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ECONOMIC AND SUSTAINABILITY ANALYSIS APPENDIX 21
Table 2, average annual benefit from productivity differential is estimated at US$ 8.62 million.
Table 2 - Expected Benefit from Productivity Differential
Notes on assumptions: (i) ‘Productivity differential’ is computed based on the number of projected Grade 12 graduates [Upper Secondary Education (USE) enrolment projections] multiplied by the differential earnings from the mean and median average income. The difference between the median and mean income is assumed to correctly reflect productivity differential; (ii) Mean income of US$ 385 as annual per capita income (based on NIS 2005 figure), median income of US$ 219 as annual per capita income, making a productivity differential of US$ 166 per annum; (iii) Assuming 80 per cent of Grade 12 graduates earn the "differential" by participating in the labor market; (iv) assuming a minimum 7 per cent of total annual benefit is due to Project; (v) Benefit begins to yield as from year 3; and (vii) Number of graduates is kept constant after year 2015 for benefit estimation purpose due to the fact that no more Project financing is replenished.
14. The approach used in the above benefit quantification is to estimate minimum benefit that one can expect from the proposed investment in enhancing education quality in Cambodia. Aggregated minimum benefit and cost for the Project are outlined in Table 3. Where possible the expected benefits have been summarized in monetary terms either as cost savings (such as producing the same output at a reduced overall cost) and increased earnings (such as producing more graduates who earn more due to better education and/or contribution to the local economy). In all cases, these benefits exclude externalities that accrue to the Project. Using a discount rate of 12 per cent as the economic opportunity cost of capital (EOCC), the economic analysis yield an economic internal rate of return (EIRR) of 22.4 per cent, a benefit/cost ratio (BCR) of 1.53 in the base case. The Project is evaluated as economically viable.
Table 3 - Benefit - Cost Analysis - Base Case
\a Benefit stream includes (i) annual cost savings due to increased system efficiency; and (ii) annual productivity differential; \b Costs are economic costs derived from financial costs applying a standard conversion factor (SCF) of 0.95 for the Kingdom of Cambodia.
15. A sensitivity analysis is conducted to test the robustness of the base case model. Five sensitive cases are examined: (i) benefit decrease 10 per cent; (ii) cost increase 10 per cent; (iii) benefit decrease 10 per cent and cost increase 10 per cent; (iv) benefit delay 1 year; and (v) benefit delay 2 years. The output of the sensitivity analysis is presented in Table 4.
Table 4 - Summary Sensitivity Analysis
value, the percentage change in a variable sufficient to reduce ENPV to zero analysis is outlined in the Supplementary Appendix.
16. The EIRR is identified to be highly sensitive to the benefit delays. In case benefit delays 1 year, BCR is reduced from 1.53 to 1.20, EIRR is reduced from 22.4 per cent to 15.8 per cent, and ENPV is 49.9 per cent lower. In case benefit delays 2 years, BCR is reduced from 1.53 to 0.92, EIRR is reduced from 22.4 per cent to 10.3 per cent (or 1.7 per cent lower than the 12 per cent threshold), and ENPV is 92.2 per cent lower, suggesting that benefit delaying 2 years would drive the Project to being economically non-viable.
17. Based on this analysis, it is recommended that the MOEYS, the executing agency, follow closely the agreed Project implementation schedule to ensure Project benefits are realized as scheduled. It further implies that the factors delaying Project implementation should be well under control and minimized to ensure the Project economic viability and sustainability (as discussed in Section C).
C. Fiscal Impact and Sustainability Analysis
18. The fiscal impact of the Project is important as it helps assess the sustainability level. In practice, education projects often support recurrent expenditures as well as capital outlays, thus making the recurrent cost sustainability issue one of central importance for the economic analysis. The impact on the overall budget once the Project is completed often determines whether the Project objectives will be sustained in the long run. Key issues to be addressed include what impacts the investment in the Project have on fiscal indicators such as total annual budget, capital and recurrent expenditure for the education sector in Cambodia during and after the implementation period of the Project.
19. The Project has been designed bearing in mind the that recurrent costs should be minimized for the Government and the community. The improvement of the quality support systems under the Project is intended to reduce wastage, improve the internal efficiency of the education sector (with a particular focus on the secondary education level), and reduce the cost of producing a USS graduate in Cambodia. The incremental recurrent Project costs arise largely from increased access to secondary schooling through enhanced quality and relevance. The costs of civil works and learning facilities have been minimized by using efficient designs and maximizing the utilization of locally available resources and materials. Although new construction and rehabilitation works are being financed, sustainability is being ensured by the Government’s commitment to operate and maintain (O&M) after the Project implementation period.
20. Table 5 presents the Project financing plan (by financier and category) as well as the outlay of State budget for the education sector during the implementation period and projections for the period thereafter (to 2020). The fiscal impact and sustainability analysis evaluates the impact of the Project on the State budget. The total financial cost of the Project, inclusive of taxes, duties, contingencies, and interest charges, is US$ 33.40 million for an implementation period of 5 years. It is proposed that the Asian Development Bank will finance 80.9 per cent, and the remainder 19.1 per cent will be financed by the Government. Community contributions have not been taken into account due to the country-specific context. The analysis indicates that the Project will have negligible impact on the State budget for the education sector. The recurrent expenditure to be paid by the Government after the Project implementation is estimated to be US$ 1.47 million per annum and include incremental staff remuneration, O&M costs of civil works, facilities, equipment, and vehicles procured under the Project. It is indicated that the Project recurrent expenditure after Project implementation (2014-2020) will only account for an average of 0.58 per cent of annual recurrent expenditure allocated to the education sector during the 2014-2020 period. It is observed that this proportion will be much smaller than the threshold of 5.0 per cent (green-highlighted area in Table 5).