Economic Analysis Overview

What is the objective of the project?

The scope of the objective will determine the choice of the analysis methods and tools. The project’s objective should be linked with the expected impact. As objectives broaden in scope, attribution becomes harder to determine, mainly because multiple causality chains can be present and multiple effects captured.

What is the counterfactual?

The most fundamental question in CBA is the establishment of the counterfactual as it is the basis for the “without” project situation. The starting point for the definition of the counterfactual is what can be called “the improved base situation without project”. This situation reflects small improvements to the project at very little cost and can serve as the benchmark against which to compare the proposed project. Also, this counterfactual can be derived from a rigorous impact evaluation that can be validly applied to the project, possibly from a pilot or another similar project that are externally valid to the one under analysis. In most cases, explicit assumptions will need to be made to compensate for the limited information on the counterfactual often relying on a “business as usual” or “improved business as usual” scenario.

What are the components? How critical are they? How separable?

The realization of expected project benefits is contingent on the effective application of a combination of inputs, grouped in components. Each component should be justified and analyzed on its own, based on an additional or marginal analysis (with/without component). Nevertheless, some components are more critical than others, and if benefits can be more clearly identified, quantified and monetized for one or several of these components, then the economic analysis can be applied to those critical components.

In some cases, benefits are the result of the combination of components and attribution to a specific component is not possible. When undertaking a CBA that is based on only one of the components of the projects, special attention should be placed on benefits attribution of that component.

Why is this project the best alternative to reach the objective?

In the selection of the alternative (s), it is important to consider any plausible mutually exclusive alternatives that involve differing technological/institutional choices, financial arrangements, locations and beneficiaries. These alternatives can generate different net benefit streams and CBA allows the selection of the best available option.

Did the analysis serve in changing the proposed project?

Economic analysis is a tool that is designed to help select projects. It is most useful if used early in the project cycle to identify bad alternatives and bad components. If used late in the cycle, its usefulness is restricted to helping decide whether to proceed or not with a particular design. If the analysis influenced the design of the project, it should be noted. If not, particular attention will be given to critical assumptions when no additional alternatives are presented as analyzing a particular project is significantly different from justifying it.

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