Economic Rates of Return

MCC is making available its Economic Rate of Return (ERR) data via interactive, downloadable Microsoft Excel spreadsheets. the spreadsheets are unique to each project within a compact.

Each spreadsheet includes:

  • A description of the project, including its economic rationale;
  • The expected project impacts, including detailed cost and benefit estimates;
  • A tool allowing users to modify key assumptions and study the effects of those modifications on the project’s returns.

Some familiarity with cost-benefit analysis will be essential to use these spreadsheets.

The Essence of the Economic Rate of Return (ERR)

At its core, an ERR is a comparison of the costs and benefits of a public investment. In MCC’s analysis, the costs of a project reflect the necessary financial expenses, including those covered by other parties. The benefits include the increased income of a country’s population or value added by its firms due specifically to the proposed project. Estimating the ERR of a proposed project before the investment is made offers MCC a forecast of the project’s likely economic impact. More details on how the ERR is calculated are provided on subsequent pages.

Closeout ERRs

MCC began updating ERRs upon compact closeout in 2011. These estimates are distinct from ex-post ERRs. As benefit streams for most projects may only start after compact closeout, these closeout ERRs remain an ex-ante estimate. Closeout ERRs are an updated estimate of a project’s cost efficiency based on the information regarding costs and benefits available at the time of closeout.

In 2014, MCC produced its first annual report on closeout ERRs, the main purpose of which is to concisely document facts on ERRs that have been updated upon compact closeouts. The annual reports are available below:

Publicly Sharing ERRs

One of MCC’s guiding principles is that foreign assistance should reinforce good governance practices, including enhanced transparency in government decision-making. As one of its initiatives aimed at increased transparency, MCC is making the ERR spreadsheets that were used in its funding decisions and those updated at closeout publicly available on its website. The spreadsheets are being released in Microsoft Excel format so that users can interact with the formulas, supporting data, and underlying assumptions used in the calculations. In addition, many of the files include interactive components that allow users to change key assumptions and see how those changes affect the project’s ERR. The spreadsheets available here reflect the most current version (i.e. Closed compacts show closeout ERRs whereas open compacts show ERRs used at the time of funding decisions).The spreadsheets reflect the technical rigor of the original economic calculations. In an effort to make the spreadsheets more broadly accessible, we have included a project description and a user’s guide in each file.

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.

Investment Decisions

MCC takes into consideration a number of factors when making its decisions to approve Compact investments. First, we value country ownership and place a premium on supporting initiatives that have broad based support in the country and that were developed through a consultative process. We also examine whether the program proposal is consistent with MCC policies and guidelines on gender, the environment, and procurement procedures, among others. Given our focus on measurable results that will reduce poverty, we analyze each program to determine its sustainability and its Economic Rate of Return (ERR). We expect programs will generate adequate benefit streams to justify the specific investments. MCC also conducts beneficiary analysis to ensure that investments will deliver tangible benefits to the poor.

ERR and Due Diligence

MCC’s due diligence process includes the estimation of the economic rate of return (ERR) for projects in the proposal from each compact-eligible country. An ERR is a comparison of costs and the potential benefits of those costs.

In MCC’s analysis:

  • Costs are the financial expenses of a proposed project, including expenses covered by other parties;
  • Benefits are the increased income of a country’s population or value added by its firms due specifically to the proposed project.

ERRs and Compact Proposals

Compact-eligible countries prepare a compact proposal which identifies the main constraints to economic growth and proposes several programs to address those constraints.

These countries have the primary responsibility for analyzing the economic impact of their proposed programs, and are expected to estimate this impact with an ERR. MCC’s due diligence process includes reviewing and validating ERR estimates produced by our country partners and, if necessary, working with a country to identify and assess possible alternatives, modifications or complements to the proposed projects.

Country Spreadsheets

Download spreadsheets to see MCC ERR data which helped determine the approval of these compacts.

These spreadsheets reflect the best information available to MCC at the time of the investment decision, and indicate the organization’s estimate of the project’s economic returns.

MCC understands that key parameters will change over time, and project design may be revised during implementation.

These spreadsheets provide a window into the assessment of economic impact used by the MCC in its consideration of the proposed investment. When project designs or model parameters change significantly, MCC may revise these models; updated information will be posted here as it becomes available.

Spreadsheet Data

What the spreadsheet data represent:

  • An overall impact estimate. The spreadsheets provide MCC’s best pre-investment estimate of the likely economic impact of the project and form the basis for monitoring and evaluation efforts.
  • Estimated benefits. The spreadsheets estimate the expected increases in either incomes or value added of individuals, households, firms or sectors of economic activity.
  • A counterfactual scenario. Potential benefits are compared against what is likely to happen without the project (e.g., a growing economy would be expected to continue growing, even without the project).
  • A snapshot in time. The spreadsheets reflect the best data available to MCC at the time the project was approved for investment.

What the spreadsheet data do not represent:

  • The sole reason for an investment decision. Although ERRs are an integral part of MCC’s decision-making process, other factors are taken into account when MCC decides whether or not to undertake a project.
  • A detailed beneficiary analysis. The ERR spreadsheets portray the overall economic impact of a project rather than apportioning the income gains along various demographic dimensions.
  • Up-to-the-minute information for projects in implementation. Many of the parameters that are used in these pre-investment estimates change over time, so ERRs may not reflect the actual implementation experience. When project designs or model parameters change significantly, MCC may revise these models; updated information will be posted here as it becomes available.