1. TECHNIQUES FOR COMPARING ALTERNATIVE EDUCATION INVESTMENTS EDUARDO VELEZ AFTH1 December 1998

2. THREE MESSAGES I. ECONOMIC ANALYSIS IS IMPORTANT IN EDUCATION II. ECONOMIC ANALYSIS IS POSSIBLE IN EDUCATION III. EXPAND EXPECTATIONS SLOWLY, CAREFULLY

3. I. ECONOMIC ANALYSIS IS IMPORTANT IN EDUCATION n Economic analysis is a tool to analyze best investments from an economic point of view n Necessary (convenient) for sector analysis and for project design n Provides a set of information. Education indicators are another set. n It helps answer the following questions: A. In which education sub-sector should one invest? B. What kind of investment in each sub-sector? C. Are the planned investments sustainable? D. What are the equity implications?

4. A. In which education sub-sector should one invest? n The first decision concerns the educational level where it makes most sense to invest. Intra-sectoral but also inter-sectoral allocations n This decision should usually be made prior to project identification, when the overall country assistance strategy is defined and specific priorities are set for the education sector within that context. n Instruments: –CAS (coverage, quality, efficiency, sequence of investment) –Public expenditure review

5. B. What kind of investment in each sub-sector? n There are different ways of achieving educational goals (identification of education inputs) n Choosing among various alternatives implies the ability to measure the costs and benefits associated with each alternative. The cost side is the easier part insofar as the various inputs financed by the project have a direct monetary cost (and the indirect cost reflecting the opportunity cost linked to foregone incomes). At the very least, each project should include a table comparing various alternative approaches in terms of unit cost of each intervention and number of beneficiaries.

6. C. Are the planned investments sustainable? n A key element of the economic analysis is to assess whether the investment planned is sustainable during and beyond the project life. The purpose of the sustainability analysis is to measure the financial implications of the project in order to identify potential financing gaps and avoid financing shortfalls. n Not only look at the financing capacity of public sector. Education investments may also generate private economic benefits that could create a ‘willingness to pay’ among potential beneficiaries. As a result, the analysis should also look at generation of private economic benefits that could create willingness to pay and ability to pay.

7. D. What are the equity implications? n Another dimension of the economic analysis is to check the consistency of the proposed investment with the Bank’s poverty reduction strategy in the country. What groups would benefit (gender, ethnic, regions, income, etc.)?

8. II. ECONOMIC ANALYSIS IS POSSIBLE IN EDUCATION Tools of Economic Analysis n n Cost-effectiveness (ce) analysis refers to the evaluation of alternatives according to both their costs and their effects with regard to producing some outcome or set of outcomes. n Cost-benefit (cb) analysis refers to the evaluation of alternatives according to a comparison of both their costs and benefits when each is measured in monetary terms.

9. II. ECONOMIC ANALYSIS IS POSSIBLE IN EDUCATION Tools of Economic Analysis (Cont...) n Cost-utility (cu) analysis refers to the evaluation of alternatives according to a comparison of their costs and the estimated utility or value of their outcomes. n n Cost-feasibility (cf) analysis refers to the method of estimating only the costs of an alternative in order to ascertain whether or not it can be considered.

10. COST-EFFECTIVENESS (CE) ANALYSIS Examples of Effectiveness Measures PROGRAM OBJECTIVES MEASURE OF EFFECTIVENESS Program completionsNo. of students completing program

11. COST-EFFECTIVENESS (CE) ANALYSIS Examples of Effectiveness Measures PROGRAM OBJECTIVES MEASURE OF EFFECTIVENESS Program completionsNo. of students completing program Reducing dropoutsNo. of potential dropouts who graduate

12. COST-EFFECTIVENESS (CE) ANALYSIS Examples of Effectiveness Measures PROGRAM OBJECTIVES MEASURE OF EFFECTIVENESS Program completionsNo. of students completing program Reducing dropoutsNo. of potential dropouts who graduate Employment of graduatesNo. of graduates placed in appropriate jobs

13. COST-EFFECTIVENESS (CE) ANALYSIS Examples of Effectiveness Measures PROGRAM OBJECTIVES MEASURE OF EFFECTIVENESS Program completionsNo. of students completing program Reducing dropoutsNo. of potential dropouts who graduate Employment of graduatesNo. of graduates placed in appropriate jobs Student learningTest scores in appropriate domains utilizing appropriate test instruments

14. COST-EFFECTIVENESS (CE) ANALYSIS Examples of Effectiveness Measures PROGRAM OBJECTIVES MEASURE OF EFFECTIVENESS Program completionsNo. of students completing program Reducing dropoutsNo. of potential dropouts who graduate Employment of graduatesNo. of graduates placed in appropriate jobs Student learningTest scores in appropriate domains utilizing appropriate test instruments Student satisfactionStudent assessment of program on appropriate instrument to measure satisfaction

15. COST-EFFECTIVENESS (CE) ANALYSIS Examples of Effectiveness Measures PROGRAM OBJECTIVES MEASURE OF EFFECTIVENESS Program completionsNo. of students completing program Reducing dropoutsNo. of potential dropouts who graduate Employment of graduatesNo. of graduates placed in appropriate jobs Student learningTest scores in appropriate domains utilizing appropriate test instruments Student satisfactionStudent assessment of program on appropriate instrument to measure satisfaction Physical performanceEvaluation of student physical condition and physical skills

16. COST-EFFECTIVENESS (CE) ANALYSIS Examples of Effectiveness Measures PROGRAM OBJECTIVES MEASURE OF EFFECTIVENESS Program completionsNo. of students completing program Reducing dropoutsNo. of potential dropouts who graduate Employment of graduatesNo. of graduates placed in appropriate jobs Student learningTest scores in appropriate domains utilizing appropriate test instruments Student satisfactionStudent assessment of program on appropriate instrument to measure satisfaction Physical performanceEvaluation of student physical condition and physical skills College placementNo. of students placed in particular colleges

17. COST-EFFECTIVENESS (CE) ANALYSIS Hypothetical Cost-Effectiveness Result for Remedial Science Programs Method Small groups Special tutors CAI Additional hrs

18. COST-EFFECTIVENESS (CE) ANALYSIS Hypothetical Cost-Effectiveness Result for Remedial Science Programs Cost per student (US$) (US$) 600 600 200 200 300 300 100 100 Method Small groups Special tutors CAI Additional hrs

19. COST-EFFECTIVENESS (CE) ANALYSIS Hypothetical Cost-Effectiveness Result for Remedial Science Programs Cost per student (US$) (US$) 600 600 200 200 300 300 100 100Effectiveness (test score) (test score) 40 40 8 30 30 20 20 Method Small groups Special tutors CAI Additional hrs

20. COST-EFFECTIVENESS (CE) ANALYSIS Hypothetical Cost-Effectiveness Result for Remedial Science Programs Method Small groups Special tutors CAI Additional hrs Cost per student (US$) (US$) 600 600 200 200 300 300 100 100Effectiveness (test score) (test score) 40 40 8 30 30 20 20 Cost- Cost-EffectivenessRatio 15 15 25 25 10 10 5

21. The least-cost method to produce an additional output. Three steps are required: 1.Regression coefficients from an education production function are used as estimates of the marginal achievement gains attributable to different inputs 2.The total economic costs per student of each individual input are calculated. 3.Alternative inputs are ranked in terms of their contribution to improving scores relative to their costs. COST-EFFECTIVENESS (CE) ANALYSIS Cost-effectiveness of Inputs for Portuguese Achievement

22. InputWater School furniture School facilities Hardware Textbook usage Writing materials Software Teacher salary Training Logos II 4 year primary 3 years secondary

23. COST-EFFECTIVENESS (CE) ANALYSIS Cost-effectiveness of Inputs for Portuguese Achievement InputWater School furniture School facilities Hardware Textbook usage Writing materials Software Teacher salary Training Logos II 4 year primary 3 years secondary Cost (US$) 1.815.458.80 16.06 16.061.651.763.410.392.501.842.215.55

24. COST-EFFECTIVENESS (CE) ANALYSIS Cost-effectiveness of Inputs for Portuguese Achievement InputWater School furniture School facilities Hardware Textbook usage Writing materials Software Teacher salary Training Logos II 4 year primary 3 years secondary Cost (US$) 1.815.458.80 16.06 16.061.651.763.410.392.501.842.215.55 Achievement change by input (coefficients) 3.513 -5.650 -5.6507.2288.9696.4034.7034.8640.055 -0.160* -0.160*3.5943.1772.383

25. COST-EFFECTIVENESS (CE) ANALYSIS Cost-effectiveness of Inputs for Portuguese Achievement InputWater School furniture School facilities Hardware Textbook usage Writing materials Software Teacher salary Training Logos II 4 year primary 3 years secondary Cost (US$) 1.815.458.80 16.06 16.061.651.763.410.392.501.842.215.55 Achievement change by input (coefficients) 3.513 -5.650 -5.6507.2288.9696.4034.7034.8640.055 -0.160* -0.160*3.5943.1772.383 Achievement gains per US$ spent 1.94-0.820.563.882.671.430.14-1.951.440.43

26. 3. EXPAND EXPECTATIONS SLOWLY, CAREFULLY n Examples from World Bank at IEPS stage: –What is rational for public investment? –What is best investment for intervention n At appraisal: –What is fiscal impact? –Can we measure benefits?

27. Rate of return and Net Present Value of School Amalgamation Options in Barbados Option 1. Retain the existing schools as they are (reference option) 2. Replace the existing schools with a new one 3. Build new school for grades 3-6 and retain one existing school for grades K-2 4. Expand one of the existing schools to accommodate all the students 5. Upgrade the existing schools, using one for grades 3-6, and the other for grades K-2

28. Rate of return and Net Present Value of School Amalgamation Options in Barbados Option -- 1. Retain the existing schools as they are (reference option) 2. Replace the existing schools with a new one 3. Build new school for grades 3-6 and retain one existing school for grades K-2 4. Expand one of the existing schools to accommodate all the students 5. Upgrade the existing schools, using one for grades 3-6, and the other for grades K-2 Rate of return (percent a year) 13.5 11.5 49.5 70.0

29. Rate of return and Net Present Value of School Amalgamation Options in Barbados Option -- 1. Retain the existing schools as they are (reference option) 2. Replace the existing schools with a new one 3. Build new school for grades 3-6 and retain one existing school for grades K-2 4. Expand one of the existing schools to accommodate all the students 5. Upgrade the existing schools, using one for grades 3-6, and the other for grades K-2 Rate of return (percent a year) 13.5 11.5 49.5 70.0 Net present value ($) -- 196,700 65,500 690,800 532,200

30. Economic Analysis of Project Component to Support the University of Mauritius (thousands of Mauritius rupees at 1994 prices) YearCapital Exp.Inc. Rec. CostsOpp. CostsBenefitsNet Benefits 1995 3,600 3,900 0 0 -7,500 199685,4285,073 140,685 22,468 -208,718 1997 92,1068,500 164,898 64,223 -201,282 1998 122,9948,648 181,076 119,061 -193,657 199977,95811,117 211,764 185,993 -114,847 200062,22612,601 231,729 256,742 -49,814 200112,774 252,314 360,314 95,226 200212,820 272,446 470,313 185,047 200312,271 297,336 582,698 273,091 2004- 2015 12,244 322,332 720,765 386,189 IRR=21.0%NPV=885,202