converting the causes of the problem into project media and building the media tree
The means of solving the problem are related to eliminating or controlling its causes. The simplest way to define such means is to replace the causes, that is, the events that cause the problem, with opposing events that help solve it.
For example, in the case of our erosion control project in Huancavelica, we would have:
Consequently, the tree of means is built based on the tree of causes and in the direction of achieving the purpose or central objective of the project. In this tree, as in the tree of causes, there will be means directly related to the central purpose or objective (the first-level means, correlate of the direct causes of the problem) and means indirectly related to it (the fundamental means, correlate of indirect causes of the problem).
The last line of the tree of causes is made up of those that can be directly attacked to solve the problem. These, when translated into media, are called fundamental media, since from them it will be possible to define the actions and possible alternatives to solve the problem.
Next, we show the media tree of the erosion control example.
Media Tree
Step 3: Converting the effects of the problem into project ends and drawing up the tree of goals
The goals of the project are the positive consequences that are expected to be achieved with the solution of the problem. For this reason, they are linked to the effects of said problem, which express the negative consequences that it would generate if the project is not executed.
The simplest way to define the aims of the project is through the identification of the desired effects after solving the problem. As in the previous cases, the indirect ends will have their correlate in the indirect effects and the direct ends in the direct effects. There will also be an ultimate goal of the project, corresponding to the final effect of the problem. In our example, the final effect of the problem was the socio-economic delay of the communities in the affected area, consequently, the ultimate goal of the project is to achieve greater socio-economic development of these communities.
Next, we show the tree of aims corresponding to the example of erosion control.
End tree
Step 4: Assemble the tree of means - ends
The last step of this third task consists of bringing together the tree of means (Step 2) and the tree of ends (Step 3) in the same diagram. This diagram should be included in Format 5.
Below is the tree of means and ends corresponding to the exercise developed so far.
Means and Ends Tree
TASK 4
Propose alternative actions and solutions
The purpose of this section is to define alternative solutions that allow the achievement of the proposed central objective.
Step 1: Propose solutions and actions
The first step to follow in order to define alternative solutions to the central problem consists of outlining actions that allow the fundamental means identified in the previous section to be specified. In this regard, it is important to remember that there are two types of actions, the complementary ones (which can be part of an alternative solution), and the mutually exclusive (which are part of different solution alternatives). Likewise, it is important to point out with special emphasis that there are certain complementary actions that allow the achievement of all the fundamental means, such as activities aimed at guaranteeing the participation of the beneficiary population, project administration activities, etc.
In relation to the search for actions that allow to specify the fundamental means proposed, it is recommended to resort to three basic sources of information:
• Documents or entities of the locality that give account of attempts to solve that have been raised or carried out previously. It is especially important to identify what type of cause (direct or indirect) it was intended to eliminate or control at that time, as well as the reasons why these attempts failed or were partially successful (political, financial, lack of acceptance by the population, etc).
• Pre-feasibility or Feasibility Studies of similar projects
• Opinion of local experts who have information on the viability of carrying out certain types of actions.
In the example that we are developing, we find three fundamental means: reducing slopes, using adequate irrigation techniques and installing forest plantations. The actions that would allow these means to be specified are detailed below:
• The construction of absorption terraces, terraces of slow formation and infiltration ditches will make it possible to reduce the slopes of soils for agricultural use.
• The construction of nurseries and the production and installation of plants will allow the installation of forest plantations.
• The training of agricultural producers in irrigation techniques will allow the use of adequate irrigation techniques.
In addition to the specific actions for each medium, it will generally require actions common to all the media, which (for simplicity) will not be incorporated into the tree of fundamental media and actions, however they will constitute an equally important part in the design of the alternatives. solution to be considered in the next module. In our example, the following common actions will be required:
• Coordination with the beneficiary population
• Project administration
• Qualification of the personnel of the offering entity
Fundamental Means Tree and Proposed Actions
MODULE II
Formulation of Natural Resource Management Projects
The formulation process constitutes the second stage in the preparation of a Project Profile.
The purpose of this module is to define and describe in detail the investment alternatives that would allow the achievement of the objectives outlined in the previous module. This description will include the definition of goals and the description of the actions and components of each investment alternative. Additionally, the definition of the project's scope of action and the beneficiary population for each investment alternative will be oriented.
Based on the above, the formulation team will proceed to schedule the actions of each alternative investment in time, for which an evaluation horizon will be arbitrarily defined (which will be definitively established in the next module). Finally, the estimation of the cost flow of the actions of each investment alternative will be oriented, which will later be used as an input to calculate the profitability of the project.
The tasks that will guide the formulation process of each of the investment alternatives are presented below. Some of the results obtained in the tasks shown below must be presented in formats of Annex 1; In this regard, it should be clarified that a copy of each format must be submitted for each proposed investment alternative. As expected, the steps developed throughout this module should be followed for each investment alternative separately.
TASK 1
Define Investment Alternatives
The steps to follow for the design of alternative solutions to the problem identified in the previous module are detailed below. The result obtained in this task must be presented in Form 6 of Annex 1.
Step 1: Define the investment alternatives
Based on the actions defined in the identification module, it is possible to propose the investment alternatives for the project. These alternatives must be qualitatively and quantitatively comparable, which implies that they must be similar in:
• the programmed goals
• the total cost of the project
• scope of the project
Each alternative is made up of a set of actions, which have been identified in Task 4 of the previous module.
As mentioned in the previous module, actions can be complementary or exclusive. When there are exclusive actions, different solution alternatives must be proposed, each one with a different (exclusive) action. If there are complementary actions, these can be included within one or more alternative solutions, which implies that alternatives can be proposed based on the different combinations of complementary actions with each of the exclusive ones.
The actions that constitute an alternative are grouped into components, these typically consist of works, studies, training and other specific products that the project is required to produce. These components aim to achieve specific results and correspond to the fundamental means listed in the tree of fundamental means and proposed actions. In this sense, the joint achievement of the specific objectives of each component (the fundamental means), allows the achievement of the central objective or purpose of the project.
In order to facilitate the programming of each investment alternative, if there is a set of shares common to all the fundamental media, these may be grouped into additional components to such media.
In the erosion control example the defined alternative includes the following components:
• Reforestation (Fundamental Environment: Install Forest Plantations)
• Mechanical Soil Conservation Works (Fundamental Environment: Decrease Slopes)
• Technical Assistance (Fundamental Environment: Use adequate irrigation techniques)
The actions common to all the fundamental media have been grouped into the following additional components:
• Participation of the Population (includes coordination actions with the population for the execution of the project)
• Qualification of PRONAMACHCS personnel
• Administration
Form 6 must present the information indicated below, for each proposed investment alternative:
• Brief summary of the alternative.
• Goals of the alternative.
• Description of the public good and / or service to be provided.
• Description of the actions of each component, explicitly indicating the product (s) that are expected to be obtained from the execution of each of the components.
• Participation of the beneficiary population in the execution of the project. Indicate what will be the participation of the population in the initial investment, in the maintenance of infrastructure works and / or in the distribution of the good and / or service.
TASK 2
Establish the Beneficiary Area and Population
The objective of this task is to determine which is the area that is intended to be benefited by the project and what percentage of the area that requires the services of the project is going to be served. Likewise, the potential beneficiary population of the project will be estimated. This information will be incorporated into Form 7 of Annex 1.
Step 1: Determine the area affected by the problem
The affected area is the area already defined in step 2 of task 1 of the identification module. The affected area is given by the geographical or political demarcation in which the problem occurs.
In the example of erosion control, the affected area includes the micro-basins of Sicra, Opamayo, Huanchuy, Colcabamba, Salcabamba and Ñahuintambo, located in the districts of Seclla, Ccochacasa, Anchonga, Lircay, Ahuaycha, Pampas, Salcabamba, Huaribamba, Colcabamba and Acosbamba, in the provinces of Angares and Tayacaja, Department of Huancavelica.
Step 2: Determine the area that requires the services offered by the project
The area that requires the services offered by the project is given by the number of hectares that are affected by the problem.
In the example of erosion control, the area that requires the services offered by the project would be the number of hectares that show moderate or severe levels of erosion.
Step 3: Determine the area that will benefit from the project
The area to benefit from the project must be less than the area that requires the services it offers. It is possible that, due to budget constraints, the benefited area is only a fraction of the area that demands the service. For this reason, Format 7 must specify what percentage of the area that demands the service is being served by each alternative investment. The latter helps us to know what the project's contribution is to solving the problem in the affected area.
Step 4: Determine the population that will benefit from the project
The population that will benefit from the project is made up of all the producers who will obtain an increase in the benefit obtained from the agricultural activity carried out, thanks to the execution of the project. Form 7 should incorporate this information.
In the example of erosion control, the benefited population would be given by all the producers who cultivate in the hectares whose erosion will be diminished. In concrete terms, it would refer to the producers who will cultivate in the terraces or ditches and in the areas protected by reforestation, as well as to the producers who receive the technical assistance granted by the project.
TASK 3
Establish the Initial Assessment Horizon
Having established the investment alternatives to be evaluated, we must define a time horizon over which the actions will be scheduled and the cost and income flows for each alternative will be evaluated. This time horizon is called the project evaluation horizon (that is, of each alternative to be evaluated).
Generally, the evaluation horizon refers to the project execution period (in its pre-operation and operation stages). However, because we are at the first level of the pre-investment stage, we must evaluate schedules and revenue streams and costs also for the next levels of the pre-investment stage. For example, if we are at the Profile level, we must consider the time it would take us to carry out the Pre-feasibility and Feasibility studies in determining the project evaluation horizon.
Below we present the steps that will guide the determination of the project evaluation horizon.
Step 1: Establish the time horizon required for the pending pre-investment studies
The first step is to establish the time horizon required to carry out the pre-investment studies that are still pending.
In this regard, it is important to remember that in the case of small projects, feasibility studies are not required, so the time horizon to be considered by the project team will only include the time necessary to carry out the pre-feasibility study.
In our example, we will assume that the pre-feasibility study that would be pending if this profile is approved, including the time that the respective approvals would take, will require a time horizon of less than 1 year.
Step 2: Establish the time horizon required for the pre-operation and operation of the project
The second step consists of establishing the time horizon of the pre-operation and operation stages of the project. The duration of the pre-operation stage is determined by the number of years required to complete the final design of the project and the search for financing, as well as to carry out the investment actions of the project (acquisition of equipment, construction of infrastructure works, carrying out training activities, and other actions that will allow the continuous provision of goods and / or services in the medium or long term). The operation stage comprises the number of years during which the project's goods and / or services are expected to be provided.
How can you establish the number of years that the pre-operation and operation stages of each alternative last?
1. If there is an asset whose investment amount is relatively large, the number of years of the project is established based on the useful life of this asset.
2. In the absence of an asset whose investment amount is significantly important in relation to the total investment, it is possible to determine the initial evaluation horizon as the number of years that projects similar to the one being analyzed last.
For example, in the soil conservation project we are evaluating the initial life horizon is equal to 20 years. This horizon has been established based on other soil conservation projects evaluated by PRONAMACHCS.
TASK 4
Prepare the Schedule for each Alternative
Step 1: Prepare the action schedule for each alternative
As mentioned above, each of the alternative investments is made up of a set of actions, which are distributed throughout the project execution period. To get an idea of how the actions that make up each alternative investment are distributed, and with it how the project costs are distributed over time, a schedule like the one shown in the table must be developed. The schedule must be included in Format 8.
The following is the action schedule for the erosion control example, corresponding to the first five years of project execution.
Schedule of Actions of the First Alternative Investment
Actions Year 1 Year 2 Year 3 Year 4 Year 5
Mechanical works for soil conservation
Construction of Infiltration Ditches
Construction of Slow Formation
Terraces Construction of Absorption Terraces
Promotion of the use of trenches and terraces
Operation and Maintenance of Infiltration Ditches
Operation and Maintenance of Slow Formation Terraces
Operation and Maintenance of Absorption Terraces
Afforestation and Reforestation Actions
Construction of Nurseries
Operation and Maintenance of Nurseries
Production of Seedlings
Plantations in definitive field
Operation and Maintenance of Forest Plantations
Administration
Participatory Planning
Holding Workshops
Conservation committees constituted
Qualification of PRONAMACHCS personnel
TASK 5
Estimate Unit Costs
Costs of each Investment Alternative
A First Estimate on which the Calculation of the Profitability of each Investment Alternative will be made
As we will see later, the calculation of the profitability of the project is based on updating the flows of incremental net income received by the agents involved in the project, that is, on the current value of the income generated by the project. These flows are obtained by deducting the incremental costs, faced by all the agents involved in the project, from the incremental (gross) income received by these agents.
In this regard, the incremental costs that the formulation team must estimate are the following:
1. Incremental costs associated with the provision of the project good and / or service. The costs of production and provision of the good and / or service in question that would be faced in the event of the execution of the project (project costs) must be estimated, and these costs will be deducted from the costs that would be incurred to provide this good and / or service in case the project is not executed (costs without project). In this way, it is possible to obtain the incremental costs of provision of the good and / or service, which the execution of the project would imply. It is obvious that, if the service is not currently provided, the incremental costs of provision of the good and / or service or project costs will be exactly equal to the total costs of provision of the good and / or service in the event of the project being executed.
In the example of the erosion control project, one should compare the costs that producers currently incur to implement soil conservation measures or techniques. These costs should be deducted from those that the execution of the project would imply, that is, from the costs of the project's actions in its pre-operation and operation stages. In this way, the change in the costs of controlling soil erosion due to the execution of the project would be obtained.
2. Incremental agricultural production costs. This estimate will be made in the next module and, obviously, will not include the costs of providing the service, referred to in the previous item (and which will be estimated in this module).
3. Incremental transaction costs. The estimation of these costs is pertinent for those projects whose execution significantly reduces the transaction costs faced by the project's beneficiary agricultural producers. This estimate will be made in the third module, as well as the costs referred to in the second item.
Based on the above, the first group of estimates that we will make in order to calculate the profitability of each investment alternative will be the one corresponding to the project costs, that is, the incremental costs associated with the actions that make up each investment alternative., including pre-investment studies, and pre-operation and operation stages.
General Considerations for Estimating Project Costs
Project costs should be estimated using conservative figures (of quantities and prices of equipment, supplies and labor), not optimistic.
• Costs must be calculated at base year prices, taking the month in which the project is evaluated as the base period. In the event that no change in relative prices is expected, the prices in force at the time of the evaluation will be used for the entire evaluation horizon.
• At the level of Profile and Pre-feasibility studies, assumptions may be used in the calculation of project costs, on changes in prices, percentages applied to administrative expenses, etc. The assumptions used must be indicated at the bottom of the Formats, and may be based on documents from similar projects.
• In the case of Profile studies, the sources may be: the costs of similar projects; expert opinion; cost studies that have been prepared in advance. At the bottom of each Format, the sources used and any additional observations considered pertinent must be indicated. When using expert opinion, the role or position they perform should be specified.
• In the case of Pre-feasibility studies, primary sources will be used to calculate those costs that do not require specialized studies. As in the case of Project Profiles, the sources, the method of collecting information in the case of primary sources, and any additional observations deemed pertinent must be indicated.
Coverage of Project Costs
It is important to include all the costs that will have to be incurred. In this sense, those operating expenses usually incurred by the offering entity will be included, insofar as they are operating expenses intended to allow the operation of the project. The amounts that the offering entity ceases to receive in order to carry out the project must also be included as costs, such as the rent of its own premises. Finally, the costs of the Pre-feasibility, Feasibility and Design studies necessary to initiate the project actions must be included.
With regard to projects whose programming has already advanced, it is important to mention that costs already incurred (in pre-investment studies) will not be included as project costs. These costs are considered sunk costs. The Profile (or Pre-feasibility study) seeks to assess whether the benefits generated are greater than the costs required for the investment to be made after the study is carried out. The amount of costs already incurred prior to the completion of the Profile (or Pre-feasibility study) is not relevant.
Finally, in the event that the bidding entities have granted the good and / or service to some or all of the beneficiary producers, prior to the project, the operation and maintenance costs that would be incurred if the project is not executed (costs without project) can be estimated based on those faced by the bidding entities before the project. As mentioned above, these costs without the project must be discounted from the costs with the project. This discount is explained because the relevant costs are the incremental costs of the project; and, in the event that the good and / or service has been provided previously, the savings that the project will generate in relation to the previous provision of the good or service must be considered.
Classification of Project Costs
As you will see in the Formats, costs are classified into four categories:
1. Studies. It includes the expenses incurred in the Prefeasibility, Feasibility and Design studies necessary to initiate the project actions.
2. Investment. The costs included in this item refer to all those expenses incurred in actions that allow generating future benefits (in the same year, or in subsequent years).
3. Operation and maintenance. It includes all the expenses necessary to maintain the continuous provision of the good or service, and with it the benefits derived from the investment actions carried out.
4. Administration. It includes the administration expenses incurred during the period in which the investment actions of the project are executed.
Machinery depreciation is not included in the project costs. This is because depreciation does not represent an effective outflow of money. The cost of the machinery is located in the year in which the machinery is purchased, it is not distributed throughout its useful life. Consequently, the re-investment costs required to replace equipment, machinery and vehicles must be included in the operation and maintenance item for the respective years.
Step 1: Estimate the unit costs of the most important investments in the project
Initially, the unit costs of the most important investments in the project should be calculated. The precision of the total costs of the actions of the project, to be carried out in the next task, will depend to a great extent on these estimates.
The formulation team will be able to select the items for the breakdown of unit costs according to the available information; and as much detail as possible should be sought. The unit costs of each registered investment must be presented in Format A1 or Format A2.
In the erosion control example, the unit cost formats could record the construction costs of each work (of a nursery, for example) or the cost per hectare of the work (the cost of building one hectare of absorption terraces, for example).
In the case of unit costs of infrastructure works for which it is possible to determine the annual maintenance cost per unit built, it should be included as a separate item (in the Maintenance line of Format A2).
Next, Format A1 of the example of erosion control is presented, in which the cost of building one hectare of absorption terraces is detailed.
TASK 6
Estimate Total Costs
The objective of this task is to guide the estimation of the costs involved in carrying out the actions of each alternative investment. These costs are estimated at private prices and at social prices.
The costs of the project at private prices are the costs of execution and maintenance of the project at market prices or at prices actually in force.
The costs at social prices are the costs that would be faced in the event of distortions in the markets related to the goods necessary for the implementation of the project.
Both cost estimates are important in the formulation and evaluation process, since the costs at private prices reflect the costs assumed by the beneficiaries and the offering entity, while the costs at social prices show the costs assumed by the country as a whole.
Step 1: Estimate the costs assumed by the offering entity at private prices
The costs assumed by the offering entity should be shown in Format 9. If there are two or more bidding entities, a cost format must be developed for each of them.
In this format, the costs are asked to be grouped according to the items defined above (Studies, Investment, Operation and Maintenance, and Administration). Within each item, it is requested that the costs be classified by actions. In this sense, it is possible for a stock to appear in more than one item.
In the example of erosion control, the actions associated with the Soil Conservation Mechanical Works component and those associated with the Reforestation component include both investment costs and operation and maintenance costs. Investment costs correspond to the amounts spent on the construction of infrastructure works (trenches and terraces) and on forest plantations, while maintenance costs correspond to the costs of keeping the built works and nurseries and plantations in operation. forestry. In Format 9 you can see how the costs assumed by the offering entity have been classified, in this case: PRONAMACHCS.
At the end of this step, the development of Format 9 for our virtual erosion control project is exemplified, in which the costs of the only bidding entity involved in the execution of the project have been recorded: PRONAMACHCS. In this example, the operation and maintenance costs of infrastructure works and forest nurseries and plantations do not appear, because these are borne by the beneficiaries.
Step 2: Estimate the Residual Value
The residual value of the project is estimated as the value of the assets at the end of the project execution and must be recorded in item 5 of Form 9. The value of these assets can be estimated through two methods: the accounting method and the market value method.
The accounting method takes into account the depreciation to which the project assets are subject. By estimating an annual depreciation rate, it is possible to know the decrease in the value of the asset for each year of useful life. For example, if the purchase value of an asset in year 1 is 10,000 soles and an annual depreciation rate of 5% is estimated, the value of the asset will decrease by 500 soles in year 2. This year the value of the asset will be 9,500 soles. In this way and considering the entire useful life horizon, it is possible to estimate the value of the assets at the end of the project.
The residual value at private prices would consider the cost of these assets at private prices as the initial value of the assets, while the residual value at social prices would consider the cost of these assets at social prices as the initial value of the assets.
The market value method estimates the value of the asset at the end of the evaluation horizon according to the sale price that that asset would have, given its age level. In this case, the residual value at social prices would be the residual value at private prices multiplied by the corresponding conversion factor. Depending on whether the asset is considered tradable equipment or non-tradable equipment, a different conversion factor would be applied.
In the example of erosion control, the value of the equipment (lampas, zapapicos) used in the construction of the soil conservation works is estimated. Considering a depreciation rate of 10% and a useful life horizon of 20 years, the residual value is estimated.
The residual value of the equipment used by the benefited producers in year 5 would be equivalent to the value of the equipment that they use for operation and maintenance in year 20. Taking into account that the producers' equipment has a useful life of 10 years, in year 15 it would have been necessary to reinvest in the assets necessary to maintain the infrastructure works. The latter implies that in the year 20 the producers' assets would be 5 years old. Assuming that in year 15 an amount of 50 thousand soles is reinvested in equipment, this would imply a residual value equal to 25 thousand soles.
The value of the assets of PRONAMACHCS at the end of the useful life horizon is zero because PRONAMACHCS is not responsible for the operation and maintenance of the works, so it does not reinvest the acquired equipment.
Step 3: Estimate the costs of production and / or provision of the good or service in the situation without a project
In the event that the offering entity has previously delivered the good or service to some or all of the project's beneficiaries, the operation and maintenance costs that the offering entity would face to maintain the provision of the good or service in case the project is not executed will be recorded in item 6 of Form 9. These costs will be discounted from the other costs.
In the example of erosion control, the costs without the project (item 6) are equal to zero since the offering entity (PRONAMACHCS) did not assume, prior to the project, operation or maintenance costs of the soil conservation works, nor of the forests in the area.
Step 4: Updating the flow of costs assumed by the offering entity
Once all the monetary values corresponding to the cost items have been entered, they must be added vertically and placed in the “Total” line. These values are expressed in base year prices and correspond to each year of evaluation of the analyzed project.
The line below Total, called “FA 12%”, contains the annual update factors when 12% is used as the discount rate. It is estimated that this rate represents for the moment the opportunity cost of public investment funds and will therefore be used in the analysis.
Multiplying the total cost for each year by its corresponding upgrade factor will convert it to your cost equivalent for year zero. This information will be inserted in the line called VAC PP, which means Present Value of Costs at private prices.
The next step is to horizontally add the current values corresponding to the N years and place the result in the box that forms the intersection between the VAC PP line and the VAC PP column. The result obtained represents the present value of the total costs assumed by the offering entity.
Step 5: Estimate the costs at private prices assumed by the beneficiaries
In Form 10, the costs assumed by the beneficiaries must be estimated. As in the case of the costs assumed by the offering entity, it is requested that the costs be classified in the four items already defined, and by actions.
Additionally, the operation and maintenance costs that the agricultural producers would assume if the project is not executed (costs without the project) must be placed in item 6 of Form 10.
Finally, the total costs must be multiplied by the update factor and added horizontally. The sum must be placed at the intersection of the VAC PP line and the VAC PP column.
In the case of the erosion control project, the beneficiaries bear the cost of the unskilled labor required in the construction of the mechanical works for soil conservation and in the reforestation activities. On the other hand, the beneficiaries assume the costs of operation and maintenance of these works. In Form 11-B of the example, presented below, the classification of the costs assumed by the beneficiaries is observed.
In relation to the costs without the project, these are equal to zero since there are currently no mechanical works for soil conservation in the benefited area, and reforestation activities have been carried out on previously deforested hectares.
Step 6: Estimate the total cost at private prices
Finally, the annual costs of the project assumed by the bidding entities (Format 9) must be added to those directly assumed by the beneficiaries (Format 10). This estimate corresponds to the total cost flow of the project and must be incorporated in Form 11.
Here is Format 11 of the erosion control example, in which it is possible to observe the total cost flow of the project.
Step 7: Disaggregate the total cost at private prices into the items necessary to estimate the total cost at social prices
In many cases, effective prices do not reflect the true value of the goods. The true value of goods is given by the social price. The social price is the price that would exist if there were no distortions (taxes, subsidies, monopoly, monopsony, etc.) in the markets related to the good that is being treated.
In order to estimate the cost at social prices, the conversion factors of some cost items have been calculated. The first step in estimating costs at social prices is to disaggregate the Present Value of Costs in these items. This disaggregation must be made in the first part of Form 12. The items shown there are:
• Tradable Equipment. This item includes goods such as: construction machinery, lampas, machetes, etc.
• Non-Tradable Equipment. This item includes goods such as: draft cattle (mules, oxen, etc).
• Tradable supplies or materials. Which includes wood, fertilizers, pesticides, etc.
• Non-Tradable Supplies or Materials. Goods such as cement, bricks, etc. belong to this group.
• Skilled labor. Refers to skilled labor or with a certain level of qualification such as construction technicians.
• Unskilled Labor Refers to labor without specialized training, such as construction workers
• Services and others. Includes water, electricity, rent, and others.
In the example of erosion control, goods such as lampas, zapapicos, spikes have been included in the item of tradable equipment. Fertilizers and pesticides provided to producers, wood used in nurseries, etc. have been included in the item of tradable inputs or materials.
The skilled labor category includes the salaries of engineers and extension agents trained in soil conservation techniques. As unskilled labor, the labor used for the construction of infrastructure works has been taken into account.
Step 8: Estimate the cost of the project at social prices
In the second part of Format 12, the Present Value of Costs at social prices is estimated. This is derived from the Present Value of Costs at private prices by the corresponding conversion factor, for each item.
The Present Value of Costs at social prices allows to know what are the total costs assumed by the country as a whole when the project is executed.
MODULE III
Evaluation
of Natural Resources Management Projects
The evaluation process constitutes the third stage in the preparation of a Project Profile.
The purpose of this module is to evaluate the investment alternatives formulated in the previous module and select the most profitable one. The module has two fundamental parts:
1. The process of estimating the income generated by the project, that is, the incremental net income received by the agents involved in the project. This section of the module will make use of the incremental cost estimates for the provision of the good or service made in the previous module (referred exclusively to the costs of the project, that is, the investment costs, operation and maintenance of the service), and will estimate the Gross incremental income received by the offering entities and the incremental benefits of the producers. Based on these estimates, the calculation of the flow of incremental net income received by the agents DIRECTLY involved with the execution of the project will be made. Further,We will estimate the increase in the levels of well-being of the population that does not participate in the project but is INDIRECTLY benefited by it. The estimate of the social profitability of the project will include both estimates, both those referring to the agents directly involved in the project and those who indirectly receive the benefits derived from its execution.
2. The process of selecting the best alternative, which will be based on the evaluation of the social profitability and the sustainability prospects of each investment alternative.
Finally, the necessary steps for the development of the logical framework of the alternative selected as optimal will be presented. As explained in the introductory part of the Manual, the logical framework of a project is an evaluation tool that should be used throughout the project cycle.
Incremental Net Income of each Investment Alternative
This section aims to teach how to estimate the income generated by the project, that is, the incremental NET income received by the agents involved in the project.
The income generated by the project is made up of one or more of the following variables:
1. Incremental net income received by the state offering entity. These revenues are estimated by deducting the net revenues that the state offering entity would obtain if the project were not executed, from those that it would obtain if it were executed. It is obvious that, in the event that the state entity has not been providing the good or service to the project beneficiaries before its execution, the incremental net income will be exactly equal to the total income obtained from the provision of the service.
2. Incremental net income received by the private offering entity. These revenues are estimated by deducting the net revenues that the private offering entity would obtain if the project were not executed from those that it would obtain if it were executed. It is obvious that, in the event that the private entity has not been providing the good or service to the project beneficiaries before its execution, the incremental net income will be exactly equal to the total income obtained from the provision of the service.
3. Incremental benefits of the agricultural producers that are served by the project (direct beneficiaries). The benefits of the producers are calculated by deducting the benefits that the producers would receive, if the project is not executed, from those received if it is executed.
For example, in the case of a soil erosion control project, these incremental benefits would be estimated as follows:
Incremental benefits obtained by agricultural producers due to mechanical soil conservation works = (gross value of production with project, which would be obtained in case of applying adequate soil conservation techniques - (production costs with project + costs of transaction with project + cost of operating and maintaining the trenches and terraces, which would be faced if adequate soil conservation techniques were used)) - (gross value of production without project, which would be obtained in case of not applying or apply ineffective soil conservation techniques - (production costs without project + transaction costs without project + cost of applying ineffective soil conservation techniques, which would be faced if the project is not executed))
As will be analyzed later, the increase in the benefits received by the agricultural producers served by the project may be due to one or more of the following reasons (depending on the project being evaluated):
• Expansion of the exploited area or of the livestock herd
• Increase in crop yields
• Recomposition of the crop ID
• Changes in production costs
• Changes in transaction costs
In the case of natural resource management projects, the benefits will be related, most of the time, with increases in the exploited area (increase in the area with the possibility of forest exploitation), or with increases in yields due to the decrease of erosion.
4. Incremental net income received by the Indirect Beneficiaries of the Project. The indirect beneficiaries of the project are those agents who, without being directly served by the project, experience increases in their levels of well-being as a result of its execution. These revenues are especially important in the case of those natural resource management projects that are oriented towards the provision of public goods. The estimation of this income is made by comparing the level of well-being of the indirect beneficiaries in case of not executing the project, with their level of well-being, in case of executing the project.
Instructions for Estimating Income
To estimate the income generated by the project, the following should be taken into account:
• The estimate of the income generated by the project should be based on conservative figures, rather than optimistic ones.
• As in the case of estimating project costs, revenues should be estimated using base year prices. In the event that the market analysis foresees alterations in the sales prices received by the producers, due to the execution of the project, such alterations should be considered in the estimation of income.
• Sources, assumptions used, and any additional observations should be included at the bottom of the income formats.
In relation to the sources of information that can be consulted for the preparation of the pre-investment studies, the following is recommended:
• In the case of Profile studies, the sources may be: production costs and estimated yields for similar projects; expert opinion; Benefit evaluation studies for producers with access to the good or service that the project seeks to provide. At the bottom of each format, the sources and assumptions used and any additional observations deemed pertinent should be indicated. When using expert opinion, the role or position they perform should be specified.
• In the case of Pre-feasibility studies, primary sources will be used to estimate production costs, yields and price of agricultural products. As in the case of Project Profiles, the sources, the method of collecting information in the case of primary sources, assumptions and any additional observations that are considered pertinent must be indicated.
In our example the changes in performance are taken from a study carried out by PRONAMACHS. This study aimed to estimate the changes in yields caused by the construction of terraces and by changes in cultivation techniques.
The Market Analysis of the Final Product - An Analysis Prior to Estimating Incremental Net Income
The increase in crop yields and / or the recomposition of the crop certificate, in some cases of large-scale projects, can produce a significant variation in production levels and, with it, alter the sale prices of the crops. agricultural products. Use Format 13
Since the incremental profits of the producers depend significantly on the sale prices of the products, in the event that the project significantly alters the current production levels, it will be necessary to analyze the behavior of the market of the final product.
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