guide2008_en

A Cost-Benefit Analysis should consider:

3.4.5.6Risk assessment

Critical factors

-Investment costs

-Difficulty in forecasting the real rate of penetration in the catchment area, from the point of view of both the relocation of companies and the development of new businesses

CHECKLIST

9Estimate the demand from existing companies to relocate to the new industrial area

9Forecast the number of new companies that would be born thanks to the new equipped area

9Evaluate carefully possible expropriation costs

9The main economic benefits are represented by the cost savings that being located in such an area could ensure for the companies. In evaluating the cost savings it is necessary to forecast the costs that a company is expected to sustain if located in an industrial zone and the costs the same company would have sustained in another location with the same business level.

129

CHAPTER FOUR

CASE STUDIES

Overview

This chapter presents five case studies providing worked examples of the methodology presented in the previous chapters. The case studies include:

-investment in a motorway

-investment in a railway line

-investment in an incinerator with energy recovery

-investment in a waste water treatment plant

-industrial investment

Each case study is organized in such a way to allow, as far as possible, a ‘horizontal’ reading structured alongside the six steps required for a consistent project appraisal. Nevertheless, they are at the same time ‘personalized’ in order to take into account sectoral specifics and to show the operational application of some of the guidelines proposed in Chapter 2 and Chapter 3.

As already mentioned, the economic evaluation of transport projects is traditionally based on a partial equilibrium approach. For this reason, in the first two case studies, the economic analysis is presented before the financial analysis and the economic benefits are obtained by adding the consumer with the producer’s surpluses and not by applying conversion factors to the project revenues.

The other three case studies are based on a general equilibrium approach, which implies the use of shadow prices. Each has, however, developed in more depth a certain topic to provide the reader with a practical application of the concepts illustrated in Chapter 2. For example:

-both the environmental case studies use an adjustment for the change of real prices (i.e. relative to general inflation);

-the incinerator case study presents a valuation of a negative externality by means of an hedonic price (see also Annex F);

-the waste water treatment plant investment offers an example of PPP and how to calculate the return on own capital to private investors (Kp);

-the industrial investment shows how risk analysis can question the project design, because, despite the baseline case seems to be acceptable, there is a high probability of a negative economic return.

The case studies are illustrative examples of the methodology of project analysis presented in the previous Chapters. They are not to be seen as synopsis of complete reports. All figures are purely indicative and should not be taken as benchmark values55.

corridor considered, etc. The case studies cannot represent a ‘typical’ project, because each actual project will be based on specific ingredients.

131

-finally, there is the traffic that will remain on the existing network which will take advantage of the reduced congestion thanks to the traffic diverted to the new motorway. Traffic reduction will contribute to a reduction in environmental emissions and noise.

As for some users, the value of time savings would not outweigh tolls, the free-of-charge option would imply a higher volume of traffic on the motorway.

Transport demand has been estimated for the entire corridor and for each of the two options it assessed against the BAU scenario. The most important inputs for the modelling process is the existing traffic data and the macro-economic, socio-economic and demographic data for the base year, for the forecast horizon (year 25) and for an intermediate year. After year 25, travel demand is assumed to remain constant. The transport model is a classical one consisting of trips generation, distribution and assignment. The following Table 4.1 summarises the total freight and passengers flows along the corridor connecting the two cities in the opening year of the new motorway:

-the traffic on the existing network in the BAU scenario;

-the traffic with the new free-of-charge motorway (diverted, generated and remaining on the existing network);

-the traffic with the new tolled motorway (diverted, generated and remaining on the existing network).

Table 4.1 Traffic forecast

DAILY TRAFFIC AT THE OPENING YEAR*

4.1.3Investment costs

The second step in the appraisal, in parallel with the forecast of the expected demand, has been to calculate the financial costs of the new motorway. Financial investment costs have been provided by the project engineers. Two separate estimates have been made, one for the free motorway and one for the tolled option. The costs for the second option are higher due to the need for segregated access ramps, equipment and buildings for collecting tolls. Costs have been disaggregated into the main type of works and on the basis of cost components (labour force, materials, carriage and freight). This enables the subsequent application of the conversion factors from financial costs into economic costs, see Table 4.3.

For the investment costs, two sets of estimates have been produced: one for the free motorway and the second for the tolled option. In the latter case, the costs related to toll collections have been included. The personnel, materials, freight and carriage costs have also been specified in this case.

The technical life of the infrastructure is 70 years and its residual value, considering the different components of the investment, has been set at 40% of the initial value.

The motorway construction will be completed in four years.

133

-the users who will remain on the existing network; goods and passengers will take advantage of the traffic reduction due to the diversion of flows toward the new motorway, which will reduce congestion and increase speeds.

The project benefits have been subdivided into the following components:

a)consumer’s surplus

b)gross producer’s surplus of the motorway operator

c)road users producer’s surplus

d)changes in fiscal revenues for the Government (gasoline taxes)

e)net environmental benefits

f)reduction in accidents

The above-mentioned benefits were calculated according to the following conventions:

a)Consumer’s surplus: changes in the area under the demand curve in excess of the users’ generalised perceived costs (perceived ‘vehicle operating costs’ (VOC), including tolls in option 2, and value of travel time).

In the modelling exercise passengers and freight will choose their route, or are induced to travel on the basis of the VOC they perceive. These will include for cars: fuel, lubricants and tolls if applied, and for trucks: fuel lubricants, a fraction of the maintenance, insurance and driving cost. Consistently, with the assumption on which the demand has been estimated, consumer’s surplus relies only on the perceived component of the travel costs. The travel times will be reduced both for the diverted traffic and the traffic remaining on the old road. Three different time values have been applied to the passenger traffic, according to purpose of travel: business, commuting and other purposes. No differentiation in value of time has been considered for goods. The values of average perceived operating costs and time per trip in the three alternatives, BAU, Motorway free of charges and Motorway tolled, (separately for freight and for passengers), are reported in Table 4.457 . As shown in Table 4.4 the perceived VOC are slightly increasing in the entire area due to the increased distance travelled by some users to access and egress the new link, and in the tolled alternative due to the tolls paid for the use of the motorway. But these increased costs are more than outweighed by the reduction in travel time. The total generalised perceived costs per trip are lower in both the alternatives as compared with the BAU. Table 4.5 illustrates how the consumer’s surplus is calculated, starting from the overall demand in the three scenarios, through the unit benefits calculated as the difference between the total generalised costs of the alternative considered and the BAU for the existing (diverted and not diverted) traffic in the entire network (with and without the new motorway), and half of this benefit for the generated traffic58. The total consumers’ benefits are calculated by multiplying the unit benefits for the volume of traffic in the alternative59.

b)Gross producer’s surplus of the motorway operator: revenues from the motorway tolls are considered as being part of the producer’s surplus (Table 4.6). All the calculation of surplus have been made separately for freight and passengers. For these reasons, the new motorway maintenance and operating costs are included directly in Tables 4.9 and 4.10 (economic analysis), as it was not possible to split the costs between the two types of traffic flows.

57The costs are calculated as average costs on the entire network considered in the analysis, as a consequence they reflect the different distribution of traffic between motorway and conventional road, which implies also changes in distance travelled. For this reason the difference between the generalised costs in the two options is less than the value of the toll applied in the tolled option.

58For instance, for passengers in the free of charge option the unit benefits of the existing traffic are given by (9.43 – 7.95) = 1.48 and for the generated traffic (9.43 – 7.95)/2 = 0.74.

59For instance, the consumer’s surplus in the two above mentioned cases is 1.48 Euro*32.2 million trips = 47.6 Millions of Euros and 0.74 Euro*0.8 million trips = 0.6 Millions of Euros.

135

Table 4.5 Consumer’s surplus

Table 4.6 Gross Producer’s surplus (motorway operator) and Road User’s surplus

Table 4.7 Government net revenues

Tables 4.9 and 4.10 summarises the calculations of social costs and benefits of the two options. The Economic Net Present Values and the Rates of Return of the two options considered are:

The results of the analysis show that there is a substantial advantage in the performance of the indicators for the free motorway option. Traffic on the motorway is much higher and as a consequence both users and society are better off, as total time savings are higher and externalities lower than in the tolled alternative. With the introduction of a tolling system the new motorway would remain under-utilised during the initial years. This is due to the fact that, although there is some congestion along the existing network, this is not high enough to induce a significant proportion of the demand to pay for the increased speed advantages allowed by the new motorway. The introduction of a pricing scheme only on some links of the network, as in this case, shifts traffic from the priced modes or links of the network to the other non-priced links or modes. From a welfare point of view, this could lead to a less positive effect. In order to maximise the net benefits of the investment, the analysis shows that it might be better to postpone the introduction of a tolling system to a second stage, (i.e., where traffic flow growth is sustained).

137