Estimating Benefits and Sensitivity and Risk Analyses for Road Projects Estimating benefits is the basic rationale for assessing the worthiness of proposed projects for funding. Sensitivity and risk analyses are some of the tools in the appraisal of benefits from a proposed project…
Financial benefits cover only monetary benefits while economic benefits cover both financial and non-financial. Economic benefits are also called social benefits. In general, one can assert that that there are no big issues with regard to monetary benefits estimation. However, estimation of economic benefits can be problematic. Estimation of economic benefits can be described as valuation. A distinct approach to valuation of projects and initiatives is one by Musgrave and Musgrave (1989, p. 137-143). In Musgrave and Musgrave’s approach, the value of projects and initiatives can be assessed based on gross benefits and costs. Based on gross benefits and costs, some of the fundamental measures that can be used to assess the value of a project or initiative can be the present value of net benefits, benefit-cost ratio, and internal rate of return. Other supplementary measures that can be used are measures such as the payback period. Lately, however, the World Bank has been reported to be shying away from these measures and have emphasized instead on the need to focus on objectives, particularly in defining and justifying objectives, and pointing out that a project or initiative is the least cost way of attaining the objectives (McElhinny 2010, p. 1). Nevertheless, economic benefit-cost analysis is still widely used by many countries of Europe (Odgaard et al. 2005, p. 18). Government agencies of the United States still use cost-benefit or benefit-cost analyses (Federal Emergency Management Agency 2006). Project proponents of the Asian Development Bank continue to use cost-benefit analysis to highlight the merit or lack of merit of a proposed project or activity (Infrastructure Professionals Enterprise Private Limited and Tamil Nadu Urban Infrastructure Financial Services Limited 2009, p. 21-27). In the United Kingdom, however, His Majesty’s Treasury (2005, p. 47) expressed a preference for cost effectiveness analysis (CEA) in which the objectives may be qualitative targets vis-a-vis the emphasis of cost-benefit or benefit-cost analysis on monetized values. An approach to appraisal that emphasizes on objectives like the CEA is the 2007 Asian Development Bank interim guidelines for enhancing poverty reduction impact of road construction projects (Kafle 2007). Musgrave and Musgrave (1989, p. 137-143) pointed out that benefits and costs can be real or pecuniary, direct or indirect, tangible or intangible, and inside or outside. Economic benefit assessments consider on real benefits and costs. Further, what differentiates economic from financial valuation is the inclusion of intangibles in the former while the latter consider only items that are tangible or those that have immediate monetary values in the market. The approach of Musgrave and Musgrave (1989) differs in a major way from the perspective of Stiglitz (2000) on economic valuation. Like Stiglitz, Musgrave and Musgrave attempt to assign or provide monetary estimates on intangibles. However, unlike Stiglitz, Musgrave and Musgrave concede that there intangibles in which assignment or estimation of monetary values are inappropriate (1989, p. 140) and points that the political process can make the decision on the provision of the good or execution of the initiative. In contrast, the perspective of Stiglitz (2000, p. 274) insists that values should be monetized. The Stiglitz framework is clear based on how he defined economic valuation, which is “developing systematic ways of analyzing costs and benefits when ...
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