Overview of economic and environmental project evaluation
Published: March 8, 2007, 6:25 pm
Author: Mohan Munasinghe
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Introduction
Mankind's relationship with the environment has gone through several stages, starting with primitive times in which human beings lived in a state of symbiosis with nature. Human interactions were primarily within the biotic sphere. This phase was followed by a period of increasing mastery over nature up to the industrial age (Overview of economic and environmental project evaluation) , in which technology was used to manipulate physical laws governing the abiotic sphere. The outcome was the rapid material-intensive and often unsustainable growth patterns of the twentieth century, which damaged the natural resource base. The initial reaction to such environmental harm was a reactive approach characterized by increased clean-up activities. Recently, a more proactive attitude has emerged, including the design of projects and policies that will help to make development more sustainable (Chapter 2 (Overview of economic and environmental project evaluation)).
Both environmental and resource economics and ecological economics are useful to address these issues. They have been defined comprehensively by other authors[1]. These two disciplines overlap[2]. Instead of highlighting the differences, we focus on the common elements, which support the sustainomics (Basic concepts and principles of sustainomics) framework. A recent training textbook issued by the World Bank and European Commission provides an excellent review of the subject – starting with sustainomics and the sustainable development triangle[3].
The environmental assets that are under threat due to human activities provide three main types of services to society – provisioning, regulation, and aesthetic-cultural (details in Chapter 4 (Overview of economic and environmental project evaluation)). Environmental and ecological economics help us incorporate ecological concerns into the conventional decision making framework of human society. More generally, the process for improving the design of policies and projects to make development more sustainable involves:
- Identifying the biophysical, and social impacts of human activities.
- Estimating the economic value (Valuing environmental costs and benefits) of environmental and social impacts.
- Modifying projects and policies to limit damage.
Project evaluation
A development project involves several steps. The systematic approach used in a typical project cycle includes identification, preparation, appraisal, negotiations and financing, implementation and supervision, and post-project audit[4].
- Identification – involves the preliminary selection of potential projects that appear to be viable in financial, economic, social, and environmental terms, and conform to national and sectoral development goals.
- Preparation – lasts up to several years, and includes systematic study of economic, financial, social, environmental, engineering-technical, and institutional aspects of the project (including alternative methods for achieving the same objectives).
- Appraisal – consists of a detailed review that comprehensively evaluates the project, in the context of the national and sectoral strategies, as well as the engineering-technical, institutional, economic, financial, social and environmental issues. Environmental and social assessments are also key elements which may affect the project design and alter the investment decision. The economic evaluation itself involves several well-defined stages, including the demand forecast, least-cost alternative, benefit measurement and cost-benefit analysis.
- Financing – if outside financial assistance is involved, the country and financier negotiate measures required to ensure the success of the project, and the conditions for funding (usually included in loan agreements).
- Implementation and supervision – implementation involves putting into effect in the field all finalized project plans. Supervision of the implementation process is carried out through periodic field inspections and progress reports. Ongoing reviews help to update and improve implementation procedures.
- Evaluation – is the final stage, involving an independent project performance audit, to measure the project outcome against the original objectives. This analysis can yield valuable information to improve processing of future projects.
The economic basis of project evaluation, including cost-benefit analysis (CBA) and shadow pricing are described next.
Note: The author welcomes comments, which may be sent to mind@mindlanka.org MIND.
Notes
This is a chapter from Making Development More Sustainable: Sustainomics Framework and Applications (e-book). Previous: Restructuring development and growth for greater sustainability (Overview of economic and environmental project evaluation) |Table of Contents (Overview of economic and environmental project evaluation)|Next: Cost-benefit analysis and economic assessment
