Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Table 4.2Investment CostsINVESTMENT COSTSFree motorwayTolled motorwayMillions % Millions %Works 502 59% 545 61%Junctions 230 27% 230 26%Land acquisition 60 7% 60 6%General expenses 42 5% 42 5%Other expenses 18 2% 18 2%TOTAL 852 100% 895 100%4.1.4 Economic analysisA preliminary financial analysis, (not reported here), has evaluated cash inflows and outflows of the twooptions, and has concluded that the NPV(C) of the tolled road option is better (i.e. less negative) than forthe free access option. This is because the former generates some toll revenues, whilst the latter generatesonly costs. The financial criterion however, from a regional development perspective, is not sufficient tomake a decision and an economic analysis must be performed. The economic evaluation of the new roadshould consider any social cost and benefit that may be generated by the project. A detailed financialanalysis will be performed (see below), on the preferred option according to the economic appraisal.Firstly, the financial investment and maintenance costs have been adjusted for fiscal components. As tothe labour force, the personnel cost has been adjusted for national insurance contributions and incometaxation. The conversion factor is equal to 0.6 because the reservation wage has been taken intoconsideration for this area that is characterised by very high unemployment.For the overheads calculation, the financial costs have been assumed to be representative of the economiccost, and therefore no conversion factor has been applied. The same is also true for the land acquisition,where the expropriation costs reflect the opportunity costs of land, thus the conversion factor is equal to 1in this case too. Specific conversion factors, calculated as a weighted average of the conversion factors ofthe single components (labour, equipment, energy etc. see Table below), have been applied to investmentsand maintenance costs as well as to the tolling system. A standard conversion factor for raw materialsequal to 0.98 has been calculated. The reference social discount rate is 5.5%.Table 4.3 Conversion factors for each type of costType of cost CF NotesUnskilled labour 0.600 Shadow wage for high unemploymentSkilled labour 1.000 The labour market is assumed to be competitiveLand acquisition 1.000 Expropriation costs reflect market pricesRaw Materials 0.980 Traded good: Standard Conversion FactorEnergy 0.492 Net of excise taxesWorks 0.794 40% Not-skilled Labour, 8% Skilled Labour, 45% Raw materials, 7% EnergyMaintenance 0.754 37% Not-skilled Labour, 7% Skilled Labour, 46% Raw materials, 10% EnergyTolling System 0.705 73% Not-skilled Labour, 10% Skilled Labour, 17% Raw materialsResidual value59% Works, 27% interference resolution, 7% land acquisition, 5% overheads,0.7852% general expensesThe project will generate positive impacts on:- the users of the new motorway, including the traffic diverted from the existing network and thegenerated traffic. They will save time and, in some cases, operating costs because the new route isshorter, but these savings will be outweighed by an increased distance to access and egress themotorway;132