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    Cost Benefit Analysis

    EBA 6113 Economic Analysis and Policy

    Prepared By:Norshamsiah Samsudin 14030214AsmaulHusna Hosen 14030047Marjan Samooty 14030027

    Prepared For:Dr Mohammad Affendy Arip

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    Project Background Under the management of MalaysiaAirports Holdings Bhd (MAHB) together

    with UEMC-BINA PURI Joint Venturecontractors MAHB is a public listed company

    controlled by state investment managerKhazanah Nasional

    The Main Terminal Building & Satellite

    Building Package was actually tendered asa Low Cost Carrier Terminal Buildings(LCCT)

    Initial date of Commencement was 16August 2010 and Date for Completion wasSeptember 2011.

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    The Changing Costs for KLIA2

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    The Layout of KLIA2

    As the many had congratulated for the opening last 2ndMay 2014,above shown is the layout of KLIA2

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    Green building with Leadership inEnergy & Environmental Design(LEED) certified (won Gold Award)

    9 storeys building with 3 levels :Level 1- Transportation hubLevel 2- ArrivalLevel 3- Departure

    All levels also include retail stores

    KLIA2 Aerobridge

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    KLIA2 is designed to be a retail airport.

    The full house level of convenience with aerobridge, public transporthub with a direct train to Kuala Lumpur, an airside transit hotel,public mall and many convenient facilities and services

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    ITEMS KLIA LCCT KLIA2

    Capacity

    (passengers per

    year)

    25 million 15 million 45 million

    Terminal size 479,404 sqm 64,067 sqm 257,000 sqm

    Retail space 19,425 sqm 8,898 sqm 32,000 (estimated)

    Car park (lots)

    6,208 (covered lots)

    5,509 (uncovered

    lots)

    3,000 (uncovered lots) 6,000

    KLIA2 Parking

    Cost about RM10 BillionRM300 Million

    (terminal cost only)

    RM3.6 - 4.0 Billion

    Runway accessRunway 1 and 2 at

    KLIA

    Runway 1 and 2 at

    KLIA

    4Km runway 3 with

    a 2.2Km separation

    from Runway 2

    Passenger

    comfort

    (capacity / floor

    space)

    52 pax per sqm 234 pax per sqm 124 pax per sqm

    Comparisons between KLIA, LCCT and KLIA2

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    Malaysia Airlines : Cost Benefit Analysis

    Cost benefit analysis (CBA) is a way of

    measuring costs and benefits of this projectin order to allow one to estimate the netgain to society and individual societymembers.

    CBA has two purposes: To determine if it is a sound investment/decision (justification/feasibility), To provide a basis for comparing projects. It involves comparing the total

    expected cost of each option against the total expected benefits, to seewhether the benefits outweigh the costs, and by how much.

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    Below shown the chronology of changestowards KLIA2 :

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    So, from above table, the failures of thecomponents that lead to the increase in cost

    were:

    Larger terminal building: RM420 million (150,000 sq m to 257,000 sq m) More aircraft stands : RM160 million (50 semi contact stands to 68 gates and 8

    remote stands) Larger runway: RM180 million (2.5km long, 45m width to 3.96 km long, 60m

    width) Increased earthworks: RM670 million (4.85 million sq m to 11.19 million sq m) Aerobridges: RM120 million (80 aerobridges) Upgraded air traffic control tower: RM130 million (77m height to 93m height) Upgraded public infrastructure: RM260 million (8km with 1.5km elevated to

    15km with 5.4 km elevated road.

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    Net Present Value (NPV)

    PV is the amountof cash today that is equivalent in value to a payment, orto a stream of payments, to be received in the future(Emery and Finnerty,1997, p. G14) and NPV is the PV ofthe expected future cash flows minus thecost(Emery and Finnerty, 1997, p. G12). NPV formula:

    Accept project if NPV > 0

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    NPV for KLIA2 :2014 - 2034

    NPV are all positives. Thus, the income gained is expected tomore than the cost.

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    Raising forecasts and target price

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    Internal rate of return (IRR) is the discount

    rate at which the net present value (that is, thevalue of all future cash flows, in excess of theoriginal investment, expressed in todaysdollars) of an investment equals zero (Argenti,1994, p. 228). Since it is an interest rate, theanswer is a percentage. The IRR = r in thisformula:

    INTERNAL RATE OF RETURN

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    INTERNAL RATE OF RETURN

    The additional cost will reduce the project IRR by 0.9-ppt to 10.3%,from 11.2% per the previous estimate. The equity IRR will remain atimpressive levels of >25% due to the high gearing nature of thisproject. KLIA2 will be able to self finance itself, generate freecashflows and have an estimated payback period of 12 years. This isstill an encouraging return rate for a project of this size.

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    Payback period

    Payback period (PP) is a method of analyzing investmentopportunities that determines how long it will take the cashinflows expected from an investment to repay (payback) theinitial outlay (Pringle and Harris, 1984, p. 289). Onecalculates payback period by using this:

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    As a rule of thumb, a debt service coverage ratio of 2x is consideredcomfortable and above 3x is very healthy, with the ability to pay

    dividends comfortably.Looking at the graph below, should the project cost escalate toMYR4.5b-5.0b, the debt service coverage ratio will only exceed 3x afterfive years. However, the ratio is below 2x in 2014-15, which implies thatMAHB may not be able to pay dividends during those years.

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    Earning Forecast

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    Assumptions :

    1. Change in KLIA2 launch date. The revised launch date will reduce the

    capitalized depreciation and capitalized interest cost in FY13 because theimpact will only happen in 2QFY14. This is purely timing issue relating to the

    accounting treatment.

    2. Higher traffic growth assumption of 6.0% p.a..We now impute atraffic growth rate of 6.0% p.a. for 2014-2020. The long-term passenger traffic

    CAGR (19 years) was at 6.2% and the 10-year CAGR was at 7.8% p.a.. 6.0% is

    more reflective of the current growth momentum.

    3. KLIA2 to enjoy Investment Tax Allowance (ITA). MAHB has put in anapplication to the Ministry of Finance for an ITA for KLIA2. This is based on

    other similar companies that have received ITA status, namely Westports,

    Port of Tanjung Pelepas, AirAsia and AirAsia X. The ITA will provide 60%

    additional allowance for its approved investment, which can be used to offset

    against its tax liabilities. We estimate lower taxes of MYR585m-645m

    ranging on project cost of MYR3.9-4.3b, for the entire lifecycle of KLIA2.

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    Cashflow (operations, investing & financing)

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    What is social cost benefit analysis?

    To reflect the real value of a project to society, wemust consider the impact of the project onsociety.

    Thus ,when we evaluate a project from the viewpoint of the society (or economy) as a whole, it iscalled Social Cost Benefit Analysis(SCBA)/Economic Analysis.

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    Core differences between CBA & SCBA

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    Approaches to SCBA

    There are two principal approaches for Social CostBenefit Analysis.

    A. UNIDO Approach, and

    B. L-M Approach.

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    UNIDO ApproachStep 1 : Calculate NPV

    Step 2 : Obtaining the net benefit of the

    project at economic (shadow) pricesDetermine the shadow price of One-shot costs Annual costs Annual benefitsCalculate net-benefit of the project by social point of view

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    UNIDO Approach

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    UNIDO Approach

    The construction of a project such as this new terminal brings the countrymany benefits. Economics benefits :1) Providing job opportunityLocal businesses would benefit from the greater influx of tourists into the

    country.2) Boost tourismTourism revenue from is expected to increase from the current RM53billion in 2009 to RM168 billion by 2020 with the completion of KLIA2project.

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    Conclusion

    Conducting a comprehensive cost benefit analysis of airport

    investment projects may require many resource consuming

    The prominence should be placed on comparability across projects

    with widely differing data availability, in order to ensure consistency

    in decision-making, rather than on the accuracy of the results.

    So, from the cost benefit analysis, we have come to an

    understanding that a hybrid terminal like KLIA2 will bring more

    significance value to the country