Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

FOCUS: PUBLIC-PRIVATE PARTNERSHIPS (PPP)As shown in Table 2.6, EU co-financed investment projects may be also financed by private investors. PPP may be an importanttool for financing investment projects when there is appropriate scope to involve the private sector. The more common attitudeof private actors towards public funding is usually grant-seeking for private investment needs and a major problem in attractingprivate investors is that they have different aims, aspirations and a higher aversion to risk than public bodies. However, privateactors may play an active role in financing projects if some incentives are provided. Of course, the public interest must beprotected at each stage of the project, from design to implementation and other issues, such as open market access, competitionand affordability must be ensured.Many types of PPP exist, usually dependent on the specificities and characteristics of each project. Particular attention should bepaid to the legal structure of the PPP as it may affect the project’s eligible expenditure. In particular, in the context of thefinancial analysis, the financial discount rate may be increased to reflect the higher opportunity cost of capital to the privatesector. The private investor may provide the appropriate evidence, i.e. investor’s past returns on similar projects. Under PPP,the public partner is usually, but not always, the owner of the infrastructure and the private partner is the operator obtainingrevenues through tariff payments. The financial analysis should not be carried out from the point of view of the owner of theinfrastructure only, and a consolidated analysis should be used in order to avoid cost/benefit double counting mistakes.For a more detailed discussion on PPP and the implications on the determination of the funding gap see Annex G. .Table 2.6 Sources of financing - Millions of EurosYEARS1 2 3 4 5 6 7 8 9 10Community assistance 60 0 0 0 0 0 0 0 0 0Local levelRegional level 15Central level 50 25National public contribution 65 25 0 0 0 0 0 0 0 0National private capital 40 0 0 0 0 0 0 0 0 0EIB loans 10Other loansOther resources 0 0 0 10 0 0 0 0 0 0Total financial resources 165 25 0 10 0 0 0 0 0 0Loan is here an inflow and it istreated as a financial resourcecoming from third parties.The amount shown is a rough indicative estimation.For a correct determination of the EU grant pleasesee Annex C.2.4.5 Financial sustainabilityHaving determined the investment costs, the operating revenues and costs and the sources of finance, it isnow possible and helpful to determine the project’s financial sustainability. A project is financiallysustainable when it does not incur the risk of running out of cash in the future. The crucial issue here isthe timing of cash proceeds and payments. Project promoters should show how over the project timehorizon, sources of financing (including revenues and any kind of cash transfers) will consistently matchdisbursements year-by-year. Sustainability occurs if the net flow of cumulated generated cash flow ispositive for all the years considered.The difference between incoming and outgoing flows will show the deficit (see example below) or surplus(Table 2.7) that will be accumulated each year.The incoming flows include:- any possible revenues for the sale of goods and services; and- the net cash from the management of financial resources.41