Transcript Document

Lecture Notes
ECON 437/837: ECONOMIC COSTBENEFIT ANALYSIS
Lecture Nine
0
STAKEHOLDER
IMPACTS
OF PROJECTS
1
Assess Stakeholder Impacts of Projects
• A comparison between economic and
financial values tells us who wins and who
loses from a specific project, i.e., the
Stakeholders.
2
For Each Input and Output Variable:
• Economic = Financial + S Stakeholder Impacts
– Example of a non-traded good with a sales tax:
• Economic Value = Financial Value
+ Change in Government Tax Revenues
+ Increase in Consumer Benefits
– Loss in Profits to other producers
• Taken over all variables and time periods of project
(using a common discount rate)
- NPV economic = NPV financial + S PV Stakeholder Impacts
Note: Stakeholder Impacts are often called externalities of project
3
General Relationship
NPVECOeco = NPVFINeco + PVEXTeco
4
Stakeholder Analysis
is composed of six distinct steps
1. Identify the externalities.
2. Measure the net impact of the externalities in each
market as the real economic values of resource flows
less the real financial values of resource flows.
3. Measure the values of the various externalities
throughout the life of the project and calculate their
present values by using the economic discount rate.
5
Stakeholder Analysis
is composed of six distinct steps (cont’d)
4. Allocate the externalities across the various
stakeholders of the project.
5. Summarize the distribution of the project’s
externalities and net benefits according to the key
stakeholders in society.
6. Reconcile the economic and financial resource
flow statements with the distributional impacts.
6
Financial, Economic and Distributive Effects of Project to
Supply Non-Tradable Goods with No Distortions
P
S
S + Project
A
P0
P1
B
C
E
D
Qs
Q0 Qd
Q
Financial Value of Output = QsCBQd or P1 (Qd -Qs)
Economic Value of Output = QsCABQd
Difference (Economic - Financial) = CAB
CAB = P1P0AB -P1P0AC = Gain in Consumer Surplus - Loss in Producer Surplus
Economic Value = Financial Value + Gain in Consumer Surplus - Loss in Producer Surplus
= Financial Value + Distributive Impacts
7
Financial, Economic and Distributive Effects of Project to
Supply Non-Tradable Goods with Unit Tax
P
d
S
E
(P0+T) = P 0
S + Project
Pd
s
A
P0
s
P1
Financial Value of Output
= QsCBQd
F
1
C
Economic Value of Output
= QsCAQ0+ Q0ABQd +AEFB
B
Increase in Government Revenue
= AEFB
D1
QS
Q0
D0
Q
Qd
CAB = PS1PS0AB – PS1PS0AC
Since PS1PS0AB = Pd1Pd0EF Therefore, CAB = Pd1Pd0EF – PS1PS0AC
= Gain in Consumer Surplus - Loss in Producer Surplus
Economic Value of Output = Financial Value of Output + Change in Gov. Tax Revenues
+ Increases in Consumer Surplus - Loss in Producer Surplus
8
Measuring Distributive Impact from Financial and
Economic Values of Inputs with Tariffs
P
S
B
PCIF(1+t)=PW(1+t)
PCIF=Pw
C
A
F
E
G
H
D + Project
D
Qs
Qs
Qd
0
1
1
Q d Q d2
Q
0
Financial Cost of Importable Goods = Qd1CFQd2
Economic Cost of Importable Goods = Qd1GHQd2*[1+(Ee/Em - 1)]
where (Ee/Em - 1) = Foreign Exchange Premium (FEP)
Financial Cost - Economic Cost = GCFH – Qd1GHQd2*(Ee/Em - 1)
= Gain in Tariff Revenues to Government – Loss in Government Revenues due to
foreign exchange premium on additional
use of foreign exchange
9
Examples
– Who benefits from worker transportation?
– Why was the Makar Port built?
10
Workers Transportation Case
Basic Facts
• Factory currently employs 20 workers. These workers take taxis every day at a
cost of $1.00.
• Factory wants to employ 40 workers, but can not recruit any additional worker
without either subsidizing transportation or paying higher wages.
• The proposal is to buy a bus for a total of $25,000 including $5,000 of import
tariff. The bus is expected to have a value of $10,000 in year 5.
- The bus will operate for 250 days per year.
- The charge per person/day on the bus will be 40 cents.
- A driver will be hired to operate and maintain the bus at a wage of $10.00
per day.
- The cost of oil and gas will be $2.00 per day.
- The spare parts bill is expected to be $100 per year.
- No income taxes are levied on the income of public enterprise.
11
Workers Transportation Case (cont’d)
• The economic opportunity cost of employing the driver is equal to
approximately 80% of his wage.
• The conversion factor for oil and gas is estimated to be 0.60 because of the
high taxes imposed on their purchase price.
• Spare parts have a tariff and taxes on them that are equal to 25 percent of
their CIF price. Thus, the spare parts conversion factor is equal to 0.80.
• The ratio of the economic exchange rate to the market exchange rate is
equal to 1.
• The financial discount rate is equal to 6%, and the economic discount rate
is equal to 10%.
12
Workers Transportation Case (cont’d)
Table 1: Financial Appraisal
PV @10%
0
1
2
3
4
5
Cash Inflows
Receipts
Final in use values
Total Inflows
Cash Outflows
Capital Expenditures
Bus purchase
Tariff on Bus
Operating Expenses
Labor
Fuel
Spare parts
Total Outflows
Net Cash Flow
NPV Financial at 6%
NPV Financial at 10%
$16,679
$6,209
4,000
0
4,000
4,000
0
4,000
4,000
0
4,000
4,000
0
4,000
4,000
0
0 10,000
4,000 10,000
20,000
5,000
20,000
5,000
10,425
2,085
417
37,927
2,500
500
100
28,100
2,500
500
100
3,100
2,500
500
100
3,100
2,500
500
100
3,100
2,500
500
100
3,100
-15,038
-13,509
-15,038
-24,100
900
900
900
900
0
0
0
0
10,000
13
Measurement of Economic Benefits
$/day
Demand for workers’
transportation
1.00
Net Benefit
to workers
Net Benefit
to workers
0.40
20
40
# of workers
Financial Revenue/person/day = $0.40
Economic Benefits/person/day
= [(20*$1.0+20*($1+$0.40)/2]/40 = $0.85
Conversion Factor = 0.85/0.40 = 2.125
14
Workers Transportation Case (cont’d)
Table 2: Economic Appraisal
Conversion Factor
PV at 10%
0
1
2
3
4
5
Cash Inflows
Receipts
Final in use values
2.125
0.8
35,444
4,967
40,411
8,500
0
8,500
1
0
20000
0
20000
0
0.8
0.6
0.8
8,340
1,251
334
29,924
10,487
TOTAL INFLOWS
Cash Outflows
Capital Expenditures
Bus purchase
Tariff on Bus
Operating Expenses
Labor
Fuel
Spare parts
Total Outflows
Net Cash Flow
NPV Economic at 10%
8,500
0
8,500
8,500
0
8,500
8,500
0
8,500
8,500
0
8,500
0
8000
8,000
2000
300
80
22,380
2000
300
80
2,380
2000
300
80
2,380
2000
300
80
2,380
2000
300
80
2,380
-
(13,880)
6,120
6,120
6,120
6,120
8,000
0
0
0
10,487
15
Workers Transportation Case (cont’d)
Table 3: Distribution of Net Benefits of the Externalities to Stakeholders
Receipts
Final in use values
PV Externalities
@10%
18,764
(1,242)
Government
Workers
Driver
18,764
-1,242
TOTAL INFLOWS
CASH OUTFLOWS
Capital Expenditures
Bus purchase
Tariff on Bus
Operating Expenses
Driver
Fuel
Spare parts
Total Externalities/Distribution
0
(5,000)
5,000
(2,085)
(834)
(83)
25,525
2,085
834
83
4,676
18,764
2,085
Reconciliation of Financial, Economic, and Distributive Analysis
NPV Economic
at economic discount rate
10,487
=
NPV Financial
at economic discount rate
-15,038
+
SUM of PV of externalities
at economic discount rate
25,525
16
Port Rehabilitation and Expansion:
The Makar Port Project in the Philippines
Basic Facts:
• Makar Port, located in General Santos City at the northern side of
Sarangani Bay, a well-protected bay in Mindanao, lies along the main
north-south trading axis which skirts Mindanao on its western shore.
• The objectives of the project are to increase the capacity and improve the
efficiency of cargo handling facilities at the port to accommodate future
flows.
• The project will cost approximately 635 million pesos (about US$23.5
million).
• 75% of the total project cost will be provided as a grant by the US Agency
for International Development (USAID) and the other 25% will be
provided from counterpart contribution by the Philippine government.
17
Port Rehabilitation and Expansion:
The Makar Port Project (cont’d)
Project Outcome (with Project)
•
Deterministic case appeared good with partial financial
analysis:
- NPV Financial (with Project) = 10.76 million pesos
•
Analysis shows project provide a negative economic
performance (-105.58 million pesos)
•
Project was implemented
18
Port Rehabilitation and Expansion:
The Makar Port Project (Cont’d)
Incremental Financial-Economic Analysis
With Project
NPV (Total Investment Point of View)
NPV (Economic Point of View)
Without Project
Incremental
(000s of Pesos)
(000s of Pesos)
(000s of Pesos)
10,760
19,453
(8,693)
(105,576)
25,683
(131,259)
Note: Exchange rate in the Philippines in Year 1 is 27 pesos/US dollar
(1994).
19
Financial Analysis
-- Incremental Financial Cash Flow Statement (Real) -(thousands
Year 1
Year 2
Peso)
Year 3
Year 4
Year 5
3,000
3,000
69
69
69
22,148 155,088 219,215
22,217 158,157 222,284
3,000
69
79,719
82,788
1,359
216
1,576
3,000
1,000
69
5,645
Year 6 Year 10 Year 15 Year 16
RECEIPTS
Port Revenues - local
- foreign
Total port revenues
Rental income from - Container Yard I
- Container Yard II
Other Income
USAID Grant and Gov. Contribution
Liquidation Values:
Total Cash Receipts
EXPENDITURES
Investment cost - non tradable
- tradable
Operating Cost:
Loss of rental income
Change in Cash balance
Change in Accounts Receivable
Change in Accounts Payable
Total Expenditures
NET CASH FLOW
NET PRESENT VALUE (at 9%)
-
2,276
243
2,519
3,000
2,000
69
7,588
6,895
425
7,319
3,000
6,000
69
16,388
8,120
452
8,572
3,000
9,000
69
340,810
20,641 340,810
22,631 103,995 153,285 49,006
2,758 93,124 139,002 57,285
9,017
9,017
1,100
1,100
1,100
1,100
1,100
1,100
79
54
158
109
(1,353)
(123)
26,489 198,219 293,386 107,392 9,001 10,157
(4,272) (40,063) (71,103) (24,604) (3,356) (2,569)
(8,693)
.
9,017
1,100
64
128
(123)
10,186
6,202
9,017
1,100
19
(390)
38
(779)
(123)
1,230
10,051
61
10,589 340,750
20
Economic Benefits of the Makar Port Project
• Additional port revenue from expansion in traffic
including foreign exchange premium.
• Additional rental income from containers yards.
• Reduction in waiting time of ships.
• Reduction in animal weight loss from waiting on
ship.
21
Economic Analysis
-- Incremental Economic Net Benefit Flow Statement -(thousands Peso)
Year 1
RECEIPTS:
Port revenues - local
- foreign
Total Port Revenues
Benefit to ship owners due to
reduction in ships' waiting time
Benefit to shippers due to reduction
in animal weight loss
Rental income from - Container Yard I
- Container Yard II Other Income
69
USAID Grant and Gov. Contribution
Liquidation Values:
Total Cash Receipts
69
EXPENDITURES:
Investment cost - non tradable
21,818
- tradable
2,596
Operating Cost:
Loss of rental income from term. shed 1,100
Change in Cash balance
Change in Accounts Receivable
Change in Accounts Payable
Total Expenditures
25,514
NET CASH FLOW
(25,445)
NET PRESENT VALUE (at 10.3%)
INTERNAL RATE OF RETURN
Year 2
Year 3
Year 4
Year 5
Year 6
Year 10
Year 15
Year 16
-
-
-
1,359
249
1,608
2,276
280
2,556
6,895
488
7,383
8,120
520
8,639
-
-
-
25,484 31,264 33,539 35,444 36,491
-
3,000
0
69
3,069
3,000
0
69
3,069
13,331 13,906 16,204 19,715
3,000 3,000 3,000 3,000 3,000
0
1,000 2,000 6,000 9,000
69
69
69
69
69
316,916
28,553 50,272 55,070 68,100 76,914 316,916
96,550 141,822 45,422
87,515 130,373 54,059
1,100
1,100
1,100
185,165 273,295 100,581
(182,096) (270,226) (72,028)
(131,259)
5.88%
9,044
1,100
80
160
(1,329)
9,056
41,216
9,044 9,044 9,044
1,100 1,100 1,100
55
65
20
(397)
111
130
39
(793)
(121) (121) (121) 1,208
10,190 10,219 10,082
19
44,880 57,881 66,832 316,898
22
Stakeholder
Analysis
(thousands Peso)
ITEM
RECEIPTS:
Total Port Revenues
Benefit to ship owners/shippers due to
reduction in ships' waiting time
Benefit to livestock shippers due to
reduction in animal wt. loss
Rental income from - Container Yard I
- Container Yard II
Other Income
USAID Grant
Liquidation Values:
Total Cash Receipts
EXPENDITURES:
Investment cost - nontradable
- tradable
Operating Cost:
Loss of rental income from term. shed
Change in Cash balance
Change in Accounts Receivable
Change in Accounts Payable
Total Expenditures
NET CASH FLOW
(A)
(B)
PV Financial at
PV Economic at
Economic Discount Economic Discount
Rate of 10.3%
Rate of 10.3%
(C)
PV of
Externalities
(B - A)
(D)
(E)
Government
Shipowners/
Shippers
Allocation of Externalities
25,677
25,928
250
250
-
-
187,684
187,684
-
187,684
22,100
23,895
577
404,200
81,587
558,037
77,025
22,100
23,895
577
75,867
413,076
77,025
(404,200)
(5,720)
(144,961)
(404,200)
(5,720)
(409,670)
77,025
264,709
280,673
245,332
44,000
9,203
223
446
(1,145)
578,732
(20,695)
260,925
230,517
44,135
9,203
227
454
(1,126)
544,335
(131,259)
(19,749)
(14,815)
135
4
8
20
(34,397)
(110,564)
(19,749)
(14,815)
135
4
8
20
(34,397)
(375,272)
264,709
23
Stakeholder Analysis
• Key Question:
– Why was this BAD project implemented?
 The Philippines wasted 131.3 million pesos in
order to transfer income to a few shipowners/shippers.
24
BASIC NEEDS
ANALYSIS
25
Basic Needs Appraisal
1.
2.
3.
4.
Financial analysis considers the views of all those who
have a financial interest in the project – owners, buyers,
sellers.
Normally the economic appraisal evaluates additional
consumption by the demanders’ willingness to pay, and
any displacement of other suppliers by the economic value
of resources saved by these suppliers.
The attainment of the basic needs of poorer members of
the community may also generate an increase in the total
satisfaction of other better off members of the community.
This public good externality needs to be included in the
benefits of investments that lead to satisfying of the basic
needs by disadvantaged members of the community.
26
Hierarchy of Minimum Basic Needs
• Survival Needs: food and nutrition, health,
water and sanitation, and clothing
• Security Needs: shelter, peace, income,
employment
• Enabling Needs: basic education and
literacy, family care and psychosocial needs
27
Basic Needs Externality Approach
• This is a practical approach for evaluating community wide
externalities arising from the increased level of basic needs
achievement by the less fortunate members of society.
• Basic needs externality (BNE) approach was introduced by
Harberger (1984) to measure this social dimension of a
project.
• The rationale for BNE approach is not just that the poor
should have more income, but that they should have better
nutrition, medical care, housing, education, etc.
28
Figure 1: Basic Needs Externalities Associated With
Each Decile of Poor
Price
Typical Private Demand Curve of
the 4th Decile
Y0
Y1
Basic Needs Externality
BNE1
BNE2
BNE3
PM
Typical Private
Demand Curve of
the 1st Decile
Typical Private
Demand Curve of the
2nd Decile
X
Typical Private
Demand Curve of the
3rd Decile
Quantity per Family
Y0X is associated with a society that generates high basic needs externalities.
Y1X is associated with a society that generates low basic needs externalities.
29
Figure 2: Basic Need Externality Caused by
Project Lowering Cost of Service
(Example: Potable Water Project Lowers Coping Cost)
Price
Basic Needs Externality
M
T
Typical Private Demand
Curve of the 4th Decile
Type A Externality = MNST
P0M
P1M
S
R
N
Typical Private
Demand Curve of
the 1st Decile
Q0
Q1
Note: Quality of family health = f (quantity of clean water consumed)
Clean Water Consumption
(Quantity per Family)
30
Figure 3: Basic Needs Externality Caused by Increased Demand
due to the Income Effect of an Investment Project
Y
Typical Private Demand
Curve of the 4th Decile
Basic Needs Externality
M
T
Type B Externality = MNST
PM
S
X
N
Typical Private Demand
Curve of the 1st Decile (After
the Income Change)
Typical
Private
Demand
Curve of the
1st Decile
Q0
Q1
D1’
D1
Quantity per Family
31
An Application of Basic Needs Externality Estimation:
Olifants-Sand Water Transfer Scheme
Basic Facts:
• The project considered here is “Olifants-Sand Water Transfer Scheme”,
which can be best described as a regional bulk water supply system.
• It includes a raising of the existing Flag Boshielo (Arabie) dam by 5
meters, construction of the Rooipoort dam and the construction of the
Water Transfer Scheme from Rooipoort to Polokwane via
Lebowakgomo.
• The region affected is the Sekhukhune Cross Border District of
Limpopo Province.
• This region has an unemployment rate of approximately 68%,
compared to the average of 46% in Limpopo Province.
• Only about 40% of the households have access to the minimum water
supply for drinking, cooking and critical hygiene of 25 liters per capita
a day (l/c/d), which is set by the Reconstruction and Development
Program of the National Government of South Africa.
32
Olifants-Sand Water Transfer Scheme
• The economic analysis indicates that the project has a highly positive
NPV.
• In the analysis of the basic needs externality, focus is on the improved
availability of water and the incomes of the poorest households
affected by the project, namely the rural communities.
• We assume that the health impact of consuming more clean water is
primary due to its use for drinking, cooking and critical hygiene.
• The increased availability of potable water is accompanied by a
dramatic fall in the costs of water for reasons that has an impact on
health, thereby causing the total amount of consumption for these
purposes to increase.
• With the present very low volumes of water consumption, it is
estimated that approximately 80 percent of the incremental potable
water provided to poor households by the project would be used for
drinking, cooking and critical hygiene.
33
Present Value of Basic Needs Externality from Increased
Consumption of Water by Poor* due to Lower Prices
PV of volume of increased
water consumption
(million cubic meters)b
PV of Externality
(Millions of Rand)
Olifants Rural Centersa
52.66
80.04
Lebalelo Rural
15.65
23.79
Types of Consumer
Total
(Poor communities with water
shortages)
68.31
(20.77% of Total Demand)
103.83
Note: *The poor are defined as those in the bottom 40 percent of the income distribution. The two
rural communities included in this analysis fall well below this threshold.
aProportion of total increment water used for drinking, cooking and critical hygiene = 80%.
The economic cost of supply is estimated to be equal to R1.9 per M3. Value of basic needs
externality of target consumption for Olifants Rural can be estimated as R1.9*52.66*0.80 m.
bThe water volumes are taken from the demand analysis of Cambridge Resources
International, Evaluation of the Olifants-Sand WaterTransfer Scheme in the Limpopo Province
of South Africa, Cambridge, MA, (2004).
34
Stakeholder Impacts on Earnings of the Olifants-Sand Water
Transfer Scheme in the Northern Province of South Africa
Stakeholder
Present Value of Impact
(millions of Rand)
Lebowakgomo Area
74.0
Rural Users
338.7
Mining
271.7
Polokwane
26.6
Irrigation
77.0
Labor
13.2
35
Basic Needs Externality from Improved Housing,
Nutrition, Health, Education of Poor* from
Increased Real Income
Value of Impact (millions
of Rand)
(1)
Basic needs externality
30% premium
(2)
Rural Areas Usersa
338.7
76.21
Laborb
10.56
2.38
Total
423.26
78.59
Stakeholder
Note:
*The poor are defined as those in the bottom 40 percent of the income distribution.
aPoor receive 100% of income change; proportion of income spent on basic needs = 75%; basic
needs externality = 30% of value of additional private expenditures on basic needs.
bPoor receive 80% (suppose 80% are the unskilled labor) of income change; proportion of
income spent on basic needs = 75%; basic needs externality = 30% of value of additional
private expenditures on basic needs.
36
Importance of Basic Needs Externalities
Present Value
(Millions of Rand)
PV basic needs externality due to price effect
103.83
PV basic needs externality due to income effect
78.59
Total basic needs externality
PV total cost of project
Ratio of basic needs externality to total investment costs
182.42
714.1
25.55%
37
Magnitude of Government Assistance
• NPV of the net economic benefits of a private sector
project is positive.
• NPV of the net financial cash flow is negative.
However, the government may want to assist the
project since its positive economic NPV will
increase the well-being of all people in society.
• The government should offer the project the smaller
amount required for the project to be undertaken or
the value of the positive net economic externalities
generated by the project.
38
ECONOMIC ASPECTS OF
FOREIGN FINANCING
Questions to be addressed
At the project level, how do we account for the
economic cost of foreign financing?
A. Case where all financing is incremental.
B. Case where all financing is non-incremental.
40
Marginal Economic Cost Of
Foreign Financing
%
C
%MEC’
%MEC0
i’f
if0
MC
B
D
E
S if
0
Df
A
0
Df
Q0
Q1
+B
Quantity of
Foreign
Borrowing
Negative externality from foreign financing
= ABCD
41
MC = rf ´ (1- tw )´{1+ f ´ (1 e )}
f
s
MC
: Marginal economic cost of funds
rf
: real cost of foreign financing
tw
: effective withholding tax rate

: ratio of [total foreign debt whose interest
rate is responsive to changes in the current
amount of foreign borrowing] to [total stock
of foreign financing]
 fs
: the supply elasticity of foreign funds to a
country with respect to the cost of funds the
country pays for its foreign financing
42
Incremental Foreign Investment
•
In an open economy, the net economic benefits from the project are going
to be shared by:
– the government (g)
– other residents of the country (p)
– foreigners (f)
•
The NPV of an investment project, using the economic cost of funds, can
be expressed as:
NPVe = Bg+ Bp + Bf – Cg – Cp – Cf
•
If the project financed from foreign sources is entirely incremental, the net
benefits of the project accrued to the host country will be:
NPVe host = NPVe + (1+)(Cf – Bf)
where  stands for the foreign exchange premium.
43
Non-Incremental Foreign Investment
• When none of the foreign investment is incremental to
the host country, the opportunity cost of the investment
for the foreigners is the stream of benefits that they
would have received from the alternative investment
forgone.
• Let the stream of dividends, interest and loan
repayments, discounted at the EOCK that actually flows
from the project to foreigners be (Bft), t=0….n
• Let the stream of benefits that foreigner would have been
paid by the alternative investments within the host
country if this project not undertaken be (Baft), t=0….n.
• Thus, the net cost to the host country will be measure by
44
Bft - Baft.
Non-Incremental Foreign Investment (cont’d)
• We can estimate parameter Z, which is the
the ratio of the present value (discounted at rf
%) of the stream of foreign equity and debt
invested in the project to the present value of
the actual stream of the foreign dividends,
debt repayment and interest received.
• rf refers to the normal rate of return to the
total foreign capital in the host country.
45
Non-Incremental Foreign Investment (cont’d)
Z=
PV (foreign equity + foreign debt) at
rf discount rate
PV (foreign dividend + foreign interest + foreign
repayment) for project at rf discount rate
• If Z = 1, the foreign investment owners will receive a normal
return (rf).
• If Z > 1, then foreigners would be earning less than a rf %
return by investing in the project.
• If Z < 1, then foreigners would be earning more than a rf %
real return.
46
Non-Incremental Foreign Investment
(cont’d)
•By multiplying this ratio (Z) by the actual stream of
dividends, debt repayment, and interest received by
foreigners from the project, we can estimate the stream of
payments to foreigners that is sufficient to generate a
normal rate of return to the foreigners. Baft = (Z)(Bft), t=0…n.
Thus, the stream of additional economic costs created by
foreign financing is Eft = (Bft – Baft), t=0,1,..
•The total adjustment is to subtract (1+)PV(Ef) using the
economic opportunity cost of capital as the discount rate.
NPVe host = NPVe – (1 + )PV(Ef)
47
Financial NPV of Utility to Percentage Change
in Tariff Structure: A case in Panama
Tariff Structure
-40%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
FNPV@15% (000 Balboas)
-2,058
27,999
37,229
46,066
54,508
62,556
70,210
77,470
84,336
Z =.1242, PV(Ef) @9.3% = -142,109
48
Sensitivity of Economic NPV to Change in
Water Tariffs
Change in Water Tariffs
(percent)
Economic NPV
(B thousands)
-15%
53,658
-10%
45,766
-5%
37,495
0%
28,845
5%
19,815
10%
10,406
15%
618
20%
-9,549
NPV econ @ 9.3% = 10,406
If accounting for foreign financing, then the
Economic NPV: 10,406 – 142,109 = - 131,703
49
Stakeholder Analysis without taking
account of foreign financing
Pe = Pf + SEi
NPVee = NPVfe + SPVe (EXTi)
PV economic flow
@ econ. d.r.
10,406
=
PV fin. flow
@ econ. d.r.
+
PV externalities
@ econ. d.r.
140,178
-
129,772
50
Project Net Benefits without Accounting for
Foreign Financing (thousand Balboas)
Metered
Metered
Customers
Government
Customers (unmetered with
24-hour supply
(also w/o
w/o project)
project)
NPV Externalities
-24,260
Economic @d.r. 9.3% - 1,568
-18,227
Commercial
& Industrial
Customers
-9,486
Unmetered
Metered
Customers
Metered
NonCustomers Customers
revenue
(unmetered with consumers
(unmetered W/ o project
intermittent water
with
and cope with w/o project
tanks w/o project)
NPV Externalities
Economic @d.r. 9.3%
5,594
intermittent
water and
don’t cope with
tanks w/o
project)
-107,258 27,678
-2,244
SUM EXT. = -129,772
51
Stakeholder Analysis with Taking Account
of Foreign Financing
Pe = Pf + SEi
NPVee = NPVfe + SPVe (EXTi)
PV economic flow
@ econ. d.r.
-131,703
=
PV fin. flow
@ econ. d.r.
+
PV externalities
@ econ. d.r.
140,178
-
271,881
52
Project Net benefits with Accounting for
Foreign Financing (thousand Balboas)
Metered
Metered
Customers
Government
Customers (unmetered with
24-hour supply
(also w/o
w/o project)
project)
NPV Externalities
Economic @d.r. 9.3% - 1,568
-24,260
-18,227
Commercial
& Industrial
Customers
-9,486
Unmetered
Metered
Customers
Metered
Loss to
NonCustomers
Economy
Customers
revenue
(unmetered with consumers
from
(unmetered W/ o project
intermittent water
with
foreign
and cope with w/o project
tanks w/o project)
NPV Externalities
Economic @d.r. 9.3%
5,594
intermittent
water and
don’t cope with
tanks w/o
project)
-107,258 27,678
financing
-2,244 -142,109
SUM EXT. = -271,881
53
Concluding Remarks
• In the vast majority of cases, a project that is
being financed from foreign sources will be simply
reallocating the total amount of foreign investment
available to the country.
• Public-Private partnerships that are carried out
either through non-arms-length arrangements or
by suboptimal risk management will generate
either large wealth transfers or payments to
foreign entities.
54
Concluding Remarks (cont’d)
• Such transfers to foreigners are always an economic
cost, but if a necessary compensation for special risks
associated with the foreign financing they are an
economic cost to host country.
• Guarantees that are provided by the government to
domestic investors may alter behavior and help or hurt a
project.
• Triggering of the guarantee is essentially a transfer from
the government to the domestic or foreign financial
institutions. In case of foreign investment it is
guaranteeing the value of the economic cost of the
investment.
55