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Project evaluation techniques for investment in LDCs
Report Project evaluation techniques for investment in LDCs The main focus of this article is to demonstate how telecommunication benefits in a developing country can be measured quantitively so that they can be used as inputs in project analysis. It stems from a research study based on interviews with about 700 users of public telecommunications services in Senegal.
The tool for analysing the panoply of possible projects in a developing country’s budget has come to be called social or economic cost-benefit analysis. While traditional financial or private cost-benefit analysis takes into account the direct benefits and costs of a project, the social calculation usually supplements this analysis with a measure of the indirect benefits and costs. To identify and measure the economic benefits of an existing or proposed telecommunications project typically requires observation of how much callers actually spend or are willing to spend to use telecommunications services. The amount of money that users are demonstrably willing to spend on telecommunications services is at least a minimum measure of these services to them. In addition to those visible benefits there are hidden benefits. In this study, visible benefits are those measured in the tariff paid to the telecommunications authority and hidden benefits are measured in the consumer surplus. Consumer surplus is based on the notion that every consumer derives from each transaction something more than they pay for it. If they enjoy no net benefit, they would be indifferent toward the purchase. Consumer surplus is measured here through a bestalternative approach. This method measures the savings a user accrues by using telecommunications services as opposed to his chosen alternative means of communications plus roundtrip travel cost to the public call office plus the consumer surplus measured in the travel and time costs of the stated alternative. By this measure, a consumer surplus estimate can be derived
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based on the difference between the cost of the alternative means and the cost of the telecommunications service (telephone or telegraph) they have just used. These cost figures incorporate the comprehensive costs incurred by users. If the cost of the alternative is more than the communications just completed then it is the measure of the full benefit enjoyed by the user. The difference between the costly alternative and the communication equals the consumer surplus - the benefit received though not purchased. Of course, if the cost of the alternative is less than the communication then there is no consumer surplus. In the private or financial analysis, total user outlay can be used to evaluate the potential telecommunications investment. The social or economic analysis should supplement this figure with a measure of the indirect benefits. Because these benefits are so difficult to measure and are often difficult to actually prove, an attempt is made to derive a credible measure of the direct but hidden benefits. The hidden benefits are then combined with the total user figures to yield a measure of comprehensive user benefits that can be incorporated into a social cost-benefit analysis. Theoretically, the government may raise telecommunications tariffs to a level equal to the average cost of the alternative means of communications stated in the survey. Thus, if the average user outlay = x (call tariff) + y (transport costs) and the cost of the stated alternative = x+y+lOO then the government can feel justified in raising the tariff to that higher figure because users are willing to pay 100
units more than they were charged to communicate that information. To determine the base figure for the total expenditure estimate the amount the consumer paid for the telegram or telephone call is added to the roundtrip transportation cost from home to the post office and back. Transport costs are not included if the user came to town on a multipurpose trip and states that they would not have come to make the communication if the other reasons did not exist. Since most calls and telegrams were made by people living within 2 km of the post office, this conservative estimate should not distort the analysis. The cost of time as measured in wages lost is not included in the total outlay figure because most of the users live in or quite near town and the inconvenierlce is minimal. Both total user outlay and consumer surplus were converted into per minute figures to be used in the benefit-cost analyses - the former as a measure of financial benefits and in combination with the latter as the measure of economic benefits. The alternative cost is based on the user’s choice of an alternative the user would make if the existing telecommunications means were not available at the location where the survey took place. The options offered to the user are: Do nothing: If the user chooses to do nothing to communicate the message as the alternative then there is no cost and no consumer surplus.
Use subscriber telephone: If the consumer chooses to use a private subscriber telephone then a 200 FCFA cost is assessed for transport and inconvenience. There must be some cost to this use, even if minimal, or else the consumer would have gone to the subscriber in the first place. Post a letter: If the user chooses to post
a letter then it is presumed that two letters will be necessary to replace the interactive process of telephony while one letter may replace many telegrams (informative without needing to be interactive), congratulatory messages and notices. It should be noted that while this letter option is used in a cost
TELECOMMUNICATIONS
POLICY
June 1985
Report/Conference report
comparison with telecommunications there is a comparability problem. A letter and a telephone call are certainly not the same mechanism and are difficult to compare. But if both are viewed as possible ways of communicating information then the letter comparison becomes more relevant, particularly in a country where the telecommunications infrastructure is so poor that letters are relied upon more than telephones and become the next-best option for domestic or international communications. Travel to another post office: If the consumer chooses to travel to another post office to send the same communications the alternative cost includes the round-trip transportation cost and, if the trip took more than 3 hours, the cost of this time. The opportunity cost of labour is used as an indicator of time costs, assuming that the user has forgone some wages by this travel. lo destination: If the user chooses to send someone else to deliver the message in person, then the alternative cost is simply the round-trip transport sum. It is assumed that the person sent has an opportunity cost of labour equal to zero and both food and any lodging costs are also excluded. Transport costs are not divided and attributed to different purposes of the trip but are fully attributed to the message delivery.
Send someone
Travel in person to destinarion: If the user chooses to deliver the message in person, then the forgone wages are added to the transport costs in determining the alternative amount.
Analysis of the Senegal survey data estimated the average cost of a call at 246 Francs CFA and a consumer surplus figure of 255 Francs CFA. From this comprehensive measure of direct benefits, it is significant that hidden benefits are more than 100% greater than visible benefits. These calculations offer the robustness of extensive in-country data collection and can lead to a relatively precise calculation of the project’s internal
TELECOMMUNICATIONS
rate of return and net present worth guideposts to a project’s worth from the perspective of both the private investor and the developing country government. These benefit measures would be modified in a cost-benefit analysis of a telecommunications project, varying the marginal benefits of the groups served by the new facilities. For a major satellite project that introduces telecommunications services into areas never served previously, this might be done by establishing consumer surplus estimates that are highest for towns and villages where service already exists even if greater demand will be created by the project construction. All costs and benefits used in the analysis must be determined to be incremental - those benefits and costs that can be attributed to the project’s
implementation. Calculations based on these methods are conservative. They do not attempt to measure the indirect benefits - often intangible, public goods that are only remotely measured by examining in depth one geographic locality or organizational entity. The usefulness of these methods for analysing telecommunications projects throughout the developing world is that it moves beyond intuition and into the world of substantive analysis, shedding longawaited light on the question of telecommunications’ contribution to economic development. Christopher W. Nordtinger Chevy Chase, MD, USA The author is currentlyManager, International Services at NetExpress, an intemational documentswitchingfirm.
Conference report North-South relationship in satellite communications New Directions in Satellite Communications: Challenges for North and South, organized by the College of Communication, The University of Texas, Austin,
TX, 24-26 October 1964.
The goal of the conference was to examine the relationship of North to South in terms of satellite applications and policy. The approach chosen was to organize the conference sessions around themes related to these issues and to provide a forum for the exchange of ideas among leaders in domestic and international communications representing industry, government agencies from industrialized and developing countries, and international organizations. The keynote speaker was Richard Colino, Director General of INTELSAT, who addressed the conference on ‘Satellites in development: policy issues for the 80s and 90s’. Colino emphasized INTELSAT’s commitment to working with developing countries to meet their telecom-
POLICY June 1985
munications needs, and referred to recent initiatives including low cost VISTA terminals for domestic thin route telecommunications, INTELNET service for point-to-multipoint data services to antennas as small as two feet in diameter. Colino also outlined Project SHARE (Satellites for Health and Rural Education) which will provide developing countries with free time on INTELSAT satellites for tests and demonstrations for 16 months beginning in January 1985. The International Institute of Communications, based in London, will cosponsor Project SHARE. Colino pointed out that only about 20% of the effort involved in developmental telecommunications projects involves the technology; the other 80% involves project planning, training and
171
The tool for analysing the panoply of possible projects in a developing country’s budget has come to be called social or economic cost-benefit analysis. While traditional financial or private cost-benefit analysis takes into account the direct benefits and costs of a project, the social calculation usually supplements this analysis with a measure of the indirect benefits and costs. To identify and measure the economic benefits of an existing or proposed telecommunications project typically requires observation of how much callers actually spend or are willing to spend to use telecommunications services. The amount of money that users are demonstrably willing to spend on telecommunications services is at least a minimum measure of these services to them. In addition to those visible benefits there are hidden benefits. In this study, visible benefits are those measured in the tariff paid to the telecommunications authority and hidden benefits are measured in the consumer surplus. Consumer surplus is based on the notion that every consumer derives from each transaction something more than they pay for it. If they enjoy no net benefit, they would be indifferent toward the purchase. Consumer surplus is measured here through a bestalternative approach. This method measures the savings a user accrues by using telecommunications services as opposed to his chosen alternative means of communications plus roundtrip travel cost to the public call office plus the consumer surplus measured in the travel and time costs of the stated alternative. By this measure, a consumer surplus estimate can be derived
170
based on the difference between the cost of the alternative means and the cost of the telecommunications service (telephone or telegraph) they have just used. These cost figures incorporate the comprehensive costs incurred by users. If the cost of the alternative is more than the communications just completed then it is the measure of the full benefit enjoyed by the user. The difference between the costly alternative and the communication equals the consumer surplus - the benefit received though not purchased. Of course, if the cost of the alternative is less than the communication then there is no consumer surplus. In the private or financial analysis, total user outlay can be used to evaluate the potential telecommunications investment. The social or economic analysis should supplement this figure with a measure of the indirect benefits. Because these benefits are so difficult to measure and are often difficult to actually prove, an attempt is made to derive a credible measure of the direct but hidden benefits. The hidden benefits are then combined with the total user figures to yield a measure of comprehensive user benefits that can be incorporated into a social cost-benefit analysis. Theoretically, the government may raise telecommunications tariffs to a level equal to the average cost of the alternative means of communications stated in the survey. Thus, if the average user outlay = x (call tariff) + y (transport costs) and the cost of the stated alternative = x+y+lOO then the government can feel justified in raising the tariff to that higher figure because users are willing to pay 100
units more than they were charged to communicate that information. To determine the base figure for the total expenditure estimate the amount the consumer paid for the telegram or telephone call is added to the roundtrip transportation cost from home to the post office and back. Transport costs are not included if the user came to town on a multipurpose trip and states that they would not have come to make the communication if the other reasons did not exist. Since most calls and telegrams were made by people living within 2 km of the post office, this conservative estimate should not distort the analysis. The cost of time as measured in wages lost is not included in the total outlay figure because most of the users live in or quite near town and the inconvenierlce is minimal. Both total user outlay and consumer surplus were converted into per minute figures to be used in the benefit-cost analyses - the former as a measure of financial benefits and in combination with the latter as the measure of economic benefits. The alternative cost is based on the user’s choice of an alternative the user would make if the existing telecommunications means were not available at the location where the survey took place. The options offered to the user are: Do nothing: If the user chooses to do nothing to communicate the message as the alternative then there is no cost and no consumer surplus.
Use subscriber telephone: If the consumer chooses to use a private subscriber telephone then a 200 FCFA cost is assessed for transport and inconvenience. There must be some cost to this use, even if minimal, or else the consumer would have gone to the subscriber in the first place. Post a letter: If the user chooses to post
a letter then it is presumed that two letters will be necessary to replace the interactive process of telephony while one letter may replace many telegrams (informative without needing to be interactive), congratulatory messages and notices. It should be noted that while this letter option is used in a cost
TELECOMMUNICATIONS
POLICY
June 1985
Report/Conference report
comparison with telecommunications there is a comparability problem. A letter and a telephone call are certainly not the same mechanism and are difficult to compare. But if both are viewed as possible ways of communicating information then the letter comparison becomes more relevant, particularly in a country where the telecommunications infrastructure is so poor that letters are relied upon more than telephones and become the next-best option for domestic or international communications. Travel to another post office: If the consumer chooses to travel to another post office to send the same communications the alternative cost includes the round-trip transportation cost and, if the trip took more than 3 hours, the cost of this time. The opportunity cost of labour is used as an indicator of time costs, assuming that the user has forgone some wages by this travel. lo destination: If the user chooses to send someone else to deliver the message in person, then the alternative cost is simply the round-trip transport sum. It is assumed that the person sent has an opportunity cost of labour equal to zero and both food and any lodging costs are also excluded. Transport costs are not divided and attributed to different purposes of the trip but are fully attributed to the message delivery.
Send someone
Travel in person to destinarion: If the user chooses to deliver the message in person, then the forgone wages are added to the transport costs in determining the alternative amount.
Analysis of the Senegal survey data estimated the average cost of a call at 246 Francs CFA and a consumer surplus figure of 255 Francs CFA. From this comprehensive measure of direct benefits, it is significant that hidden benefits are more than 100% greater than visible benefits. These calculations offer the robustness of extensive in-country data collection and can lead to a relatively precise calculation of the project’s internal
TELECOMMUNICATIONS
rate of return and net present worth guideposts to a project’s worth from the perspective of both the private investor and the developing country government. These benefit measures would be modified in a cost-benefit analysis of a telecommunications project, varying the marginal benefits of the groups served by the new facilities. For a major satellite project that introduces telecommunications services into areas never served previously, this might be done by establishing consumer surplus estimates that are highest for towns and villages where service already exists even if greater demand will be created by the project construction. All costs and benefits used in the analysis must be determined to be incremental - those benefits and costs that can be attributed to the project’s
implementation. Calculations based on these methods are conservative. They do not attempt to measure the indirect benefits - often intangible, public goods that are only remotely measured by examining in depth one geographic locality or organizational entity. The usefulness of these methods for analysing telecommunications projects throughout the developing world is that it moves beyond intuition and into the world of substantive analysis, shedding longawaited light on the question of telecommunications’ contribution to economic development. Christopher W. Nordtinger Chevy Chase, MD, USA The author is currentlyManager, International Services at NetExpress, an intemational documentswitchingfirm.
Conference report North-South relationship in satellite communications New Directions in Satellite Communications: Challenges for North and South, organized by the College of Communication, The University of Texas, Austin,
TX, 24-26 October 1964.
The goal of the conference was to examine the relationship of North to South in terms of satellite applications and policy. The approach chosen was to organize the conference sessions around themes related to these issues and to provide a forum for the exchange of ideas among leaders in domestic and international communications representing industry, government agencies from industrialized and developing countries, and international organizations. The keynote speaker was Richard Colino, Director General of INTELSAT, who addressed the conference on ‘Satellites in development: policy issues for the 80s and 90s’. Colino emphasized INTELSAT’s commitment to working with developing countries to meet their telecom-
POLICY June 1985
munications needs, and referred to recent initiatives including low cost VISTA terminals for domestic thin route telecommunications, INTELNET service for point-to-multipoint data services to antennas as small as two feet in diameter. Colino also outlined Project SHARE (Satellites for Health and Rural Education) which will provide developing countries with free time on INTELSAT satellites for tests and demonstrations for 16 months beginning in January 1985. The International Institute of Communications, based in London, will cosponsor Project SHARE. Colino pointed out that only about 20% of the effort involved in developmental telecommunications projects involves the technology; the other 80% involves project planning, training and
171