Financial and Economic Evaluation Guidelines for International Forestry Projects

Abstract

This article covers the principles of financial and economic analysis to improve the implementation of forestry projects. A financial analysis considers costs, prices, and profits of carrying out a project or activity in terms of market prices. Economic analyses use market prices where available and nonmarket prices are developed for goods and services that lack commercial prices. The main stages of the financial and economic analysis include defining the project objectives; collecting data for analysis; the estimation of inputs for activities, costs, and prices; the development of cash flow tables; the use of profitability indicators to estimate the financial or economic returns; the actual implementation of the project; and monitoring and evaluation. Economists use various capital budgeting criteria and discounted cash flow analysis to guide in the selection of projects, including the Net Present Value (NPV), the Land Expectation Value or Soil Expectation Value (LEV or SEV), the Internal Rate of Return (IRR), and the Benefit/Cost ratio. Financial and economic analysis can assess the merits of new products and services, such as forest carbon, biodiversity, water quality, and beauty. They can help identify which benefits are more valuable to society and local communities, which is useful for forest policy decisions, such as developing forestry programs for local communities, helping produce goods and services efficiently, making payments for environmental services, and helping conserve valuable ecosystems and promote community welfare.