Coping with the disappointingrates of return on development projects that affect the environment

Abstract

Lending institutions'initial appraisals often ignore the true costs of environmental impacts, and many development projects are launched despite returns that are often below the cost of capital and all too often actually negative. Most environmental impacts are negative, so approving a project with a low true rate of return is not only a financial waste but a gratuitous stress on the ecosystem. Ecosystems typically have a low tolerance for such impacts, so low-yielding projects entail serious ecosystem opportunity costs. The author explores why projects with environmental impacts so often have lower-than-anticipated rates of return, and what can be done to remedy the situation. Many observers are optimistic because there is more environmental awareness than there was in the 1970s and early 1980s and environmental screening is more a part of project evaluation. But, says the author, attention to environmental risk has not yet provoked the structural changes in government institutions that would allow for the development of incentives that give proper weight to environmental risks. The fundamental political economy of early commitment to grandiose projects of uncertain environmental consequences has not been overturned. It is also important to develop better appraisal methodologies and to hold those preparing initial project appraisals accountable for their appraisals. If post-project evaluations do not capture the most significant environmental costs, analysts conducting appraisals early in the project's life are unlikely to worry about being caught out by their unfounded optimism or their disregard for environmental consequences. The good news is that in policy reform and structural adjustment the movement is toward eliminating blatant risk-seeking and making government institutions accountable for the results of their own actions. Although the conditionalities imposed by international funding institutions can be helpful, the primary responsibility for designing and selecting appropriate projects that have an envrironmental impact still lies with the governments of the developing world.Health Economics&Finance,Poverty Monitoring&Analysis,Health Monitoring&Evaluation,Development Economics&Aid Effectiveness,ICT Policy and Strategies