International Investment Project

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Posted by Bob on September 19, 1999 at 11:09:13:

A capital budget of $100 million is not easy to spend on one project. The World Bank would be challenged to find an economically and politically acceptable project at even their low hurdle rates of return or cost/benefit ratios, which typically turn out to be negative in post-audits.

Examples of new projects of this size include financing public infrastructure (health, education, transportation, communications, and natural habitats) such as (1) airport, (2) seaport, (3) wildlife santuary, (4) forest preserve, (5) distributed healthcare delivery system (family planning, prenatal care, etc), (6) nationwide satellite cellular telephony or internet access, and (6) decentralized educational system from K-12 through college and vocational-technical schools.

In addition to the $100 million in equity, another $100 million in bonds might be issued if necessary to increase the total project size. The interest on the bonds could be paid out of users' fees. There are many developing countries that need foreign capital for such "investments", and the political obstacles often outweigh the economic considerations.

The required rate of return depends on the opportunity cost of capital, and this is indicated by yields on so-called risk-free long-term government securities such as the U.S. 30-year Treasury bond. It is more appropriate to use a so-called "cost-benefit analysis" to evaluate an investment that does not involve products and services being sold in the marketplace. The costs and benefits will vary widely depending on two assumptions: first, the degree of inclusion of externalities in total costs; and second, the time horizon of the analysis. By changing either one or both of these assumptions within broad limits, you can get almost any cost/benefit ratio desired.

For more about externalities, you might check out the book entitled "The Ecology of Commerce : A Declaration of Sustainability" by Paul Hawken at the Books & Links page.

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