Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

THE CALCULATION OF REVENUESReferring to a base years, the revenue predicted has been calculated as follows:- civil purification service (in the current situation ‘without the intervention’ no purification charge is applied): 50.3 Mm 3 /year* €0.283 per m 3 * 0.950 = 13,523,000€/y 89 ;- industrial supply in the reservoir: 12.1 Mm 3 /year * €0.480 per m 3 * 0.995= 5,779,000€/y;- irrigation supply: 15.75 Mm 3 /year * €0.030 per m 3 * 0.87 = 411,000€/y;- to take into account the certain expected level of evasion of the payment of service bills the following ‘dispersion factors’have been applied cautiously before revenue calculating: municipal services: 5%, industrial water supply service: 0.5%,irrigating water supply service: 13%.- at the end, in calculating the performance indices, the values of the revenues in each year are obtained starting from theabove baseline values and taking into account the growth in the water demands (see above) and the dynamics of currentprices.In addition to the above mentioned revenues, the residual value, over the 27 years of life of theinfrastructures 90 , is set to be 4.0% of the initial costs of the long life parts of the investment plus 3.8% ofthe costs of the replaced components (short life parts). The total residual value (€6,030,000, expressed atconstant prices and not discounted) is allocated in the last year (30 th ) of the investment period.The financial performance indicators are:- Financial Net Present Value (investment) FNPV(C) €–29,083,911- Financial Rate of Return (investment) FRR(C) 1.9%- Financial Net Present Value (capital) FNPV(K) €–8,357,812 91- Financial Rate of Return (capital) FRR(K) 3.7%As for the financial sustainability of the project, the cumulative cash flow of the project is always positivewith a minimum value of about €788,000, occurring in the fifth year.Moreover, if the service fee is set at €0.02 per cubic metre of treated water, the separate analysis of thefinancial profitability of the local public capital (Municipal funds, i.e.: FNPV(K g ) and FRR(K g )) and thefinancial profitability of the private capital (equity and loan to finance the investment and replacementcosts and the cash deficit in the early years of operation, i.e.: FNPV(K p ) and FRR(K p )) – net of EU grant– gives the following results:- Public partner of the PPP (municipality) FNPV(K g ) €3,491,008 92FRR(K g ) 7.8%- Private partner of the PPP (operator firm) FNPV(K p ) €5,139,536FRR(K p ) 6.5%For this project, the maximum amount to which the co-financing rate of the priority axis applies is€32,467,727. This is determined by multiplying the project eligible cost (in this case €100,831,451 atcurrent price) by the funding-gap rate (32.2%). Assuming the co-financing rate for the priority axis is equalto 80%, then the maximum EU contribution is €25,974,182.89Note that the rate of the purification service is applied to the volume of water delivered to users, as measured by the water meters.90At the end of the horizon time, the operative life of the plants and other equipments is equal to the analysis horizon minus the constructiontime: 30 – 3 = 27 years.91In the table 3.32, the functioning financial costs are financed by short-term loans with an average interest of 8%.92The sum of FNPV(Kg) and FNPV(Kp) is not equal to FNPV(K), because the amount of capital expenditures incurred separately by thepartners does not include the national contribution, that instead is considered, in addition to above mentioned contributions, in the calculation ofFNPV(K). A similar reasoning applies to the values of FRR(K).172