Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

The financial performance indicators are:- Financial Net Present Value (investment) FNPV(C) - €755,593,000- Financial Rate of Return (investment) FRR(C) - 5.0%- Financial Net Present value (capital) FNPV(K) - €641,616,000- Financial Rate of Return (capital) FRR(K) -4.6%As shown by the economic analysis, the introduction of a tolling scheme would lower the socio-economicprofitability of the motorway as part of the additional capacity provided by the new infrastructure wouldremain under-utilized. The net socio-economic loss can easily be measured: it represents the loss inconsumer’s surplus due to the reduction in generated traffic and the difference from external benefits ofthe diverted traffic. For the traffic that will remain on the motorway, there is no loss of benefits as theprice they pay for the use the motorway will represent cost for the users but there will be a benefit for themotorway operator. Thus the key issue here is the divergence between economic and financial criteria.While the answer is clear from an economic perspective, (the free of charge motorway should bepreferred), it might still be interesting, from a financial point of view, to explore possible ways of having atleast a partial cost recovery or a private involvement in the project financing.On the one hand, having estimated the advantages and disadvantages from the introduction of a full costrecovery pricing scheme, it might be possible to assess whether there is an acceptable trade off, from asocial point of view, between the advantages of introducing some level of tolls and the disadvantages interms of benefits forgone. By running the demand model with different tolls it may be possible to find thetolls that generate a sum of revenues that outweigh the loss of consumers’ benefits due to the reduction indiverted and generated traffic.On the other hand, in order to guarantee a flow of private capital to the project, it would be intresting toconsider a shadow tolling (see Box below). Whenever a socially costly traffic diversion due to theintroduction of tolls is outweighed by the decreased social costs of public sector funding because of theprivate equity involved in the project, the comparison would imply a careful evaluation of the marginalcost of public funds in the country.As a third option, the concessionaire can take risk only for the state of the asset and bear no traffic risk.The Design Build Finance and Maintain (DBFM) is one of the options considered under the overallPublic Private Partnership approach. This contract design puts a strong emphasis on timely completion ofthe project and on improvement of overall project management processes.FOCUS: SHADOW TOLLINGPrivate financing of transport infrastructure requires that a revenue stream remunerates the project promoter. In the absence ofa revenue stream, the private sector may be willing to finance an infrastructure, and subsequently to operate and maintain it onthe basis of a service contract. In the framework of such a contract, the private company can design, build finance and operate(DBFO) a road and will receive payments linked to the traffic using the road, the so called ‘shadow tolling’, over the lifetime ofthe concession. The shadow tolling approach may be considered as an alternative to the traditional ‘pay as you go’ approach.The approach transfers both construction cost and traffic risk to the concessionaire, and therefore can be treated as a PublicPrivate Partnership (see Annex G). Road users will not be charged, but traffic volumes would be metered in order to calculatethe amount of money paid to the concessionaire.138