Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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determine directly the willingness-to-pay. Other methods can be adopted, which may be found inliterature.b) Water supply projects, with the aim of protecting the resources of high quality and environmental value.Some projects aim at avoiding over-exploitation or some water sources and at identifying alternatives.An example is the replacement of water extracted from coastal aquifers, which have become salty dueto pumping excessive volumes of resource, with water produced from other sources, such asdesalination, wastewater reuse, surface water sources, etc. The benefit (or non use value) is given bythe water preserved for other uses, current or future. The possible alternative uses of the saved waterhave to be accurately identified and, for each of them, the related potential demands quantified.When this is done, the benefits can be valued by means of water accounting prices as in the previouscase.c) The main benefit of the interventions aimed at limiting water leaks is the reduced volume of waterused for supplying the networks compared to an equal or greater quantity of distributed water.Examples are projects for network rehabilitation or, more in general, of ‘water asset management’. Asin the previous case, the benefit is given by the water preserved for other uses, to be quantified assaid above.d) For any intervention, that is intended to guarantee the availability of drinking resources in areas withsanitary problems, and where water sources are polluted, the benefit may be directly estimated byvaluing the deaths and illnesses that can be avoided by means of an efficient water supply service. Tomake an economic valuation, it is necessary to refer on one hand (illnesses) to the total cost ofhospital or out-patient treatments and to the income loss due to possible absence from work, and onthe other hand (deaths) to the statistical life value quantified on the basis of the average income andresidual life expectancy or with other methods.e) The social benefits of sewer and depurator projects may be evaluated on the basis of the potentialdemand for sewage, that will be fulfilled by the investment and estimated according to an adequateaccounting price 34 . Alternatively, if possible, direct valuation may be applied to benefits such as:- The value of the illnesses and deaths avoided thanks to an efficient drains service (see above);- The value derived from preserving or improving the quality of the water bodies or the lands inwhich the waste water discharges and the related environment. This value is made up of both ‘use’and ‘non-use’ values (see the diagram below).f) For ‘white’ or mixed drains projects, the benefit is the damage avoided to land, real estate and otherstructures due to potential flooding or unregulated rainwater, valorised on the basis of the costs forrecovery and maintenance (avoided costs).In any case, if no standard economic appraisal method is applicable for the specific project, it is possibleto resort to comparisons with any similar project, that may have been developed in a context as close aspossible to the one in the affected area. Obviously, in the case of projects that have multiple objectivesand, therefore, derive from a combination of two or more of the categories above, the benefits are givenby a proper combination of those described above.For any project, the positive or negative externalities due to the impact of the infrastructure’s constructionand the use of the water resources, have to be carefully taken into account, as far as possible, by means ofa quantitative approach. Various methods exist for the valuation of environmental costs and benefits andthese can be found in the literature (see Annex F) 35 .As mentioned in Chapter 2, taxes and subsidies should usually be treated as transfers within society andshould therefore be excluded from the estimation of economic costs. However, in the water service34Basically the same as the demand for water, applying an appropriate reduction factor of the flow rates waste water discharged in the seweragenetwork (as an as an example from literature: 0,8).35See, as example, Pearce D., Atkinson G. and Mourato S. ‘Cost-Benefit Analysis and the Environment: Recent Developments’ (2005).100
projects, as in other sectors in which a strong connection with the natural environment exists, it isimportant to distinguish between general taxes and environmental taxes and subsidies:- General taxes need to be deducted from economic costs;- Environmental taxes and subsidies may represent internalised environmental costs or benefits and, assuch, should not be deducted from economic costs or revenues (but attention should be paid in suchcase to avoid double-counting of externalities).3.2.2.5 Risk assessmentCritical factors- The forecasts of the demand dynamics- The rate of change in tariffs or fees, largely dependent upon the decisions taken by the nationalor regional regulatory bodies- The lack of capacity to respond to shocks (which often requires excess capacity in the firstoperating periods)- The determining influence of collateral interventions (for example, the effectiveness of watersupply is strictly related to the good state of repair of distribution networks)- The dynamics of costs over time of some critical goods and services for certain projectsMainvariablesto consider- The cost of the investment- The rate of demographic growth- The forecasts of any migration flow- The development rate of crops and the national and/or international dynamics of the saleprices of agricultural products (for irrigation purposes)- The variation in tariffs or fees over a period of time- The demand and price dynamics of the water that may be recovered in case of reutilization;- The operating costs (maintenance, management, etc.)- The cost of fuels and/or- The cost of electric energy for desalination plants- The cost of chemical additives and the mud disposal cost for depurators3.2.2.6 Other project evaluation approachesIn addition to what has already been stated in previous paragraphs, it may be useful to produce a specialevaluation of the effectiveness of the proposed system when the location for the project is a sensitive areafrom an environmental point of view.In any case, an evaluation of the environmental effects (or costs) of water use, implied by the projectunder analysis, has to be presented by the proposer in accordance with the previously mentioned WaterFramework Directive 2000/60/CE.During the evaluation stage, it is necessary to analyse, even if briefly 36 , the environmental impact of thework to be realised with the project and to check any deterioration effect on the soil, the water bodies, the36Legislation in the majority of Member countries requires the compulsory evaluation of the environmental impact for some of theseinfrastructures (e.g. dams, large aqueducts, depurators, etc.), in the approval stage of projects.101
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ACRONYMS AND ABBREVIATIONSBAUB/CCBA
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TABLESTable 2.1 Financial analysis
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FIGURESFigure 1.1 Project cost spre
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Cohesion Fund, and through the leve
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or the plant will not reveal excess
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CHAPTER ONEPROJECT APPRAISAL IN THE
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Some specifications for financial t
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FOCUS: INFORMATION REQUIREDGeneral
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In particular, CBA results should p
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CHAPTER TWOAN AGENDA FOR THE PROJEC
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objectives, are, as far as possible
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considered the appropriate shadow p
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2.3.2 Feasibility analysisFeasibili
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This approach will be presented in
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Current assets include:- receivable
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The following items are usually not
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Mainly, the examiner uses the FRR(C
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The dynamics of the incoming flows
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eturn on their own capital (Kp). Th
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While the approach presented in thi
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2.5.1 Conversion of market to accou
Page 50 and 51: Table 2.9 Electricity price dispers
Page 52 and 53: 2.5.1.2 Fiscal correctionsSome item
Page 54 and 55: previously estimated in projects wi
Page 56 and 57: FOCUS: ENPV VS. FNPVThe difference
Page 58 and 59: 2.6 Risk assessmentProject appraisa
Page 60 and 61: Table 2.14 Impact analysis of criti
Page 62 and 63: Figure 2.6 Probability distribution
Page 64 and 65: eneficiary. The project proposer sh
Page 66 and 67: There are many ways to design an MC
Page 68 and 69: PROJECT APPRAISAL CHECK-LISTCONTEXT
Page 70 and 71: - reduction of congestion by elimin
Page 72 and 73: - the methods applied to estimate e
Page 74 and 75: - the marginal external costs: cong
Page 76 and 77: - the benefits for the existing tra
Page 78 and 79: The following tables show some refe
Page 80 and 81: 3.1.1.6 Risk assessmentDue to their
Page 82 and 83: As shown in Figure 3.1, only under
Page 84 and 85: 3.1.3.7 Other project evaluation ap
Page 87 and 88: - Waste Management Hierarchy rules
Page 89 and 90: The time horizon for a project anal
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Page 95 and 96: Territorial reference frameworkIf t
Page 97 and 98: Cycle and phases of the projectGrea
Page 99: One of the most important aims of t
Page 103 and 104: 3.2.3.2 Project identificationBasic
Page 107 and 108: In order to evaluate the overall im
Page 109 and 110: for regassification plants, number
Page 111 and 112: Examples of objectives are:- change
Page 113 and 114: decontamination if any;- the techni
Page 115 and 116: 3.3.3.6 Risk AnalysisCritical facto
Page 117 and 118: 3.3.4.6 Risk assessmentCritical fac
Page 119 and 120: 3.4.1.5 Economic analysisThe follow
Page 121 and 122: Financial inflows• Admission fees
Page 123 and 124: expectancy suitably adjusted by the
Page 125 and 126: The time horizon for project analys
Page 127 and 128: A Cost-Benefit Analysis should cons
Page 129 and 130: CHAPTER FOURCASE STUDIESOverviewThi
Page 131 and 132: - finally, there is the traffic tha
Page 134 and 135: c) Road users producer’s surplus:
Page 136 and 137: 4.1.5 Scenario analysisTwo scenario
Page 138 and 139: The financial performance indicator
Page 140 and 141: Table 4.10 Economic analysis (Milli
Page 142 and 143: Table 4.12 Financial return on capi
Page 144 and 145: 4.2 Case Study: investment in a rai
Page 146 and 147: 4.2.4 Economic analysisThe benefits
Page 148 and 149: Financial investment costs have bee
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Figure 4.6 Results of the risk anal
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Table 4.22 Economic analysis (Milli
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Table 4.24 Financial return on capi
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4.3 Case Study: investment in an in
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ate of 0.6% per year is assumed for
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The shadow price of the CO 2 avoide
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As a result, the probability distri
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Table 4.36 Financial return on capi
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4.4 Case Study: investment in a was
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4.4.2 Financial analysisAlthough in
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THE CALCULATION OF REVENUESReferrin
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0.15 m 3 /m 2 a depreciation of 20%
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As result, the probability distribu
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Figure 4.13 Probability distributio
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Table 4.48 Financial return on nati
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Table 4.50 Financial return on priv
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16 17 18 19 20 21 22 23 24 25 26 27
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4.5 Case Study: industrial investme
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4.5.4.1 Investment costsThe total i
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Finally, a residual value was estim
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This analysis shows the need to pay
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Table 4.62 Financial return on inve
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Table 4.64 Return on private equity
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Table 4.66 Economic analysis (thous
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ANNEX ADEMAND ANALYSISDemand foreca
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The method applied for the forecast
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Furthermore, travel demand depends
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This Guide supports a unique refere
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A higher discount rate for countrie
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Figure C.1 Project ranking by NPV v
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The main problems with this indicat
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EXAMPLE OF SHADOW WAGE IN DUAL MARK
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Another exhaustive way to include d
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Figure E.2 Percentage of low income
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ANNEX FEVALUATION OF HEALTH &ENVIRO
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Figure F.1 Main evaluation methodsS
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- expenditure on capital equipment
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due to air pollution or water conta
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BENEFIT TRANSFER - SELECTED REFEREN
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ANNEX GEVALUATION OF PPP PROJECTSIt
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adjustments for Competitive Neutral
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ANNEX HRISK ASSESSMENTIn ex-ante pr
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Reference ForecastingThe question o
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Figure H.5 Levels of risks in diffe
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ANNEX IDETERMINATION OF THE EU GRAN
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A.4. Technological Alternatives and
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GLOSSARYAccounting period: the inte
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Market price: the price at which a
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BIBLIOGRAPHY1. ReferencesBelli, P.,
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Ray, A. 1984, Cost-benefit analysis
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EnvironmentGeneralAtkinson, G., 200
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European Commission, DG Tren, 2003,
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Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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