Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

previously estimated in projects with similar (e.g. geographical) conditions as a proxy for the values of thesame goods in the project under analysis. Although some adjustments are often necessary to reflect thedifferences between the original and the new project, this approach allows the proposer to save researchefforts and to have, at the same time, reference values for the environmental benefits (or costs) that arisefrom the project implementation.If a benefits transfer is not possible because of lack of data, then environmental impacts should at least beidentified in physical terms for a qualitative appraisal in order to give the decision-maker more elementsfor a considered decision, by weighing up the more quantifiable aspects, as summarised in the economicrate of return, against the less quantifiable ones. Multi-criteria analysis is often useful in this framework(see par. 2.7). A full discussion of the assessment of environmental impact goes beyond the scope of thisGuide, but CBA and environmental impact analysis are both required by EU regulations and should beconsidered in parallel and, whenever possible, should be integrated and consistent.For a more detailed discussion on methodologies for the monetisation of environmental impacts and howto perform a benefits transfer see Annex F.2.5.2.1 Accounting value of public sector owned capital assetsMany projects in the public sector use capital assets and land, which may be state-owned or purchasedfrom the general Government budget.Capital assets, including land, buildings, machinery and natural resources, should be valued at theiropportunity cost and not at their historical or official accounting value. This has to be done wheneverthere are alternative options in the use of an asset and even if it is already owned by the public sector.Nevertheless, for some goods there may be no alternative use so that there is no related option value. Inthat case, past expenditures or irrevocable commitments of public funds are not social costs to beconsidered in the appraisal of new projects (e.g. ‘sunk costs’).2.5.3 Inclusion of indirect effectsIndirect effects are defined as quantity or price changes occurring in secondary markets. To betterunderstand whether indirect effects can be ignored or not when conducting a CBA, it is important todistinguish between efficient and distorted secondary markets. A distorted secondary market is a market inwhich prices do not equal social marginal opportunity costs. The existence of taxes, subsidies, monopolypower and externalities is the main cause of distortion of a market.As anticipated in par. 2.2.2, indirect effects occurring in efficient secondary markets should not beincluded in the evaluation of the project’s costs and benefits whenever an appropriate shadow price hasbeen given in the primary markets. The main reason for not including indirect effects is not because theyare more difficult to identify and quantify than direct effects, but because they are irrelevant in a generalequilibrium setting, as they are already captured by shadow prices. Adding these effects to the costs andbenefits measured in primary markets usually results in double-counting (see example below).The circumstances, however, in which indirect effects have to be measured and considered, depend uponthe existence of distortions such as taxes, subsidies, monopolistic rents and externalities. These effectsmay be positive or negative depending on the sign of the distortion in the secondary market and the crosselasticityof the good in the secondary market with respect to the change in the primary market. In apartial equilibrium setting, indirect effects occurring in distorted secondary markets should, in principle, beincluded in the CBA, because it is only in this kind of market that they may represent important costs orbenefits to society. For example, if a government intervention generates changes in the quantitiesexchanged in secondary markets, the costs or benefits resulting from the increased (or decreased)distortion should be measured. However, in practice, this may be difficult because although distortions areeasily identifiable, their sizes are often difficult to measure. In addition, to produce significant changes insecondary markets very large price changes in the primary market are usually necessary, so that themagnitude of indirect effects is often not relevant and their exclusion from CBA accounts results in only anegligible bias.54