Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

One of the most important aims of the financial analysis in the water services sector is to demonstrate thelong term financial sustainability of the project.In the case of a PPP project, the financial analysis should show how the improved financial performanceof the project, as allowed by the EU grant, is shared between the public and the private partner of thePPP. This depends precisely upon the amount of public and private funding and how the charges (andrisks) of future management are broken down among the partners of the PPP.After a consolidated financial analysis, the above mentioned issue could be addressed, for example, bycalculating an FRR(K g ) and an FRR(K p ), respectively for the public and the private investor. To computethese performance indicators it is sufficient to change the capital outlays in the FRR(K) or FNPV(K)calculation accordingly (for an application see the water waste case study in Chapter 4).For the outflow, the purchasing price of the products and services, necessary for both the operation of theplant and the additional services supplied, should be considered. Since water infrastructures are generallycharacterized by a long period of useful life, the financial analysis should consider the residual value of theinvestment, according to the methods, that were described in the second chapter of the Guide.3.2.2.4 Economic analysisThe benefits and economic costs of projects in the water supply and waste water treatment sector have tobe identified on a case-by-case basis, as they are strongly related to the type of investment and servicesoffered, which in this sector show a very large variability with respect to the project objectives, the uses ofwater, the prevailing type of investments, etc. (see project identification). In any case, according to theaforementioned Directive 2000/60/EC, the analysis must both the costs and benefits arising to the users,and the costs and benefits arising for the water resource itself, and for the environment in general, have tobe taken into account.The main benefits can be identified as follows with respect to the type of project and its objectives:a) Water supply projects, with the aim of increasing the quantity and / or the reliability of water supply for civilian uses,irrigation and industrial purposes.The main social benefit in the economic analysis may be evaluated according to estimates of expecteddemand for water resources that the investment will satisfy. In other words the benefit is equal to thewater demand satisfied by the project and not satisfied in the do-nothing alternative, suitably valued.The water service is a classic case of natural monopoly. Market prices generally suffer considerabledistortions. The basis for the estimation of an accounting price for water may be the user’swillingness-to-pay for the service 33 .The willingness-to-pay (WTP) can be estimated empirically by applying the market prices ofalternative services (tank trucks, bottled drinking water, distribution of drinks, purification by meansof devices installed by the users, in situ sanitary processes for potentially infected waters, etc.). Inother words, the social benefits of the water service can be evaluated by considering the bestalternative technique feasible for the supply of the same catchments area (backstop technology) andby quantifying the price of the alternative service.Otherwise, a conversion factor (CF) may be applied to the revenues deriving from the water service,realised or improved by the project. The CF is based on a planning parameter, that can be defined, asan example, by calculating the mean value between the willingness-to-pay (see above) and the longterm marginal cost of the service and adjusting the result in order to take into account the distributiveeffects. This method must be used with caution and only in cases where it is not possible to33Alternatively, for any water infrastructure meant for the service of industrial or agricultural areas, it is possible to evaluate the added value ofthe additional product, that has been gained through the water availability. But the adequacy of this approach for determining the economicbenefits must be carefully evaluated on a case-by-case basis.99