**Table 10. Methods Employed in Appraisal of Net Project Benefits** (43 projects withi a major administration component)

||Heuristic<br>appraisal|(% of projects)<br>Social/Economi<br>Returns|c Financial<br>returns|Heuristic<br>Risk<br>assessment|Quantitative<br>Risk<br>Assessment|
|---|---|---|---|---|---|
|TALs, LILs, SILs, RILs|lO0<br>_|8<br>|28.6|100|14.3|
|SALs and SECALs|100|)__<br>_|0|100|0|
|All Projects|100|2.4|14.3|1100|7.1|
|Notes: 1. Details are not av<br>2. For 2 projects rev|ailable for one p<br>enue impact was|roject.<br>estimated.||||

**Box 9. Cost Benefit Analysis** _The Philippines nax Computerization projecL, 19933_

The Philippines' Tax Computerization project is one of 7 projects in the sample with a formal analysis of net project benefits (others include technical assistance loans to Argentina, Bulgaria, Guatemala, Latvia, Mongolia and Thailand, though the methods of analysis are not uniform). Compared to other proects the analysis is detailed in the Staff Appraisal Report (SAR). Furthermore, estimates of additional tax collection are based on tax by tax evasion estimates made in three different studies.<sup>2</sup> The project's net financial benefits are calculated based on year by year (estimated) project expenses and year by year (estimated) incremental revenue collection due to the project. The source of incremental revenues is reduced evasion alone, the reduction in evasion being assumed to be to 40%/o of the initial level, translating to an increase in the tax-GDP ratio from the existing 15.5% to 19%K by 2001. The project duration is 1993-97 but cash flows for the period 1993-2001 are considered for net benefit calculations. Project costs after 1997 are assumed to be a constant (real) amount per year. Total tax collection in 1992 is estimated at 209 billion pesos and total tax; evasion at that point was estimated at 80 billion pesos. The project also assumed that tax collection would increase gradually over a period of up to 7 years. Given an estimated growth rate of GDP, incremental collection and net benefits were calculated year by year using three possible scenarios:

1. Benefits are achieved gradually during years 293

2. Benefits are zero in the first 4 years and then achieved gradually during years _5-9._ 3. Benefits are achieved gradually during yea rs2-54 Annual discount rates between 10% and 20% were used, without any comment, to discount future net benefits. The range of discounted present values for these calculations was 59 to 225 million pesos and the (discounted present value) benefit to (discounted present value) benefit-cost ratio ranged from 42 to I 110 million pesos. The internal financial rate of return (IFFR) was between 203% and 300%.

The assessment pointed out that intangible beinefits include lower future manpower requirements even if there was rapid growth in the number of taxpayers, and greater taxpayer and staff satisfaction. The assessment also claimed that an economic rate of return was "impossible to estimate" since the main effect of the project was the transfer of additional resources from the private to the public sector. Jt also noted-that additional collections were likely to be forthcoming from identified non-filers, even after the projectfs useful life was over.

_Evaluation:_ Taken on its own terms, the assumed real growth rate of GDP during 1994-2001 (7% per year) was overly optimistic given the 4.5% rate actually achieved during 1992-97, according to World bank data). The assumption that tax evasion would fall to 40% of its initial level appears similarly optimistic, especially since the project design does not explicitly address corruption of tax officials, 22