Methodology for CBA preparation SOP Environment

Transcription

1 Methodology for CBA preparation SOP Environment Programming Meeting for water and wastewater projects in the period Mamaia, th July 2008 Massimo Marra JASPERS Regional Office for Romania and Bulgaria

2 JASPERS activities Joint Assistance to Support Projects in European Regions Advisory services to MAs and Final Beneficiaries EC/EIB/EBRD Objectives: increase the capacity of beneficiary countries, support them to make best use of EU funding, improve/speed up fund absorption JASPERS concentrates on Major Projects : - Transport and other sectors 50 M > capital cost - Environment 25 M > capital cost JASPERS priorities are : - large projects supported by Cohesion Fund and ERDF - other Cohesion Fund projects - other ERDF projects Horizontal Issues covering more than one country/sector (as CBA) 2

3 What does JASPERS offer? Assistance from early stages of project through to the decision to grant assistance Preparatory work required to deliver a mature project e.g. Advice on conceptual development and project structuring Advice on project preparation e.g. cost-benefit analysis, financial analysis, environmental issues, procurement planning. Review of documentation: feasibility studies, technical design, tender documents. Advice on compliance with EU law (environmental, competition and others) and conformity with EU policies 3

4 Rationale for JASPERS support on CBA Article 40 Council Regulation 1083/ Major Projects: MS to provide the Commission with ( ) a cost-benefit analysis, including a risk assessment and the foreseeable impact on the sector concerned and on the socio-economic situation of the MS EC Guidance - WD 4: clarifications for period WD 4: MS encouraged to develop own CBA framework - EC CBA GUIDE revised version published in June 2008 ULTIMATE GOALS Ensure soundness and consistency across project proposals Facilitate and speed up approval process (both RO and EC) 4

5 National CBA Guidelines Being developed jointly by Romanian Authorities (MESD MEF) and JASPERS National CBA Guidelines to be consistent with EC and Romanian requirements (HG 28/2008) Valid for ALL projects co-financed by Structural Funds General CBA Guidance document Rationale and objectives What is a CBA and why/when perform it (small projects) General methodological Approach (discount rates, reference period, etc.) Macroeconomic assumptions and data to be used Valid for all sectors To be formally embedded in national approval process Sectoral CBA Guidelines for Water, Transport, SW and Energy Strategic approach and definition of objectives Project identification and demand assessment Feasibility and Option Analysis Financial Projections Economic Analysis Risk and Sensitivity analysis Conclusions and presentation of results 5

6 General CBA Structure STRUCTURE OF CBA 1. Option and Feasibility Analysis How can an objective be achieved? Are the selected options feasible? CBA main elements 2. Financial Analysis Does the project need cofinancing? How much money is necessary to implement the option selected? 3. Economic Analysis Is the project worth cofinancing? What is the impact on the area where the project is going to be implemented? 4. Risk Analysis Which are the most likely financial and economic results? 6

7 Sequence of CBA Water/WW projects Strategic approach and definition of objectives Project identification and Option Analysis Financial Projections Economic Analysis Risk and Sensitivity analysis Conclusions and presentation of results 7

8 Strategic approach Main strategic drivers Compliance with EC Directives Improvement of water resource management (Regionalisation) Expected impact on regional development Project must be consistent with National policy, NSRF and SOP priority areas Project to support the achievement of SOP objectives 8

9 Definition of Project Objectives Objective 1 Objective 2 Objective 3 Objective 4 Objective 5 SOP Objectives Priority Axis 1 Provide adequate water and sewerage services, at accessible tariffs Provide adequate drinking water quality in all urban agglomerations Improve the purity of watercourses Improve of the level of WWTP sludge management Create innovative and efficient water management structures Example Project Objectives Specific Objective Values without project Expected value after completion 1. Increase in coverage of water and sewerage services 2. Improvement of quality of drinking water to meet EU standards (98/83/EC) 3. Increase of coverage of wastewater treatment to meet Urban WWT Directive 4. Establish efficient operators and associated structures (ROCs, IDAs) % of population connected to water supply and sewerage systems % of population with drinking water meeting EU standards Number of agglomerations with adequate wastewater treatment Number of ROC/IDA with adequate set up and capacity to manage water/ww systems % of population connected to water supply and sewerage systems % of population with drinking water meeting EU standards Number of agglomerations with adequate wastewater treatment Number of ROC/IDA with adequate set up and capacity to manage water/ww systems 9

10 Option Analysis and Selection Assessment of existing infrastructures Identification of problems (How/Why objectives are not met) Project Objectives Identification of options (What can we do to meet objectives) First screening and shortlist Multicriteria analysis National policy and SOP Objectives Comparison of retained options (technical and economic) Selection of preferred option 10

11 Financial Analysis To establish the level of financial self-sufficiency, financial performance and sustainability of the project Projections of financial flows of the project for without (baseline) and with project scenarios: Total planned investment (including residual value) Revenues (demand evolution and tariff increases) Operating and maintenance costs (also estimate cost savings) In local currency and then translation into euros Reference period typically 30 years Financial discount rate set at 5% Project impact = Difference between with and without scenario 11

12 Establishing scenarios With Project Without project Macroeconomic data Population dynamics Service levels Connections and metering rate Shall be valid for all projects (NSRF) Same in both scenarios Water consumption (domestic&not) Physical losses & infiltration O&M costs Financial performance EBITDA & EBIT Cash flows and reserves Debt service coverage (DSCR) Tariff development and Affordability Tariff increase steps Affordability constraints Polluter pays Principle!! Equity considerations!! 12

13 Project profitability indicators Incremental cash flows used to determine financial performance indicators before and after EU grant before FNPV/C needs to be <0 (or FRR/C< 5%) If revenue generating: Funding Gap calculation Project assessment with requested EU grant: financial package completed with cofinancing & loans ensure FRR/K (return on national capital) not excessive Financial sustainability requires cumulative cash flow positive for all years ideally at project level, surely needed at operator level 13

14 Funding Gap (1) Only for revenue generating projects (as per Art. 55 of Regulation 1083/2006 If project revenues do not cover O&M costs, then the project is not revenue-generating Calculation based on incremental revenues and costs, and normally using constant euros Depreciation and contingencies not to be included See details in Working Document 4: Guidance on the Methodology for Carrying Out Cost-Benefit Analysis, prepared by the Commission in August

15 Funding Gap (2) DIC: Discounted Investment cost Funding gap R% Gross self-financing margin (100-R)% DNR: Discounted Net Revenue* Funding gap The funding gap is the part of the investment cost which is not going to be paid back by the project net revenue. The funding-gap rate is the complementary to 100% of the gross self-financing margin. Funding gap rate: R = DIC DNR DIC * Discounted net revenue = + discounted revenue discounted operating costs + discounted residual value 15

16 Factors to consider in establishing FG Article 55(2): 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 ( ) 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. Polluter pays principle: Scenario for tariffs should reflect the correct application of the Polluter Pays Principle. For Water: WFD 2000/60/EC - Article 9. Member States shall take account of the principle of recovery of the costs of water services, including environmental and resource costs, ( ) in accordance in particular with the polluter pays principle. Affordability (equity): WFD 2000/60/EC - Article 9. Member States may in so doing have regard to the social, environmental and economic effects of the recovery [ ]". Practically, total charges paid by the users for water and wastewater services should not exceed certain commonly accepted thresholds. 16

17 Tariff setting and Affordability Rationale for Funding Gap Affordability Limit Total cost to be covered by tariffs (Polluter Pays) MESD policy on Affordability: 4% of income for the poorest 10% of per capita 75 litres/day. Higher tariffs may be required if financial sustainability of ROC is endangered. In these cases, special measures to reduce the financial burden on the poorest households 17

18 Economic Analysis To establish if the project has a positive net contribution to society (ENPV>0, ERR> social discount, B/C ratio positive) Similarly to financial analysis comparisons between benefits and costs, but: Costs measured in term of opportunity foregone Benefits reflects both saving in costs and external benefits not valued by financial prices Social discount rate set at 5,5% Incremental impact on society = Difference between with and without economic scenario 18

19 Economic Analysis Identifying benefits Benefits from improved access to drinking water Benefits from improved quality of bathing and surface waters (use and non use values) Resource costs savings Other benefits difficult to monetise Adjusting costs Fiscal corrections Converting financial prices into economic prices Add negative externalities 19

20 Project benefits and Negative Externalities Project Benefits Type Base for calculation Monetary value Comments Access to drinking water Nr. Of households in project service area 148 Euro/household/year (2008 value) Values for following years of projection to be increased by real GDP growth Improvement of water bodies (use value) Nr. Of people living in the project service area 20.4 Euro/person/year (2008 value) Values for following years of projection to be increased by real GDP growth Improvement of water bodies (non use value) Nr. Of households in project service area Euro/household/year/KM river See Annex Cost savings to customers private well Nr. Of households newly connected 315 Euro/household/year Cost savings to customers sewage disposal Nr. Of households newly connected 348 Euro/household/year Cost savings to operator water abstraction Incremental water savings (in m 3 ) Water abstraction fee (Apele Romane) To be detailed in technical FS Cost savings to operator energy consumption CO 2 emission savings (in tonnes) From 25 Euro/tonne in 2010 to 45 Euro/tonne in 2030 To be detailed in technical FS. Negative Externalities Type Base for calculation Monetary value Comments Increase in CO 2 emission sludge digestion CO 2 emission (in tonnes) From 25 Euro/tonne in 2010 to 45 Euro/tonne in 2030 To be detailed in technical FS. Increase in CO 2 emission sludge transportation CO 2 emission (in tonnes) From 25 Euro/tonne in 2010 to 45 Euro/tonne in 2030 To be detailed in technical FS. 20

21 Adjusting Costs Economic costs (conversion factors): 21

22 Sensitivity and Risk Analysis (1) Purpose is to assess the robustness of the project financial and economic profitability indicators (FRR/C, FNPV/C, ERR, ENPV) First, identification of key variables and their impact in terms of changes in the profitability indicators Second, calculate switching values for those variables for which a variation of 1% results in a variation of more than 5% in the profitability indicators 22

23 Sensitivity and Risk Analysis (2) Finally, estimate probability distributions for the profitability indicators based on the probability distribution of all the key variables (Monte Carlo) 23

24 CBA Conclusions Standard format for presenting CBA results (Application Form info requirements) Does the project needs co-financing?? Financial analysis FNPV/C <0; Revenue Generating Financial sustainability ensured Is the project worth co-financing?? Economic analysis results ENPV, ERR and B/C ratio Funding Gap Other benefits/costs not monetised needs to be listed 24

25 THANK YOU! 25