Risks of large infrastructure investments: the case of Kathmandu

摘要

In 2003, the Asian Development Bank asked the authors to conduct a benefit-cost analysis of the proposed Melamchi Water Supply Project (MWSP) for Kathmandu, Nepal. The project is controversial and has its critics. The authors, however, were told to assume that MWSP would be successfully implemented as planned. Our analysis considered 3 different methods for discounting and 2 different evaluation criteria. Sources of uncertainty included household benefits, damage from earthquakes, future rates at which households will connect to the improved system, and the fate of Nepal's economy. To address uncertainty, the analysis employed ⅰ) switching values and ⅱ) Monte Carlo simulation. The probability is high that MWSP is not economically feasible when discounting is by conventional methods, but it is an attractive project if hyperbolic or shadow pricing capital methods are used for discounting.