|Disaster Economics (Department of Humanitarian Affairs/United Nations Disaster Relief Office - United Nations Development Programme , 1994, 56 p.)|
Discounted cash flow techniques
Discounted cash flow (DCF) techniques allow the value of future benefits and costs to be converted to a single value represented in current dollars. DCF techniques are needed to (a) ensure the future stream of benefits associated with an investment will be sufficient to pay for the capital and operating costs of establishing and maintaining it, and (b) help choose between investment alternatives which may have different costs and benefits. Such techniques use a discount rate. Rate options include the money market rate of interest, the opportunity cost of capital and the social time preference rate. (See Gittinger.)
Net present value
The net present value (NPV) of an investment is one form of DCF technique. Assuming there is no budget constraint investments are acceptable when the NPV is greater than or equal to zero; that is, when the discounted flow of benefits is greater than or equal to the discounted flow of costs.
Internal rate of return
The internal rate of return (IRR) of an investment is a second common form of DCF technique. The IRR shows the return on the capital used in an investment. Assuming there is no budget constraint, an investment is acceptable when the IRR is greater than or equal to a chosen discount rate.
Domestic resource costs
Another method referred to by Gittinger for evaluating between alternatives is to examine the domestic resource cost (DRC) associated with an investment or operation. DRC calculations require an estimate of domestic resources used in earning or saving a unit of foreign exchange. From a policy point of view, resources should be allocated only to those commodities or production systems where there is an international comparative advantage.
Economic consistency models
Theoretically, a price is determined when supply equals demand. Economic consistency models broadly attempt to break up the source of any supply, and show the groups in society responsible for demanding that supply. Two categories of consistency model are generally discussed: (a) social accounting models (SAMs), show where production and income has come from, and how it has been used and spent; and (b) commodity accounting models (CAMs), which do the same thing, normally for food items, but expressed in terms of volume of commodity.
Revised minimum standard model
The World Bank has produced a consistency model called the revised minimum standard model (RMSM), the assumptions behind which can be adapted to meet the circumstances of individual countries. This model is usually available to any country wishing to use it. The model is based on standard accounting principles, and permits projections of, e.g., imports to be cross checked for consistency against expected changes in output, consumption, and savings.
All countries require money to undertake investments and meet financial commitments. This money is either generated internally, through savings, or borrowed externally. It is generally financially impossible for most developing countries to borrow on international capital markets. International borrowing is usually at concessional rates, i.e. below market interest rates, offered by multilateral lending institutions such as the World Bank.
In the post war/post colonial period, many governments decided that they, rather than the private sector, should control key areas of strategic production, distribution and pricing. Over the years, state controlled companies have evolved, (with a minimum of 51% share ownership), to produce energy, store grains and market food surpluses. Such organizations are parastatal corporations.
All countries need to import items. In order to pay for these imports, countries must use foreign exchange, earned through exporting products or generating net service income through activities such as shipping, insurance or tourism. Although barter operations do occur, the general mechanism for paying for exports and imports is through the use of foreign currency. An exchange rate is used which reflects the value of one country's currency against another. The stronger a country's currency, the more the exchange rate will be in that country's favor.
Employment opportunities in poorer countries are generally limited. Work opportunities may be abroad, in countries which are either labor deficient or sufficiently rich to employ foreign labor to undertake basic production and service activities. These foreign employees send income back to their families who live in their country of origin. In many countries, this type of remittance income can amount to a very substantial percentage of total income earned by nationals in employment.
Public investment program
There are many activities for which government must take, or chooses to take, responsibility. This is particularly true in poorer countries, where the private sector is likely to lack adequate investment resources and capacity. These activities may include public sector service delivery covering gas, electricity, water, transport, health and education. In order to ensure that no public investment project is started in these sectors until it has been properly appraised, it is normal to prepare a public investment programme (PIP) of projects which have passed criteria set by government. This procedure should ensure that only projects of the highest priority are started and, even then, only when budgetary resources permit.
Project preparation facility
Most public sector projects go through a project cycle, which traditionally includes identification, preparation, appraisal, implementation, monitoring and evaluation. Although government might identify good project ideas, it is often an expensive exercise to go to the second stage, that of project preparation. Without this level of detail, the selected funding agency will find it difficult to decide whether to lend money to permit project implementation. The World Bank has a project preparation facility (PPF) which helps countries prepare project plans. The PPF can also be made available to allow a project to be prepared on a pilot basis, prior to preparing the project on a larger scale.
Indicative planning figure
UNDP country programmes are usually costed over a five year cycle. The level of funding is defined as the country indicative planning figure (IPF). It gives Government a broad outline of UNDP resources available for development purposes.
Structural adjustment is defined as an attempt to effect a major change in an economy. It aims to get the economy back to a healthy state, improving its balance of payments over the medium term, i.e. about five years. The main policy instruments used are incentives to increase production, saving, and investment in the public and private sectors, together with supporting monetary and budgetary policies.
Direct costs are those costs immediately attached to the procurement of services or goods, i.e. the purchase price. Direct cost for the reconstruction of a building, for example, is the total of all material and labor costs for the project.
Indirect costs are all costs associated with any goods or services beyond the intrinsic value of the thing itself. The indirect cost for the reconstruction of a disaster-destroyed building might be the loss of income to the workers in the building who cannot report to work or the service personnel who take care of the building.
Opportunity cost is a term used to capture the idea that if funds are spent on one activity, (e.g. repairing a building) those same resources are unavailable for another project (e.g. building a school or clinic). The opportunity to build a school or clinic is lost when the funds are used to rebuild or repair. If mitigation measures had been taken in the construction of the building, the likelihood of having to spend money on repair and reconstruction would be lessened.