Pakistan Institute of Development Economics



Efficiency Analysis of Projects in the Pakistan Economy

The analysis of projects can be undertaken in three stages;the ftrst stage looks at the ftnancial aspects; the second stageexamines the projects from an economic aspect and the third stageappraises the project from a social perspective. For the uninitiatedreader it is important to distinguish between these three types ofanalyses. Financial analysis is the initial stage of examining a projectwith respect to its viability. The analysis is undertaken from the pointof view of the sponsoring agency or individual and the prices used forvaluing inputs and outputs are those prevailing in the market, in otherwords, current prices. These prices naturally include taxes andsubsidies which may and do act as a distorting feature. Also, inftnancial analysis the objective is more or less straightforward andsimple – that is maximize proftts. For a government planning offtcer orfor one who is concerned with looking at the macro economy inparticular, the picture that emerges is more complex. This is so becausethe government planning offtcer has to satisfy himself that the aims andobjectives of development projects mesh in with the economic and socialaspirations of the country as a whole and are not the objectives of asingle particular group of persons. For this, the pricing and valuingsystem has to be different from the one that examines projects from aftnancial point of view. Economic or efftciency analysis, therefore,looks at the beneftts and costs of a project from the broader viewpointof its impact on the economy. The major differences between economic andftnancial analysis lies in the fact that prices used to value inputs andoutputs are net of taxes and subsidies; these latter reflect simplytransfer payments and not real cost. Also, in an economic analysis,funds received from outside agencies are not treated as beneftts andinterest and principal repayments are not treated as cost.

Shamim A. Sahibzada, Mir Annice Mahmood

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