Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

More documents

Recommendations

Info

eturn on their own capital (Kp). The example below shows a simple way to disentangle the financialreturns to the private capital investors.Table 2.8Evaluation of the financial return on national capital - Millions of EurosYEARS1 2 3 4 5 6 7 8 9 10Total operating revenues 0 42 115 119 126 126 126 126 126 126Residual value 0 0 0 0 0 0 0 0 0 12Total inflows 0 42 115 119 126 126 126 126 126 138Total operating costs 0 -56 -75 -98 -101 -101 -101 -101 -117 -117Interests 0 0 0 0 -0.2 -0.2 -0.2 -0.2 -0.2 0Loans reimbursement 0 0 0 0 -2 -2 -2 -2 -2 0National private contribution -40 0 0 0 0 0 0 0 0 0National public contribution -65 -25 0 0 0 0 0 0 0 0Total outflows -105 -81 -75 -98 -103.2 -103.2 -103.2 -103.2 -119.2 -117Net cash flow -105 -39 40 21 22.8 22.8 22.8 22.8 6.8 21Financial rate of return on national capital - FRR(K) 5.04%Financial net present value of capital - FNPV(K) 0.25Financial internal rate of return on national capital is calculatedwith outflows including the national (public and private) capitalwhen it is paid up, the financial loans at the time they are paidback, in addition to operating costs and related interest, whilewith revenues as inflows. It does not consider the EU grant.A discount rate of 5% has beenapplied to calculate this value.EXAMPLE: RETURN ON INVESTED CAPITAL TO PRIVATE INVESTORSUnder the 2007-2013 Programming period the EU grant finances only part of the project ‘funding-gap’ and the rest of thecapital expenditure must be matched by other sources of finance, including loans and private contributions.The following table provides a numerical example of the return on invested capital to a hypothetical private investor operating apublic water company.Assume a major project (values are discounted):- Total investment cost M€280- Total operating cost M€512- Total operating revenue M€576- Funding Gap Rate 79%- Interest on loans 10%- Discount rate 5%- The residual value is here excluded because in many PPP contracts the infrastructure is returned to the public sector at the endof the period.Sources of financing:- EU grant = M€159- National public contribution = M€73- Private equity= M€38- EIB loan = M€10YEARS1 2 3 4 5 6 7 8 9 10Total operating revenues 0 72 72 72 72 72 72 72 72 72Total inflows 0 72 72 72 72 72 72 72 72 72Total operating costs 0 -64 -64 -64 -64 -64 -64 -64 -64 -64Interests 0 0 0 0 -0.1 -0.1 -0.1 -0.1 -0.1 0Loans reimbursement 0 0 0 0 -2 -2 -2 -2 -2 0Concession fee to public partner 0 -1.55 -1.55 -1.55 -1.55 -1.55 -1.55 -1.55 -1.55 0Private equity -38 0 0 0 0 0 0 0 0 0Total outflows -38 -65.6 -65.6 -65.6 -67.7 -67.7 -67.7 -67.7 -67.7 -64Net cash flow -38 6.45 6.45 6.45 4.35 4.35 4.35 4.35 4.35 8Financial rate of return on private equity– FRR(Kp) 5.6%Financial net present value of private equity- FNPV(Kp) 0.9444
2.5 Economic analysisThe economic analysis appraises the project’s contribution to the economic welfare of the region orcountry. It is made on behalf of the whole of society instead of just the owners of the infrastructure, as inthe financial analysis. The key concept is the use of accounting shadow prices, based on the socialopportunity cost, instead of observed distorted prices.Observed prices of inputs and outputs may not mirror their social value (i.e. their social opportunity cost)because some markets are socially inefficient or do not exist at all. Examples are monopoly or oligopolymarkets, where the price includes a mark-up over marginal costs; trade barriers, where the consumer paysmore than he/she could elsewhere. Prices as they emerge from imperfect markets and from some publicsector pricing or rationing policies, may fail to reflect the opportunity cost of inputs. In somecircumstances this may be important for the appraisal of projects. Financial data, while important forbudgetary reasons, may be misleading as welfare indicators.When market prices do not reflect the social opportunity cost of inputs and outputs, the usual approach isto convert them into accounting prices using appropriate conversion factors, if available from theplanning authority (see par. 2.5.1).In other cases, there may be project costs and benefits for which market values are not available. Forexample, there might be impacts, such as environmental, social or health effects, without a market pricebut wich are still significant in achieving the project’s objective and thus need to be evaluated and includedin the project appraisal.When market values are not available, effects can be monetised through different techniques, in partdepending on the nature of the effect considered (see par. 2.5.2). ‘Money’ valuation here has no financialimplication. CBA ‘money’ is just a convenient welfare metric and, in principle, any numeraire can be usedjust as well. In the context of the EU Funds, using the Euro as the unit of account, for both the financialand economic analysis, has clear presentational advantages.The standard approach suggested in this Guide, consistent with international practice (see the Referencesection), is to move from financial to economic analysis, starting from the account in Table 2.5 (theperformance of the investment regardless of its financial sources). To do so, appropriate conversionfactors should be applied to each of the inflow or outflow items to create a new account (Figure 2.3)which also includes social benefits and social costs.The methodology is summarised in five steps:- conversion of market to accounting prices;- monetisation of non-market impacts;- inclusion of additional indirect effects (if relevant);- discounting of the estimated costs and benefits;- calculation of the economic performance indicators (economic net present value, economic rate ofreturn and B/C ratio).The rest of this section explains these five steps and, at the same time, highlights the following topics:- the standard conversion factor;- the shadow exchange rate;- the marginal cost of public funds;- the shadow wage (see also Annex D); and- the social discount rate (see also Annex B).45
Page 3: ACRONYMS AND ABBREVIATIONSBAUB/CCBA
Page 7 and 8: TABLESTable 2.1 Financial analysis
Page 9: FIGURESFigure 1.1 Project cost spre
Page 12 and 13: Cohesion Fund, and through the leve
Page 14 and 15: or the plant will not reveal excess
Page 17 and 18: CHAPTER ONEPROJECT APPRAISAL IN THE
Page 19 and 20: Some specifications for financial t
Page 21 and 22: FOCUS: INFORMATION REQUIREDGeneral
Page 23 and 24: In particular, CBA results should p
Page 25 and 26: CHAPTER TWOAN AGENDA FOR THE PROJEC
Page 27 and 28: objectives, are, as far as possible
Page 29 and 30: considered the appropriate shadow p
Page 31 and 32: 2.3.2 Feasibility analysisFeasibili
Page 34 and 35: This approach will be presented in
Page 36 and 37: Current assets include:- receivable
Page 38 and 39: The following items are usually not
Page 40 and 41: Mainly, the examiner uses the FRR(C
Page 42 and 43: The dynamics of the incoming flows
Page 46 and 47: While the approach presented in thi
Page 48 and 49: 2.5.1 Conversion of market to accou
Page 50 and 51: Table 2.9 Electricity price dispers
Page 52 and 53: 2.5.1.2 Fiscal correctionsSome item
Page 54 and 55: previously estimated in projects wi
Page 56 and 57: FOCUS: ENPV VS. FNPVThe difference
Page 58 and 59: 2.6 Risk assessmentProject appraisa
Page 60 and 61: Table 2.14 Impact analysis of criti
Page 62 and 63: Figure 2.6 Probability distribution
Page 64 and 65: eneficiary. The project proposer sh
Page 66 and 67: There are many ways to design an MC
Page 68 and 69: PROJECT APPRAISAL CHECK-LISTCONTEXT
Page 70 and 71: - reduction of congestion by elimin
Page 72 and 73: - the methods applied to estimate e
Page 74 and 75: - the marginal external costs: cong
Page 76 and 77: - the benefits for the existing tra
Page 78 and 79: The following tables show some refe
Page 80 and 81: 3.1.1.6 Risk assessmentDue to their
Page 82 and 83: As shown in Figure 3.1, only under
Page 84 and 85: 3.1.3.7 Other project evaluation ap
Page 87 and 88: - Waste Management Hierarchy rules
Page 89 and 90: The time horizon for a project anal
Page 91 and 92: 3.2.1.7 Other project evaluation ap
Page 93 and 94: every user support the total costs
Page 95 and 96:
Territorial reference frameworkIf t
Page 97 and 98:
Cycle and phases of the projectGrea
Page 99 and 100:
One of the most important aims of t
Page 101 and 102:
projects, as in other sectors in wh
Page 103 and 104:
3.2.3.2 Project identificationBasic
Page 105 and 106:
3.2.3.7 Other project evaluation ap
Page 107 and 108:
In order to evaluate the overall im
Page 109 and 110:
for regassification plants, number
Page 111 and 112:
Examples of objectives are:- change
Page 113 and 114:
decontamination if any;- the techni
Page 115 and 116:
3.3.3.6 Risk AnalysisCritical facto
Page 117 and 118:
3.3.4.6 Risk assessmentCritical fac
Page 119 and 120:
3.4.1.5 Economic analysisThe follow
Page 121 and 122:
Financial inflows• Admission fees
Page 123 and 124:
expectancy suitably adjusted by the
Page 125 and 126:
The time horizon for project analys
Page 127 and 128:
A Cost-Benefit Analysis should cons
Page 129 and 130:
CHAPTER FOURCASE STUDIESOverviewThi
Page 131 and 132:
- finally, there is the traffic tha
Page 134 and 135:
c) Road users producer’s surplus:
Page 136 and 137:
4.1.5 Scenario analysisTwo scenario
Page 138 and 139:
The financial performance indicator
Page 140 and 141:
Table 4.10 Economic analysis (Milli
Page 142 and 143:
Table 4.12 Financial return on capi
Page 144 and 145:
4.2 Case Study: investment in a rai
Page 146 and 147:
4.2.4 Economic analysisThe benefits
Page 148 and 149:
Financial investment costs have bee
Page 150 and 151:
Figure 4.6 Results of the risk anal
Page 152 and 153:
Table 4.22 Economic analysis (Milli
Page 154 and 155:
Page 156 and 157:
4.3 Case Study: investment in an in
Page 158 and 159:
ate of 0.6% per year is assumed for
Page 160 and 161:
The shadow price of the CO 2 avoide
Page 162 and 163:
As a result, the probability distri
Page 164 and 165:
Page 166 and 167:
16 17 18 19 20 21 22 23 24 25 26 27
Page 168 and 169:
4.4 Case Study: investment in a was
Page 170 and 171:
4.4.2 Financial analysisAlthough in
Page 172 and 173:
THE CALCULATION OF REVENUESReferrin
Page 174 and 175:
0.15 m 3 /m 2 a depreciation of 20%
Page 176 and 177:
As result, the probability distribu
Page 178 and 179:
Figure 4.13 Probability distributio
Page 180 and 181:
Table 4.48 Financial return on nati
Page 182 and 183:
Table 4.50 Financial return on priv
Page 184 and 185:
16 17 18 19 20 21 22 23 24 25 26 27
Page 186 and 187:
4.5 Case Study: industrial investme
Page 188 and 189:
4.5.4.1 Investment costsThe total i
Page 190 and 191:
Finally, a residual value was estim
Page 192 and 193:
This analysis shows the need to pay
Page 194 and 195:
Table 4.62 Financial return on inve
Page 196 and 197:
Table 4.64 Return on private equity
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
Page 208 and 209:
A higher discount rate for countrie
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 240 and 241:
ANNEX IDETERMINATION OF THE EU GRAN
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,
show all

Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?