Project Finance

Economic Framework for

Assessing Development
Impact

Mayank Singh PGPF-01-

Priyanshu Sharma PGPF-01-
Rohit Singh PGPF-01-024
Sagar Chitrada PGPF-01-
What do big institutions and banks look for before funding
projects ?

 Multilateral institutes (IFC, EBRD etc.) provide support to private projects

with a goal of stimulating growth in developing nations.

 To participate in funding, they need to understand a project's private and

social returns

 As a manger in a company seeking funding, needs to understand these returns

to better predict how a project will be received.

 An economic framework for assessing a project’s private and social return,

will help in examining the overall development impact of a project.
Private vs Social Returns

 A profitability of an investment from society’s perspective may differ from the private sector’s perspective.

 When people are free to decide which transaction they wish to enter into, there are four main reasons for
Private returns differing from Social returns:

 Reason 1: Taxes, Tariffs, Subsidies & government interventions. Due to taxes, there is a difference between the
return the private investor receives and the returns generated by project.

 Reason 2: Transaction costs: It may prevent investor from collecting a fee for services provided, resulting in an
un price benefit to society

 Reason 3: Externalities: Non-market effects (Externalities) are not captured in private returns but can increase
the social returns

 Reason 4: Imperfect Markets: Significant difference in the price paid for a good and the opportunity cost of
providing that good
Net Impact

Producers of Complementary Products

 Difficult to quantify the value derived from this effect. But where relevant the effect is positive.

 Incurs indirect benefits

Suppliers
 Enjoy increased demands to goods & services and often high profits

 Impact on suppliers is an example of backward linkage

Gain to suppliers from increased

demand
Net Impact

Competitors & New Entrants

 Competitors may see reduction in demand and thus a lower price for their products

 Consumers benefit if we see society as overall

 Competitors may benefit from network & demonstration effects

Neighbours

 It refers to the surrounding community that will be impacted by projects

 Impacts may result from environmental externalities, new or improved infrastructure

 Impact on environment maybe positive or negative

 Large firms often contribute to local communing by funding scholarships, building schools
Net Impact

Rest of Society
Under this, one would include the effect of taxes, subsidies, tariffs & other government interventions

 Profit Taxes - A portion of profits goes to taxes. For private return – one calculates free cash flow after any profit taxes due. For
social return, one includes profit taxes as part of overall return.

 Value-Added, Sales, and Excise Taxes – Govt collection of VAT will rise if overall sales increases.

 Subsidies – Included in the FRR. Subtracted from ERR.

 Import Tariffs, and Export Taxes – For goods produced by the project, the social revenue stream should be reduced by the portion
of the price that is accounted for by the tariff. For inputs also, the costs should be adjusted to reflect the existence of tariffs.