Accounting for Market Distortions in an Integrated Investment Appraisal Framework

Abstract

Public investments are key policy instruments used by governments in pursuing their overall development goals and strategies. Given the limited resources available to an economy, the chosen projects should fit into the overall development strategy, which usually concerns many stakeholder groups. Despite this fact, in practice the appraisal of most investment projects carried out by governments, multilateral financial institutions and consultants have tended to be basically a financial analysis with only a partial, if any, economic evaluation. The stated constraints are largely the time frame in which these appraisals are to be prepared, and the lack of data for carrying out a professionally adequate economic appraisal. This paper reports on an effort in Rwanda that, we believe, has successfully addressed both of these constraints. Our paper first presents the adjustments required to convert the financial values of investment projects into their corresponding economic values in a manner that meets a high standard of professionalism. The paper also describes the comprehensive framework and practical approaches to the estimation of the economic prices and Commodity-Specific Conversion Factors (CSCFs) for project inputs and outputs. The paper applies the framework to tradable and non-tradable goods and services in Rwanda, and estimates their CSCFs to be used in the economic appraisal of investment projects in the country. These analytical frameworks have then been used to develop a web-based database of CSCFs for Rwanda (http://rwanda-cscf.minecofin.gov.rw), containing more than 5,000 tradable commodities, and non-tradable goods and services such as transportation, construction, electricity, and telecommunication. The database provides easy access from anywhere in the world for project appraisal specialists involved in the formulation, evaluation and implementation of projects, and allows them to conduct an up-to-date economic appraisal of investment projects in a professionally satisfactory manner.