Economics costs vs.

financial costs

Economic costs are the opportunity cost of resources (i.e. the value of the highest-value alternative use).
Financial costs, meanwhile, are resources that are “paid for” (a turn of phrase borrowed from the health
sector).

Not all resources used in the delivery of WASH interventions and programmes are paid for. Consider
unpaid household time in programme participation or toilet construction, and the use of an asset that is
donated to the programme, such as a vacuum truck. An estimate of the value of each of these resources
would be excluded from a financial analysis but included in an economic analysis. This is because
economic analyses should assess opportunity costs (defined above).

Underlying this is issue of valuation, i.e. what are things worth? Theories of value have been debated in
economics since the discipline began. Financial costs are normally straightforwardly valued at the price
paid. The complicated part is how to spread them over time – the financial cost of a programme in a
given year is rarely the same as programme expenditure in that year.

Valuation of economic costs, however, is more tricky. There can be many competing ways to value an
opportunity cost. For example, the opportunity cost of a person’s unpaid time in undertaking unskilled
labour might be taken as (i) the minimum wage rate in that country for unskilled labour, (ii) 50% of that
(reflecting the fact that the time may not have been allocated to income‐generating activity), or (iii)
some other assumption based on another wage rate local to the setting (if the minimum wage is not a
good reflection of market wages). The opportunity cost of a donated vacuum truck might be its
estimated resale value in the open market. So, the total economic cost of a programme or intervention
is the value forgone of all resources used.

Financial analysis implies the perspective of a given payer, whereas economic analysis usually (but not
always) implies a societal perspective. So, economic evaluations (such as those employing cost-benefit
or cost-effectiveness analysis) usually take a societal perspective. Planning and budgeting exercises,
meanwhile, usually take the perspective of the institution that will pay for the programme of service. For
example, the budget for an NGO’s rural water programme would only include the financial costs that
would pass through their books. It would not include financial costs borne other stakeholders partners
(such as local governments or households) covered from other revenue sources.

Types of economic and financial analysis 

There are many types of economic and financial analysis. All require cost analysis. Going into them is
beyond the scope of this post. In brief, economic analysis is primarily concerned with efficiency
(whether technical, productive or allocative) so includes things like economic evaluation (cost-benefit,
cost-effectiveness), damage cost assessment, etc. but also assessment of economy and input/output
relationships. Altogether, most of these things are part of Value for Money analysis (see diagram on p.5
of this). Financial analysis, meanwhile, includes things like funding gap analysis, cashflow analysis,
willingness to pay assessment etc. – note the focus on covering costs, rather than on assessing
efficiency.
The table below uses a few examples to illustrate some important of the purposes, and how the purpose
drives the analytical perspective and type of cost used. More on this another time.

Conclusion