ROBERT F. WAGNER SCHOOL OF PUBLIC SERVICE
NEW YORK UNIVERSITY
International Development Projects Planning (IDPP)
FALL 2015
Section / Timing / Classrooms / InstructorsURPL-GP.2652.S.001
(Lectures) / Fridays, 2:00pm-3:40pm / BOBST- LL145 / Leonardo Romeo
URPL-GP.2652.S.002 (Laboratory) / Saturdays, 9:30am-1:00pm / TISCH- LC19 (computer lab) / Leonardo Romeo
Giuliano Bosi
Introduction
Since the mid-seventies, the “project approach” to development aid has come under criticism and, four decades later, “project aid” while still a prominent aid modality, is no longer the only, or thepreferred, form of development assistance.
This reflects broader changes in development thinking. Early views (in the 50’s and 60’s) that exclusively focused on the shortage of financial resources for sector investments as the critical constraint for development, have been increasingly broadened, shifting the attention to the policy and institutional context within which investment projects take place. Reflecting such shift, various forms of “program” or “policy-based” assistance, as opposed to specific project financing, have emerged as new aid modalities.
The formulation and selection of investment projects is now increasingly subordinated to the development of sector-wide programs, (in turn framed by medium-term public expenditure frameworks) which aremeant to ensure that projects are consistent with good macro and sectoral policies and are financially and institutionally sustainable.
But if planning investment projects is no longer the only, or the main, concern of aid agencies, the task has not gone away or lost its critical importance for aid-recipient governments (central and local) in developing countries. Welfare is improved through investment in change and a substantial part of available resources are invested in projects. Good policies and institutions are critical, but without appropriate investments, the best policies, and most performing institutions, will not deliver sustained economic and social development.
Having lost their absolute prominence as development aid instruments, investment projects remain therefore a key instrument of development administration, and are still an important vehicle of international assistance[1]. In fact enthusiasm for a “program approach” to aid delivery should notobscure the wide array of aid modalities that is often necessary to deploy, as well as the importance ofspecific investment projects among them. There is therefore a continuing role for projects as both (a) away of managing government interventions and (b) a modality of donors’ intervention, where this is madeconsistent with the objectives of national programs developed and owned by national authorities.
Project planners in governments and aid agencies continue to face the challenge of ensuring thetechnical quality, the financial sustainability and the economic, social, institutional and environmentalviability of development projects.
Course Description
Goals and Scope of the course
The Course aims at providing students with:
- An introduction to financial and economic analysis of investment operations and its application to the planning and appraisal of international development projects.
- An opportunity to acquire and practice basic skills for the financial and economic appraisal of selected urban/rural infrastructureand income-generating development projects of moderate scale and complexity.
To these ends, the course will introduce the basic concepts and techniques for integrated appraisal of public and private investment projects, including financial and economic analysis, risk analysis and the assessment of projects’ distributional effects (winners and losers) and impact on poverty reduction goals.
Schedule and Format
The class will meet once a weekon Fridays and every other week on Saturdays.
The Friday sessions will include lectures and some in-class discussion
The Saturday sessions will include review of the homework assigned the preceding week and more extensive in-class discussion. During most of the sessions however students will be working on their own (with help from instructors as needed) on the appraisal of real projects including
- a rural income-generating project
- a small-scale hydropower project,
- a transport infrastructure project and
- a small urban water supply project.
The last Lab session will be dedicated to completing in a single session the appraisal of a smaller project to help recap the entire content of the course and prepare for the final exam.
Assignments and Final Exam
Students will be required to:
- Carry out weekly homework assignments.
- Complete on their own, and within two weeks, the appraisal of the real project on which they will have started to workwith the instructors in each lab session. There will be 4 (four) such projects (see detailed course outline below).
- Take a final exam (“take-home”).
The final grade will reflect performance on all the above and will be calculated using the following weights:
- Weekly Homework Assignments (25%),
- In-Lab and home-based work on real projects’ appraisal (40%)
- Final Exam (35%)
Handbooks and reference materials
There is no single textbook for this course, but students will be referred to selected sections of:
- G. Jenkins, A. Harberger et al. Integrated Appraisal of Investment Projects : Concepts and Practice,Cambridge Resources International (2004)
The following texts will also be selectively used in the course.
- USAID, The Project Appraisal Practitioners’ Guide (2009)
- Asian Development Bank,Guidelines for the Economic Analysis of Projects (1998)
- Pedro Belli et al., Handbook on Economic Analysis of Investments Operations. World Bank (1998)
All handbooks and other reading and reference materials will be made availableon the course site in NYU-CLASSES.
Computer Software
Students are expected to be familiar with the basic functionalities of MS-Excel. In addition, during the course, two specialized software packages will be introduced.
- LOGFRAMER v.1.3. LOGFRAMERis a Windows application that facilitates the design of the logical framework of a project. It is distributed under a General Public License. It may be downloaded at
- CRYSTAL BALL. Crystal Ball is the leading risk analysis software package. It is aMS-Excel add-on application originally developed by DECISIONEERING Ltd. and now distributed and serviced by ORACLE. A free, fully functional, but time-limited (3 months), version of Crystal Ball will be made available to all course participants under a temporary license that the instructors obtain from ORACLE every year.
They will be installed in the TISCH LC-19 computer lab machines, but students using a PC will also be able to install them on their personal machines (both applications don’t run on Mac OS machines).
Course Content Outline
Date / Section / ContentPART 1 - Introduction to Development Projects Planning and Appraisal
Fri. Sep. 4 / Lecture 1 / Outline
Projects: definition and position in the hierarchy of policy instruments
Projects and Public Finance Management (PFM)
Projects and Public Investment Programs (PIP)
Projects vs. other Aid Modalities
Readings
AnandRajaram et.al.,A Diagnostic Framework for Assessing Public Investment Management The World Bank Policy Research Working Paper 5397 August 2010
OECD, List of Aid Types (2014)
Mick Foster and Jennifer Leavy, The Choice of Financial Aid Instruments Overseas Development Institute, Working Paper 158, October 2001
Bert Jacobs, European programs and Chinese projects: a modality clash on sustainable infrastructure development in Africa Proceedings of the 4th European Conference on African Studies, 15-18 June 2011, Uppsala, Sweden
Assignment #1
Projects as instruments of Development Administration and Aid Modalities
Fri. Sep. 11 / Lecture 2 / Outline
The Logical Framework : a tool used in different project planning and management methods
The Logical Framework Approach (LFA)
Other LF-based project planning methods
- Project Cycle Management (PCM)
- Results-Based Management (RBM)
- Theory of Change (TOC)
NORAD, The Logical Framework Approach (LFA), Handbook for objective-oriented planning4th Edition 1999
Oliver Bakewell and Anne Garbutt , The use and abuse of the logical framework approach,SIDA November 2005
Reidar Dale, The logical framework: an easy escape, a straitjacket, or a useful planning tool? Development in Practice, Volume 13, Number 1, February 2003
Assignment #2
Preparing a Project Planning Matrix (Log-frame)
Sat. Sep. 12 / Laboratory 1 / Review of Assignment 1
Installation of LOGFRAMER 1.3 software, and presentation of its basic functionalities
Presentation of a “development problem case” as background for carrying out a Means-End analysis and designing a relevant project.
in class work to identify and select "strategies" (Means-End analysis) and prepare a Project Planning Matrix or Log-frame (to be completed in LOGFRAMER 1.3 format as Assignment #2)
Fri. Sep. 18 / Lecture 3 / Outline
Project Appraisal Methods: Cost-Based vs. Multi-Criteria Decision Making (MCDM)
A popular MCDM method: The Analytic Hierarchy Process(AHP)
Cost-Based methods: CBA, CEA, CUA
Fundamentals of Cost-Benefit Analysis (CBA)
Readings
UK Department for Communities and Local Government: Multi-criteria analysis: a manual London January 2009 (glance through the entire manual and then read Appendix 5 –AHP pp 127-130)
Gines de Rus,Introduction to Cost-Benefit Analysis,E.Elgar 2010, Ch. 1 pp 1-13
Assignment #3
Fundamentals of Project Appraisal
PART 2 - Financial Analysis of Development Projects
Fri. Sep. 25 / Lecture 4 / Outline
The Discounted Cash Flow (DCF) Technique
Financial Modeling of projects: basic structure of a project’s cash flow statement
Investment Criteria (NPV, IRR, B/C Ratio, Payback Period)
Estimation and use of debt service ratios (ADSCR and LLCR)
Readings
IFACProject Appraisal Using Discounted Cash Flow International Good Practice Guidance (2008)
USAID,The Project Appraisal Practitioners’ Guide (2009), Chapters 5 and 6
G. Jenkins, A. Harberger et al. Integrated Appraisal of Investment Projects : Concepts and Practice, Cambridge Resources International (2004), Chapter 3 and 4
Assignment #4
Definition and Use of Investment Criteria
Sat. Sep. 26 / Laboratory 2 / Review of Assignments 2 and 3
Presentation of First Major Case " Women Farmers Income Generation"
In class work to start the financial analysis of the project
Fri. Oct. 2 / Lecture 5 / Outline
Use of consistent prices in project appraisal
- Definition of Prices and Price Indices
- Incorporating Inflation in the Financial Analysis
- Impacts of Inflation on Financial Cash flow
- Inflation and rates of exchange
- Inflation and Interest Rates
- Discount Rates in Financial Analysis from different POV
- Required Return on Equity (ROE)
- Weighted Average Cost of Capital (WACC)
- Consistency Check for the Two Financial Points of View
USAID,The Project Appraisal Practitioners’ Guide (2009), pp. 84-96 in Chapter 6 and 7
G. Jenkins, A. Harberger et al. Integrated Appraisal of Investment Projects : Concepts and Practice, Cambridge Resources International (2004), Chapter 6
The African Development Bank Group, Guidelines for Financial Management and Financial Analysis of Projects (2006) Chapter 3, pages 19-21
Assignment # 5
The treatment of inflation in project appraisal and the financial opportunity cost of capital
Fri. Oct. 9 / Lecture 6 / Outline
Determination of Scale in Project Selection
Timing of Investments
Adjusting for length of life in project appraisal
Projects with Interdependent and Separable Components
Readings
G. Jenkins, A. Harberger et al. Integrated Appraisal of Investment Projects : Concepts and Practice, Cambridge Resources International (2004), Chapter 5
Assignment # 6
Optimizing size and timing of investment in project appraisal
Sat. Oct. 10 / Laboratory 3 / Review of Assignments 4 and 5
Presentation of Second Major Case " Mini-Hydroelectric Power Plant"
In class work to start the financial analysis of the project
PART 3 - Risk Analysis of Development Projects
Fri. Oct. 16 / Lecture 7 / Outline
Assessing Project Risks
- Sensitivity Analysis
- Scenario Analysis
- Monte-Carlo Simulations
- Building a forecasting model
- Selecting key risk variables
- Running simulations
- Assessing correlation conditions among risk variables
- Analyzing the results of simulations
Savvakis C. Savvides, Risk Analysis in Investment Appraisal, Project Appraisal, Volume 9 Number 1, pages 3-18, March 1994
Johnathan Mun, Applied Risk Analysis, (2002) Wyley Finance ,Chapter 5
Assignment #7
Assessing Risks in project appraisal (1)
Fri. Oct. 23 / Lecture 8 / Outline
Using Crystal Ball (CB) to select key risk variables
- developing Tornado Charts
- developing Spider Charts
- Simultaneous assessment of project sensitivity to multiple risk variables
- Getting and formatting the historical data
- Identifying trends and disturbances
- Determining range and intervals of the errors frequency distributions
- computing and adjusting the errors probability distributions
Frederick Hiller and Mark Hiller, Introduction to Management Science 5th Ed. McGraw Hill Online Learning Center (2014) , Chapter 20
Assignment #8
Developing a probability distribution from historical data
Sat. Oct.24 / Laboratory 4 / Review of Assignments 6 and 7
Presentation of Third Major Case " Bridge over the Mango River"
In class work to start the financial analysis of the project
PART 4 - Economic Analysis of Development Projects
Fri. Oct. 30 / Lecture 9 / Outline
Microeconomics Foundations of project appraisal
- Economic vs. Financial Prices
- Three postulates of welfare economics
- Economic prices in undistorted markets
- Economic Prices in distorted markets
- consumer surplus
- producer surplus
G. Jenkins, A. Harberger et al. Integrated Appraisal of Investment Projects : Concepts and Practice, Cambridge Resources International (2004), Chapter 8 and 9
Assignment #9
Micro-economics of project appraisal
Fri. Nov. 6 / Lecture 10 / Outline
Economic valuation of Inputs and outputs
- Traded and non-traded goods
- Incremental and non-incremental inputs and outputs
- Valuation of traded inputs and outputs
- valuation of non-traded inputs and outputs
- valuation of Land
- valuation of labor
- valuation of non-marketed goods
- The economic opportunity cost of capital (EOCK)
G. Jenkins, A. Harberger et al. Integrated Appraisal of Investment Projects : Concepts and Practice, Cambridge Resources International (2004), Chapter 10, 12 and 13
Assignment #10
Economic valuation of project inputs and outputs
Sat. Nov. 7 / Laboratory 5 / Review of Assignments 8 and 9
Presentation of FourthMajor Case " Small Scale Urban Water Supply"
In class work to start the financial analysis of the project
Fri. Nov. 13 / Lecture 11 / Outline
Economic Appraisal of Water Supply Projects
- Characteristics of Water Supply Projects
- Water as an Economic Good
- The Water Supply Project
- Least-Cost Analysis for Choosing an Alternative Water System
- Identification, Quantification, Valuation of Economic Benefits and Costs
- Sensitivity and Risk Analysis
- Sustainability and Water Pricing
- Distribution Analysis and Impact on Poverty
Asian Development Bank , Handbook for the EconomicAnalysis of Water Supply Projects (1999)
Assignment #11
Economic valuation of urban water supply
Fri. Nov. 20 / Lecture 12 / Outline
Valuation of Environmental externalities
- Valuing Environmental costs and benefits
- Using Non-Market Values in Cost-Benefit Analysis
- Reveled Preferences Methods
- State Preferences Methods
Readings
IDPP Teaching Note 12.1 Valuing Environmental Externalities (2015)
Assignment #12
Valuing Environmental Externalities
Sat. Nov.21 / Laboratory 6 / Review of Assignments 10 and 11
In class completion of economic analysis of Fourth Major Case " Small Scale Urban Water Supply"
PART 5 - Analysis of Distributional Effects and Poverty Impact of Development Projects
Fri. Dec. 4 / Lecture 13 / Outline
Distribution Analysis
- Externalities and the project FNPV and ENPV
- Identification of Stakeholders
- Stakeholders sharing the FNPV
- Distribution of ENPV among stakeholders
- Poverty Impact Ratio
- Poverty impact of transport projects
- Poverty impact of water supply projects
Sat. Dec. 5 / Laboratory 7 / Review of Assignments 12
In class review of a case of distributional analysis, identifying winners and losers of a development project
Fri. Dec. 11 / Lecture 14 / COURSE RECAP
In-class presentation and appraisal of a small-scale project, serving as a comprehensive recap of concepts and techniques covered in the course.
NB: Some questions in the final exam will refer to the appraisal of this project
[1]“Investment lending” that finances projects still represents about two thirds of the World Bank lending portfolio, the remaining third going to “policy-based lending” i.e. different forms of general or sector budget support tied to policy and/or institutional reform