Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

0.15 m 3 /m 2 a depreciation of 20% of a yearly rent 95 of about 63.6 €/m 2 (corrected) leads to an hedonicprice of 980 Thousands of Euros per year.For the evaluation of the economic benefits, the revenues collected by the Municipality and the operatorfrom the services, even if corrected by means of appropriate CF’s, do not, in this case, adequatelyrepresent the social benefits from the project 96 . So, in the present analysis, the financial inflows have notbeen included at all, in order to avoid any double-counting.Generally, for the evaluation of the positive externalities or the benefits due to water supply services, thewillingness-to-pay method could be used in order to establish accounting prices for the services that mayhave an alternative market. Since the accounting prices thus obtained refer to the service to the end-user,then in order to obtain the prices required for the analysis, appropriate breakdown coefficients derivedfrom literature and experience have to be taken into account 97 .In the present case study a direct valuation approach was preferred, differentiated for various services, asfollows.- The major benefit of the new system, that will supply the water to the industrial area, is the saving ofthe groundwater resources, with the consequent restoration of the hydro-geological balance over timeand the generation of many positive environmental effects. A possible conservative approximation ofthe value of this positive externality can be obtained by putting a value on the volumes of water saved.Water is no longer extracted from groundwater, but supplied by the new project system re-using theintensively treated wastewater. In this case, the volumes of industrial supplied water (equivalent to theamount of resource yearly saved from the groundwater), reduced by a coefficient of dispersion 98 (0.80),are equal to roughly 9.7 Mm 3 /year, assuming a potential irrigation re-use, at an accounting price 99 of€0.81 per m 3 .- The main benefits of the new irrigation service are the significant improvements in quantity and qualityand the greater diversification of products, which increases the income of farms in the area. In thesituation without intervention, agricultural production was limited by the scarcity of water, almost alltaken from the local groundwater (oasis-like irrigation). Conservatively, an increase of 25% of addedvalue generated in the irrigation area (estimated to be €52,000 per hectare; see above) has been taken.To the value obtained a breakdown factor (0.65) 100 was applied in order to take account of theirrigation distribution network which is not part of the project. The method described above should begenerally applied with caution. First, we must be careful not to double count the social benefit. Thisrisk was avoided here by not taking into consideration the financial revenues from the irrigationservice. Secondly, the accounting price for the supply of irrigation water, mentioned above, is not reallysuitable in this particular case. This price refers, in fact, to the economic benefit from new irrigatedareas (practically not cultivated before). So, the accounting price might overstate the benefit due, as isthe case under examination, to the replacement of a local irrigation system with a new system that ismore stable and efficient. Not having a more appropriate value of the accounting price, the relativeincrease of the added value of the yearly crop production has been taken as the best proxy of thebenefit.95The figure adopted derives from a study on similar cases in the same state carried out with various methods (including: revealed preferenceand stated preference methods). See also: European Commission, Common Implementation Strategy for the Water Framework Directive,Guidance Document No 1 ‘Economics and the Environment – The Implementation Challenge of the Water Framework Directive’ produced byWorking Group 2.6 – WATECO, 2003.96The water service is a classic case of natural monopoly. Market prices generally suffer considerable distortions. As an example, the prices inthe sector are based almost always on administered tariffs, which are, for many reasons, far from the equilibrium values.97Accounting price for the supply of industrial water: € 1.00 per m 3 x 0.70 (breakdown coefficient only for bulk water supply) = € 0.70 per m 3 .Accounting price for the supply of irrigation water: € 0.24 per m 3 x 0.65 (breakdown coefficient only for bulk water supply) = € 0.16 per m 3 .98Due to the leakage and other reasons.99This accounting price was applied to evaluate the benefit due to the saving in resources abstracted from natural sources and substituted, asstated, by treated waste water. For the additional volumes of water the greater added value of the additional (or improved) agricultural productiondue to the greater availability of water was evaluated. In this way one obtains a value of € 0.81 per m 3 , used in the calculation. This last accountingprice could be used to evaluate the benefits of the additional supply of resources for irrigation purposes, too.100Values of the breakdown factors between the adduction and distribution or between other parts of the water nets can be derived from theanalysis of the data reported in the technical literature on water services.174