Evaluation HigHligHts

•  Malnutrition is widespread among children in developing countries, raising morbidity and mortality.

•  Impact evaluations can provide insights about effective interventions to reduce malnutrition, though the findings are variable.

•  The World Bank is ramping up its nutrition response and its impact evaluation efforts.

•  This report reviews the findings of recent nutrition impact evaluations, the experience of evaluations of the nutrition impact of Bank support, and the use of the evaluation results to improve outcomes.

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Chapter 1Evaluation HigHligHts

•  The Articles of Agreement that founded the World Bank established the principle that Bank projects should aim to increase welfare in member countries.

•  Bank policy has traditionally mandated that cost-benefit analysis be used to determine whether Bank projects increase welfare. Operations with a positive net present value increase welfare because discounted benefits exceed costs.

•  Bank policy requires a net present value calculation for all projects except those for which benefits cannot be measured in  monetary terms.

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Chapter 1

2  |  Cost-Benefit Analysis in World Bank Projects

World Bank PolicyThis evaluation is grounded in World Bank policy on cost-benefit analysis, which in 

turn is grounded in the Articles of Agreement that established the International Bank 

for Reconstruction and Development in 1944. The Articles state that “the purposes of 

the Bank are: (i) To assist in the reconstruction and development of territories of mem-

bers by facilitating the investment of capital for productive purposes .  .  . (iii) .  .  . thereby 

assisting in raising productivity, the standard of living and conditions of labor in their 

territories” (World Bank 1944).

The Articles state that the fundamental goal of World Bank operations is to raise productivity, incomes, or welfare (“standard of living”) and wages, employment, or working conditions (“conditions of labor”) in the territories of mem-ber countries. Cost-benefit analysis is the technique the Bank has used, since the early 1970s, to gauge for itself, and to verify for stakeholders outside the Bank and the Bank’s Board of Directors, that its operations are indeed having a net positive effect on the standard of living in member countries. Cost-benefit analysis is defined as any quantita-tive analysis performed to establish whether the present value of benefits of a given project exceeds the present value of costs. Such analysis usually also produces both a net present value (NPV) calculation and an economic rate of return (ERR) calculation.

Increasing the welfare of poorer countries is the fundamen-tal objective underlying Bank policy on cost-benefit analy-sis. That policy directs the Bank to help borrowing counties select the highest-NPV project and to do nothing if the best alternative entails a negative NPV. When a country borrows at commercial interest rates and the (properly measured) NPV is negative, the country as a whole is becoming poorer as a result of the project. That is why the policy against neg-ative NPV projects is particularly important.

In the case of International Development Association (IDA) credits, which contain a large grant element, a negative NPV does not necessarily mean that the receiving country is poorer; nevertheless, such a project wastes taxpayer funds from donor countries because better alternatives are not pursued. Whenever a country fails to pursue the alternative with the highest NPV, global resources are wasted.

Bank policy also serves as a safeguard against project choices being captured by narrow political or sectional in-terests. Efficiency considerations always compete with other

motives in project selection, and the policy is designed to give efficiency the upper hand in this competition. Borrow-ers have expressed their appreciation of the Bank’s role as an honest broker (World Bank 1992a, annex B, p. 14).1

The current version of the Bank’s policy on cost-benefit analysis is Operational Policy (OP) 10.04, “Economic Eval-uation of Investment Operations,” written in September 1994 (see appendix D).2 Three parts of this policy deserve special comment. The first part is the rule to guide deci-sions to approve investment operations. Bank policy re-quires choosing the investment that maximizes the NPV of benefits from a list of alternatives and not investing if the NPV is negative. The clear policy against investments with negative NPVs is rooted in the desire to avoid lowering na-tional welfare in member countries.

The second part of Bank policy establishes the scope of cost-benefit analysis. It states that the positive NPV test should apply to all Bank investment operations, with a sin-gle exception: “If the project is expected to generate benefits that cannot be measured in monetary terms, the analysis (a) clearly defines and justifies the project objectives, re-viewing broader sector or economy-wide programs to en-sure that the objectives have been appropriately chosen, and (b) shows that the project represents the least-cost way of attaining the stated objectives.” Hence, the positive NPV criterion should apply to all operations except those for which benefits cannot be measured in monetary terms. In that case, the operation must be established as the least-cost way of attaining the stated objective. Redistributive pro-grams are, therefore, not at odds with this part of Bank policy if they are achieved in a cost-effective manner.

The third part of Bank policy is guidance on what constitutes good cost-benefit analysis. The policy stipulates what must be analyzed to establish that an operation will achieve or has

World Bank Policy       |       3

achieved a positive NPV. These criteria are covered in detail in chapter 4 of this report. In summary, they stipulate that:

•   The main goal of the ex ante project analysis is to estimate the discounted expected present value of its benefits, net of costs, because this is the basic criterion for a project’s acceptability. This places a premium on accurate and un-biased estimates.

•   Benefits and costs should be measured against the situa-tion without the project.

•   All projects should be compared against alternatives, in-cluding the alternative of doing nothing.

•   Analysis should consider the sources, magnitude, and ef-fects of the risks associated with a project by taking into account the possible range in the values of the basic vari-

ables and assessing the robustness of the project out-comes with respect to changes in these values.

•   The economic analysis  should  examine  the  consistency with the Bank’s poverty-reduction strategy.

•   The  economic  evaluation  of  Bank-financed  projects should take into account any domestic or cross-border externalities.

A mandate to adhere to basic principles of transparency and accuracy in the assumptions and estimates is also part of Bank policy. The analysis should be clear, accurate, and sufficiently complete to support informed decisions.

The points mentioned in this chapter constitute the basic evaluative principles against which this evaluation will be conducted.

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