How Does the Cost Benefit Analysis and Financial Analysis Relate The World Bank

Difference Between Financial vs. Economic Analysis The Economic analysis focuses on incremental benefits and costs arising from a given Project and includes both project benefits and externalities. This is typically best achieved through a “With and Without Test” as you can better identify the incremental values. While the “Project” specific analysis may be important for the Financial test, the consolidated analysis is even more important to ensure sustainability of the utility or the system. The economic test is not usually concerned with cash flows so the ENPV or EIRR usually suffice to ensure the Project’s returns surpass the Opportunity Cost of Capital of the Government. The Financial Sustainability Analysis must find a solution to ensure that all financial obligations are satisfied.

Who’s Perspective Determines the Analytical Scope and Financial Test Government Should be principally concerned about value to society and best use of available resources Project’s Economic Rate of Return Utility Manager Should be concerned about the overall financial sustainability of the utility Consolidated cash flow analysis drives requirement for profitability What about us? What should be our main focus? What analysis is important to us? BOT WTP Operator Should be concerned about reliability of cash flows driven by Rate of return requirements Project’s cash flow analysis, and FIRR calculation against required WACC Private Lender Should be concerned about overall capacity of the utility to service debt Consolidated debt service analysis and overall profitability of the utility

As Development Professionals We should focus on expanded or improved services hence the economic value of the Project. However, we also need to ensure the financial sustainability of the utility. The Role of the Financial Analyst is to Find a Financially Sustainable Solution to Economically Justified Projects

So the Difference Between Financial vs So the Difference Between Financial vs. Economic Analysis is Much More than differentiating Costs and Benefits!

Determining the Justification for VGF Financing 44 23 Costs Revenues 21 NPV in US$ millions Financial Viability Gap Financial Costs & Benefits Adjustments for Economic Costs & Benefits Transfer Payments 3 13 Water Collection Savings Health Related 37

A Simplified Approach to Deriving Economic Costs and Benefits

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