Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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adjustments for Competitive Neutrality, Retained Risk and Transferable Risk to achieve the required service deliveryoutcomes, and is used as a benchmark for assessing the potential value for money of private party bids.The PSC should:- be expressed as the Net Present Cost of a projected cash-flow based on the specified government discount rateover the required life of the contract;- be based on the most recent or efficient form of public sector delivery for similar infrastructure or relatedservices;- include Competitive Neutrality adjustments so that there is no net financial advantage between public and privatesector ownership;- contain realistic assessments of the value of all material and quantifiable risks that would reasonably be expectedto be transferred to the bidders;- include an assessment of the value of the material risks that are reasonably expected to be retained by thegovernment.The assessment requires a number of steps:Raw PSC. First of all a raw PSC has to be estimated, which provides a base costing under the public procurementmethod where the underlying asset or service is owned by the public sector. This includes all capital and operatingcosts, both direct and indirect, associated with building, owning, maintaining and delivering the service (orunderlying asset) over the same period as the term under the Public Private Partnership, and to a definedperformance standard as required under the output specification. One of the keys to constructing a PSC is theidentification of the Reference Project. The Reference Project is the most likely and efficient form of public sectordelivery that could be employed to satisfy all elements of the output specification.Figure G.1 Public Sector ComparatorCompetitive Neutrality adjustments remove any net advantages (or disadvantages) that accrue to a governmentbusiness simply by virtue of being owned by the government. This allows a fair and equitable assessment between aPSC and the bidders.Transferable risk Estimate of the value of those risks (from the government’s perspective) that are likely to beallocated to the private party.Retained risk Estimate of the value of those risks or parts of a risk that the government proposes to bear itself.Risk adjustment bids may propose different levels of risk transfer. Before the PSC can be compared against theaccepted variant bids, the level of risk transfer proposed in each bid should be analysed to reflect the level of risktransfer proposed by the government.This is achieved by adjusting the relevant bids through the following method:- where a bid offers a greater level of risk transfer to the private sector than proposed by the government, theadjustment to the bid cost will be negative (reduce the total bid cost); or232
- where a bid offers a lower level of risk transfer to the private sector than proposed by the government, theadjustment will be positive (increase the total bid cost).The amount of the adjustment should be calculated in the same manner as Retained Risk.Implications for financial analysisUnder a PPP, there is private equity involved in the project and the transfer of funds from the public sector,including the grants given by the Structural Funds, should not be excessive. A straightforward way to check this is tosplit the standard NPV(K) or FRR(K) in the components accruing respectively to the national public sectorNPV(Kg) and to the private sector NPV(Kp). The latter is simply the net present value of the operating flows lessthe private equity, loan reimbursement and interest. It is the return for the private investor when both the EU grantand the national public sector transfer are excluded from the performance calculation. For an example, see CaseStudy Water in Chapter 3.233
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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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- Waste Management Hierarchy rules
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The time horizon for a project anal
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every user support the total costs
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Territorial reference frameworkIf t
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Cycle and phases of the projectGrea
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One of the most important aims of t
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projects, as in other sectors in wh
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3.2.3.2 Project identificationBasic
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In order to evaluate the overall im
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for regassification plants, number
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Examples of objectives are:- change
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decontamination if any;- the techni
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3.3.3.6 Risk AnalysisCritical facto
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3.3.4.6 Risk assessmentCritical fac
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3.4.1.5 Economic analysisThe follow
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Financial inflows• Admission fees
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expectancy suitably adjusted by the
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The time horizon for project analys
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A Cost-Benefit Analysis should cons
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CHAPTER FOURCASE STUDIESOverviewThi
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- finally, there is the traffic tha
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c) Road users producer’s surplus:
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4.1.5 Scenario analysisTwo scenario
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The financial performance indicator
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Table 4.10 Economic analysis (Milli
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Table 4.12 Financial return on capi
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4.2 Case Study: investment in a rai
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4.2.4 Economic analysisThe benefits
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Financial investment costs have bee
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Figure 4.6 Results of the risk anal
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Table 4.22 Economic analysis (Milli
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4.3 Case Study: investment in an in
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ate of 0.6% per year is assumed for
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The shadow price of the CO 2 avoide
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As a result, the probability distri
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16 17 18 19 20 21 22 23 24 25 26 27
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4.4 Case Study: investment in a was
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4.4.2 Financial analysisAlthough in
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THE CALCULATION OF REVENUESReferrin
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0.15 m 3 /m 2 a depreciation of 20%
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As result, the probability distribu
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Figure 4.13 Probability distributio
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Table 4.48 Financial return on nati
Page 182 and 183: Table 4.50 Financial return on priv
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Page 186 and 187: 4.5 Case Study: industrial investme
Page 188 and 189: 4.5.4.1 Investment costsThe total i
Page 190 and 191: Finally, a residual value was estim
Page 192 and 193: This analysis shows the need to pay
Page 194 and 195: Table 4.62 Financial return on inve
Page 196 and 197: Table 4.64 Return on private equity
Page 198 and 199: Table 4.66 Economic analysis (thous
Page 200 and 201: ANNEX ADEMAND ANALYSISDemand foreca
Page 202 and 203: The method applied for the forecast
Page 204 and 205: Furthermore, travel demand depends
Page 206 and 207: This Guide supports a unique refere
Page 208 and 209: A higher discount rate for countrie
Page 210 and 211: Figure C.1 Project ranking by NPV v
Page 212 and 213: The main problems with this indicat
Page 214 and 215: EXAMPLE OF SHADOW WAGE IN DUAL MARK
Page 216 and 217: Another exhaustive way to include d
Page 218 and 219: Figure E.2 Percentage of low income
Page 220 and 221: ANNEX FEVALUATION OF HEALTH &ENVIRO
Page 222 and 223: Figure F.1 Main evaluation methodsS
Page 224 and 225: - expenditure on capital equipment
Page 226 and 227: due to air pollution or water conta
Page 228 and 229: BENEFIT TRANSFER - SELECTED REFEREN
Page 230 and 231: ANNEX GEVALUATION OF PPP PROJECTSIt
Page 234 and 235: ANNEX HRISK ASSESSMENTIn ex-ante pr
Page 236 and 237: Reference ForecastingThe question o
Page 238 and 239: Figure H.5 Levels of risks in diffe
Page 240 and 241: ANNEX IDETERMINATION OF THE EU GRAN
Page 242 and 243: A.4. Technological Alternatives and
Page 244 and 245: GLOSSARYAccounting period: the inte
Page 246 and 247: Market price: the price at which a
Page 248 and 249: BIBLIOGRAPHY1. ReferencesBelli, P.,
Page 250 and 251: Ray, A. 1984, Cost-benefit analysis
Page 252 and 253: EnvironmentGeneralAtkinson, G., 200
Page 254 and 255: European Commission, DG Tren, 2003,
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Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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