Welfare implications in the appraisal of projects : a case study of the fishpond estate project in the Philippines

Abstract

This study makes use of two contrasting approaches in the ex ante analysis of a specific project in the Philippines, the 'unified' Little and Mirrlees and Squire and van der Tak (LM/ST) and Harberger approaches. In the light of the latter approach, it explores the practicability and relevance of introducing social analysis in investment decisions. The rationale and convention for the application of the two methodologies are reviewed and detailed in a manner so that their differences are clearly reflected. They are then applied to the Smallholder Fishpond Estate Project to ascertain whether or not the addition of equity criteria can assist in improving the quality of decisions in public expenditure by confronting the issue of the project's distribution effects in addition to its allocative-efficiency effects. The major macroeconomic features of the Philippine economy and the development objectives of the country are outlined. They are then incorporated in the derivation not only of the national efficiency pricing parameters but also the social value parameters in congruity with the procedures recommended in the methodologies. Details of the specimen project are also discussed from which the estimation of project specific parameters had been based. The economic rates of return derived by both LM/ST and Harberger approaches are shown to be much higher than those estimated in the Task Force Report. A principal implication is that the project is economically efficient in the utilization of resources. However, the brief discussion on the practical limitations of the compensation approach indicate the undesirability of relying on economic analysis entirely and highlights the need for an alternative approach. The study then turned for guidance to social cost-benefit analysis. The results of the social analysis, however, revealed that the projected distribution of the benefits from the project has been biased in a way that many would regard as socially regressive. The study concludes that a change of approach has to take place at an earlier stage than project appraisal. The efficiency of social analysis, which has been shown to allow for the incorporation of and trade-off between various government objectives in project analysis, could only be realized when distribution income criterion is applied at the identification and formulation stage when the choice of an objective function could exert influence. The study further concludes that the appropriateness of the LM/ST methodology depends on countries where:(1) the prices of goods deviate from their social values either because of distortion in the factor markets and/or because of government interference with the market mechanism; (2) the aggregate savings and investment in the economy may be less than the level that is socially desirable; (3) the government has a controlling rather than supporting role in the process of capital accumulation and growth; and (4) a generally weak fiscal system operates. Show more