Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Option analysisThe construction of a reference solution and the identification of promising alternatives are two aspectsthat will influence all the results of the following evaluations. The reference solution will generallycorrespond to a BAU scenario. The BAU scenario should not be a ‘catastrophic’ one, resulting in trafficparalysis and in very high social costs.In the case of strong congestion phenomena, whether at present or in the future, the reference solutionshould include those interventions (management, maintenance, etc.), which will probably be put intoaction in the absence of the project.The analysis of alternative project solutions is equally critical. After defining the BAU scenario andanalysing the critical aspects in terms of a demand/capacity ratio (see below), it is necessary to identify allpromising technical alternatives on the basis of physical circumstances and available technologies.The main potential for distorting the evaluation is the risk of neglecting relevant alternatives, in particularlow-cost solutions, such as managing and pricing solutions, infrastructure interventions that areconsidered as not ‘decisive’ by designers and promoters, etc.Investment costs and operating costsFor the BAU scenario, and for each alternative, the preliminary step is to estimate all the investment costsand expenses for maintenance, ordinary and extraordinary, and for renewals, and then to allocate thesecosts over the time horizon.It is necessary to ensure that the project will include all the works required for its functioning (forexample, the links to the existing networks, the technological plants, etc.) as well as the relevant costs ofeach alternative. The estimates of costs and times need to be realistic and preferably ‘on the safe side’given the uncertainties involved; the latter point is particularly important for those projects which may beof significant relevance for the local community.For collective transport modes, it will be necessary to design an operating model and to calculate its costs.For example, a hypothesis put forward for the operation of the railway, should include the number oftrains which may be offered by type of train (goods, passengers, by making a distinction between shortand long-distance traffic), where each service is associated to the relating costs. The same applies for nodeinfrastructures, such as ports and airports.Pricing policiesFares, tolls and other pricing policies will influence the expected volume of demand and the distributionof demand across transport modes. It is therefore important whenever a different pricing hypothesis isintroduced, to reconsider the demand estimates and allocate the correct traffic volumes to each mode.The pricing criteria for transport infrastructures are a complex issue and may generate some problemswhen comparing the financial and economic evaluations. It is important to distinguish between:- the fares which maximise the proceeds for the managers/constructors of infrastructures: these kinds offares maximise the capacity for self-financing;- the efficiency fares: these take into consideration the social surplus and consider also the external costs(congestion as well as the environmental and safety costs).Efficient pricing should, in principle, be based on social marginal costs and requires the ‘internalisation ofexternal costs’ (Polluter Pays Principle), including congestion and environment costs. Social efficiencyrequires that users pay all the marginal private or internal and external costs that they impose on society.An efficient structure of charges confronts users with the marginal social costs of their decisions.In the case of transport infrastructures, marginal social costs comprise:- the producer’s marginal costs: infrastructure wear and tear, e.g. in the road sector, damage from heavygoods vehicles increases as the fourth power of the axle weight;73