BRESAT Naxos Cost Benefit Analysis

Transcription

1 BRESAT Naxos Cost Benefit Analysis Dr Steve Sheppard A presentation by

2 Scope of Presentation How is the economic benefit of broadband justified in ERDF applications? What is the process? A cost-benefit template?

3 How is the economic benefit of broadband justified in ERDF applications?

4 Need for Cost-Benefit Analysis (CBA) To show the Return-on-Investment (RoI) of investment of public funds = Demonstrating value for money 5:1, 10:1, 30:1 = Allowing policy makers/funders to compare broadband interventions against investment in other policy areas = Enabling comparison between different options for broadband intervention

5 In short.its step 5 in the appraisal

6 How is the economic benefit of broadband justified in ERDF applications? EU project and programme appraisal guidance = (guide to cost benefit analysis of investment projects July 2008) Sequential process = 1. Context and project objectives = 2. Project definition = 3. Feasibility and option appraisal = 4. Financial analysis o Stop (if FNPV>0) i.e. project does not require financial support o Go (if FNPV>0) i.e. project does require financial support = 5. Economic analysis (cost benefit analysis) o Stop (if ENPV<0) i.e. society is better off without the project o Go (if ENPV>0) i.e. society is better off with the project

7 What is the cost benefit process?

8 What does a cost-benefit analysis look like? Typically a cash-flow spreadsheet = Time across the top 10, 15, 20 years = Monetised beneficiary costs + benefits down the side = Totalled at the bottom for each year = Annual balances are added up using the Net Present Value function 3.5% (typically) = This gives the net additional benefits of the project = This is divided by the investment to calculate RoI/VfM

9 Cost benefit process Confirm project geography and CBA geographies Confirm what speed increase is being delivered Confirm deployment timetable and take-up assumptions Model Benefits = Identify beneficiaries SMEs, households, public services = Identify types of benefit GVA income/cost saving carbon = Estimate quantity of benefit (net additional) - monetised = Estimate timing of benefit (deployment and take-up profiles) Model Costs (not to be confused with investment cost) = Identify types of cost to beneficiaries instillation/ tariff = Quantify based on deployment/ take up profiles Calculate 10-year NPV@3.5%/5% of balance

10 When do you do the cost benefit In practice, you need to do = Several high level cost benefits to help inform step 3 option appraisal = Then a fully detailed cost benefit at step 5 the economic appraisal

11 CBA required at 2-points in the appraisal process EU project and programme appraisal guidance = (guide to cost benefit analysis of investment projects July 2008) Sequential process = 1. Context and project objectives = 2. Project definition = 3. Feasibility and option appraisal.high level CBA = 4. Financial analysis o Stop (if FNPV>0) i.e. project does not require financial support o Go (if FNPV>0) i.e. project does require financial support = 5. Economic analysis..full CBSA o Stop (if ENPV<0) i.e. society is better off without the project o Go (if ENPV>0) i.e. society is better off with the project

12 Cost benefit template.

13 A 10-year NPV looks like this

14 Cost Benefit Template Can be done at different levels of granularity = Start with high level then go to intermediate level then go as granular as makes sense given nature of the project Metrics = Mix of top-down and bottom-up depending on depth Evidence = Public stats, literature, from other schemes, local (survey) Not all information will be available = Some gaps will need to be filled with estimates/ working metrics traffic light colour coding

15 CBA 4 levels of analysis, from top-down snap-shot to fully bottom-up analysis

16 CBA Levels of Detail Using SME calculation as an example Top Down Bottom Up Snap Shot Single calculation N/a High Level Calculation over 10 years taking rates of deployment and take-up into account Medium Level Calculation over 10 years taking industrial structure into account N/a Informed by local surveys Detailed Level Sector by sector build up, estimating all types of benefit

17 CBA Levels of Detail Using SME calculation as an example Top Down Bottom Up Snap Shot Total SME GVA * % uplift N/a High Level 10-yr NPV ((SME GVA * % uplift) * deployment timing * take-up scenarios Note (qualitatively) wide SME impacts Medium Level + 1 (or 2) digit sectoral breakdown reflecting (a) diff GVAperFTE (b) diff propensity to adopt/exploit High level calcs for wider SME impacts Detailed Level Only as cross check for bottom up N/a Local surveys No/size/sector SMEs Nearby deployments take-up Nearby deployments adoption/ exploitation Sector by sector build up

18 Benefits

19 Benefits Step 1 identify types of beneficiary in the deployment area = Business, households, public services, environment Step 2 identify the different ways in which each will benefit from = (i) getting broadband for the first time, or (ii) from getting faster broadband Step 3 work out how to convert all benefits to single standard economic metric = To GVA (gross value added or its equivalent)

20 Types of benefits and beneficiaries Economic = Firms small, medium (and large) = Use of ICTs boosts productivity, innovation and enterprise = Digital connectivity is an increasingly essential component of ICTs Social/ Community = Education = Access to jobs = Access to health and other services Public Sector = Service delivery cost savings via online transactions = Schools = Health

21 Typical benefit metrics Economic SMEs = Net additional GVA = Equivalent jobs Social households = Cost savings = Increased lifetime earnings Public services = Cost savings = Increased quality relative value of services

22 Benefits more detailed breakdown

23 Types of SME benefit Existing SMEs in deployment area = IT Time saving large file transfer, back-up, all web-activities = IT Cost saving VoIP, back-up = Non IT Time saving all coms (mail/post) + travel to meetings = Non IT Cost savings travel to meetings, more efficient procurement (online=lower costs) = Better recruitment = Better training = Better tie in to existing customers, reach new customers/markets = New products/ services = Expansion (multi-site, multi-country) easier, cheaper

24 Types of SME benefit New SMEs in deployment area = Existing SME sets up additional business = Residents set up new business because of broadband (double counting with household impact) = Inward investment o External entrepreneur sets up new business in the area o External existing business (i) relocates to, (ii) expands into deployment area o External indirect inward investment (invests in existing SME in deployment area)

25 Types of Household Benefit Households as start ups = Already work in or run business but start a broadband based activity also = Economically inactive (including disabled) start a broadband enabled business or work from home via broadband Households as labour force = New entrant pipeline proficiency increased educational attainment because of broadband = Transition change/find a job quicker/better fit because of broadband = Homeworking improved efficiency, less time wasted on travel, carbon savings Households as consumers = Savings and/or increased unit consumption via shopping online = Spending in wider catchment (leakage) i.e.. Amazon = Spending on new things digital content, digital devices, digital services Households as service users = Health health information on line improves health and reduces visits, saving time = Local services transactions online save time, improved organisation of services Housing as tourist/visitor lets = Increased lets/ higher rents = Shift in use of existing stock New housing development = Encourage/enable more (Right Move)

26 Types of public service benefit Administration = Transactions on line saves time and travel cost = Some services delivered online, better organisation Schools/ colleges/ training providers = Increased educational attainment online teaching resources, students online in school and at home, better organisation Health = Health information on line improves health and reduces visits saving time and travel cost = Some services online/ monitoring online Social services/day care = Cheaper/better organisation = Some services/monitoring online

27 Benefits included in Level2 CBA Construction Construction (equiv GVA in local area) SMEs SMEs GVA uplift - due to getting broadband for the first time SMEs GVA uplift - due to faster broadband Households Household savings and increased income due to getting broadband for the first time Household savings and increased income due to getting faster broadband Public service Public service cost savings Environmental Environmental - costed carbon reductions Potential transformational Existing SME exponential growth SME inward investment Additional households Environmental (value of carbon saving)

28 10-Year NPV - Benefits Yrs Total Construction (equiv GVA in local area) Construction (equiv GVA - in local area) SMEs - increased GVA SMEs GVA uplift - due to getting broadband for - 277, , , , ,110,900 the first time SMEs GVA uplift - due to faster broadband - 81, ,883 81,506 61, ,025 Households Household savings and increased income due to - 95, ,603 95,683 71, ,730 getting broadband for the first time Household savings and increased income due to getting faster broadband - 2,162 2,703 2,162 1, ,649 Public service cost savings Public service cost savings - 70,438 88,048 70,438 52, ,753 Environmental Environmental - costed - carbon reductions

29 Modeling the impacts of faster broadband

30 Modelling impact of satellite broadband Three factors to consider Some firms/ households will be getting broadband for the first time Some will already have broadband and will be getting faster broadband (super fast) When the next generation of satellites are launched, some will be able to get ultrafast

31 Costs

32 Costs Costs are = Costs to the beneficiaries = Not to be confused with cost of the investment, or size of the grant Costs for a satellite broadband project will be = Instillation cost per premises = Tariff..30pcm =.but we need to deduct what will be paid for anyway as we only need to take account of additional costs Its not clear [yet] what they will be paying (anyway), for 100 Mbps from a terrestrial network = There may be a similar instillation cost, or more? = The tariff may not be that much less?

33 Costs - example

34 Key concepts

35 Key concept: Net Additionality Gross impacts = Allow for deadweight (would have happened anyway without the project) = Allow for displacement (benefit taken from another area, so its not additional, but displaced) = Allow for leakage (benefit occurs outside the impact area) Net impact = Allow for multiplier Total Net impact

36 Key concept: Impact Area Deployment area and impact areas not necessarily the same thing Usual to have two impact areas = Project area = Wider area functional economic area Net additionality varies between these = Its less, sometimes a lot less for wider area

37 Key concept: sensitivity and scenario analysis This is not an exact science Relies on a number of assumptions Some data also subject to error Therefore important to undertake sensitivity analysis, to identify key variables.then to undertake scenario analysis, testing the key variables.producing a 3 * 3 results matrix

38 Key concept: Net Present Value Cost benefit analysis is typically over 10 years, but may be 20 years (i.e.. the economic life of the project) Future values (costs and benefits) need to be expressed in today s values, so they can be summed and presented as a single result The most common method used to do this is the Net Present Value function (NPV) which discounts future values at a chosen discount rate (typically 3.5% for developed regions and 5% for less developed regions)

39 Critical evidence Its still difficult to be certain how much impact broadband has.very difficult indeed

40 Double Counting Need to avoid double counting benefits/ impacts = Highest risk when using both top down macro impact metrics and bottom up beneficiary metrics.because its not always clear what has been included in the various top-down macro impact metrics figures