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Annex 3. Economic Costs and Benefits
Economic and Financial Analysis - El Salvador: Land Administration II
Summary of Economic Benefits and Costs
Flow
Net Present Value of Flows
Expected Benefits
US$ 70.7 million
Expected Costs
US$ 38.4 million
Net Benefits
US$ 32.3 million
IRR
21%
I. Economic Costs
The costs used in the economic analysis are those costs which bear directly on land regularization and the
functioning of the land registration system. These costs include land regularization activities,
decentralization of land administration services, project administration, and operating costs after the
completion of the investment phase. As shown in Annex 5 on Project Costs, the costs with contigencies
total US$ 55.8 million, of which US$ 39.4 million are for land regularization, US$ 8.7 million for the
decentralization of land administration services, and US$ 4.3 million for project management. These costs
are treated as a flow over the six years of the project. Operating costs after the investment-phase are
expected not to exceed US$ 200,000 per year and they are accrued over the next 14 years. Using a discount
rate of 12%, these costs have a net present value of US$ 38.4 million.
II. Economic Benefits
Benefits are estimated in four dimensions: a) impact on property value; b) impact on banking system; c)
streamlining of registration process and d) environmental benefits. This annex discusses each of these types
of benefits. For evaluating the cost-benefit ratio of the project only direct benefits, financial benefits, and
streamlining of registration process are used. Accruing benefits over a 20 year period and using a discount
rate of 12%, these benefits have a net present value of US$ 70.7 million.
Impact of the Regularization Process on Property Values
Increased property value due to regularization is a summary indicator of the capitalized value of three
major types of benefits associated with land regularization: improved investment and environmental
conservation incentives, marketability, and ability to use the land as collateral for loans. Estimating the
magnitudes of these expected increases is a complex problem for a national program. Property values are
influenced by a wide range of factors—location, access to public services, size, value of construction, use
of the property—each of which interacts with tenure status. Controlling for these factors, the difference in
value between similar regularized and unregularized properties is a good indicator of the economic benefit
of regularization. The additional value increment associated with regularization of tenure is estimated,
based on empirical examination of properties which have been regularized under LAP I.
The premium for land regularization can be interpreted from estimating a basic linear regression model of
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