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Environment Valuation, Project Appraisal And
Political Consensus In The Third World

by Alister McFarquhar
Downing College, University of Cambridge, Cambridge CB2 1DQ


The paper assesses environment valuation methods including top-down CBA. National and international institutions advocate devolution of decision-making. Good environment planning should involve local populations, local planning and local valuation.

Partial measures of environment valuation of non-market goods and services including the Benefits Transfer Method and Contingent Valuation (CV), and Hedonic Pricing, still frequently used in spite of a poor record, are assessed. The current emphasis in multilateral project evaluation on Financial Rate of Return and the Weighted Average Cost of Capital emphasizes the increasing importance of commercial and national rather than local and social criteria in public projects.

Debate on ethical and economic aspects of environment valuation is summarized with a critique of CBA. In spite of rhetoric to the contrary, a local and democratic approach is not currently reflected in environment valuation in practice.


The writer is indebted to ADB for prolific quotation from their state of the art Manuals (ADB 1996,1997) on Environmental Valuation and Project Appraisal, and to John Boyd and others in ADB, who may prefer anonymity, for guidance on practice. Comments by Ian Sturgess, who sadly died recently, greatly improved the script. This paper is offered to the web in his memory. John Richardson created the production layout of the paper: Apologies to authors of seminal articles on environmental valuation for liberal quotations that are severally too brief to do justice to their contributions. The usual responsibilities lie with the writer.

I. Introduction

The paper summarizes methods for valuing environment particularly methods used in the Development Banks. The use of shadow or social prices began in the late fifties in project evaluation in multilateral development banks (MDBs). Curiously, cost benefit analysis (CBA) has hardly been used beyond the MDBs although prescriptive in some US environmental legislation. CBA uses shadow or social prices and tries to capture indirect benefits and costs of a project not part of the financial flows. This has become routine practice only in MDBs. CBA incorporating social prices, as it must to be worth the name, was not used much in the UK before or after the famous Third London Airport inquiry (1972). Even in the multilateral organizations (MO), emphasis has shifted to calculation of the financial rate of return as privatization and cost recovery became more important in the 1990s. Some authorities claim to use CBA, ignoring or unaware of social pricing as an essential element.

Exactly what role CBA plays in the evaluation of projects remains unclear. In the MOs, once a project is conceived on intuitive grounds, it is seldom rejected. This suggests that CBA is used to justify rather than assess. An approved project must show a minimum rate of return, so CBA may be used to modify a project to achieve the required rate of return rather than to eliminate projects which do not provide adequate return as first conceived. Alternatively, data like social prices susceptible to uncertainty may be manipulated to justify a project, although this is difficult to prove.

It is useful to think of environment evaluation in terms of a development project where social appraisal methods are routinely applied. Most development can be viewed as projects, public or private, often subject to planning control. CBA has been routine in the appraisal of MDB projects, but has been in decline as it gives ground to a myriad of alternative and complementary partial social measures of poverty and distribution. However, CBA is enjoying a new lease on life in valuation of the environment. This coincides with a revival of debate on contingent valuation in the planning literature.

This paper questions if repeating the experience of the last four decades in project appraisal and contingency valuation is a useful approach to environment valuation in democratic planning, especially difficult with conflict between local and national objectives. CBA has been used properly to justify state sponsored development supposedly in the interest of the nation state as a whole as its assumptions on mobility of labor require. Now the MOs advocate devolution of planning to local authorities and of property rights to ethnic groups and minorities who suffer directly the environmental consequences of development. Are these laudable objectives consistent with a planning criterion like CBA, which is essentially top-down rather than bottom-up? Before exploring this it is essential to review current practices in project evaluation in MOs in sections II, III and IV.

Section II summarizes financial and economic evaluation method as reflected in manuals published by the development banks. Section III discusses physical environment assessment (EIA, EA) and, specific partial techniques for economic evaluation of environment using primary stated preference methods including, contingency valuation (CV), hedonic pricing (HP), travel cost method (TCM) and secondary benefits transfer method (BTM). Section IV summarizes the state of the art of CBA as practiced in the development banks. Section V reviews the recent debate on environment valuation. Section VI considers the implications of the debate on environment valuation for the continued use of CBA and CV in environment management and planning. Section VII examines the relation between environment management and political consensus as a vital factor in planning.

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