Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Each section below will take on a strictly operational perspective and each issue will be reviewed bothfrom the standpoint of the investment proposer and from that of the project examiner for the cofinancingdecision.The chapter briefly mentions other evaluation approaches, such as cost-effectiveness analysis, multicriteriaanalysis and economic impact assessment. These are to be seen as complements to CBA, not assubstitutes.2.1 Context analysis and project objectives2.1.1 Socio-economic contextThe first step of the project appraisal aims to understand the social, economic and institutional context inwhich the project will be implemented. In fact, the possibility of achieving credible forecasts of benefitsand costs often relies on the accuracy in the assessment of the macro-economic and social conditions ofthe region. In this regard, an obvious recommendation is to check that the assumptions made, for instanceon GDP or demographic growth, are consistent with data provided in the corresponding OperationalProgramme.An in-depth analysis of the socio-economic context is also instrumental for carrying out the demandanalysis, which consists of the demand forecast for the goods/services the project will generate. Theforecast for demand is a key indicator for the estimation of the future revenues, if any, of the project andconsequently its financial performance (for a more detailed discussion on demand analysis, see Annex A).The forecast demand is crucial for non-revenue generating projects as well and, in general, the economicperformance of a project depends upon the features and dynamics of its regional environment.Particular attention should be paid at this stage to identifying whether the project under considerationbelongs to networks at national or international level. This is particularly the case for transport and energyinfrastructures, which may consist of interdependent projects. When projects belong to networks, theirdemand, and consequently their financial and economic performance, is highly influenced by issues ofmutual dependency (projects might compete with each other or be complementary) and accessibility(possibility of reaching the facility easily). Thus, the boundaries of the relevant context of the analysis, e.g.local, national or trans-national, should be identified on a case-by-case basis.2.1.2 Definition of project objectivesA clear statement of the project’s objectives is an essential step in order to understand if the investmenthas social value. The broad question any investment appraisal should answer is ‘what are the net benefitsthat can be attained by the project in its socio-economic environment?’The benefits considered should not be just physical indicators (km of roads) but socio-economic variablesthat are quantitatively measurable. The project objectives should be logically connected to the investmentand consistent with the policy or programme priorities.While a clear statement of the socio-economic objectives is necessary to forecast the impact of the project,it may often be difficult to predict all the impacts of a given project. Welfare changes have a number ofcomponents and there may be data constraints. For example, regional data do not usually allow us tomake reliable estimates of the overall impact of individual projects on trade with other regions; indirectemployment effects are difficult to quantify; competitiveness may depend on foreign trade conditions,exchange rates, changes in relative prices. For many of these macroeconomic variables it may be tooexpensive to conduct project-specific analysis.The approach of the present Guide is to focus on social cost-benefit analysis. CBA aims to structure theexpectations of the project promoter in a rigorous way. It cannot answer all questions about futureimpacts, but it focuses on a set of microeconomic variables as a shortcut to estimate the overall economicimpact of the project. The key indicator for the net socio-economic benefit of the project is simply itseconomic net present value, as described below. The impacts on employment, the environment, and other26