Economic assessment
of forestry project

Hans Gregersen
Arnoldo Contreras

Reprinted 1995

Rome, 1992


Table of Contents

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ISBN 92-5-103285-8
ISSN 0258-6150

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© FAO 1992

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Table of Contents


Authors' Preface


The role of projects
The role of economic impact assessments
The economic assessment process

Part I. The Economic Assessment Process

1. Determining the Questions to be Answered

1.1 Considering a Range of Questions

1.1.1 Financial questions (those related to actual expenditures and receipts)
1.1.2 Economic efficiency questions (going beyond monetary costs and returns)
1.1.3 Differences between the financial and economic efficiency analyses

1.2 Need for Question Specificity

2. Designing the Assessment Approach

2.1 Using the With and Without Principle
2.2 Considering Interdependence and Separability of Project Components
2.3 Considering Constraints on the Assessment
2.4 The Basic Assessment Steps

3. Answering the Financial and Economic Efficiency Questions

3.1 Methods for Answering Financial Questions

3.1.1 Is the project financially acceptable to the interested parties?
3.1.2 What are the income distribution impacts?
3.1.3 What are the budget and financial sustainability implications?
3.1.4 How will the project affect foreign exchange inflows and outflows?

3.2 Methods for Answering Economic Efficiency Questions

Part II. Principles and Techniques for Conducting Economic Analyses

4. Identifying and Quantifying Inputs and Outputs

4.1 Introduction
4.2 Project Components: Separability and Interdependence

4.2.1 Horizontal project components
4.2.2 Vertical project components and one-way dependence
4.2.3 Interdependencies with other projects

4.3 Identifying Inputs and Outputs: General Considerations
4.4 Identifying Direct Inputs and Outputs

4.4.1 Direct inputs
4.4.2 Direct outputs

4.5 Identifying Indirect Effects

4.5.1 Indirect positive effects
4.5.2 Indirect negative effects
4.5.3 Additional points: Indirect effects

4.6 Location Related Inputs and Outputs (Effects)

4.6.1 General effects
4.6.2 Specific effects

5. Valuing Inputs and Outputs

5.1 Introduction - the Approach
5.2 Using Market Prices in the Financial Analysis
5.3 Estimating Future Prices

5.3.1 Treatment of inflation
5.3.2 Estimating relative price changes
5.3.3 The Big Project effect

5.4 Market Prices and Economic Values - Some Definitions

5.4.1 Appropriate economic value measures for different types of outputs
5.4.2 Appropriate economic value measures for different types of inputs

5.5 Determining Adequacy of Existing Market Prices as Measures of Economic Value

5.5.1 Estimating the importance of inputs or outputs
5.5.2 Identifying discrepancies between existing local market prices and economic values
5.5.3 Ease with which acceptable shadow prices can be developed

Annex 5.1 Shadow Pricing Outputs
Annex 5.2 Shadow Pricing Inputs

6. Conducting the Analysis (Comparing Costs and Benefits)

6.1 Introduction
6.2 Constructing Value Flow Tables

6.2.1 The relationship between financial cash flow tables and economic value flow tables
6.2.2 Treatment of transfer payments and input timing issues.

6.3 Discounting Benefits and Costs

6.3.1 Determining the discount rate
6.3.2 Applying discounting formulas

6.4 Computing Measures of Financial and Economic Efficiency

6.4.1 Net present value
6.4.2 The internal rate of return
6.4.3 Relationships between NPV and ERR

Annex 6.1 Common Discounting and Compounding Formulas
Annex 6.2 How To Calculate the Economic Rate of Return (ERR)

7. Dealing With Uncertainty: Sensitivity Analysis

7.1 Introduction
7.2 Purpose of Treating Uncertainty
7.3 Guidelines for Treatment of Uncertainty
7.4 Identifying Likely Major Sources of Uncertainty
7.5 The Sensitivity Analysis

7.5.1 Using net present value measures for sensitivity analysis
7.5.2 Breakeven analysis

7.6 Dealing with Critical Factors Identified in the Sensitivity Analysis

7.6.1 Changing the project design
7.6.2 Building safeguards and flexibility into a project

References Cited

FAO Technical Papers