Beyond Rate of Return: Reorienting Project Appraisal

Traditional approaches to project appraisal fail in practice to address two fundamental questions: whether a project belongs in the public or the private sector; and what effect any external assistance associated with the project has on the country's development. The first issue is of general interest to both national policymakers and international donors. If the government provides a good or service that would otherwise have been provided by the private sector, the net contribution of the public project could be low. The second issue is of particular concern to donors. If financial resources are fungible, the project being appraised might well have been undertaken without external financing. In this case, donor funds are actually financing some other, unappraised project. Both cases argue for a shift in the emphasis of project evaluation away from a concern with precise rate-of-return calculations and toward broader sectoral analyses and public expenditure reviews. In this context, three areas critical for proper project appraisal include a consideration of the rationale for public intervention, the fiscal impact of the project, and the fungibility of external assistance.