Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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ANNEX IDETERMINATION OF THE EU GRANTThe EU contribution is generally determined by multiplying the project’s eligible expenditure by the co-financing rateof the relevant operational programme’s priority axis. The eligible expenditure is the part of the investment cost thatmay be eligible for EU co-financing. It should be noted that in the 2000-2006 period common eligibility rules for theStructural Cohesion Fund were determined at Community level, while for the 2007-2013 period the rules areestablished at national level, apart from some exceptions set out in the regulations relating to each fund.For revenue-generating projects, the methodology used for the determination of the EU grant is the funding-gapapproach.In order to modulate the contribution from the Funds, the maximum eligible expenditure is identified by Article55(2) Regulation 1083/2006 as the amount ‘that shall not exceed the current value of the investment cost less the current value ofthe net revenue from the investment over a specific reference period’. Such identification of the eligible expenditure aims atensuring enough financial resources for project implementation, avoiding, at the same time, the granting of an undueadvantage to the recipient of the aid (over-financing) 132The funding-gap approach applies to all investment operations (not just major ones) which generate net revenuesthrough charges borne directly by users. It does not apply to the following cases:- projects that do not generate revenues (funding-gap rate equals 100%);- projects whose revenues do not fully cover the operating costs (funding-gap rate equals 100%);- projects subject to State-aid rules.According to the funding-gap approach, three steps have to be followed in order to determine the EU grant:- the first step involves the calculation of the funding-gap rate, which is the share of the discounted cost of theinitial investment not covered by the discounted net revenue of the project. In other words, the funding-gap rateis the complement to 100% of the gross self-financing margin. The funding-gap rate (R) is given by the ratiobetween the maximum eligible expenditure (Max EE) and the discounted investment cost (DIC):R = Max EE / DIC = (DIC – DNR) / DICwhere:- DNR (Discounted Net Revenue): discounted revenue - discounted operating costs + discounted residualvalue- Cash flows used in this calculation are the ones included in the calculation of the profitability of investment -FNPV(C). In particular:- financial revenues generated by the projects, and not all the sources of financing, are used for the calculationof net revenues;- re-investments are not included in the investment cost but in the operational costs;- the second step is the identification of the ‘the amount to which the co-financing rate for the priority axis applies’ 134 . This‘decision amount’ (DA) is defined as the eligible cost (EC) multiplied by the funding-gap rate (R):DA= EC*R- the third step is the identification of the maximum EU grant, that is equal to the decision amount (DA)multiplied by the maximum co-funding rate (Max CRpa) fixed for the priority axis in the Commission’s decisionadopting the operational programme.EU grant = DA* Max CRpaIt gives the amount of financial resources provided by the EU.132It should be noted that in the 2000-2006 period the co-financing rate was modulated and not the eligible expenditure.133Art. 55.6 ‘ This Article shall not apply projects to the rules on State aid within the meaning of Article 87 of the Treaty’.134Art. 41.2 ‘The Commission shall adopt a decision…(that) defines the physical object, the amount to which the co-financing rate for thepriority axis applies, and the annual plan of financial contribution from the ERDF or the Cohesion Fund’.240
ANNEX JTABLE OF CONTENTS OF A FEASIBILITYSTUDYA.1. Executive Summary1.1. Project Promoters and Authorities1.2. Object of Analysis1.2.1. Project Name1.2.2. Brief Description of the Project1.2.2.1. Sector1.2.2.2. Location1.2.2.3. Area Impacted by the Project (regional, national, international..)1.3. Promoter’s Objectives1.4. Previous Experiences with Similar Projects1.5. Brief Description of the Appraisal Report1.5.1. Authors of this Report1.5.2. Scope of the Report. Ties to other Projects.1.5.3. Methodology of the Project Analysis.1.6. Main Results of the Analysis1.6.1. Financial Returns1.6.2. Economic Returns1.6.3. Impact on Employment1.6.4. Environmental Impact1.6.5. Other ResultsA.2. Socio-economic context.2.1. Main Elements of the Socio-economic Context2.1.1. Territorial and Environmental Aspects2.1.2. Demographics2.1.3. Socio-cultural Elements2.1.4. Economic Aspects2.2. Institutional and Political Aspects2.2.1. General Political Outlook.2.2.2. Sources of Financing (specify if loans or grants); EU Funds (ERDF, EIB, CF, ESF, etc.); national authorities(central governments, regions, others); private individuals2.2.3. Financial Coverage on the part of the aforementioned sources2.2.4. Administrative and Procedural Obligations; Decision-making Authorities for the Project; Territorial PlanningObligations; licences/permits; requirements for licences and incentives.2.2.5. Expected times for: licences/permits; licences/incentive to pay..A.3. Supply of and Demand for the Project’s Outputs.3.1. Potential Demand Expectations3.1.1. Needs the Project Meets within a Set Period of Time3.1.2. Current and Future Trends in Demand3.1.3. Demand Breakdown by Consumer Type3.1.4. Means of Purchase or Distribution3.1.5. Specific Market Research: Results3.2. Competition3.2.1. Supply Features of Similar Outputs3.2.2. Competitive Structure, if existing or can be forecasted3.2.3. Success Factors3.3. Proposed Strategy3.3.1. Outputs3.3.2. Prices3.3.3. Promotion3.3.4. Distribution3.3.5. Marketing3.4. Estimate on the Percentage of Potential Use3.4.1. Sales Forecasts for the Project3.4.2. Market shares, coverage of the shares of various needs3.4.3. Forecasting hypothesis and techniques241
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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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16 17 18 19 20 21 22 23 24 25 26 27
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4.5 Case Study: industrial investme
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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 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
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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
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 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 238 and 239: Figure H.5 Levels of risks in diffe
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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