guide2008_en

and environment sectors, the ERDF and IPA may also finance projects in the energy, industrial and service sectors.

In this framework, CBA provides support for informed judgement and decision making. Article 40(e) of Regulation 1083/2006 states that the managing authorities are required to provide a CBA for major projects to be financed under their Operational Programmes for cohesion policy. This makes CBA an input, amongst others, for decision making on major project co-financing by the EU. CBA, i.e. financial and economic project appraisal, including risk assessment, may be complemented by other studies, for example cost-effectiveness and multi-criteria analyses (par. 2.7.1-2), if the project is likely to have important non-monetary effects, or economic impact analysis, in the case of significant macroeconomic effects (par. 2.7.3).

Investment projects, co-financed by the Structural Funds, the Cohesion Fund and the IPA constitute implementation tools for EU Cohesion Policy and pre-accession. By means of a CBA the welfare contribution of a project to a region or a country can be measured and, in so doing, the contribution of an investment project to EU cohesion policy objectives can be assessed. For this reason, besides regulatory requirements for major projects, the Member States may also need to use CBA for projects with investment costs below the threshold mentioned in the EU regulations. In fact, most public administrations in the Member States or in the candidate countries provide further specific guidance to project promoters.

For the same reason it is also necessary to carry out a CBA for major projects implemented under CF and ERDF in order to meet the acquis standards. In this case, it is important to clearly assess whether the benefits of the specific option chosen to comply with the requirements outweigh its costs.

1.2Definition of projects

In the General Regulation for the Structural and Cohesion Funds, major projects are defined as those with a total cost exceeding €25 million in the case of the environment and €50 million in the case of all the other sectors (Article 39 Regulation 1083/2006). This financial threshold is €10 million for IPA projects (Article 157(2) Regulation 718/2007). The following types of investments can constitute a ‘major project’:

-a project, that is an economically indivisible series of tasks related to a specific technical function and with identifiable objectives;

-a group of projects, that indicatively:

♦are located in the same area or along the same transport corridor

♦achieve a common measurable goal;

♦belong to a general plan for that area or corridor

♦are supervised by the same agency that is responsible for co-ordination and monitoring;

-a project phase that is technically and financially independent and has its own effectiveness.

In particular, the application forms for EU assistance (see section B.4.1 of application form for ERDF and CF; section B.5.1 for IPA) explicitly require that justification for the division of the project into stages and evidence of their technical and financial independence is provided.

A project phase can be considered as a major project, especially in the case where the construction phase for which the assistance of the Funds is requested cannot be regarded as being operational in its own right2. This is the case, for example, for an operation expected to be longer than the programming period, so the co-financing request for the period 2007-2013 is only for a phase of the entire operation (Article 40(d) 1083/2006).

‘Operational’ in this context means that the infrastructure is functionally complete and is being used, even if the full design capacity of the facility cannot be exploited because of restrictions linked to incomplete subsequent phases.

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Figure 1.2 The project investment cost includes any one-off pre-production expenses

Source: Authors

1.3Information required

Community regulations indicate which information must be contained in the project dossier submitted to the Commission. Article 40 of Regulation 1083/2006 stipulates its own rules for the submission of the request for co-financing of major projects. It asks for results of a feasibility study, a cost-benefit analysis, a risk assessment, an evaluation of the environmental impact3, a justification for public contribution and a financing plan showing the total planned financial resources and contributions from the Funds and other Community sources of funding (see Focus for details). Similar information requirements apply to IPA projects.

For the formal request for contribution to the Commission, the Managing Authority should submit a standard application form (see Annexes XXI and XXII of the Implementing Regulation) which provides a detailed description of the specific information needed for each section of the feasibility, cost-benefit, environmental impact and risk analyses.

Furthermore structured data provided in the application forms will also be encoded, according to the rules for the electronic exchange of data (see Article 39-42 of the Implementing Regulation and its Annex XX).

A major project is formally notified only after the application form and the structured encoded data are submitted to the Commission.

Reading this Guide will help project proposers to better understand what information is required by the different decision-makers, and eventually by the Commission, in order to evaluate the socio-economic benefits and costs; how to consider the environmental costs and benefits; how to weigh the direct and indirect effects on employment; how to evaluate the economic and financial profitability, etc. In fact, there are different ways to respond to these requests for information: Chapter 2 stresses some fundamental questions, methods and criteria.

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FOCUS: INFORMATION REQUIRED

General Regulation (Article 40 Reg 1083/2006): The Member State or the managing authority shall provide the Commission with the following information on major projects:

(a)information on the body to be responsible for implementation;

(b)information on the nature of the investment and a description of it, its financial volume and location;

(c)the results of the feasibility studies;

(d)a timetable for implementing the project and, where the implementation period for the operation concerned is expected to be longer than the programming period, the phases for which Community co-financing is requested during the 2007 to 2013 programming period;

(e)a cost-benefit analysis, including a risk assessment and the foreseeable impact on the sector concerned and on the socioeconomic situation of the Member State and/or the region and, when possible and where appropriate, of other regions of the Community;

(f)an analysis of the environmental impact;

(g)a justification for the public contribution;

(h)the financing plan showing the total planned financial resources and the planned contribution from the Funds, the EIB, the EIF and all other sources of Community financing, including the indicative annual plan of the financial contribution from the ERDF or the Cohesion Fund for the major project.

IPA Implementing Regulation (Article 157 Reg. 718/2007): When submitting a major project to the Commission, the operating structure shall provide the following information:

(a)information on the body to be responsible for implementation;

(b)information on the nature of the investment and a description of its financial volume and location;

(c)results of feasibility studies;

(d)a timetable for the implementation of the project before the closure of the related operational programme;

(e)an assessment of the overall socio-economic balance of the operation, based on a cost-benefit analysis and including a risk assessment, and an assessment of the expected impact on the sector concerned, on the socio-economic situation of the beneficiary country and, where the operation involves the transfer of activities from a region in a Member State, the socioeconomic impact on that region;

(f)an analysis of the environmental impact;

(g)the financing plan, showing the total financial contributions expected and the planned contribution under the IPA Regulation, as well as other Community and other external funding. The financing plan shall substantiate the required IPA grant contribution through a financial viability analysis.

Implementing Regulation-Corrigendum (Article 40 Reg. 1828/2006): The computer system for data exchange shall contain information of common interest to the Commission and the Member States, and at least the following data necessary for financial transactions: ( … ) e) the requests for assistance for major projects referred to in Articles 39, 40 and 41 of Regulation (EC) No 1083/2006, in accordance with Annexes XXI and XXII to this Regulation, together with selected data from those Annexes identified in Annex XX.

1.4Responsibility for project appraisal

According to Regulation 1083/2006, Article 40, the Member State, or the managing authority of the Operational Programme under which the major project is submitted, has the responsibility to provide the Commission with the information needed for project appraisal.

FOCUS: THE INCLUSION OF MAJOR PROJECTS IN AN OPERATIONAL PROGRAMME

General Regulation (Article 37(1) 1083/2006): Operational programmes relating to the Convergence and Regional competitiveness and employment objectives shall contain: ( … ) h) an indicative list of major projects within the meaning of Article 39, which are expected to be submitted within the programming period for Commission approval.

Implementing Regulation (Annex XVIII 1828/2006), Annual and Final reporting (contents):

-ERDF/CF Programmes: Major Projects (if applicable);

-progress in the implementation of major projects;

-progress in the financing of the major projects;

-any change in the indicative list of major projects in the operational programme.

IPA Implementing Regulation: (Article 155 (2) Regulation 718/2007): Operational programmes shall contain: ( … ) j) for the regional development component, an indicative list of major projects, accompanied with their technical and financial features, including the expected financing sources, as well as indicative timetables for their implementation.

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In this framework (according to Article 41), the Commission is responsible for the appraisal of major projects on the basis of information provided by the proposer. A project examiner will consider the list of regulatory requirements as a general indication of the minimum information needed. The major project will be appraised in the light of the factors listed in Article 40, its contribution towards achieving the goals of those priorities, and its consistency with other Community policies.

During this process the Commission may ask for integration of information if the application is incomplete, inconsistent or not of a sufficient quality. In doing so, the Commission can consult outside experts, including the EIB, if necessary. The EIB is also involved in the JASPERS initiative (see Focus below).

FOCUS: APPRAISAL BY THE COMMISSION

General Regulation

Article 41 Regulation 1083/2006: The Commission shall appraise the major project, if necessary consulting outside experts, including the EIB, in the light of the factors referred to in Article 40, its consistency with the priorities of the operational programme, its contribution to achieving the goals of those priorities and its consistency with other Community policies.

Article 36(3) Regulation 1083/2006: 3) The Commission may consult the EIB and the EIF before adoption of the decision referred to in Article 28(3) and of the operational programmes. That consultation shall relate in particular to operational programmes containing an indicative list of major projects or programmes which, by the nature of their priorities, are suitable for mobilising loans or other types of market-based financing. 4) The Commission may, if it considers it appropriate for the appraisal of major projects, request the EIB to examine the technical quality and economic and financial viability of the projects concerned, in particular as regards the financial engineering instruments to be implemented or developed. 5) The Commission, in implementing the provisions of this Article, may award a grant to the EIB or the EIF.

FOCUS: THE JASPERS INITIATIVE

JASPERS (Joint Assistance to Support Projects in European Regions) is a joint initiative of the EIB, the European Commission (Regional Policy Directorate-General - DG Regio) and the European Bank for Reconstruction and Development (EBRD). It is a technical assistance partnership, aimed at assisting the EU Member States covered by the Convergence Objective in preparing the high-quality major infrastructure projects to be submitted for co-financing under the Structural and Cohesion Funds. The assistance provided by JASPERS may cover any preparatory work needed to prepare an application for funds.

JASPERS operates on the basis of a Country Actions Plan, prepared in partnership with the Beneficiary State and the geographical desk in DG REGIO. The completed project form must indicate the inputs of JASPERS to the national preparation and appraisal team of the project.

Major projects application forms shall indicate if the project has received assistance from JASPERS and report the overall conclusions and recommendations of the JASPERS contribution. For further details see URL: http://www.jaspers.europa.eu/

The Commission’s decisions concerning co-financed projects will be based on an in-depth evaluation. When the evaluation presented by the candidate is insufficient or not convincing, the Commission may ask for a revision or a more thorough elaboration of the analysis; alternatively, it may conduct its own appraisal, if necessary, availing itself of an independent evaluation. Member States often have structures and internal procedures for evaluating projects of a certain size, but sometimes difficulties may emerge in carrying out a quality evaluation. In any case, the final decision will be the result of a dialogue with the proposer, in order to obtain the best results from the investment.

To sum up, the economic appraisal of projects by the Commission (which is just one of the aspects of the whole decision process) is based on a three-step approach. The aim of this approach is to check whether:

-the project appraisal dossier is complete. This means that all the necessary information should be available. If this is not the case the project will not be admissible;

-the analysis is of a good quality. This means that the analysis is sound in terms of coherence of the CBA with the Commission’s methodology and the national CBA guidelines (where available). The working hypotheses made for the forecasts are realistic and the methods used for the calculation of the main performance indicators are correct;

-the results provide a basis for a co-financing decision.

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1.5Decision by the Commission

After its appraisal the Commission will make its decision. This is required to define:

-the physical object;

-the amount of eligible expenditure to which the co-financing rate of the priority applies;

-the annual plan for financial contributions from the ERDF of the Cohesion Fund.

FOCUS: DECISION BY THE COMMISSION

General Regulation

Article 41(2, 3) 1083/2006: 2) The Commission shall adopt a decision as soon as possible but no later than three months after the submission by the Member State or the managing authority of a major project, provided that the submission is in accordance with Article 40. That decision shall define the physical object, the amount to which the co-financing rate for the priority axis applies, and the annual plan of financial contribution from the ERDF or the Cohesion Fund. 3) Where the Commission refuses to make a financial contribution from the Funds to a major project, it shall notify the Member State of its reasons within the period and the related conditions laid down in paragraph 2.

Concerning the first point, a suitable description of the ‘physical object’ should be provided. As regards the co-financing rate, the one fixed at the priority axis level under which the major project is submitted should be considered.

FOCUS: THE CO-FINANCING RATE

General Regulation (Article 53 1083/2006):

-The contribution from the Funds at the level of operational programmes under the Convergence and Regional competitiveness and employment objectives shall be subject to the ceilings set out in Annex III. 31.7.2006 L 210/51 Official Journal of the European Union EN.

-For operational programmes under the European territorial cooperation objective in which at least one participant belongs to a Member State whose average GDP per capita for the period 2001 to 2003 was below 85% of the EU-25 average during the same period, the contribution from the ERDF shall not be higher than 85% of the eligible expenditure. For all other operational programmes, the contribution from the ERDF shall not be higher than 75% of the eligible expenditure co-financed by the ERDF.

-The contribution from the Funds at the priority axis level shall not be subject to the ceilings set out in paragraph 3 and in Annex III. However, it shall be fixed so as to ensure compliance with the maximum amount of contribution from the Funds and the maximum contribution rate per Fund fixed at the level of the operational programme.

-For operational programmes co-financed jointly: (a) by the ERDF and the Cohesion Fund; or (b) by the additional allocation for the outermost regions provided for in Annex II, the ERDF and/or the Cohesion Fund, the decision adopting the Operational Programme shall fix the maximum rate and the maximum amount of the contribution for each Fund and allocation separately.

-The Commission’s decision adopting an operational programme shall fix the maximum rate and the maximum amount of the contribution from the Fund for each operational programme and for each priority axis. The decision shall show separately the appropriations for regions receiving transitional support.

As regards the eligible expenditure, in the case of revenue-generating projects which are not subject to State Aid rules (Article 55 Regulation 1083/2006), the current value of the net revenue from the investment must be deducted from the current value of the investment in order to calculate the eligible expenditure (see box below).

FOCUS: REVENUE-GENERATING PROJECTS

General Regulation (Article 55 1083/2006). Eligible expenditure on revenue-generating projects shall not exceed the current value of the investment cost less the current value of the net revenue from the investment over a specific reference period for: (a) investments in infrastructure; or (b) other projects where it is possible to objectively estimate the revenues in advance. Where not all the investment cost is eligible for co-financing, the net revenue shall be allocated pro rata to the eligible and non-eligible parts of the investment cost. In the calculation, the managing authority shall take account of the reference period appropriate to the category of investment concerned, the category of project, the profitability normally expected of the category of investment concerned, the application of the polluter-pays principle, and, if appropriate, considerations of equity linked to the relative prosperity of the Member State concerned.

EC Working Document No 4: in contrast to the 2000-2006 period, the eligible expenditure and not the co-financing rate is modulated in order to relate the contribution from the Funds to the revenues generated by the project. ( … ) It should be noted that Article 55 applies to all projects and not just to major projects. ( … ) Article 55 applies to investment operations which generate net revenues through charges borne directly by users. It does not apply to the following cases:

-Projects that do not generate revenues (e.g. roads without tolls);

-Projects whose revenues do not fully cover the operating costs (e.g. some railways);

-Projects subject to State-aid rules – Article 55(6).

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Each section below will take on a strictly operational perspective and each issue will be reviewed both from the standpoint of the investment proposer and from that of the project examiner for the cofinancing decision.

The chapter briefly mentions other evaluation approaches, such as cost-effectiveness analysis, multicriteria analysis and economic impact assessment. These are to be seen as complements to CBA, not as substitutes.

2.1Context analysis and project objectives

2.1.1Socio-economic context

The first step of the project appraisal aims to understand the social, economic and institutional context in which the project will be implemented. In fact, the possibility of achieving credible forecasts of benefits and costs often relies on the accuracy in the assessment of the macro-economic and social conditions of the region. In this regard, an obvious recommendation is to check that the assumptions made, for instance on GDP or demographic growth, are consistent with data provided in the corresponding Operational Programme.

An in-depth analysis of the socio-economic context is also instrumental for carrying out the demand analysis, which consists of the demand forecast for the goods/services the project will generate. The forecast for demand is a key indicator for the estimation of the future revenues, if any, of the project and consequently its financial performance (for a more detailed discussion on demand analysis, see Annex A). The forecast demand is crucial for non-revenue generating projects as well and, in general, the economic performance of a project depends upon the features and dynamics of its regional environment.

Particular attention should be paid at this stage to identifying whether the project under consideration belongs to networks at national or international level. This is particularly the case for transport and energy infrastructures, which may consist of interdependent projects. When projects belong to networks, their demand, and consequently their financial and economic performance, is highly influenced by issues of mutual dependency (projects might compete with each other or be complementary) and accessibility (possibility of reaching the facility easily). Thus, the boundaries of the relevant context of the analysis, e.g. local, national or transnational, should be identified on a case-by-case basis.

2.1.2Definition of project objectives

A clear statement of the project’s objectives is an essential step in order to understand if the investment has social value. The broad question any investment appraisal should answer is ‘what are the net benefits that can be attained by the project in its socio-economic environment?’

The benefits considered should not be just physical indicators (km of roads) but socio-economic variables that are quantitatively measurable. The project objectives should be logically connected to the investment and consistent with the policy or programme priorities.

While a clear statement of the socio-economic objectives is necessary to forecast the impact of the project, it may often be difficult to predict all the impacts of a given project. Welfare changes have a number of components and there may be data constraints. For example, regional data do not usually allow us to make reliable estimates of the overall impact of individual projects on trade with other regions; indirect employment effects are difficult to quantify; competitiveness may depend on foreign trade conditions, exchange rates, changes in relative prices. For many of these macroeconomic variables it may be too expensive to conduct project-specific analysis.

The approach of the present Guide is to focus on social cost-benefit analysis. CBA aims to structure the expectations of the project promoter in a rigorous way. It cannot answer all questions about future impacts, but it focuses on a set of microeconomic variables as a shortcut to estimate the overall economic impact of the project. The key indicator for the net socio-economic benefit of the project is simply its economic net present value, as described below. The impacts on employment, the environment, and other

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