Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

2.2.1 What is a project?A project can be defined as an operation comprising a series of works, activities or services intended toaccomplish an indivisible task of a precise economic or technical nature; one which has well defined goals.The appraisal needs to focus on the whole project as a self-sufficient unit of analysis and not on fragmentsor sections of it. Partitions of projects for purely administrative reasons are not appropriate objects ofappraisal.This may, in some cases, entail requesting the promoter to consider a set of sub-projects as in fact onelarge project. This might be the case with a request for EU financial support for some initial phases of aninvestment, whose success hinges on the completion of the project as a whole. Thus, the whole projectshould be considered. CBA requires going beyond the purely administrative definitions. For instance, toassess the quality of a given project, the promoter must produce an adequate appraisal, not only for thepart of the project to be financed with the assistance of EU Funds, but for the parts that are closelyconnected to it as well and possibly financed in other ways. In other words, a consolidated CBA may benecessary in order to understand the net benefits of one section of a project.Sometimes a project application consists of several inter-related but relatively self-standing components.For example, for a project comprising hydroelectric power, irrigation water and recreational facilities, ifbenefits and costs of each component are independent, then the components are separable and can betreated as independent projects. Appraising such a project involves, firstly, the consideration of eachcomponent independently and, secondly, the assessment of possible combinations of components.When there are different feasible options for a section of a project, simplified CBA for each option mayhelp to test their impact on the whole project (see par. 2.3.3). As an example, a project may consist of thecompletion of a trans-national electricity link under the TEN–E. Here, the economic appraisal shouldfocus not on the entire link, but only on the project’s section where different options are available.The promoter should justify the project identification choice and the examiner has the task of judging thequality of this choice. In the event that the object of analysis is not clearly identified, the examiner mayrequest that the promoter integrates the presentation dossier with a clarification of its identification(‘where is the other half of the bridge?’).EXAMPLE: IDENTIFICATION OF A PROJECTA highway project connecting town A with town B, which is justified only by the expectation that an airport will be located inthe vicinity of town B and that most of the traffic will take place between the airport and town A: the project should be analysedin the context of the airport-highway system as a whole.A hydroelectric power station, located in X and supposed to serve a new energy-intensive plant in Y: again, if the two works aremutually dependent for the assessment of costs and benefits, the analysis should be integrated, even if the EU assistance isrequested only for the energy supply part of the project.A large-scale productive forestation project, financed with public funds and justified by the opportunity of supplying a privatelyowned cellulose company: the analysis should consider costs and benefits of both components, which is to say the forestationproject and the industrial plant.2.2.2 Indirect and network effectsAfter having identified the project, the boundaries of the analysis should be defined. The project has adirect impact on users, workers, investors, suppliers, etc. but also indirect impacts on third parties. Therisk of double counting project benefits should be carefully considered.In general, indirect impacts in secondary markets should not be included in the economic appraisal,whenever an appropriate shadow price (see Glossary and section 2.5) has been given for the benefits andcosts. For instance, the impact of a highway on the local tourism sector, e.g. through the additionalemployment or additional added value should not be included in the CBA when an appropriate shadowwage has been used, as will be discussed further (see par. 2.5.3). As a general rule, market effects (quantityor price changes) in undistorted secondary markets should be ignored, assuming that the appraisal has28