Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

More documents

Recommendations

Info

FOCUS: ENPV VS. FNPVThe difference between ENPV and FNPV is that the former uses accounting prices or the opportunity cost of goods andservices instead of imperfect market prices, and it includes as far as possible any social and environmental externalities. This isbecause the analysis is done from the point of view of society, not just the project owner. Because externalities and shadowprices are considered, most projects with low or negative FNPV(C) will now show positive ENPV.The ENPV is the most important and reliable social CBA indicator and should be used as the mainreference economic performance signal for project appraisal. Although ERR and B/C are meaningfulbecause they are independent of the project size, they may sometimes involve problems. In particularcases, for example, the ERR may be multiple or not defined, while the B/C ratio may be affected byconsidering a given flow as either a benefit or a cost reduction.On the contrary, there might be cases where the use of the benefit-cost ratio is appropriate, for exampleunder the capital budget constraints (see Annex C).In principle, every project with an ERR lower than the social discount rate or a negative ENPV should berejected. A project with a negative economic return, uses too much of socially valuable resources toachieve too modest benefits for all citizens. From the EU perspective, sinking a capital grant in a projectwith low social returns means diverting precious resources from a more valuable development use. Forexample, from the perspective of Cohesion Policy, a low return investment in a Convergence Objectiveregion means that the project will contribute nothing to achieve the objective.In some exceptional cases, however, a project with a negative ENPV could be accepted for EU assistanceif there are important non-monetized benefits (e.g. for biodiversity preservation projects, cultural heritagesites, landscape). This should be seen as a rare occurrence, and the appraisal report should still specify in aconvincing way, through a structured argument, sustained by adequate data, that, in some sense, socialbenefits exceed social costs, even if the applicant is unable to fully quantify the former. There shouldclearly be a strong case for such a request for co-financing of a major project.Table 2.11 Observed ERR of a sample of investment projects sponsored by the EU during theprevious programming periodsN. of projectsERR%AverageERR%Std. Dev.Sector average /total averageEnergy production a 3 14.19 9.36 0.87Energy transport and distribution b 2 12.60 6.22 0.77Roads and highways b 56 15.53 9.58 0.95Railways and underground b 48 11.62 8.21 0.71Ports, airports b 20 26.84 28.99 1.64Water supply and waste water treatment b 116 11.33 6.31 0.69Solid waste treatment b 31 28.27 72.24 1.72Industries and other productive investments a 2 15.17 7.30 0.93Other b 11 11.96 10.53 0.73TOTAL 289 16.39 17.64 1.0a: 1994-1999 programming period; b: 2000-2006 programming periodSource: Authors’ calculations on available DG Regio data. On ISPA projects see Florio and Vignetti (2006).56
Table 2.12 Review of the main analytical itemsDefinition Value/formula SectionNational parametersFinancial DiscountRateSocial Discount RateWelfare weight 1Standard ConversionFactor 2Shadow ExchangeRate 3Marginal Costof Public FundsShadow pricesTraded itemsNon-traded minoritemsNon-traded majoritems 4Shadow wage 5Performance indicators 6Financial net presentvalueFinancial rate of returnon investmentFinancial rate of returnon capitalEconomic net presentvalueEconomic rate ofreturnBenefit-cost ratioLegenda:1Welfare weight:2Standard Conversion Factor:3Shadow Exchange Rate:4Shadow Prices:5Shadow wage:6Performance indicators:The rate at which future values in the financialanalysis are discounted to the present. It reflectsthe opportunity cost of capital.The rate at which future values in the economicanalysis are discounted to the present. It reflectsthe social view on how net future benefitsshould be valued against present ones.Weight for adjusting the project net benefits inorder to include distributive effects in theanalysis.General factor for adjusting market prices toaccounting (shadow) prices.The economic price of foreign currency, whichmay diverge from the official exchange rate.The ratio between the shadow price of taxrevenues and the population average of thesocial marginal utility of income.Prices to be used in the economic analysis,reflecting inputs’ opportunity costs and/orconsumers’ willingness-to-pay for outputs.The shadow prices are the international orborder prices.The national Standard Conversion Factorshould be used to correct their prices.Sector-specific conversion factors should beused to correct their prices.The opportunity-cost of labour. The valuedepends on the different types ofunemployment:1) Full employment2) mild unemployment3) dualistic labour market4) strong involuntary unemploymentThe sum that results when the expectedfinancial costs of the investment are deductedfrom the discounted value of the expectedrevenues.The discount rate that zeros out the FNPV. It iscompared with a benchmark in order to evaluate5%, in real terms (EC Working Doc. N.4)3.5%, in real terms (EC recommendation forcountries non-eligible for the Cohesion Fund)5.5%, in real terms (Cohesion Fund eligiblecountries)par. 2.4Annex Bpar. 2.5.4Annex Bpar. 2.4.2Annex GSCF= (M + X) / [(M + Tm) + (X - Tx)] par. 2.5.1SER = ∑ [OERt * (CIt / COt)] / n par. 2.5.1Country-based values, dependent on taxation system par. 2.5.1par. 2.5.1CIF for imports and FOB for exports par. 2.5.1SCF= (M + X) / [(M + Tm) + (X - Tx)] par. 2.5.1SCFi= WTP/p or MC/p par. 2.5.11) SWR = W2) SWR = mc + zd3) SWR = n(Δu/ΔL) + zd4) SWR = W(1-u)(1-t)FNPV =the project performance. ( 1 FRRC)The return for the national beneficiaries(public and private combined). ( 1 FRRK )The difference between the discounted totalsocial benefits and costs.The discount rate that zeros out the ENPV. It iscompared with a benchmark in order to evaluateSn01n∑ atSt= + + ... +01nt=0 (1 + i)(1 + i)(1 + i)SSpar. 2.5.1Annex Dpar.2.4.5Annex CSt0 = par. 2.4.5∑ t+Annex C0∑ +St=tENPV =the project performance. ( 1 ERR)PV ( B)C PV ( C)The ratio of the present value of social benefitsto the present value of social costs over the timehorizon.⎛W = ⎜⎝CC iSn01n∑ atSt= + + ... +01nt=0 (1 + i)(1 + i)(1 + i)SSpar. 2.4.6Annex Cpar. 2.5.5Annex CSt0 = par. 2.5.5∑ t+Annex CB =par. 2.5.5Annex CC: average consumption level; C i : per capita consumption; e: constant elasticity of marginal utility of incomeM: Total imports; X: Total exports; T m : import taxes; T x : export taxesOER: official exchange rate; CI: currency inflow; CO: currency outflow; n: number of years; t: timeMC: marginal cost; WTP: willingness-to-pay; p: priceW: market wage; L: labour; c: conversion factor; d: conversion factor; m: lost annual output of hiring a new employee;n: reservation wage; t: rate of social security payments and relevant taxes; u: unemployment rate;z: additional cost of transferring workers (relocation)PV: present value; St: balance of cash flow funds; a t : discount factor; i: discount ratee⎞⎟⎠57
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 44 and 45: eturn on their own capital (Kp). Th
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 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 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 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

Create successful ePaper yourself

Delete template?

Save as template?