COST EFFECTIVENESS

ANALYSIS

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cost-effectiveness analysis
What are the costs of alternative means for reaching goal?
We know we must fight crime, but what is the cheapest way to do it?

The objective CEA is to compare costs per unit of outcome of

alternative approaches or technologies that will provide the same
service for purposes of capital budgeting.

Types
Constant-cost studies specify the output for a given cost from
alternative programs.
Least-cost studies alternative programs to achieve a given goal
are examined in terms of cost.
Objective-level studies estimate the cost of achieving several
performance levels of the same objective.
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 Cost Effectiveness Analysis

•Examples of application of CEA to other areas:

– Choosing from two school systems that give same education
benefits
• Centralized schools that require bus transportation and
more expensive smaller schools to which students can
walk.
– Two types of court systems
• More court rooms at the headquarters or mobile courts.
– Alternative ways of supplying potable water to communities.
– Alternative technologies to generate electricity
• Thermal vs hydro; single vs combined cycle plant

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 Cost Effectiveness Analysis
• The focus of a cost-effectiveness analysis is on evaluating
the costs of the alternatives.

• The analysis involves the measurement of benefits in some

kind of quantifiable manner (e.g., lives saved, schooling
years increased, additional water consumed) and then
compare the effectiveness of alternative options to deliver
the project or program:
– Computing the ratio of costs (Ci) to its benefit (Ei), for
example, dollars per school seat.
– Alternatively, measuring the effectiveness (Ei) in terms of
its cost (Ci).

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 Costs Assessment
• While computing cost-effectiveness ratio for a particular project,
attention should be paid to the treatment of costs, which include
not only financial but also social and economic costs.
• In the education sector, the enhancement of primary schooling is
sometimes viewed in terms of the additional number of schools
blocks and improvement of their physical condition. But any
programs of developing school systems must also take into account
the cost of additional teaching personnel, teaching materials and
regular maintenance costs.
• For health projects, analysts should identify capital costs
(expenditures for hospital/clinic, equipment, and training),
recurrent expenditures (costs for administrators, doctors, nurses,
lab technicians, unskilled support, and other staff), and indirect
costs (patients’ time and travel). 5
 Discounting
• Although cost effectiveness analysis does not place a
monetary value on the benefits, the project’s benefits
(effectiveness) has to be discounted to the same year as
the discounted costs.

• Both the costs and units of effectiveness should be

discounted by the same rate.
PV of Costs i
CE i 
PV of Effectiveness i

• The cost-effectiveness ratios are computed for each of the

alternatives and then the analyst can rank the alternatives
and take a decision.
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 Discounting in Health Care Evaluation
• Currently a 3% discount rate used in both costs and benefits by
convention is far too low.

• As most health interventions need to be continued through time

(e.g. drugs), the discount rate is not too critical as most costs and
benefits occur in the same period.

• Discounting, however, is very important when capital

expenditures are involved such as construction of clinics, hospital,
or equipment of CAT scan, MRI machines.

• Failure to discount future health benefits and costs properly can

lead to paradoxical results.
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 CEA Can Be Used in Two Forms:

Method 1: Constant Effects

• Uses least-cost analysis to determine the lowest cost alternative for
meeting the same level of benefits, including intangible benefits.
• Selection criteria is “choose the alternative that has the lowest
present value of costs.”
– The outcome may be a function of the rate of discount and may
switch with change in discount rate.
• Example:
– Choosing from two types of water pipes of different diameters that yield
the same quantity and quality of water per day (smaller pipe has lower
investment cost but higher operating or pumping costs),
– Selecting from two alternatives for generating the same amount of
electricity (thermal and hydro generation units, the former with a lower
investment and higher operating cost compared to the latter).

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 Case 1
Least Cost Method
Drinking Water: Alternative Delivery Systems

Alternative A: (All figures in '000)

Years 0 1 2 3 4 5

Installation cost 3000

Operating cost 700 700 700 700 700

Total cost 3000 700 700 700 700 700

PV of Total cost (at 6%) $5,949 PV of Total cost (at 9%) $ 5,723

Alternative B: (All figures in '000)

Years 0 1 2 3 4 5

Installation cost 4200

Operating cost 400 400 400 400 400

Total cost 4200 400 400 400 400 400

PV of Total cost (at 6%) $5,885 PV of Total cost (at 9%) $ 5,756

The results switch with change in discount rate.

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Method 2: Cost-Effectiveness Ratio

– Calculates the cost per unit of benefit. Both

benefits and costs vary across alternatives.
– Example:
Benefits are simply measured as the number of
Premature Deaths Prevented.
• Two different health programs: DPT-BCG vaccination
campaign for children or AIDS treatment program for infected
patients.
• The cost per child vaccination and per patient will be
computed in this case. Here the purpose is to see which
program yields more value per dollar of expenditure.

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 Case 2
Cost of Health Project: Immunization against DPT (diphtheria,
pertussis and tetanus) - Bacillus of Calmette and Guérin (BCG-
against tuberculosis)

(All figures in ' 000 of US$)

Year 2000 2001 2002 2003 2004 2005

Premature Deaths Prevented - 8,000 12,000 18,000 25,000 30,000

Capital Costs
Facilities 2,500
Equipments 8,500
Vehicles 5,000
Training 2,000
Technical Assistance 6,000

Recurrent Costs
Personnel 10,000 16,000 25,000 36,000 42,500
Supplies 15,000 24,000 37,500 55,000 64,000
Training 500 800 1,250 1,800 2,100
Maintenance 2,000 3,200 4,500 7,200 8,000
Others 3,300 5,500 8,200 12,000 14,500
Total Costs 24,000 30,800 49,500 76,450 112,000 131,100

Present value of Total Benefits 6.0% 75,560 Present value of Total Benefits 9.0% 68,547
Present Value of Total Costs 6.0% 347,980 Present Value of Total Costs 9.0% 317,503

Cost per unit of Premature Deaths Prevented 4.61 4.63

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 Case 3
Cost of Health Project: AIDS Program

(All figures in ' 000 of US$)

Year 2000 2001 2002 2003 2004 2005

Deaths Prevented - 500 750 1,000 1,400 1,750

Capital Costs
Facilities 200
Equipments 1,000
Vechicles 300
Training 500
Technical Assistance 1,500

Recurrent Costs
Personnel 2,000 2,500 4,000 5,000 6,000
Supplies 40,000 65,000 90,000 120,000 150,000
Training 100 100 100 100 100
Maintanance 250 300 450 600 800
Others 300 500 800 1,250 1,500
Total Costs 3,500 42,650 68,400 95,350 126,950 158,400

Present value of Total Benefits 6.0% 4,395 Present value of Total Benefits 9.0% 3,991
Present Value of Total Costs 6.0% 403,591 Present Value of Total Costs 9.0% 366,711

Cost per unit of Deaths Prevented 91.82 91.88

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 Incremental (or Marginal)
Cost-Effectiveness Ratio
• The decision makers need to compute incremental (or marginal)
cost-effectiveness ratios.
• This need arises when a new alternative is compared with the
existing situation.
• The numerator now contains the difference between the cost of the
new and old alternatives, and the denominator is also the difference
between the effectiveness of the new and old alternatives:
Ci  CO
Marginal CE i 
Ei  EO
• This ratio can be interpreted as the incremental cost per unit of
effectiveness. When there are several alternatives available, the
marginal cost-effectiveness ratio can be used to rank the new
measures versus the existing one.

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 Case 4
Marginal Cost-Effectiveness Ratios in Prevention of Traffic Fatalities

Policy Total Incremental Total Incremental Marginal Ranking

Measures lives Effectiveness Cost Cost CE Ratios
saved (million $
(Deaths (Million $) ($)
Prevented per Year)
a Year)
A Existing 500 500 20.00 _ _ _

B Existing plus 600 100 25.50 5.50 55,000 2

Enforcement

C Existing plus 1000 500 31.50 11.50 23,000 1

Road safety

D Existing plus 585 85 25.00 5.00 58,824 3

Public
Campaign

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 Limitations of CEA
1. Does not measure willingness to Pay
• CEAs are a poor measure of consumers’ willingness to pay as the output
or benefit is not priced in the market nor is the output considered
homogeneously.
• What is the willingness to pay for the additional “drug addicts treated”?
• The number of addicts treated may not be the best approximation of the
value of the final outcome (i.e., consequential crime reduction may also
be important for the taxpayers).
• The link between the intermediate measure of effectiveness and final
output, such as reduction in crime, is not explicitly stated.
• Faced with this kind of situation, the analyst must make sure that this link
is properly established. Even with this link, it is hard to know the value of
the final outcome if no market value is placed.

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 Limitations of CEA (cont’d)
2. Excludes some external benefits
• The concept of CEA excludes most externalities on the benefits
side.

• On the benefit side, the CEA looks only at a single benefit and all
other benefits are essentially ignored.
- An improvement in education will not only increase life-time
earnings of the students but also contribute to a reduction in
the rates of unemployment and crime.
- In healthcare, there are external benefits due to such
treatments as the vaccination of children, i.e. other people do
not catch the infection diseases.

• The above issue will not occur for a complete CBA. The analyst
doing the CEA should be careful not to exclude important
benefits arising from a particular project.
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 Limitations of CEA (cont’d)
3. Excludes some external costs
• While computing the cost-effectiveness ratio for a particular project,
attention is paid to the treatment of costs, which should include not
only financial but also social costs.

• In the education sector, the enhancement of primary schooling is

sometimes viewed in terms of the additional number of school
blocks and improvement of their physical conditions. Many other
costs must be included to get the desired outcome.

• Different types of projects often have some of the costs in non-

monetary terms, such as waiting time, coping costs, enforcement
costs, regulatory costs, compliance costs, etc.

• The economic CEA carried out for such projects must account for all
costs based on the economic instead of financial prices of goods
and services.
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 Limitations of CEA (cont’d)
4. Does not account for scale of project
• Scale differences may distort the choice of an “optimal”
decision.

• A project with smaller size but higher efficiency level may get
accepted, while another project may provide more quantity of
output at a reasonable cost.

• A strict CEA fails to overcome this problem.

• A complete CBA does not have this problem because the net
present value already accounts for the differences in size
among alternative projects.

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 Scale Problem in CEA

Effectiveness Cost
Method CE Ratio EC Ratio Ranking
(Patients a Month) (Rand)

Alternative A 200 50,000 250 0.0040 1

Alternative B 1,150 300,000 261 0.0038 2

• Let’s say there are two mutually exclusive options in the choice of medical diagnostic
equipment for a clinic.
• The first type of machine (A) costs R 50,000 and it can diagnose 200 patients a month.
• The second option involves more expensive equipment (B), which will cost R 300,000 but
could serve up to 1,150 people a month.
• The CEA results in the selection of the least costly alternative, option A, which costs R 250
per diagnosis.
• Option B allows to process almost a six-fold higher number of medical tests a month, at
cost of R 261 per patient.
• Unless there is a severe budget constraint for implementation of alternative B, this
alternative could be justified even if its average costs are higher than costs of alternative A.
This is because the total benefits that alternative B generates are very much larger than the
benefits of alternative A.

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 Cost-Utility Analysis
• The estimation of benefit in CEA is limited to a single measure of
effectiveness such as reduction of mortality. This simplification
ignores benefits stemming from reduced morbidity and, hence, a
cost utility analysis (CUA) is employed.
• In principle, CUA could be used with multiple outcomes but as the
number of dimensions grows, the complexity of analysis also
increases.
• Practically, CUA has been traditionally utilized in healthcare,
measuring improvement in health as measured by both quantity
(years of life) and quality of healthcare improvement (health status).
• Each type of benefit (Bj) would be assigned its relative importance,
or weight (wj), in the utility:
Ci
CU i 
 n 
  Bj * w j  
 
 j1 i

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 Types of Economic Evaluation in
Health Sector
• Economic evaluation: compare the resources consumed
with the health consequence.
• The benefit of an intervention is better described as
extending the life span of individuals, rather than
preventing deaths alone.
• Disability-Adjusted Life Years (DALY)
- Overall measure of disease burden by combining
years of life lost and years lived with disability
• Quality-Adjusted Life Years (QALY)
- Measure of quality of life

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 Disability Adjusted Life Years (DALY)

• The DALY index calculates the productive years lost

from the ideal lifespan due to morbidity or premature
mortality – a measure of the combined quantity and
quality of life.
• Reduction of productivity due to morbidity is a function
of the years lived with the disability, and an assigned
weighting.
• It allows both morbidity and mortality to be considered
in a single measure. Nevertheless, it is to some extent
subjective and controversial.

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 Quality Adjusted Life Year (QALY)
• QALY is a measure of combining the quantity and quality
of life. It takes one year of perfect health-life expectancy to be
worth 1, but regards one year of less than perfect life
expectancy as less than 1.

• An intervention results in a patient living for four years rather

than dying within one year. Hence, the treatments add 3 years
to the person’s life. However, if the quality of life falls from 1 to
0.5, the treatment generates 1.5 QALY.

• The weights/index are generally obtained through survey or

medical experts in the field.

• QALYs provide an indication of the benefits gained from a

variety of medical procedures in terms of quality, life, and
survival for the patient.
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 Evaluation of
Education Projects

• Educational projects may have many types of

components, with benefits measurable in both monetary
and non-monetary terms.
• Investment in education generates various in-school and
out-of-school benefits.
• In-school benefits include gains in the efficiency of the
education system.
• Out-of-school benefits include improvement of the
income-earning skills of the students and externalities
(benefits) that accrue to society at large beyond the
project beneficiaries.

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 Evaluating Investments with
In-School Benefits
• In-school benefits include gains in the efficiency of the
education system (e.g., enhance learning, reduce student’s
repeat, reduce crime).
• As in any other enterprise, the production of education
services involves decisions how it combines inputs to
produce the desired objectives.
• Alternative ways to enhance the educational system:
– Invest in writing and textbook;
– Invest in educational software;
– Invest in hardware facilities/furniture;
– Upgrade teachers.

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 Evaluating Investments with
Out-of-School Benefits
• Out-of school benefits arise after the project’s beneficiaries
finish a course of study or leave a training program.
• The most obvious of such benefits is the gain in the
beneficiaries’ work productivity, as reflected in differences in
pay (or in farm output).
– The difference in outputs between the two groups of
farmers, valued in market prices, can be used to estimate
the economic benefits of investing in primary education.
• In evaluating a project from society’s point of view, the benefits
include gross-of-tax earnings and fringe benefits in the wage
package such as retirement benefits.
• Most of the social benefits are difficult to quantify including
crime reduction, social cohesion, income distribution, possibly
fertility reduction.
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 Figure 1. Age-Earnings Profiles of High School and University Graduates
in Venezuela, 1989

300,000

250,000
University
200,000 Graduates

150,000

100,000 High School

Graduates
50,000

12 16 20 24 28 32 36 40 44 48 52 56 60
Age Source: Pedro Belli (2001)

The calculation typically involves two steps:

1) estimating the relevant age earnings profiles to obtain the increment
in earnings at each age;
2) discounting the stream of incremental earnings using an appropriate
discount rate.
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If the returns to university education interest us,
the profiles would refer to earnings for university
and high school graduates.

Earning/Cost Benefits Age earnings profile

of university graduates

Age earnings profile

of school graduates
Forgone Earnings secondary

18 22 65 Age
Direct Costs

0 4 47
Time (Years)
Source: Pedro Belli (2001)
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The standard formula in cost-benefit analysis can be
modified to the specific problem here:

( EU  ES ) t  4
t  43
NPV     ( E S  C )
u t (1  i ) t

t 4 (1  i )t t 1

Es , Eu - refer to the earnings of secondary

and university graduates
Cu - refers to annual unit cost of university education
i - refers to the discount rate
t - refers to the time periods

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Table 2. Returns to Investment in Education by Level,
Latest Available Year (percent)
Country Primary Secondary Higher

Argentina 8.4 7.1 7.6

Bolivia 9.3 7.3 13.1
Botswana 42 41 15
Brazil 35.6 5.1 21.4
Chile 8.1 11.1 14
Colombia 20 11.4 14
Costa Rica 11.2 14.4 9
Ecuador 14.7 12.7 9.9
El Salvador 16.4 13.3 8
Ethiopia 20.3 18.7 9.7
Ghana 18 13 16.5
Mexico 19 9.6 12.9
South Africa 22.1 17.7 11.8
Philippines 13.3 8.9 10.5
Zimbabwe 11.2 47.6 -4.3

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Cost Effectiveness Analysis of
Investment in Education

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 Investment in Education

• In many developing countries the budget that is allocated

to educational sector is a significant proportion of total
public sector expenditure.

• Allocating the budget efficiently within the Department of

Education is important for both public sector efficiency
and the effectiveness of the delivery of education
services.

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 CEA in Education
• Efficiency in education is affected by many different factors such as:
– Number of available classrooms
– Number of learners in each class
– Level of knowledge and expertise of teachers
– Availability of text books and other facilities

• A serious shortage of classrooms may prevent students from

entering school. It may result in overcrowding, thereby decreasing
the efficiency in learning of students and discouraging them from
attending school.

• A CEA is to find the most efficient use of the given budget allocation
using the limited information available such as the number of
classrooms available in each school district relative to the number of
students in that district.

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 An Example:
Province of Limpopo in South Africa

• In some provinces of South Africa as well as elsewhere in Africa, the

most urgent problem with the primary and secondary school system
is a shortage of classrooms.
• For example, the education system in Limpopo of South Africa has
been suffered from shortage of classroom space. Since 1997 great
efforts have been made to deal with problem. Between 1995-2002,
7,800 classrooms were built. It was expected to take about 10-15
years to overcome the backlog of schools that are needed.
• The issue is how to prioritize the areas where the school classrooms
should be built until the budget is exhausted.
– It is difficult to place monetary value on the annual benefits of an
investment in new classrooms.
– Benefits are related to reduction in students/classrooms ratio and
the number of students affected by the reduction.

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 Calculation of Incremental Benefit-Cost Ratios
School Next Year’s Existing No. Next Year’s Next Year’s Reduction First Year Project First Year
Name Enrolment of (N/C) w/o (N/C) w/ in (N/C) Benefits of Investment B/C
N Classroom Project Project [(3)-(4)] Project Cost Ratio
C [(5)*(1) (R 000)
(1) (2) (3) (4) (5) (6) (7) (8)
1. School A 685 1 685 137 548 375,380 420 0.8938

2. School B 567 1 567 113 454 257,418 420 0.6129

3. School C 876 9 97 67 30 26,280 420 0.0626

4. School D 531 1 531 106 425 225,675 420 0.5373

5. School E 1,028 5 206 114 92 94,576 420 0.2252

6. School F 439 1 439 88 351 154,089 420 0.3669

7. School G 396 2 198 66 132 52,272 420 0.1245

8. School H 780 12 65 49 16 12,480 420 0.0297

9. School I 347 5 69 39 30 10,410 420 0.0248

10. School J 772 16 48 39 9 6,948 420 0.0165

11. School K 333 1 333 67 266 88,578 420 0.2109

12. School L 450 3 150 64 86 38,700 420 0.0921

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 Schools with the Highest Incremental B/C Ratios
School Name Next Year’s Existing No. Next Year’s Next Year’s Reduction in First Year Incremental Accumulative
In Enrolment of (N/C) w/o (N/C) w/ (N/C) Benefits of B/C Project
Ranking N Classroom Project Project [(3)-(4)] Project Ratio Costs
C [(5)*(1) (R 000)
(1) (2) (3) (4) (5) (6) (7) (8)
1. School A 685 1 685 137 548 375,380 0.8938 420

2. School B 567 1 567 113 454 257,418 0.6129 840

3. School D 531 1 531 106 425 225,675 0.5373 1,260

4. School F 439 1 439 88 351 154,089 0.3669 1,680

5. School E 1,028 5 206 114 92 94,576 0.2252 2,100

6. School K 333 1 333 67 266 88,578 0.2109 2,520

7. School G 396 2 198 66 132 52,272 0.1245 2,940

8. School P 474 3 158 68 90 42,660 0.1016 3,360

9. School A* 685 5 137 76 61 41,785 0.0995 3,780

10. School L 450 3 150 64 86 38,700 0.0921 4,200

11. School E* 1,028 9 114 79 35 35,980 0.0857 4,620

12. School B* 567 5 113 63 50 28,350 0.0675 5,040

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 Cost-Utility Analysis
• A cost-utility analysis (CUA) is maximizing the overall effectiveness of
public expenditure on school infrastructure by taking into account
important factors.
• Information on key factors available for each school area:
– Number of available classrooms
– Number of learners in the school area and a projection of future
growth of number of learners in the area
– Type of school (Primary or Secondary)
– Location of school (Urban or Rural)
– Support facilities of the existing school

• A CUA approach is to measure a “priority index”, including a

weighted average of all the key factors affecting the project
selection.
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 Calculation of Priority Index

• A “priority index” (PI) can be constructed to include

infrastructure adequacy and other important factors such as
facilities available at school.

PI =  Infrastructure Adequacy Factors  *  Augmenting Adjustment 

 Backlog of Class-Blocks * weight Backlog 

Infrastructure Adequacy Factors =  
 Excess Class Attendance * weight Excess 
n
Augmenting Adjustment = 1 +   Augmenting Factor * weight 
j=1
j j

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 Infrastructure Adequacy

• There are two aspects of infrastructure adequacy: class-block

backlog and the learner-to-classroom ratio.
• (A) Class-block Backlog. The class-room backlog is estimated as
a number of additional buildings, measured by a standard 4-class
block, required at a particular school in order to maintain the
maximum acceptable class size. Weight in PI Index = 0.70.
• (B) Learner-to-Classroom / Target Class Size Ratio. The
overcrowding of classes is measured by the excess of actual class
attendance to the maximum target class size, i.e. by the learner-to-
classroom / target class size ratio. Weight in PI Index = 0.30.

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 Weights for Augmenting Factors
1. Type of School.
Primary (P=0.25) or Secondary (S=0) 0 or 0.25
2. Support Facilities. Max = 0.25
Water (N=0.08) or (Yes=0) 0 or 0.08
Toilets (N=0.08) or (Yes=0) 0 or 0.08
Electricity (N=0.04) or (Yes=0) 0 or 0.04
Fences (N=0.02) or (Yes=0) 0 or 0.02
Library (N=0.01) or (Yes=0) 0 or 0.01
Labs
Primary (N=0.01) or (Yes=0) 0 or 0.01
Secondary (N=0.02) or (Yes=0) 0 or 0.02
3. Location of School.
Rural (R=0.20) or Urban (U=0) 0 or 0.20
4. Development Factors.
Expected Population Decline (N=0) or (Yes: -0.40 to 0) Min = -0.40
Other Factors (N=0) or (Yes: 0 to 0.05) 0.00 to 0.05

Maximum Weight of Augmenting Factors 0.75

Maximum Possible Augmenting Adjustment 1.75
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 Example

• A mixed sample of both primary and secondary (S3, S4,

and S6) schools in urban and rural areas. All 8 schools
have infrastructure backlogs.
• Different sizes of schools, and different number of
classrooms are currently available.
• The availability of basic facilities varies from location to
location.
• Question: How to rank these schools in terms of their
priority for additional infrastructure?

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 Estimating School PI Index
INFRASTRUCTURE ADEQUACY
Weight S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8
Total Number of Learners 280 1,000 550 1,400 800 450 600 950
Available Classrooms 3 17 6 21 11 6 8 9 81
Learner-to-Classroom Ratio 93 59 92 67 73 75 75 106
A. Class-blocks Backlog 0.70 1.0 2.0 2.4 4.8 2.3 1.7 1.8 3.7 Score A: 0.70 1.40 1.70 3.33 1.58 1.20 1.23 2.58
B. Learner-to-Classroom Ratio/Target Size 0.30 2.3 1.5 2.6 1.9 1.8 2.1 1.9 2.6 Score B: 0.70 0.44 0.79 0.57 0.55 0.64 0.56 0.79
Total Weight of Section 1.00 Total Section Score: 1.40 1.84 2.49 3.90 2.12 1.84 1.79 3.37
Section Ranking: 8 6 3 1 4 5 7 2
AUGMENTING FACTORS
1. Type of School. 0.25
Primary (P) or Secondary (S) P P S S P S P P 0.25 0.25 0.00 0.00 0.25 0.00 0.25 0.25
2. Support Facilities. 0.25
Water 0.08 N N N Y N Y N Y 0.08 0.08 0.08 0.00 0.08 0.00 0.08 0.00
Toilets 0.08 N Y N Y N N N N 0.08 0.00 0.08 0.00 0.08 0.08 0.08 0.08
Electricity 0.04 N Y N Y N N Y N 0.04 0.00 0.04 0.00 0.04 0.04 0.00 0.04
Fences 0.02 N Y N Y Y N N N 0.02 0.00 0.02 0.00 0.00 0.02 0.02 0.02
Library 0.01 N N N Y N Y N N 0.01 0.01 0.01 0.00 0.01 0.00 0.01 0.01
Labs N Y N N N N N N 0.01 0.00 0.02 0.02 0.01 0.02 0.01 0.01
Primary 0.01
Secondary 0.02
Total Section Score: 0.24 0.09 0.25 0.02 0.22 0.16 0.20 0.16
3. Location of School. 0.20
Rural (R) or Urban (U) R U R R U R U R 0.20 0.00 0.20 0.20 0.00 0.20 0.00 0.20
4. Development Factors
Expected Population Decline -0.40 N N N N N Y N N 0.00 0.00 0.00 0.00 0.00 -0.20 0.00 0.00
Other Factors 0.05 N N N N N N N N 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Section Score: 0.00 0.00 0.00 0.00 0.00 -0.20 0.00 0.00
Maximum Weight of Augmenting Factors 0.75 Total Augmenting Factors: 0.69 0.34 0.45 0.22 0.47 0.16 0.45 0.61
Maximum Possible Augmenting Adjustment 1.75 Augmenting Adjustment: 1.69 1.34 1.45 1.22 1.47 1.16 1.45 1.61
PRIORITY INDEX AND RANKING
Priority Index: 2.37 2.47 3.60 4.75 3.12 2.14 2.59 5.43
ALLOCATION OF BLOCK #1 Ranking: 7 6 3 2 4 8 5 1
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 Efficiency Maximization Rule
• RULE: Because the priority index reflects a number of objectives,
the overall effectiveness of budget spending is maximized when the

funds are forwarded to schools with the highest ranking.

• Since each additional building will alter the current priority index and
ranking of schools, the ranking is recalculated after each new
addition of class-rooms or changes in support facilities and the type
of school.
• It is a multi-stage selection process until the budget is exhausted.

43
 Allocation of Funds for Construction of
New Blocks #2 and #3
ALLOCATION OF BLOCK #2 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8
1 2 2
Total Number of Learners 280 1,000 550 1,400 800 450 600 950
New Class-Blocks 0 0 0 0 0 0 0 1
Available Classrooms 3 17 6 21 11 6 8 13 85
Learner-to-Classroom Ratio 93 59 92 67 73 75 75 73
Resulting Class-blocks Backlog 0.70 1.0 2.0 2.4 4.8 2.3 1.7 1.8 2.7 0.70 1.40 1.70 3.33 1.58 1.20 1.23 1.88
Learner-to-Classroom Ratio/Target Size 0.30 2.3 1.5 2.6 1.9 1.8 2.1 1.9 1.8 0.70 0.44 0.79 0.57 0.55 0.64 0.56 0.55

Total Section Score: 1.40 1.84 2.49 3.90 2.12 1.84 1.79 2.43
Augmenting Adjustment: 1.69 1.34 1.45 1.22 1.47 1.16 1.45 1.61
Priority Index: 2.37 2.47 3.60 4.75 3.12 2.14 2.59 3.91
Ranking: 7 6 3 1 4 8 5 2

ALLOCATION OF BLOCK #3 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8

Total Number of Learners 280 1,000 550 1,400 800 450 600 950
New Class-Blocks 0 0 0 1 0 0 0 0
Available Classrooms 3 17 6 25 11 6 8 13 89
Learner-to-Classroom Ratio 93 59 92 56 73 75 75 73
Resulting Class-blocks Backlog 0.70 1.0 2.0 2.4 3.8 2.3 1.7 1.8 2.7 0.70 1.40 1.70 2.63 1.58 1.20 1.23 1.88
Learner-to-Classroom Ratio/Target Size 0.30 2.3 1.5 2.6 1.6 1.8 2.1 1.9 1.8 0.70 0.44 0.79 0.48 0.55 0.64 0.56 0.55

Total Section Score: 1.40 1.84 2.49 3.11 2.12 1.84 1.79 2.43
Augmenting Adjustment: 1.69 1.34 1.45 1.22 1.47 1.16 1.45 1.61
Priority Index: 2.37 2.47 3.60 3.79 3.12 2.14 2.59 3.91
Ranking: 7 6 3 2 4 8 5 1

44
 Allocation of Funds for Construction of
New Blocks #4 and #5
ALLOCATION OF BLOCK #4 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8
1 2 2
Total Number of Learners 280 1,000 550 1,400 800 450 600 950
New Class-Blocks 0 0 0 0 0 0 0 1
Available Classrooms 3 17 6 25 11 6 8 17 93
Learner-to-Classroom Ratio 93 59 92 56 73 75 75 56
Resulting Class-blocks Backlog 0.70 1.0 2.0 2.4 3.8 2.3 1.7 1.8 1.7 0.70 1.40 1.70 2.63 1.58 1.20 1.23 1.18
Learner-to-Classroom Ratio/Target Size 0.30 2.3 1.5 2.6 1.6 1.8 2.1 1.9 1.4 0.70 0.44 0.79 0.48 0.55 0.64 0.56 0.42

Total Section Score: 1.40 1.84 2.49 3.11 2.12 1.84 1.79 1.60
Augmenting Adjustment: 1.69 1.34 1.45 1.22 1.47 1.16 1.45 1.61
Priority Index: 2.37 2.47 3.60 3.79 3.12 2.14 2.59 2.58
Ranking: 7 6 2 1 3 8 4 5

ALLOCATION OF BLOCK #5 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8 S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8

Total Number of Learners 280 1,000 550 1,400 800 450 600 950
New Class-Blocks 0 0 0 1 0 0 0 0
Available Classrooms 3 17 6 29 11 6 8 17 97
Learner-to-Classroom Ratio 93 59 92 48 73 75 75 56
Resulting Class-blocks Backlog 0.70 1.0 2.0 2.4 2.8 2.3 1.7 1.8 1.7 0.70 1.40 1.70 1.93 1.58 1.20 1.23 1.18
Learner-to-Classroom Ratio/Target Size 0.30 2.3 1.5 2.6 1.4 1.8 2.1 1.9 1.4 0.70 0.44 0.79 0.41 0.55 0.64 0.56 0.42

Total Section Score: 1.40 1.84 2.49 2.34 2.12 1.84 1.79 1.60
Augmenting Adjustment: 1.69 1.34 1.45 1.22 1.47 1.16 1.45 1.61
Priority Index: 2.37 2.47 3.60 2.85 3.12 2.14 2.59 2.58
Ranking: 7 6 1 3 2 8 4 5

45
 Budget Allocation Results
• The objective is to ensure that the benefits are maximized from the allocation of capital budget for the construction of new class-blocks.

• Notes: * Ranked first before allocation.

** Ranked second before allocation.
*** Ranked third before allocation.

Max PI
Allocated To: S.1 S.2 S.3 S.4 S.5 S.6 S.7 S.8
Observed
1st Block School 8 * 5.43 1
2nd Block School 4 ** 4.75 1
3rd Block School 8 3.91 1
4th Block School 4 3.79 1
5th Block School 3 *** 3.60 1
Total New Blocks Allocated: 0 0 1 2 0 0 0 2

46
 CEA: Power Projects
Levelized Economic Cost of Energy with
Alternative Technologies

Single Combined
Cycle Plant Cycle Plant

PV of Economic Cost (M Rupees):

Investment Costs 146.83 205.57
O&M Costs 68.95 68.95
Fuel Paid by the Utility 388.72 207.32
Total 604.51 481.84

PV of Energy Generated (MWhs) 3,297,471 3,297,471

Levelized Cost of Energy:

Cost Expressed in Rupees/kWh 0.183 0.146

47
 CEA for Water Projects:
Present Value of Water Shortages
under Alternative Development Strategies
and Project Schedule
(million M3, 2002)

Rooipoort Site Upstream Downstream

Height of FSL FSL FSL FSL FSL FSL
Rooipoort Wall 724 728 731 720 725 731
A Flag Boshielo+5m 85.7 85.7 85.7 85.7 85.7 85.7
B Rooipoort 56.4 31.9 19.7 56.4 28.7 15.6
C Rooipoort + Flag+5m 12.2 3.6 1.7 12.2 2.8 1.7

48
 CEA for Water Projects:
Marginal Financial Unit Cost of Water
Delivered to Bulk Users
(R/M3, in 2002 Prices)

Rooipoort Site Upstream Downstream

Height of FSL FSL FSL FSL FSL FSL
Rooipoort Wall 724 728 731 720 725 731
A Flag Boshielo+5m 1.47 1.47 1.47 1.47 1.47 1.47
B Rooipoort 3.00 2.49 2.29 3.15 2.50 2.20
C Rooipoort + Flag+5m 2.17 2.06 2.05 2.26 2.10 2.04

49
 CEA for Water Projects:
Marginal Economic Unit Cost of Water
Delivered to Bulk Users
(R/M3, in 2002 Prices)

Rooipoort Site Upstream Downstream

Height of FSL FSL FSL FSL FSL FSL
Rooipoort Wall 724 728 731 720 725 731
A Flag Boshielo+5m 2.19 2.19 2.19 2.19 2.19 2.19
B Rooipoort 3.40 2.43 2.07 3.53 2.39 1.95
C Rooipoort + Flag+5m 2.12 1.91 1.87 2.21 1.94 1.86

50