The ECNEC in its meeting in November last year while considering Peshawar Sustainable Bus Rapid Transit corridor project (revised), directed Planning, Development & Reform Division to submit a report on the model used for economic and financial analysis of projects.
The Ministry of Planning, Development and Reform informed ECNEC that economic and financial analysis is one of the key components of a project's feasibility study. After determining the project's technical, social, commercial and environmental feasibility, its economic and financial viability is crucial in selecting projects for approval/implementation. It is, therefore, mandatory for the project sponsoring authorities to undertake proper project feasibility study and incorporate the results, assumptions and model used for undertaking the financial and economic analysis in the project's PC-I document.
Ministry of Planning, Development & Reform further stated that economic analysis of a project is carried out from the standpoint of its contribution to the development of the national economy as a whole. Whereas, financial analysis deals with only costs and returns to the project participants (individual organization's point of view). No doubt, some social sectors projects are considered on the merit of basic needs. However, in order to have fruits of economic development through Public Sector Development Program (PSDP) investment, it is imperative that public money is spent strictly according to financial and economic viability of the project. There is also a need to analyze whether projects are sustainable after their completion by ensuring that sufficient operating and maintenance cost is available to maintain the public assets.
The meeting was apprised that the financial and economic data and analysis provided in the PC-1 are scrutinized in the Planning, Development and Reform Division and details are submitted as part-C of the working paper for consideration of the CDWP.
However, only the results of economic and financial analysis such as Economic Internal Rate of Return (EIRR), Financial Internal Rate of Return (FIRR) and Benefit Cost Ration (BCR) are indicated in the summary for ECNEC.
It was further noted that public sector development projects are broadly categorized as social sector, production sector and infrastructure. The data requirement and type of analysis differ from sector to sector and even project to project within specific sector.
The purpose of using economic analyses is to ensure that those projects with the highest economic return are prioritized for approval/implementation. The financial cost-benefit analysis is undertaken to determine levelized tariff/toll rates, etc, and the amount of subsidy, if involved, in a specific project. Risk and sensitivity analysis are used to allow changes in key parameters, thus warning planners about the most important things that can go wrong.
The economic and financial (cost-benefit) analysis is useful where benefits or major parts thereof are measurable and can be quantified, benefit-cost analysis may not be applied. In such cases only unit cost analysis is undertaken to evaluate cost effectiveness.
