Over the past sixty years, the World Bank has been at the forefront of economic analysis through the projects and programs it has designed and financed in the developing world. The robust economic analysis that was carried out for many early infrastructure and later social sector projects helped client countries to learn the key cost and benefit parameters that underlay these projects. When I was at university, cost benefit analysis (CBA) publications of World Bank were used to illustrate how to carry out economic analysis of projects, including what factors to consider, the limitations of standard methods, the nuances which need to be considered, and the sensitivity analysis that needed to be carried out to ensure that the analysis is technically robust.
Recently, various reviews of Bank projects have found that economic analysis is now one of the weaker areas of our project design. CBA is often not prioritized; instead it is treated as a low profile activity and even s as an after-thought. The results of CBA are not considered upfront in the project design stage, as they should be. As a result, a few months ago, the World Bank Operations Policy Unit (OPCS) came out with new guidelines and tools to help Bank teams prioritize and implement CBA in a robust manner. In addition to making the guidelines more robust and expansive to cover all types of projects (including infrastructure, social sector, and institutional reform projects), the new guidelines also helps teams to provide more useful analysis on the impact of proposed projects on fiscal sustainability and to make the case for bank comparative advantage in any given project. However, we have seen very little progress on the latter two aspects of economic analysis in recently prepared project documents.
In my own experience at the World Bank as a country economist, I have found economic analysis of investments a weak area in most client countries. There is also often a lack of public discourse about the costs and benefits of “transformational” public investment projects. In the context of projects we prepared or public expenditure reviews (PERs) we carried out, country authorities always asked us to help their staff (mainly from Ministries of Finance and Planning) to learn the tools and techniques of robust CBA. I was fortunate that I had excellent country economists in the field offices that were able to help me provide workshops to train client ministry staff. This clearly shows that the client demand for technical assistance in the economic analysis of projects is very high and, as such, we need to do much more to provide this service to our clients. At a time when many of our clients are scaling up public investment in infrastructure without necessarily having the technical capacities within their line ministries to properly assess and choose from alternative investment or to design and evaluate projects, the Bank could play a crucial role in enhancing the capacities of our clients for public investment management analysis, including in the case of providing “Reimbursable Advisory Services” (RAS). It is essential that we are on the cutting edge of CBA knowledge, but we also need to promote more transparency within the client countries about public investment decisions, especially those involving large projects. Feasibility studies of large public investment projects should be made public and debated by legislatures before the countries approve these projects in their budgets and approve the loans to finance them. Greater transparency and public debate about “transformational” projects will provide some safeguard against not too uncommon “white elephant” projects, which end up costing countries more than they are worth.
As a first step, it is necessary that we, as the WBG, carry out a systematic quantification of the stream of costs and benefits related to a project – both tangible and intangible – and then show how we use that information to carry out a technically robust CBA that estimates Net Present Value (NPVs), Internal Rate of Return (IRRs), Cost Benefit (CB) ratios, least cost options etc. By doing this we will be able to show how the current design is superior to any alternative design or financing modality for the proposed project.
In many low income countries, which now have access to much larger volumes of non-traditional donor “cheaper” aid, the lack of economic analysis of investment and reforms has become a critical area of deficiency in project planning. Client countries do not do rigorous economic analysis nor do the non-traditional donors in many of these projects; greater benefits are “assumed”. WBG can help in this regard. This will also help address the fiscal sustainability aspects of new projects in poverty-stricken IDA countries.
There are three reasons why economic analysis needs to be an integral part of WBG services:
1. Improve project effectiveness on the ground: As we advise governments to implement new projects and critical reforms, it is essential that WBG does a systematic cost benefit analysis so that we and the client can clearly understand all the elements of costs, benefits, and related risks and constraints. This will reduce the number of problem projects with disbursement delays and implementation problems. It will enable teams to take appropriate actions that will help achieve lasting results on the ground.
2. Meet Client Demand: Many client countries express the desire to build their capacity for economic analysis. During my time as country economist, I found that not only IDA but also IBRD countries wanted to improve their capacity for analysis of investment projects and expenditures. In most cases, the country economics team was able to organize workshops during our missions to meet this demand and provide on the job training for client staff.
3. Develop a niche knowledge product: Economic analysis of projects is a niche knowledge product that can be delivered to clients of all types. However, we can only sell this product if we demonstrate we are good at it. This means doing good economic analysis in the projects we prepare and in policy reforms we help design, support, and implement. It also means that we must be expeditious; clients will not use WBG services if project planning is to suffer inordinate delays.
Therefore, the WBG needs to quickly invest to enhance the skills of its operational staff to carry out systematic CBA that is “state of the art”. This highlights the need for hands-on training for team leaders and key staff working on investment projects. Without this, we may be slowly losing a comparative advantage we have enjoyed for a very long time. Can the WBG rise up to the challenge and continue to lead in providing high quality economic analysis?