What is conversion factor to project evaluation?

Answer 1

I am assuming that you want to know what the conversion factors for project evaluation is.

In developing countries, and possibly, some developed countries, there are many factors that distort the market prices of goods and services. Some of these are minimum wages; tariff protection on imported manufactured goods; monopolies providing services and goods; and/or any action by government and the private sector that has an effect on the price of goods or services needed for projects.

To account for these distortions one would use, so-called, shadow prices. These prices should reflect the "true" scarcity value of the inputs for a project. Thus in a labour surplus economy, with minimum wages the wage rate would probably be adjusted downwards to reflect the abundance of labour. For other inputs that could be imported one would calculate a shadow exchange rate that would reflect the relative scarcity of foreign exchange reserves. You will realize that the number of calculations could be enormous. What people have done is to look at past projects and calculated an adjustment factor for each of the items in the project evaluation from that. These factors would then be used instead of shadow prices.

Thus a conversion factor used in project evaluations takes the place of the calculation of shadow prices for project in- and outputs.