The author applies to the health sector an approach to analyzing projects advocated in a recent paper by Devarajan, Squire, and Suthiwart-Narueput. In the health sector, a project evaluation should: 1) Establish a firm justification for public involvement. The author identifies a number of common failures in the markets for both health services and insurance but argues that this should be the starting place for economic analysis, not a reason to ignore economics; 2) Establish the counterfactual: what happens with and without the project. Project outputs should be predicted net of the reaction of consumers and providers in the private sector. This requires knowledge of the market structure (supply, demand, and equilibrium) for health services; 3) Determine the fiscal effect of the project. The issue of appropriate levels for fees should be handled jointly with project evaluation; and 4) Acknowledge the fungibility of project resources and examine the incentives facing public servants. Ministries of health may shift their own resources away from activities that are funded by project to those that are not evaluated at all. Project outputs depend on the incentives for civil servants to provide good service--a consideration rarely taken into account in project evaluations. The author concludes that much of the analysis relevant to projects should be done before project evaluation. If the issues of fungibility and incentives are given due respect, the donors'best form of intervention may not be traditional projects at all but rather general loans with conditions related to general sector strategy and reform. For a standard project, a fair amount of information from supporting sector work is needed before evaluation. If clinical services (or anything depending on people s behavior) are part of the project, information is needed about the supply and demand for substitute services. The market structure of health care is an essential part of the background work.
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