Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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- the marginal external costs: congestion costs, environmental costs, external accident costs, i.e. thosecosts generated by the transport activities that do not fall on those individuals whose choices havecaused them, but on other individuals, or on society as a whole.Efficient pricing should generally involve low tolls where or when there is no congestion (so as tomaximise the use of the infrastructure) and high tolls where, or when, this phenomenon occurs. If theinfrastructure is not congested, there might be a conflict between financial need and the optimal use of theinfrastructure: in this case, tolls intended to recover a fraction of the investment costs can cause a suboptimaluse of the infrastructure. It is therefore important to clarify the pricing criteria that have beenapplied.FOCUS: RAIL NETWORK ACCESS TOLLSThe pricing regimes of the railway sector represent an important factor and should be analysed with great care. There are two oppositestrategies: average cost tolls (the ‘Anglo-German strategy’) featuring very high values and marginal cost tolls (the ‘French strategy’) featuring verylow values.These will not completely solve either the problem of congestion tolls (when demand exceeds supply) or the problem of track allocation criteria.In fact, special services, for example at a local level, may enjoy partial or total benefits. The allocation of tracks (i.e. of capacity) may be subjectto constraints for the protection of the incumbent operator (‘grand-father’s right’). Tolls and regulatory constraints outline a framework, whichis quite complex for the correct evaluation of the flows of future proceeds, especially in the longer term.THE EUROVIGNETTE DIRECTIVEThe harmonization of rules regarding crossing freight traffic is one of the main targets of the EU Commission in order to set a road-pricingsystem. On 17 May 2006 the European Parliament and the Council adopted Directive 2006/38/EC amending Directive 1999/62/EC on thecharging of heavy goods vehicles for the use of certain infrastructure (so called ‘Eurovignette Directive’). The Directive does not oblige MemberStates to introduce road pricing for trucks: Member States are free to decide whether or not to introduce so called ‘user-charges’ or ‘tolls’.Member States may maintain or introduce tolls and/or user charges on the trans-European road network for purposes such as dealing withenvironmental damages, tackling congestion, minimising infrastructure damage, optimising the use of the infrastructure concerned or promotingroad safety.The mark-ups are the new instrument introduced in the amended Directive, allowing Member States to add 15% or 25% to the average toll onroads in mountainous area, according to some conditions:- the road sections must be subject to acute congestion or the vehicles using these roads sections must cause significant environmentalimpacts;- the revenues must be invested in priority projects of the TEN-T networks;- the maximum level for mark-ups is 15% (25% in case of cross-border projects);- tolls must be proportionate to the objective pursued;- tolls must be transparent and not discriminatory.The amended Directive, moreover, allows Member States to differentiate the tolls depending on the EURO emission class, or the time of day,the type of day or season.While Directive 1999/62/EC applies to vehicles over 12 tonnes, the new Directive introduces taxes on vehicles over 3.5 tonnes, but MemberStates will be required to extend this obligation until 2012.The Directive recommends that the vignette revenues should be used to optimise the entire transport system (not just for roads). As thisrecommendation is not legally binding, some Member States may also use the revenues for non-transport purposes. The financial analysis of aroad project will consider the Eurovignette revenues only when this is consistent with the national legislation.3.1.1.4 Financial analysisThe financial analysis will generally be conducted from the viewpoint of the infrastructure manager (whichmight differ from the service operator). If required, it may first be carried out for the owners and theoperators, and then consolidated.Financial InflowsFinancial Outflows• Tolls, fares and charges • Investment costs• Transfers from the government (this item is to be- expenses for renewalsconsidered only for the calculation of the return on- extraordinary maintenance operationscapital) • Operating costs-road- ordinary maintenance costs of planned works- costs related to tolling• Operating costs-rail- ordinary maintenance costs of planned works- costs related to charging74
Financial investment costs are an outcome of the technical analysis, usually disaggregated by the type ofworks into which the intervention may be broken down and allocated over the construction time. Thecost analysis should distinguish the elementary cost components (labour force, materials, carriage andfreight) so as to facilitate the subsequent application of the conversion factors for converting financial intoeconomic costs.Financial inputs will be represented by the proceeds from the tolls/tariffs applied for the sale of welldefinedservices. The estimate for the proceeds must be consistent with the on demand elasticity andtrends of explanatory variables (see the previous paragraph about pricing criteria). The financial analysis ofnon-revenue generating infrastructures will show the net present cost for the public sector.With regard to the recourse to private funding or Public Private Partnerships, attention should be paid topossible inefficiencies which may result from cost recovery policies. These may, in turn, affect the quantitydemanded (under-utilisation).3.1.1.5 Economic analysisThe economic evaluation of transport investments relies on a well developed and straightforwardframework and differs substantially from the financial analysis, since many of the benefits and costs arepublic goods, or goods without a market. Moreover, following a long and established tradition, theeconomic evaluation is based on a partial equilibrium approach (see box in Chapter 2).With regard to the economic investment and operating costs of vehicles, if market prices are deemed toreflect the opportunity cost of resources, it will be necessary only to eliminate transfers from the financialcosts by applying a conversion factor to each elementary cost component and to take tax burdens intoaccount. If market prices are not deemed to reflect the opportunity cost of resources for somecomponents, it will be necessary to apply shadow prices to correct the costs (see the general methodologydescribed in Chapter 2 of the Guide).Benefits result from variations in the area below the transport demand curve, as well as from thevariations in economic costs, including external costs. Social benefits are obtained by adding the followingcomponents:- variations in the consumer’s surplus: change in generalised transport costs, wich incorporate the moneycosts travel, (i.e. the perceived cost: fares, tariffs and tolls, and vehicle costs perceived by the users 9 );- variations in road user producer’s surplus: the unperceived costs of the private the road users enterinto the calculation of the road users producer’s surplus as they are considered as producers of theservices they supply to themeselves (car users) or to their customers (trucks). The difference betweenthe total costs of producing these services and the vehicle operating costs perceived is defined as‘unperceived operating costs’(e.g. tyres, maintenance and depreciation). These costs enter into thecalculation of the road users producer’s surplus and are then added to the consumer’s surplus.;- variations in infrastructure and services operator producer’s surplus: profits and losses of infrastructuremanagers, if available, and transport service operators;- variations in taxes and subsidies for the government;- variations in external costs (emissions, noise, accidents).The calculation of the consumer’s and producer’s surplus and the external costs, will take into accountgoods that have no market (see below) and whose estimate may require special techniques. Whencalculating the benefits, it is recommended that a distinction be made between:9There is a gap between the operating costs of road vehicles and the costs as perceived by users, the latter beinglower than the real cost. In fact, for istance, car users tend just to take into account fuel expenses and underestimateother expenses. The difference between the operating costs and the perceived costs is defined as ‘unperceivedoperating costs’.75
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ACRONYMS AND ABBREVIATIONSBAUB/CCBA
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TABLESTable 2.1 Financial analysis
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FIGURESFigure 1.1 Project cost spre
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Cohesion Fund, and through the leve
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or the plant will not reveal excess
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CHAPTER ONEPROJECT APPRAISAL IN THE
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Some specifications for financial t
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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 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 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
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The time horizon for project analys
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A Cost-Benefit Analysis should cons
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CHAPTER FOURCASE STUDIESOverviewThi
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- finally, there is the traffic tha
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c) Road users producer’s surplus:
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4.1.5 Scenario analysisTwo scenario
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The financial performance indicator
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Table 4.10 Economic analysis (Milli
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Table 4.12 Financial return on capi
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4.2 Case Study: investment in a rai
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4.2.4 Economic analysisThe benefits
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Financial investment costs have bee
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Figure 4.6 Results of the risk anal
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Table 4.22 Economic analysis (Milli
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4.3 Case Study: investment in an in
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ate of 0.6% per year is assumed for
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The shadow price of the CO 2 avoide
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As a result, the probability distri
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16 17 18 19 20 21 22 23 24 25 26 27
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4.4 Case Study: investment in a was
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4.4.2 Financial analysisAlthough in
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THE CALCULATION OF REVENUESReferrin
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0.15 m 3 /m 2 a depreciation of 20%
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As result, the probability distribu
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Figure 4.13 Probability distributio
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Table 4.48 Financial return on nati
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Table 4.50 Financial return on priv
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16 17 18 19 20 21 22 23 24 25 26 27
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4.5 Case Study: industrial investme
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4.5.4.1 Investment costsThe total i
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Finally, a residual value was estim
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This analysis shows the need to pay
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Table 4.62 Financial return on inve
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Table 4.64 Return on private equity
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Table 4.66 Economic analysis (thous
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ANNEX ADEMAND ANALYSISDemand foreca
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The method applied for the forecast
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Furthermore, travel demand depends
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This Guide supports a unique refere
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A higher discount rate for countrie
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Figure C.1 Project ranking by NPV v
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The main problems with this indicat
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EXAMPLE OF SHADOW WAGE IN DUAL MARK
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Another exhaustive way to include d
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Figure E.2 Percentage of low income
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ANNEX FEVALUATION OF HEALTH &ENVIRO
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Figure F.1 Main evaluation methodsS
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- expenditure on capital equipment
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due to air pollution or water conta
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BENEFIT TRANSFER - SELECTED REFEREN
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ANNEX GEVALUATION OF PPP PROJECTSIt
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adjustments for Competitive Neutral
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ANNEX HRISK ASSESSMENTIn ex-ante pr
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Reference ForecastingThe question o
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Figure H.5 Levels of risks in diffe
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ANNEX IDETERMINATION OF THE EU GRAN
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A.4. Technological Alternatives and
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GLOSSARYAccounting period: the inte
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Market price: the price at which a
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BIBLIOGRAPHY1. ReferencesBelli, P.,
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Ray, A. 1984, Cost-benefit analysis
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EnvironmentGeneralAtkinson, G., 200
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European Commission, DG Tren, 2003,
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Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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