Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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Figure H.5 Levels of risks in different phases of a given infrastructure projectSource: OECD TI/1, 2007Moreover ‘there is a demonstrated, systematic tendency for project appraisers to be overly optimistic. To reduce thistendency, appraisers should make explicit, empirically-based adjustments to the estimates of a project’s costs,benefits and duration. It is recommended that these adjustments be based on data from past projects or similarprojects elsewhere, and adjusted for the unique characteristics of the project in hand. In the absence of a morespecific evidence base, departments are encouraged to collect data to inform future estimates of optimism, and in themeantime use the best available data’ 131 .According to Flyvbjerg and Cowi (2004) cost overruns and/or benefit shortfalls, i.e. optimism bias, are the results ofa number of different factors:- multi-actor decision-making and planning;- non-standard technologies;- long planning horizons and complex interfaces;- changes in project scope and ambition;- unplanned events.As a result, cost overruns and benefit shortfalls lead to an inefficient allocation of resources, delays and further costoverruns and benefit shortfalls.In addition to carrying out a full risk assessment, which represents a major step ahead in mitigating inaccuracy andbias, other measures recommended in order to reduce optimism are:- better forecasting methods through the use of ‘Reference class’ forecasting;- changed incentives in order to reward better projects;- transparency and public control to improve accountability;- involvement of private risk capital;Table H.2 provides some examples of mitigation measures of identified risks extrapolated from the World BankProject Appraisal Documents (PADs) for different countries.131The Supplementary Green Book Guidance on Optimism Bias (HM Treasury 2003)238
Table H.2 Risk mitigation measuresCountry Project Risk Rating Risk mitigation measureAzerbaijanKyrgyzRussiaTurkeyPowertransmissionWatermanagementimprovementMunicipal heatingRailwayreconstructionProject implementationdelays due to lack of localfinancing and poor projectmanagementCounterpart funds are notavailable in timely mannerPotential corruption mayerode project benefitsSocial resistance to changeNote: Risk rating: H (High risk), S (Substantial risk), M (Modest risk), N (Negligible or Low risk)Source: World Bank Project Appraisal DocumentsSNMHLocal financing requirement minimised. ProjectImplementation Unit to be assisted by technicalassistance for project management duringimplementation.Project design minimises the need for counterpartfunds, except for taxes. The Ministry of Economyand Finance has developed a satisfactory trackrecord of support to ongoing IDA-fundedirrigation projects.Commercial and Financial Management systemsfor the project will provide more transparency andimprove possibilities for adequate audit andcontrol.Close cooperation between the Government,General Directorate of State RailwaysAdministration (TCDD) management and thetrade unions, early definition of an appropriatesocial plan, expeditious payment of the severancebenefits and assistance to staff.239
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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
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Table 4.50 Financial return on priv
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4.5 Case Study: industrial investme
Page 188 and 189: 4.5.4.1 Investment costsThe total i
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Page 192 and 193: This analysis shows the need to pay
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Page 196 and 197: Table 4.64 Return on private equity
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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
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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
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Page 228 and 229: BENEFIT TRANSFER - SELECTED REFEREN
Page 230 and 231: ANNEX GEVALUATION OF PPP PROJECTSIt
Page 232 and 233: adjustments for Competitive Neutral
Page 234 and 235: ANNEX HRISK ASSESSMENTIn ex-ante pr
Page 236 and 237: Reference ForecastingThe question o
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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