Financial analysis and its ensuing market
prices do not really reflect the real value of goods, services and factors of
production from the society’s point of view. There are many factors distorting
markets and market prices ranging from rapid inflation, import tariffs, un- and
underemployment, imperfect capital markets, small market size, literacy levels
and environmental. In many developing countries, quite rarely the results of
the financial analysis equal the cost of the economic analysis.
If the project income and expenditures do not
reflect the costs and benefits to a society, then financial profits are an incomplete
measure which the society will gain from a project. Also, the benefits to
society of a project or business may be so great that despite a negative
financial analysis, instruments can be used to change the outcome.
Proper faecal sludge management has positive
external effects, as most environmental initiatives do, and clearly provides a
benefit to the society. This implies that calculating profits as is done in the
financial analysis needs to be augmented with a separate economic (social) analysis
to establish the real gains to the society. Economic (social) cost-benefit
analysis corrects the financial revenues and expenditures for differences in
project effects and converting the resulting flows into benefits and costs on
the basis of accounting prices.
The preparatory course does not look at the
calculations and formulas of economic analysis in detail as it is more complex
than financial analysis. Instead let us take at the basic underlying principles
through an example.
The Human Waste Company (HWC) wants to run a
business of collection and transporting human waste by truck. It also wants to
treat the human waste and convert into an agricultural input which it wishes to
market. It is a small town and there are no other interested buyers. The
Government is interested in selling a license to start and operate this
business to HWC.
Yet the financials of HWC do not look very
promising. The Local Government realises that without the Human Waste Company human
waste will only collected manually with serious health hazards and
indiscriminately disposed and not treated.
The project revenues are lower than the combined funding cost and
project costs. Therefore, the Government is considering applying different
that can change the company’s financial analysis. It uses socio-economic
analysis to justify the usage of taxpayer’s money.
1: Project revenues
The local government may decide to give a fee
or subsidy for the amount of human waste collected and/or treated from the
households. Though not easy to monitor, this will lead to increase in project
revenues. The chart may now look as below:
2: Funding costs
The Government or a donor may decide to
provide project funding below market rates. For ease of explanation, say they
decide to provide half the funding required for the business as a subsidy or a
grant. HWC still needs to take a loan for the other half. In this case the
business still does not look too promising:
3: Project costs
The local Government looked at all the fees
that HWC had to pay it annually, such as a license fee to operate its vehicles,
run its business, and a separate one for the treatment site. In view of the
positive environmental effects it has decided to waive all the fees.
All three scenarios show that based on the
positive external effects – environmental – the Government can change the
outcome of the financial analysis. The Government may apply one instrument, two
or all three.
Yet from the point of HWC, there will still be
a risk as the Government may change and whatever subsidy instruments were
applied may be withdrawn.
There may be another reason for continued
Government support in the case of HWC. The distribution of benefits amongst
different social groups, different regions and different uses in terms of
consumption and savings is important to governments. This is the area of social
analysis. Social analysis is beyond the scope of the preparatory course.
 This is a simplification. Following this one
link one may download 30 financial instruments used in the WASTE programmes, www.waste.nl An overview of the financial
instruments for sanitation used in FINISH programmes in India and Kenya