Narrowing the Options A Economic Considerations - Session 7 Managing Project Preparation for Climate Change Adaptation

USAID Climate Change Adaptation Project Preparation Facility for Asia and the Pacific
(USAID Adapt Asia-Pacific)
Session 7:
Narrowing the Options A:
Economic Considerations
January 18, 2017

USAID Adapt Asia-Pacific
Course Overview
• Day 1: Project Presentations,
Climate Finance, and Climate
Impacts
• Day 2: Planning, Risk
Management, and “Bounding” the
Project
• Day 3: Economic Analysis,
Safeguards, and Project Logic
• Day 4: Public-Private Partnerships,
Blended Finance, & Managing
Project Design
• Day 5: Monitoring & Evaluation
and Final Presentations

Orientation to Process
Project
Concept
Recruit
Design Team
Project
design &
Management
framework
Economic,
Social & Env’t
Analyses
Project
Appraisal
Project
Approval
• Project need has been identified
• Develop Terms of Reference (TOR)
• Recruit design team
• Design team conducts feasibility study
• Government appraises feasibility study
• Approved feasibility incorporates appraisal findings
• Project document for financial approval and implementation
Project Design

Project Cycle Responsibilities
Project Cycle Step Who’s Responsible? Managerial
Responsibilities
1. Climate policy &
strategy
Government Be informed and alert
2. Project design Financier, lead
agency, contractor
(design team)
Project concept, TOR
for design,
supervision of
contractors
3. Project appraisal Financier, lead
agency, contractor
Verify quality,
feedback. Yes/no
4. Project
implementation
Implementing entity Supervision, reports
5. Monitoring &
evaluation
Implementing entity Supervision

Session 7 Outcomes
• Understand and apply decision rules based on economic criteria
• Determine which elements of a project are appropriate for public
and private sector financing

PART 1:
UNDERSTANDING ECONOMIC ANALYSIS
OF CCA PROJECTS

Revisiting the Project Cycle
RESULTS
Policy &
Strategy
Project
Design
Implementation
Appraisal/
Approval
• Project Concept
• Recruit Design
Team
• Project Design &
Management
Framework
• Economic, Social,
and Environmental
Analyses

Project Concept: Urban Water Supply
and Wastewater Management in Fiji
Project
Concept
Recruit
Design Team
Project
design &
Management
framework
Economic,
Social &
Env’t
Analyses
Project
Appraisal
Project
Approval
• ADB and Fiji agree on the project concept
• TA Report is prepared to obtain funds for project preparation. It
covers:
• (i) Issues
• (ii) Impact and Outcome
• (iii) Methodology and Key Activities
• (iv) Cost and Financing
• (v) Implementation
Project Design

Terms of Reference: Urban Water Supply
Project
Concept
Recruit
Design
Team
Project
design &
Management
framework
Economic,
Social &
Env’t
Analyses
Project
Appraisal
Project
Approval
• Attached to the TA report discussed in the previous slide is a
Design and Monitoring Framework, Cost Estimate and
Financing Plan and outline TOR
• The TOR sets out the following:
• (i) Overview
• (ii) Scope of Work
• (iii) Reporting and Schedule
Project Design

Design Team Recruited for: Urban Water
Supply and Wastewater Management in Fiji
• Following the approval of the TA report that sets out the project
concept, scope of work, TOR, cost and financing, implementation
arrangements and reporting schedule, a design team can be recruited
to undertake the Feasibility Study
• Allow about 8-10 weeks for bids by shortlisted consulting firms,
evaluation of bids and award of contract. Then the FS team is fielded
and starts work
This Module discusses your role in recruiting the design team and
supervising the project design process
Project Design
Project
Concept
Recruit
Design
Team
Project
design &
Management
framework
Economic,
Social &
Env’t
Analyses
Project
Appraisal
Project
Approval

Economic, Social, & Environmental
Analysis Timeline
Inception
Report:
1 Month
• Coordinate meetings & review of inception report
• Agree with design team on details in final
inception report
Draft
Feasibility
Study: 4
Months
• Coordinate meetings & review draft feasibility
report
• Appraise project: Yes/No decision
• Provide revisions for final feasibility report
Final
Feasibility
Study: 1
Month
• Coordinate with design team
• Review and approve final feasibility report
Design & Management Framework.
Economic, social, environmental analyses
Comply with requirements of financier Draft
Feasibility Study
Address gov’t & financier appraisal
edits and revisions  final feasibility
report & project document
Design Team
Responsibilities (CONDUCT)
Management Team
Responsibilities (SUPERVISE)
Consultations with government,
preliminary visits, develop work
plan, budgetinception report
Final Project Document

Session 7 Part 1 Objectives
• 4.2.A. Describe the importance of rigorous economic analysis as
a cornerstone of good project design
• 4.2.B. Recognize and adopt managerial best practices for
economic analysis
• 4.2.C. Identify and define several types of costs and benefits
relevant for economic and financial analysis
• 4.2.D. Identify documentation and tools associated with
economic and financial analysis
• 4.2.E. Compare and contrast economic and financial analysis
and describe the role of each in project design

Projects & Economic Analysis
• Government determines project concept, often helped by
financier
• Objectives, scope, TOR are outlined in the concept
• Design team refines objectives, develops outputs, components,
& activities.
• Design team analyzes costs & benefits through economic
analysis
Demonstrate why the project is an appropriate use of scarce
resources!

Upfront Considerations
• The role of the manager is to support & supervise the design team. The
TL's job is to lead the team
• Economics and Finance specialists have far less time on the FS than
the technical specialists. The technical viability of the project is most
important. But it must be financially profitable and economically viable
to be sustainable
• TIP: Make sure the TOR and allocated time for experts is adequate.
Make sure the experts are genuinely qualified, experienced and capable
of rigorous analysis
• Government should be active in a rigorous appraisal of the project
• The more understanding the government has of project preparation, the
greater the ownership, and the greater is the chance to achieve a well
designed project!

Financial & Economic Analyses:
What’s the Difference?
• Both help to establish the case for doing your project
• Economic & Financial analyses should be complementary and
consistent
• Economic analysis demonstrates costs & benefits to society
• Financial analysis demonstrates costs & benefits to the firm or to
private individuals or households (e.g. farmers, natural resource
users)
Now let’s look at what goes into each, and
what you need to pay attention to.

What Goes Into Economic
Analysis?
Exact contents may differ from project to project, but in general economic
analysis contains the following elements
1. Introduction: What is the project doing?
2. Economic Rationale: What is it doing?
3. Demand Analysis: Indicates that something needs to be done
4. Least Cost Analysis: Comparing the various options to demonstrate
yours is the most cost effective
5. Assumptions/Risks: What is your methodology, and what might go
wrong?
6. Costs: Market and non-market values of inputs/activities
7. Benefits: Valuing the “good” that comes from the project
8. Metric: How are you comparing the costs and benefits?
9. Sensitivity Analysis: If something changes, how will the project be
affected?
10. Conclusions: Should we do the project?

• Every quantifiable activity is broken down into costs
• Fixed vs. Variable; direct vs. indirect, salvage values, financial charges
• Costs tend to be heavy at the beginning of the project
• Currency and Categories of Costs
• Base Costs & Contingency Allowances
• Cost Summary shows the breakdown of the costs of the project,
whereas Cost Schedule shows the costs over time
• Don’t exceed your limits (e.g. capacity to disburse, labor
capacity)!!!
• Make sure the costs are based on competitive supply and reflect
market values
• For more info, refer to ADB guidance here.
Costs

Example of Project Cost Summary and
Financing Plan

Example of a COST SCHEDULE

COSTS: SOFTWARE TOOLS
• MICROSOFT EXCEL: Widely available…existing
expertise....very powerful. Recommended
• COSTAB: Sophisticated and powerful tool for
presenting standard costs tables that can be linked to
procurement plans and converted for economic
analysis. Not recommended for occasional users.
• TIP: Verify all information before entering into COSTAB or Excel
• TIP: Be sure to obtain final cost estimates model (soft
copy) from design team for future use!

• The “good” that results from activities, components, overall
project
• Market benefits vs. non-market benefits…is the method used for
the latter appropriate and rigorous?
• Financial & Economic benefits are expressed in financial and
economic terms
• Don’t confuse “with project” and “without project” with “before
project” and “after project”
• TIP: If country prices are distorted, import prices can be used
• TIP: BENEFITS ARE CONTEXT SPECIFIC!
BENEFITS

Metrics for Comparison
Costs and Benefits are aggregated and compared to yield a metric
or measure of effectiveness. The comparison technique and
metric varies from project to project and from financier to
financier!
• Cost Benefit Analysis (ADB): Net Present Value, Benefit Cost
Ratio…What are the decision rules?
• Cost Effective Analysis
• Multi-Criteria Analysis
Know which techniques and metrics are
appropriate, and know what the numbers mean!

Sensitivity Analysis
• Sensitivity analysis helps to address uncertainty in project
design.
• Identify elements that are uncertain
• Determine realistic alternative values
• Examine how these changes impact the key metrics of the
economic analysis
• Does this change the recommendation of the project?

Hints from the Adaptation Fund
• Attention to most vulnerable communities and groups within
communities
• Equitable distribution of benefits
• Avoid maladaptation
• Avoid marginalization of minority & indigenous groups
• Comply with environmental and social principles
• More guidelines here.

Managerial Best Practices for
Economic and Financial
Analysis
What can you do to ensure quality and minimize delays?
• Accuracy, consistency, completeness and honesty
• Tables in clear formats as per requirements of financier
• Transparency in all assumptions; make sure they are explained
and justified!
• Check for consistency between economic & financial analysis
and design and monitoring framework (logframe)
• Be aware of sector-specific considerations and practices!

Useful Resources

Session 7 Outcomes SELF
CHECK
• Understand and apply decision rules based on economic criteria
• Determine which elements of a project are appropriate for public
and private sector financing

APPENDIX:
EXAMPLES OF ECONOMIC &
FINANCIAL ANALYSES OF
PROJECTS
28

Economic Analysis:
Quantitative Analysis of Costs
and Benefits
• Costs and Benefits need to be compared to assess
whether there are net positive benefits
• Quantitative estimates are prepared by the team to allow
this comparison
• This stage of the project analysis is normally called the
“cost benefit analysis”
• In reality only some projects (bigger ones typically) are
subject to formal CBA. Others are subject to cost-
effectiveness analysis, or similar analysis.
• Examples are given in the following slides….

Economic Analysis: CBA
Requirement
• Multilateral banks and some other donors require a
quantitative assessment of economic viability. This can
take the form of cost-benefit analysis or cost-
effectiveness analysis, or multi-criteria analysis of the
proposed investment
• The next several slides contain examples of the results
of 3 cost-benefit analyses for climate change investment
projects and policy-based programs

CBA EXAMPLE 1: Valenzuela City
Integrated Flood Risk Management
• A pre-feasibility study was undertaken for a potential
project to address an increasing risk of flooding in
Valenzuela City, part of Metro Manila
• The CBA of the proposed project compared the incremental
costs of investments in flood control and management,
including O&M costs, with the incremental benefits arising
from increased protection for residential, commercial,
industrial and institutional infrastructure, and fishponds
• The Economic Internal Rate of Return of the proposed
project is 20.6%, well above the 12% threshold usually
applied to public works projects. The Economic Net Present
Value of the project over its 30-year life is estimated to be
PhP 4.4 billion.

CBA: Elevation Map of
Meycauayan River Watershed

Economic Analysis: Barangay
Size and Population Densities

Economic Analysis: Expected
Barangay Flood Damage by Sector

Economic Analysis: Valenzuela City

Electrical Post Used for Water
Level Monitoring in Valenzuela

EIRR & NPV: Valenzuela City

Economic Analysis: Sensitivity Valenzuela
City Integrated Flood Risk Management

Economic Analysis: Climate
Change Scenario

Economic Analysis: Climate Change
Valenzuela City Integrated Flood Risk
Management

CBA EXAMPLE 2: Urban Water Supply
• Economic CBA of investment in the Greater Suva Area -- inadequately
supplied at peak demand – projected population growth and climate
change impacts will widen the water supply gap without the project
• Options: least cost of water supply and sewerage needs of GSA.
Present value of life-cycle costs of each technical option was
compared, including capital investment, operations and
maintenance
• Water benefits: reduced cost F$30/cu meter compared to
tanker truck; elimination of current and future suppressed
demand; reduced non revenue water
• Sewerage benefits: avoided new sewerage connections;
increased land values; avoided decline in sewerage
connections via upgrade investments; biogas production;
Co2 abatement – replacing diesel
• Project benefits: EIRR>12%; sensitivity tested

Urban Water Supply and
Wastewater Management in Fiji
• Financial analysis of water supply and wastewater management
investment in the Greater Suva Area
• Tested the viability of 4 outputs: (i) increased water
supply/reliability; (ii) increased sewerage coverage; (iii)
institutional strengthening of WAF; and (iv) project management
during implementation
• FIRRs: negative on outputs (i), (ii) and for the project overall
• Only with a very substantial increase in water and sewerage
tariffs would WAF revenues increase sufficiently for the
investment to have a positive FIRR.
• A tariff review was recommended by ADB to support water demand
management and to improve the financial sustainability of WAF.
Currently being undertaken to revise a tariff review study in 2012. In
addition, the Pacific Regional Investment Facility has financed a tariff
review study. The result of these two studies will be the basis for
WAF to submit a proposal to its Board.

CBA EXAMPLE 3: Climate Change Adaptation
Program, Philippines (WB/GEF)
• GEF-supported projects do not have to be justified through a
full economic analysis. For GEF, climate change adaptation
projects require an Additional Cost Analysis.
• During implementation, assessment of the economic impact
and cost-benefit analyses would be part of the selection
criteria for proposed adaptation measures. Models which
take account of future climate impact would be analyzed to
show the benefits from implementing adaptation measures
and the possible economic losses that could occur if such
actions were not taken.
• This is a common feature in a program approach (greater
policy focus than direct project investment approach).

Is CBA always needed?
• Not all CCA project financiers call for project
CBA in economic terms
• Many projects funded via the Adaptation Fund or
Green Climate Fund have been approved without
an economic CBA. Greater emphasis has been
placed on financial analysis and cost-
effectiveness as a key input to the decision-
making criteria
• Reasons for this focus on the difficulty of
quantifying all benefits in terms of monetary
values
• Livelihoods investments through CCA
interventions also rely on financial analysis as
these benefit individual households; these are
justified through financial analysis of the

Cost-Effectiveness Analysis:
AF Examples
• Describe or provide an analysis of the cost-
effectiveness of the proposed project/programme.
• Logical explanation of scope and approach
• Sustainability
• Compare project to alternative interventions
• Quantitative estimates required only where feasible and
useful
• Five examples are given in the following slides: 4 from
India (including financial analysis of livelihoods
aspects) and 1 project from Timor-Leste

CEA EXAMPLE 1: MSSRF
Project, Andhra Pradesh, India
• Mangroves as a first line of defense against sea level rise
have financial and economic benefits, including wood and
non-wood products and aquatic products
• Combining mangrove rehabilitation for coastal protection
with integrated mangrove and fish farming systems (shrimp,
fish, mussel/oyster and crab culture) provides a more cost-
effective solution for coastal erosion control and gradual
soil accretion, resilient livelihoods and anti-pollution benefits,
than the alternative of a sea wall
• Quantified analysis presented of direct net incremental
benefits, plus description of positive externalities, and all
CEA aspects

CEA EXAMPLE 2: TAAL
project in Madhya Pradesh,
India
• Ad hoc identification of rural pond sites + poor practices + lack of
technical knowledge + CC impacts = major risks for inland fisherfolk
(high poverty)
• Project invests in improved site identification (larger and deeper
ponds) for longer seasonal production, surrounding vegetation and on-
site controls, adaptable species selection, de-silting, insurance and
marketing innovations, and knowledge management
• Capital cost of fish farming in 0.5 ha of tank will rise by 30% to 35%
increasing water retention capacity of 50%, sustained growth in
catch/harvest of 25-30%, and reduced fish mortality of 20%.; catchment
restoration to prevent top soil erosion will support at least 0.2 ha of
cropping
• At full operation and required maintenance, a fish farmer can generate
a financial profit for at least 20 years; Project is economically viable
and sustainable

CEA EXAMPLE 3: BAIF Project in
Uttarakhand, India
• Climate change has accelerated degradation of the natural
resource base of marginalized communities in Champawat
district, Uttarakhand; project activities will impact 800 hill
area households
• Project invests in community mobilization; livelihoods
through increased water supply (natural spring rejuvenation,
rainwater harvesting), efficient use (demonstrations), fruit
trees, vegetables in poly houses, cropping, livestock
breeding services (AI) and milk marketing; ecosystem
rehabilitation; and knowledge management; activities to
support women and reduce poverty are emphasized
• All investments are cost effective; significant incomes gains;
risks reduced though quality inputs, extension and marketing

CEA EXAMPLE 4: DRCSC
project in West Bengal, India
• Project sited in semi-arid area of extremely degraded soils and
high poverty; 5,000 households and 23,000 beneficiaries
• Project invests in small-scale agriculture (cropping/livestock),
soil conservation, village water supply and conservation (check
dams, storage), weather observation/advisories at local level,
extension, disaster proofing (grain and seed storage), energy
efficiency (biogas/stoves) and knowledge management
• Detailed descriptive analysis of cost effectiveness is provided;
quantified CEA also provided; both illustrate the incremental
financial and economic gains to be made by the project
• DRCSC’s track record shows this project is relevant throughout
the lateritic soils zone of India – high risk of CC impacts and
many poor people

DRCSC Project in West
Bengal, India: Micro-irrigation

DRCSC Project in West
Bengal, India: Terracing and
Ponding

CEA EXAMPLE 5: UNDP Project
in Timor Leste
• The project objective is to safeguard community assets,
livelihoods, and investments in road infrastructure in the
DARDC. In the absence of the project, the longevity and
sustainability of these ongoing investments in road
infrastructure are at risk to damage caused by climate-induced
disasters.
• Strengthening livelihood assets; at least 5,000 households
(>25,000 people) will benefit directly; the total area benefitting
from improved watershed management against the effects of
climate-induced disasters will be at least 50,000 hectares.
• CEA covers: disaster prevention and preparedness; low cost
early warning system; disaster risk management; watershed
management.
• CEA presented quantitative analysis and results from published
sources for all activities, not primary data for the project area.

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