Zbornik radova Koridor 10 - Kirilo Savić

3rd International Scientific and Professional Conference
CORRIDOR 10 - a sustainable way of integrations
Usually, the projects are considered from two perspectives:
- Financial analysis, which is made from the perspective of the investor and must answer the
question: Will the estimated income at current prices exceed the estimated costs It is
necessary to use the project cash flow forecast to calculate suitable net return indicators and
profitability of investments.
- Economic analysis, which is made from the perspective of the whole society and appraises
the project`s contribution to the economic welfare of a region or country and must answer the
question: Will the total benefits, that will be generated by new infrastructure, exceed the costs
which are necessary for its construction and operation
We move from financial to economic analysis in three steps (Cost-Benefit Analysis of Investment
Projects, 2004):
- Elimination of taxes and subsidies and other non-market transfers,
- Corrections due to the external factors (externalities),
- Conversion of market to accounting prices and inclusion of additional effects in society
(determination of conversion factors).
Determination of eligibility of investments should base on cross-checking of results of both analyses.
The most common example of investments in public railway infrastructure is that the indicators of
economic analysis are positive, so the constructions brings economic welfare for society, but the
indicators of financial analysis are negative and therefore the investors will not recover the value of
investment in capital. These projects are eligible for co-financing by EU funds.
2. METHODOLOGICAL ASSUMPTIONS
To preform financial and economic analysis correctly it is necessary:
- To determine needs with the analysis of the existing and future demand;
- Clear identification of the project as a self-sufficient unit of analysis, determination of the
objectives and measures, that will enable to achieve set goals;
- To study and estimate alternative options and determine which option is the optimal to achieve
set goals.
Calculation of project profitability indicators is made by using cost benefit analysis. Differential
method is used (incremental approach), which means that investment appraisal aims to compare two
situations – “with the project” and “without the project” 1 . Situation “without the project” is the base
starting point for the project analysis and usually represents implementation of the do-minimum option
(alternative). Do-minimum option enables that the existing condition of the public railway infrastructure
is preserved and that the condition is not deteriorating. Situation “with the project” represents
implementation of the best alternative option.
It is necessary to determine time horizon (observation period) for which the effects of the project are
observed/calculated. According to European Union recommendation observation period for investment
in railway infrastructure is 30 years.
All calculations in the analysis are carried out at constant prices, usually at prices, that are valid at
time of working out document.
Costs and benefits occurring in different times must be discounted with discount rate 2 . In Slovenia
the discount rate is set at country level with the Decree on the uniform methodology for the
preparation and treatment of investment documentation in the field of public finance in the amount of 7
%.
1 Determination of the project cash flows are based on the differences in the costs and benefits between the scenario“with the
project” and “without the project”.
2 Discount rate is annual rate at which future values are discounted to the present – multiplying the future value by a coefficient
that decreases with time.
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