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The main changes in CBA for major projects 2014-2020
Witold WillakHead of Sector, Major Projects,
Unit G1 for Smart and Sustainable growth, DG Regional and Urban Policy, European
Commission
• The most objective and rigorous tool to assess the quality of projects: not only for the COM but
also for the MA vis-à-vis beneficiaries
• Gives indication on whether the project needs EU financing and whether it is financially
sustainable in short and long-term
• Allows for measuring quantifiable impact of the project on its target area by monetizing mainly
direct effects;
• It should become real tool in managing the projects and in the selection process ultimately
comparing one to another;
• Why CBA is required for major projects 2014-2020
• For the first time – the main principles of the CBA methodology are enshrined in
Commission Implementing Regulation (EU) no 2015/207 and in Delegated Regulation
no 480/2014 (calculation of the discounted net revenues);
• Strict application of basic rules in order to assure more rigour and homogeneity in
application of the CBA;
• Possibility of the MS to adjust basic parameters via national CBA guidance – justified
and agreed with the Commission;
• Methodology for Cost Benefit Analysis in the period 2014-2020
IMPLEMENTING REGULATION 2015/207
1 GENERAL PRINCIPLES Objectives of CBA (assess whether the project is worth co-financing and needs co-financing)
Methodological principles (e.g. incremental method)
Elements required in CBA
2 ELEMENTS OF CBA1.Presentation of the socio-economic context;
2.Definition of objectives;
3.Identification of the project;
4.Results of feasibility studies with demand and option analysis;
5.Financial analysis;
6.Economic analysis;
7.Risk assessment.
PROJECT'S CONTEXT, OBJECTIVES, IDENTIFICATION OF SCOPE AND TECHNICAL FEASIBILITY & ENVIRONMENTAL SUSTAINABILITY
• Timing of CBA – should be carried out as soon as possible in the project preparation
phase;
• Context and project objectives should be more linked to the needs in line with OP's
perspective;
• Demand analysis –critical issue for preparing CBA – more attention to current
infrastructure endowment and other planned /expected projects;
• Option analysis – mainly multi-criteria analysis for selecting strategic options, and
quantitative method for selecting solution at technological level (least cost solution
and/or simplified CBA);
Financial analysis – main financial indicators – no major changes
Financial analysis – new elements
Requirements for specific values of financial profitability indicators in
secondary legislation: FRR(C), FRR(K), FNPV(C), FNPV(K);
Reduced FDR from 5% (in 2007-13) to 4 % (national approaches possible if
justified)
More emphasis on ensuring financial viability (sustainability) in the project
implementation and operation; in case of pre-existing infrastructure also in
relation to beneficiary (not only project)
More strict line on highly profitable projects;
Calculation of FNPV (Kp) for private equity to avoid overcompensation;
FINANCIAL ANALYSIS
Recommendation for use of constant prices
Obligatory reference periods by sector (see: next slide)
The financial analysis of major projects shall be carried out taking into account the rules
set out in section III (Method for calculating the discounted net revenue of operations
generating net revenue) of Commission Delegated Regulation (EU) No 480/2014
(Determination of costs, revenues and residual value, in compliance with polluter-pays
principle, full-cost recovery, affordability),
Note: Financial analysis is required for major project, irrelevantly of the method selected
by the MS in application of Article 61 (operations generating net revenue after
completion);
ANNEX I of Delegated Regulation 480/2014- Reference periods
Sector Reference period (years)
Railways 30Water supply/sanitation 30
Roads 25-30Waste management 25-30Ports and airports 25Urban transport 25-30Energy 15-25Research & innovation 15-25
Broadband 15-20Business infrastructure 10-15
Other sectors 10-15
Calculation of expected net revenues and EU grant calculations
funding gap approach maintained but simplified via choice of three methods in Article
61:
calculation of the discounted net revenues per project;
Flat rates net revenue percentage for a sector/subsector (recently added RDI 20%)
Decreased co-financing rate for all operations at priority axis level;
transport – tolling policies - trade-off between revenues and benefits for the society;
water systems – more rigour due to ex ante conditionality 6.1;
How to approach State Aid projects? (possibility of applying Article 61 at
national level);
Economic analysis
Key steps of economic analysis:
Fiscal corrections
From market to shadow prices (simplification: if conversion factors not available at national level
and in absence of significant market distortion CF=1)
Evaluation of non-market impacts
Social discount rate of 5% for cohesion MS and 3% for others; different SDR if justified
Calculation of the economic performance indicators (ENPV>0, ERR>SDR and B/C>1)
The main economic benefits by sector to be considered
Simplified economic analysis in special cases (e.g. projects driven by compliance) – cost-
effectiveness analysis with qualitative assessment of main economic benefits
• According to Annex III to the Implementing Regulation on application form and CBA methodology, for the programming period 2014-2020 the Commission recommends that for the social discount rate 5 % is used for major projects in Cohesion countries and 3 % for the other Member States.
• Member States may establish a benchmark for the SDR which is different from 5% or 3 %, on the condition that:
i) justification is provided for this reference on the basis of an economic growth forecast and other parameters;
ii) their consistent application is ensured across similar projects in the same country, region or sector.
• The Commission encourages MSs to provide their own benchmarks for the SDR in their guidance documents, possibly at the start of the operational programmes and then to apply it consistently in project appraisal at national level.
SOCIAL DISCOUNT RATE: THE EUROPEAN COMMISSION BENCHMARK
• In certain limited cases where the benefits of a major project are very difficult or impossible to quantify and monetise, but where costs can be predicted with reasonable confidence, notably for major projects driven by necessity to ensure compliance with EU legislation, a cost-effectiveness analysis (CEA) can be performed instead of a CBA.
• In such cases the appraisal shall focus on verifying that the project is the most efficient solution for the society to supply a given, necessary service at the pre-defined conditions set out. In addition, qualitative description of main economic benefits should be provided. CEA is carried out by calculating the cost per unit of ‘non monetised’ benefit and is required to quantify benefits but not to attach a monetary price or economic value to the benefits.
SIMPLIFIED ECONOMIC ANALYSIS
Main economic benefits by sector (examples from Implementing Regulation 2015/207)
Sector/Subsector
Economic benefits
Wastemanagement
(i) reduction of health and environmental hazards (reduced contamination of air,water, soils)
(ii) reduction of landfill space/costs (for waste treatment facilities)
(iii) recovery of materials, energy and production of compost (avoided cost ofalternative production/generation, incl. externalities)
(iv) reduction of GHG emissions (i.e. CO2, CH4)
Roads, Railways,Public Transport
(i) reduction in generalised costs (for movement of goods / people):
- time savings (most important)
- vehicle operating costs savings
(ii) accident savings
(iii) reduction of GHG emissions
(iv) reduction of non-GHG emissions (i.e. local air pollution impacts)
(v) reduction of noise emissions (sometimes for urban projects)
RISK ASSESSMENT
Sensitivity analysis – similar to 2007-2013
Qualitative risk analysis including measures for risk mitigation and risk matrix
Optional: probabilistic risk analysis (required only if residual risk exposure is still
significant)
The minimum risks to be taken into account (from Implementing Regulation)
National risk registers to facilitate risk assessments of beneficiaries
Main risks per sector (example from Implementing Regulation 2015/207)
Sector / Subsector Specific risksEnergy Demand risks:
(i) Demand shortfalls
(ii) Evolution of prices of different competing fuels
Design risks:
(iii) Inadequate design cost estimates
Procurement risks:
(iv) Procedural delays
Construction risks:
(v) Project cost overruns
Operational risks:
(vi) Maintenance and repair costs higher than predicted, accumulation of technical breakdowns,for example those caused by climate change impacts
Regulatory risks:
(vii) Changes of environmental requirements, economic instruments (i.e. RES support schemes,EU ETS design)
Other risks:
(viii) Public opposition83
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