Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

2.3 Feasibility and option analysisThe present section provides an overview of the main features of a good project option selection. Thisprocess aims at providing evidence that the project choice can actually be implemented and is the bestoption of all feasible alternatives.2.3.1 Option identificationOnce the socio-economic context and the potential demand for the project output have been analysed,then the next step consists of identifying the range of options that can ensure the achievement of theobjectives of the project.Typical examples of options are:- different routes, or different construction timing, or different technologies considered for transportprojects;- large hospital structures rather than a more widespread offer of health services through local clinics;- the location of a production plant in area A, nearer to the end markets, versus area B, nearer to thesuppliers;- different peak-load arrangements for energy supply;- energy efficiency improvements rather than (or in addition to) the construction of new power plants.The basic approach of any investment appraisal aims to compare the situations with and without theproject. To select the best option, it is helpful to describe a baseline scenario. This will usually be aforecast of the future without the project, i.e. the ‘business as usual’ (BAU) forecast.This is also sometimes labelled the ‘do-nothing’ scenario, a term that does not mean that operations of anexisting service will be stopped, but simply that they will go on without additional capital expenditures. Ina nutshell, BAU is a no-investment forecast of what will happen in future in the context underconsideration. This scenario is not necessarily non-costly, because for already existing infrastructures, itcomprises incurring operational and maintenance costs (as well as cashing the revenues generated, if any).In some circumstances, it is useful to consider, as a first project option against the ‘business as usual’scenario, a ‘do-minimum’ project. This assumes incurring certain investment outlays, for example forpartial modernisation of an existing infrastructure, beyond the current operational and maintenance costs.Hence, this option includes a certain amount of costs for necessary improvements, in order to avoiddeterioration or sanctions. In some cases, for example, public investment projects are motivated by theneed to comply with new regulations. The ‘do-minimum’ option here is the least cost project that ensurescompliance. This is not always, however, the most beneficial option and in some cases the complianceinvestment costs can be substantial. In fact, there may be better alternatives (e.g. scrapping the oldinfrastructure and building elsewhere a new one, or adopting a radical change of approach to serviceprovision, for example shifting from rail to ‘sea highways’).After having defined the BAU scenario and the ‘do-minimum’ option, it is necessary to look for otherpossible alternative solutions on the basis of technical, regulatory and managerial constraints, and demandopportunities (‘do-something’ alternatives). One critical risk of distorting the evaluation is to neglect somerelevant alternatives, in particular some low-cost solutions (i.e. managerial capacity-building, pricingchanges, alternative infrastructure interventions).In general, when dealing with options, pricing policy is often a decision variable – and will have an impacton the performance of the investment, not least through influencing demand. Thus, the relationshipbetween each option and the assumptions on tariffs, or other prices, should be explored. Thecombinations of locations, investment expenditures, operating costs, pricing policies, etc., may amount toa large number of feasible alternatives, but usually only some of them are promising and worth detailedappraisal. An experienced project analyst will typically focus on the BAU scenario, the ‘do-minimum’option and a small number of ‘do-something’ options.30