NGO "ANOTHER WAY" (STICHTING BAKENS VERZET), NETHERLANDS, SUSTAINABLE INTEGRATED SELF-FINANCING DEVELOPMENT PROJECTS AND ADVANCED DEVELOPMENT TECHNOLOGIES

Costs and benefits analyses pose difficult issues for social development projects, starting with the need for them and their utility. The authors of this course believe that costs and benefits analyses belong to the private economic sector and that they are inappropriate to social investments of the type foreseen in integrated development projects.

Costs and benefits calculations can become extremely complex.

For example, in 2001 the European Commission issued a tender for the development of a method for analysing costs and benefits of air quality within the framework of the «Clean Air for Europe (CAFE) programme». Paragraph 5.1.4. of the technical annex required an examination of key monetary values in three main sectors:

i.) values on mortality and morbidity due to changes in air quality;

ii.) values on changes in ecosystems; and

iii.) values on material damage, including damage to cultural patrimony.

Runhaar H. et al, (Policy Analysis for Sustainable Development – The Toolbox for the Environmental Scientist, International Journal of Sustainability in Higher Education, Vol.7 no.1, Emerald Publishing Group, Bingley, 2006) write:

“CBA [Costs and benefits analysis] has several methodological as well as pragmatic weaknesses. For one thing, it is very data intensive. Often, the unavailability or inaccuracy of data will place a serious limitation on the usefulness of the method (Rossi et al., 2004; Wrisberg and Udo de Haes, 2002)[6]. By extension, when major costs or benefits are disregarded because they cannot be measured or monetised (e.g. the extinction of a particular animal or income re-distributional effects), the project may appear less or more efficient than it is (Rossi et al., 2004). Therefore, such costs and benefits should be added to the list, albeit in qualitative terms. Thirdly, CBA is not appropriate when a programme is not yet beyond the development state or when uncertainty remains about the effects (Rossi et al., 2004). Fourthly, the treatment of indirect effects is subject to debate, since it is often difficult to assess to what extent they are included in the measurement of direct effects (which raises the risk of double-counting). Finally, and more fundamentally, it is questioned whether consumer preferences are a proper basis for the valuation of effects on nature (e.g. the extinction of species) (van Wee, 2003; Fischer, 1997).”

Runhaar et al (op. cit.) acknowledge furthermore, on page 46 of the cited publication, refer criteria connected with quality of life and ask:

“Which allocation of development aid to the various possible projects will result in the highest benefits in terms of improved quality of life?”

The question is pertinent. Another issue is how improvement in the quality of life of the populations can be measured. [ See the human development indicator in table 1 of the Report on Human Development for 2007/2008 by the UNDP.]

The method of calculating cost and benefits is about initial monetary value, management costs, and the expected results expressed in monetary benefits. All of the project results are calculated and expressed in monetary terms. To do that, calculations are usually based on an «actual value ». An attempt is made to «photograph » the results of a project in advance to be able to compare investment returns compared with those for other projects.

The problem arises how the operation of the social and financial structures set up during the execution of integrated development projects leading to an general improvement in the quality of life of the populations can be monetised. In particular, how do you do this if the structures operate in the framework of a local money system ? Where are comparative elements to be found in other projects ?

Initial investments.

The «present value » of the investments made in the departure point for the «photograph» to be made for the calculation of costs and benefits. The investments can be made during the year of reference. They can also take place over a period of several years.

Where the investments are made in a single year, the costs and benefits calculations relating to them are referred to their value at the moment the investments are made, the moment the «photograph » is taken. The value is the same whether the investment is a commercial one with interest, a loan investment without interest, or a gift.

In reality there is, however, a major difference between the investment forms.

The future value after 12 months of an investment made by way of gift and without interest is the present value of the investment discounted by a commercial rate of interest which is considered to be «appropriate ». This is the « commercial price » of the investment.. If the money had been kept in a bank it would have «earned » interest, which would accumulate over the years. Using it for a project «costs » money.

For example, with a constant rate of interest « r » of 7%, the future value « VF » of a gift or interest-free investment expressed as present value «VA » 100 after 12 months will be 100* (1- 0.07) or 93. It is a sort of rate of depreciation of 7%, in this case of 7 units.

VF=VA*(1-r)

Future value VF of present value 100 after 24 months would be 93*(1-0.07) = 86.92 approx.

Future value VF of present value 100 after de 36 months would be 86.92*(1-0.07) = 81,23 approx.

The future value of investments made by way of gift or without interest usually diminishes over time.

This depreciation can in principle be added to the project costs for the purposes of costs and benefits calculations. However, this is not usually done, because the moment of taking the «photograph » is the moment the investment is made.

In case of investments subject to interest payments, the situation is different. The 7% interest ( being 7 units out of 100) is charged to the project.. In relation to the project, in the absence of capital repayment, the invested capital will remain at 100. In reality, the capital will vary according to the rate of inflation (i). Supposing a rate of inflation (i) of 3% the theoretical value of the capital will be:

VF=VA*(1-i), or 97.

The investor earns 7 units on account of interest, and from the financial point of view loses three of the seven units to inflation.. His net profit would then be just 4 units.

However, even these factors are rarely taken into consideration in costs and benefits calculations.

Benefits

The calculation of the present value of future benefits is made using an annual discount based on a «suitable » interest rate. With an interest rate of 7% after 12 months and investment of 100 units will have a value of 93.

VF=VA*(1-r), or 93.

After 24 months the original 100 units will have a value of 93* (1-7%) = 90,21

After 36 months the original 100 units will have a value of 90,21* (1-7%) = 84,88

etc.

For the calculation of future values in case of investments by way of gift or without interest, the official rate of inflation instead of a rate of interest could eventually be applied. At a rate of inflation of 3%, after 12 months the future value of de 100 units would then be 97 units.

VF=VA*(1-i), or 97.

After 24 months future value would be 97* (1-3%) = 94,09

After 36 months the future value would be 94,09* (1-3%) = 91,27

etc

Benefits forecasts are not necessarily constant over the years. Suppose the forecasts are for 0 units of benefits the first year, 100 units the second year, and 200 the third year. The present value of the benefits applying a rate of inflation of 3% would then be 0 the first year,, 97 the second year, and (2000.97)0.97, or 188.18 the third year.

Management costs

The amount of operating and maintenance costs on the other hand, increases, in principle, over the years according to the rate of inflation. At a constant rate of inflation of 3% actual costs of 100 units after 12 months would be 100* 1.03 = 103. After 24 months they would be, 103*1.03 or about 106.09 environ. After 36 months they would be about 109.27 units.

However, even for operation and maintenance costs, the calculations are most often made on the basis of the same rate of discount as the one applied to benefits. This leads to a systematic under-evaluation of costs and an exaggeration of the positive results planned.

The impossibility of forecasting, or even the will to forecast, the future development of the costs of services once in public control but privatised in modern times is not even taken into consideration. Some on-going costs, such as the cost of electricity, telephone, post, and transport have undergone changes with each successive round of neo-liberal privatisation. These changes were not foreseen (or were deliberately ignored) at the moment costs and benefits were prepared. This type of «optimism » also brought with it a major under-evaluation of the costs and a corresponding exaggeration of the positive results of projects.

The calculation period.

Calculation periods can reach 20 years in the case of long-term investments such as roads or dykes. They are more often based on 10-15 year periods.

Because the calculations are repeated over long periods, the choice of the rate of interest and/or of the rate of inflation to be applied is obviously very important. The choice of high interest rates carries with it very low future values towards the end of the series of calculations. Yet the choice is often entirely discretionary and left in the hands of those making the calculations, who also have a vested interest in the results.

Discussion.

Traditional costs and benefits analyses are usually limited to the monetisation on savings on current expenditure in a given project area. Many of the new structures during project execution which improve the quality of life of the populations are not taken into consideration. For example, 200 schools can be built in a project areas where there were none before. The schools can be staffed with teachers who are not yet available. And in one stroke most of the Millennium Development goals in the area can be achieved and surpassed. Yet these activities are not taken into account in traditional costs and benefits analyses. The formation of 200 nursing centres, 40 medicine distribution points, and the creation of a network of 40 bicycle ambulances are not taken into account either.

Similarly, the introduction of a local money system is not taken into consideration as a benefit, because no equivalent exists at the moment the project starts. The enormous benefits resulting from the local money systems, including some 4.000 new occupations, the formation of numerous sports clubs, cultural centres, productive activities etc have a zero value for traditional costs and benefits analyses, because they do not exist at the moment the initial «photograph » is taken.

The result of the applications of traditional costs-benefits analyses is that what does not exist at the moment the initial «photograph » is taken, cannot be monetised. No account is taken of the creation within the framework of each project, of numerous structures enabling most of the Millennium Development goals to be achieved together with a good quality of life for all in the project area.

Conclusion

It can therefore be concluded that practices relating to costs and benefits analyses produce results that are notoriously false, even to the limits of fraud, and benefit the least scrupulous operators who deliberately magnify future revenues and reduce the future costs to produce a good monetary ratio between the supposed benefits and the investments made. The decision to carry out and/or to finance a development project calls for an ethical evaluation which takes the social influences and improvements to the general quality of life of the populations into account, rather than a monetisation based on pure speculation.

1. Research.

On one page, make a list of 10 donors or funding institutions active in your chosen area (where necessary, in your country) Next to each one, indicate whether a costs and benefits analysis was required, in which form, and over which period.

2. Opinion,

Explain on one page why it is difficult to monetise the social results of a project.

3. Research.

Make a monetised comparison of the returns over ten years of an investment made in a traditional 60W light bulb and that of a 6W LED bulb after having given the purchase price of the two bulbs, their duration, and their energy consumption. Future costs projects for energy are of course the same in both cases. You are free to choose your projections for the increase of the cost of energy. What are your conclusions ?

◄ ►

◄ Eighth block : Section 3 : Costs and benefits analysis.

◄ Eighth block : Economic aspects.

◄ Main index for the Diploma in Integrated Development (Dip. Int. Dev.)

◄ List of key words.

◄ List of references.

◄ Course chart.

◄ Technical aspects.

◄ Courses available.

◄ Homepage Bakens Verzet

"Money is not the key that opens the gates of the market but the bolt that bars them."

Gesell, Silvio, The Natural Economic Order, revised English edition, Peter Owen, London 1958, page 228.

“Poverty is created scarcity”

Wahu Kaara, point 8 of the Global Call to Action Against Poverty, 58^th annual NGO Conference, United Nations, New York 7^th September 2005.

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