Calculating ERRs

MCC’s methodology for ERR analysis is best described as micro-economic growth analysis, which measures the expected increases in household incomes or the value-added of individual firms. ERRs can also be considered MCC’s best pre-investment estimate of the likely economic impact of the proposed investment. These ERRs also include income or value added that is expected to be generated through environmental and social improvements, but do not attempt to quantify and incorporate the broader social value of these improvements.
Every ERR calculation considers two scenarios:

1. The expected outcome with the project investment; and
2. The expected outcome without the project investment.

Scenario 1:
Expected Outcome with Project Investment

This scenario reflects the increases in income or value added generated by the proposed program, as well as the full costs related to the program.

Scenario 2:
Expected Outcome with No Project Investment

The second scenario, called the counterfactual, reflects an estimate of what is likely to happen in the future if no project investment takes place. While this may be considered a “status quo” scenario, the estimation of future economic outcomes without the project also accounts for dynamic trends. For example, a growing economy would be expected to continue growing consistent with recent projections, even without the project.

ERR analysis compares the difference in incomes or value added between the two scenarios. The ERR, then, is expressed in percentage terms, and represents the interest rate at which the discounted net benefits equal the discounted costs. Projects that are likely to generate larger increases in household incomes per dollar invested will have higher ERRs.

MCC models incorporate the best information available at the time regarding core parameters, but projections of future economic activity for both scenarios must account for uncertainty. MCC conducts sensitivity analysis on its ERRs using a range of plausible values on the major variables that drive the results. Thus, ERRs represent MCC’s best estimate of what we expect will happen as a result of the project, while the sensitivity analysis represents the potential range of outcomes.