Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

INTRODUCTION AND SUMMARY1. The new editionThe present Guide to Cost-Benefit Analysis of Investment Projects updates and expands the previousedition (2002), which in turn was the follow up of a first brief document (1997) and of a subsequentsubstantially revised and augmented text (1999). The new edition builds on the considerable experiencegained through the dissemination of the previous versions and particularly after the new investmentchallenges posed by the enlargement process.The objective of the Guide reflects a specific requirement for the EC to offer guidance on projectappraisals, as embodied in the regulations of the Structural Funds, the Cohesion Fund, and Instrument forPre-Accession Assistance (IPA) 1 . This Guide, however, should be seen primarily as a contribution to ashared European-wide evaluation culture in the field of project appraisal.The Guide has been written with a view to meeting the needs of a wide range of users, including deskofficers in the European Commission, civil servants in the Member States and in Candidate Countries,staff of financial institutions and consultants involved in the preparation or evaluation of investmentprojects. The text is relatively self-contained and - as its previous version - does not require a specificbackground in financial and economic analysis of capital expenditures. Its main objective is to ensure abroad conceptual framework, a common appraisal language among practitioners in the many countriesinvolved in EU Cohesion Policy.The rest of this introductory chapter presents the motivations, ambitions and some caveats of thesuggested approach. At the same time, it offers a concise summary of its key ingredients, both in terms ofmethodological assumptions and of some benchmark parameters.2. MotivationInvestment decisions are at the core of any development strategy. Economic growth and welfare dependson productive capital, infrastructure, human capital, knowledge, total factor productivity and the quality ofinstitutions. All of these development ingredients imply - to some extent - taking the hard decision to sinkeconomic resources now, in the hope of future benefits, betting on the distant and uncertain futurehorizon. The economic returns from investing in telecoms or in roads will be enjoyed by society after arelatively short time span following project completion. Investing in primary education means betting onthe future generation and involves a period of over twenty years before getting a result in terms ofincreased human capital. Preserving our environment may require decision-makers to look into the verylong term, as the current climate change debate shows.Every time an investment decision has to be taken, one form or another of weighting costs againstbenefits is involved, and some form of calculation over time is needed to compare the former with thelatter when they accrue in different years. Private companies and the public sector at national, regional orlocal level make these calculations every day. Gradually, a consensus has emerged about the basicprinciples of how to compare costs and benefits for investment appraisal.The approach of the Guide draws from real life experience, combined with up-to-date research. The aimhere is to communicate to non-specialists the key intellectual underpinnings of investment projectevaluation, as widely practised by international organisations, governments, financial actors and managerialteams world-wide. The specificity of the Guide lies in the broad perspective of EU Cohesion Policy infurthering investment and regional development through capital grants, as offered by the Structural and1See also the EC Working Document No 4, Guidance on the methodology for carrying out Cost-benefit analysis, available on URL:http://ec.europa.eu/regional_policy/sources/docoffic/working/sf2000_en.htm11