E-CBA at society level
The general purpose of the economic cost-benefit analysis (E-CBA) is to facilitate a more efficient allocation of resources, demonstrating the economic benefit of a given project or programme for society as a whole, in relation to existing alternatives. The E-CBA is carried out from the perspective of society as a whole and not from the perspective of an investor as will be seen below.
The E-CBA evaluates the contribution of investments made by LAPs to the economic wellbeing of the corresponding region or country, trying to incorporate benefits and non-financial costs expressed in monetary terms. When the aim is to evaluate investment in an LAP in its entirety, it can generally be argued that the E-CBA is more revealing than the F-CBA, as incremental financial income is generally not sufficient to meet the investment and operating costs of the total investment.
For the purposes of the E-CBA of an LAP, the main quantifiable and monetizable economic benefits at society level are the following:
- The main benefit is the increase in property value arising from the improvement in the perception of security of tenure resulting from an LAS-strengthening process. See Fact sheet on the increase in property value.
- A further possible benefit is the reduction in costs for users of LAIs associated with the reduction in time and distance involved in carrying out land transactions in LAIs that have been modernized and decentralized by LAPs (see Annex 7: questionnaire for users of registration services in the fact sheet Analysis of the cost and time of registration procedures).
As regards the costs, the total project investment is generally used along with the recurrent costs corresponding to those which should be taken into account to guarantee continuity of the incremental economic benefits which the project aims to generate.
Example
Example
Very simply, as an example, let us assume that an LAP working on the regularization of urban and rural properties
- will be implemented over 5 years, and investments begin in year 0.
- The number of rural and urban titles generated by the LAP is defined, and this represents the physical goals linked to increased value of rural and urban properties (a larger number of subgroups could in reality be defined with the aim of reflecting more precisely variations in property prices found with similar characteristics).
- During the project formulation, it was estimated that the number of rural titles expected to be generated with the support of the LAP is 1,000 the first year, 1,500 the second, 3,000 the third, etc. and that for urban properties, the number will increase from 1,000 the first year to 8,000 the fifth year.
- It was estimated that the increase in rural property value from obtaining a title is USD 500/ha, while for urban areas it is USD 2,000/ha (see fact sheet on evaluation of the increase in property value).
Table of economic flow from increased rural property value
Table of economic flow from increased rural property value
The CBA for a project generating benefit in perpetuity
The CBA for a project generating benefit in perpetuity
The Net Present Value (NPV) of a project whose main benefit was the increase in the value of regularized properties could be calculated using an alternative method which considers the generation of benefits in perpetuity, in other words which does not define a limited analysis period for its calculation. This assumption can be used for LAPs considering that land is not a consumable asset and even has the ability to generate infinite benefits over time. As the analysis period used in the NPV formula provided above nears infinity, the results of the two methods should become closer.
The major benefit of this method with income in perpetuity is the simplicity of its formula. Its major restrictions are:
- the series of assumptions necessary to estimate the flow of net income expected to infinity, which leads to a high level of speculation;
- the specific features of the derivation of the formula which limit the flexibility of the scenarios which can be considered.
For example, the use of this formula requires the increase in property value to be constant over time so that a perpetual growth rate can be assumed for income. Due to this, to be able to take into account periods when investments are made and periods when variability of net income may exist in the first years of the project (for example due to the gradualness inherent in the production system), both formulas would have to be used sequentially: first, estimating the net present value with perpetual income (NPVp) starting from the period when net incomes stabilize (Pe), and then estimating the net present value with income that is finite over time (NPVf), entering the NPVp as an income in the period Pe.
The simplest version of this formula is:
NPVp = NIc / r
Where:
NPVp = the present value of the flow of perpetual net income;
NIc = the constant net income in a period;
r= discount rate
Cost and saved time for LAI users
Another LAP economic benefit for all LAI users that could be considered is the saved money and time due to the service modernization and LAI decentralization.
The following steps need to be made to measure this benefit:
- Identify the different products and services related to land transactions that LAP seeks to make more efficient, with higher quality and decentralized.
- Using historical records, measure the number of land transactions and the associated services which costs should be reduced.
- Estimate expected savings (in case of ex-ante evaluation) or achieved ones (in case of ex-post evaluation) of money and/or time, for products or services, as result of LAP actions.
- Define the opportunity costs or economic value equivalent to the users time and their transportation expenses.
Example
Example
In a simplified way to explain ex ante evaluation of LAP and for illustrative purposes we will assume that:
- In a without project situation, users takes an average of two hours of their time to requested a property certification and 1.5 hours to finally obtained.
- LAP will invest in a system issuing a property certification by internet, which will save 3 hours of the users time.
- Payment for the improved service will cost the same.
- Economic value of users average time was estimated in 2.00 US$ per hour and the average cost of transportation 4.00 US$ per user.
- It is estimated that the average of the number of users who will request a property certification is 100,000, on the first year only 50% of them will have access to internet service. The following years the number of users will increase to 2,000. Then, the incremental net flow of economic benefits from cost savings and users time would be organized as shown in table 3.
See Economic Flows related to the benefits of users of the LAI
See Economic Flows related to the benefits of users of the LAI
Investment costs
The E-CBA at society level will generally consider the whole of the investment necessary to guarantee the strengthening of property rights and the modernization of LAIs. The following flows will be considered for this:
- Investment costs, which are essentially funds intended for the LAP implementation, i.e. its annualized budget (in the case of an ex ante evaluation) or funds used during the LAP implementation (in the case of an ex post evaluation).
These generally consist of:
- Cadastral surveying and mapping contract, cadastral mapping costs, legal diagnosis and resolution of disputes covered directly by the institutions
- Contracts for the development of IT systems
- Training and technical assistance for LAI and municipalities
- Equipment for LAI and municipalities
- Project administration costs (PCU)
- Other studies, including M&E - The costs of recurrent operations, which are essentially those incurred after the operational closure of the LAP until the last year of the analysis period, to guarantee the generation of project benefits once the LAP has closed operations (for example the replacement of equipment purchased, or continued contracts for some staff after the closure of the project, regardless of the source of funding).
To adjust these financial flows to economic flows, a conversion factor is generally used between market prices and shadow prices, which can be applied globally or just to certain costs such as inputs, qualified or unqualified labour, energy, materials, tools or equipment. The value of these conversion factors is generally available from national institutions or in the economic literature.
Example
Example
Very simply and as an example, the following table shows how to present the costs of the project for an ex post E-CBA at society level.
- The flow of expenses begins in year zero, and LAPs therefore usually have high pre-investment costs (cadastral mapping, development of IT systems, etc.).
- The project is organized in 4 components: cadastral mapping, regularization of property, institutional strengthening and administration and M&E.
- Project investments are carried out over 5 years.
- The incremental costs of the project, which correspond to replacing equipment, updating software, technical assistance and specialist training, were projected over 15 years.
- A general conversion factor between market price and shadow price of 0.96 was applied, which was provided by the Ministry of the Economy of the country where the LAP was implemented.
See Flows project costs projected to 15 years in 1,000 US $
See Flows project costs projected to 15 years in 1,000 US $
With this information you can calculate the net incremental flow, which can be added to the flow of incremental net benefits generated by the increase in land value to compute the economic efficiency indicators (E-IRR and E-NPV).
E-IRR and E-NPV
The E-CBA can be carried out at the level of society as a whole and in this case the sum of all the incremental benefits generated by the project is used, as in the case of the increase in property value and the reduction in transaction costs for users.
In this case all the costs of all the components of the project should be considered. An alternative would be to carry out a differentiated analysis per component of the LAP or level of intervention which would involve a comparison of costs and income for some of the project components only, such as regularization of tenure or modernization of LAIs.
Example
Example
Using the flows of costs and revenue given in the previous examples, an example is provided here of an ex post E-CBA at society level. This example considered:
- Flows of revenue: the sum of the benefits of the increase in property value and savings made by users of LAS as a result of the modernization of LAIs and the decentralization of services;
- Flows of costs: the sum of all the investment costs of the project, including recurrent costs, with the application of a global conversion rate between market price and shadow price of 0.96;
- A discount rate of 10% was used for the calculation of the Net Present Value (NPV).
Ver Flujo de ingresos y costos para el cálculo de VPN y TIR-E
Ver Flujo de ingresos y costos para el cálculo de VPN y TIR-E
Aplicando las formulas convencionales para obtener la TIR y la VAN económico se obtendría:
- TIR 25%
- VAN: USD 13, 235,000