Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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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
Table 4.9Economic analysis (Millions of Euros) - Tolled motorwayCF 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15BENEFITSConsumer’s surplus 0.0 0.0 0.0 0.0 13.4 14.7 16.1 17.5 18.8 20.2 21.5 22.9 24.2 25.6 26.9Time Benefits 0.0 0.0 0.0 0.0 37.1 38.7 40.3 42.0 43.6 45.2 46.8 48.5 50.1 51.7 53.3Vehicle Operating Costs (perceived) 0.0 0.0 0.0 0.0 -23.7 -24.0 -24.2 -24.5 -24.8 -25.0 -25.3 -25.6 -25.9 -26.1 -26.4Gross Producer and Road User Surplus 0.0 0.0 0.0 0.0 23.8 24.0 24.2 24.4 24.6 24.8 25.0 25.2 25.4 25.6 25.8Tolls 0.0 0.0 0.0 0.0 28.4 28.8 29.1 29.5 29.8 30.2 30.6 30.9 31.3 31.6 32.0Vehicle Operating Costs (not perceived) 0.0 0.0 0.0 0.0 -4.7 -4.8 -4.9 -5.1 -5.2 -5.4 -5.5 -5.7 -5.8 -6.0 -6.1Net revenues for the State 0.0 0.0 0.0 0.0 2.4 2.5 2.6 2.6 2.7 2.8 2.9 3.0 3.1 3.1 3.2Net Environmental Benefits 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1Accident reduction 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1TOTAL BENEFITS 0.0 0.0 0.0 0.0 39.5 41.2 42.8 44.5 46.1 47.8 49.4 51.1 52.8 54.4 56.1COSTSInvestment CostsWorks 0.794 87.3 120.7 129.4 95.3Junctions 0.794 45.6 45.6 45.6 45.6Land acquisition 1.000 14.7 14.2 14.7 14.7General Expenses 0.998 10.5 10.5 10.5 10.5Other expenses 0.998 4.5 4.5 4.5 4.5Total investments costs 162.6 195.5 204.7 170.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Operating Costs (motorway operator)Maintenance 0.573 0.0 0.0 0.0 0.0 0.7 0.7 0.7 0.7 0.7 0.7 1.5 1.5 1.5 1.5 1.5General Expenses 0.998 0.0 0.0 0.0 0.0 3.3 3.3 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.5 3.5Total operating costs 0.0 0.0 0.0 0.0 4.0 4.0 4.1 4.1 4.1 4.1 4.9 4.9 4.9 5.0 5.0TOTAL COSTS 162.6 195.5 204.7 170.6 4.0 4.0 4.1 4.1 4.1 4.1 4.9 4.9 4.9 5.0 5.0NET BENEFITS -162.6 -196.0 -204.7 -170.6 35.5 37.2 38.8 40.4 42.1 43.7 44.5 46.1 47.8 49.4 51.0CF 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30BENEFITSConsumer’s surplus 28.3 29.6 31.0 32.3 33.6 34.8 36.1 37.3 38.6 39.8 39.8 39.8 39.8 39.8 39.8Time Benefits 54.9 56.6 58.2 59.8 59.8 62.7 64.1 65.5 66.9 68.4 68.4 68.4 68.4 68.4 68.4Vehicle Operating Costs (perceived) -26.7 -26.9 -27.2 -27.5 -27.7 -27.8 -28.0 -28.2 -28.4 -28.6 -28.6 -28.6 -28.6 -28.6 -28.6Gross Producer and Road User Surplus 26.1 26.3 26.5 26.7 26.8 27.0 27.1 27.3 27.4 27.6 27.6 27.6 27.6 27.6 27.6Tolls 32.3 32.7 33.0 33.4 33.6 33.8 34.0 34.3 34.5 34.7 34.7 34.7 34.7 34.7 34.7Vehicle Operating Costs (not perceived) -6.2 -6.4 -6.5 -6.7 -6.8 -6.8 -6.9 -7.0 -7.1 -7.1 -7.1 -7.1 -7.1 -7.1 -7.1Net revenues for the State 3.3 3.4 3.5 3.6 3.6 3.7 3.7 3.7 3.8 3.8 3.8 3.8 3.8 3.8 3.8Net Environmental Benefits -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1Accident reduction 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2TOTAL BENEFITS 57.7 59.4 61.0 62.7 64.1 65.6 67.0 68.5 69.9 71.4 71.4 71.4 71.4 71.4 71.4COSTSInvestment CostsWorks 0.794Junctions 0.794Land acquisition 1.000General Expenses 0.998Other expenses 0.998Total investments costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -293.5Operating Costs (motorway operator)Maintenance 0.573 1.5 1.5 1.5 2.2 2.2 2.2 3.3 3.3 4.0 4.0 4.0 4.0 4.0 4.0 4.0General Expenses 0.998 3.5 3.5 3.5 4.4 4.4 4.4 4.4 4.4 4.7 4.7 4.7 4.7 4.7 4.7 4.7Total operating costs 5.0 5.0 5.0 6.6 6.6 6.6 7.7 7.7 8.7 8.7 8.7 8.7 8.7 8.7 8.7TOTAL COSTS 5.0 5.0 5.0 6.6 6.6 6.6 7.7 7.7 8.7 8.7 8.7 8.7 8.7 8.7 -284.8NET BENEFITS 52.7 54.3 56.0 56.0 57.5 58.9 59.3 60.7 61.3 62.7 62.7 62.7 62.7 62.7 356.2Discount Rate 5.5%ENPV -41.3ERR 5.0%B/C ratio 0.9139
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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
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Table 2.9 Electricity price dispers
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2.5.1.2 Fiscal correctionsSome item
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previously estimated in projects wi
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FOCUS: ENPV VS. FNPVThe difference
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2.6 Risk assessmentProject appraisa
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Table 2.14 Impact analysis of criti
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Figure 2.6 Probability distribution
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eneficiary. The project proposer sh
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There are many ways to design an MC
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PROJECT APPRAISAL CHECK-LISTCONTEXT
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- reduction of congestion by elimin
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- the methods applied to estimate e
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- the marginal external costs: cong
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- the benefits for the existing tra
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The following tables show some refe
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3.1.1.6 Risk assessmentDue to their
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As shown in Figure 3.1, only under
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3.1.3.7 Other project evaluation ap
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Page 89 and 90: The time horizon for a project anal
Page 91 and 92: 3.2.1.7 Other project evaluation ap
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Page 95 and 96: Territorial reference frameworkIf t
Page 97 and 98: Cycle and phases of the projectGrea
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Page 101 and 102: projects, as in other sectors in wh
Page 103 and 104: 3.2.3.2 Project identificationBasic
Page 105 and 106: 3.2.3.7 Other project evaluation ap
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
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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 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
Page 150 and 151: Figure 4.6 Results of the risk anal
Page 152 and 153: Table 4.22 Economic analysis (Milli
Page 156 and 157: 4.3 Case Study: investment in an in
Page 158 and 159: ate of 0.6% per year is assumed for
Page 160 and 161: The shadow price of the CO 2 avoide
Page 162 and 163: As a result, the probability distri
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Page 168 and 169: 4.4 Case Study: investment in a was
Page 170 and 171: 4.4.2 Financial analysisAlthough in
Page 172 and 173: THE CALCULATION OF REVENUESReferrin
Page 174 and 175: 0.15 m 3 /m 2 a depreciation of 20%
Page 176 and 177: As result, the probability distribu
Page 178 and 179: Figure 4.13 Probability distributio
Page 180 and 181: Table 4.48 Financial return on nati
Page 182 and 183: Table 4.50 Financial return on priv
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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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