4 Meth for C1BA Preparation

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Methodology for CBA preparationSOP Environment

Programming Meeting for water and wastewater projectsin the period 2008-2009

Mamaia, 10-13th July 2008

Massimo Marra

JASPERS Regional Office for Romania and Bulgaria


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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, supportthem to make best use of EU funding, improve/speed up fundabsorption

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)


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What does JASPERS offer?

Assistance from early stages of project through to thedecision 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, procurementplanning.

Review of documentation: feasibility studies, technicaldesign, tender documents.

Advice on compliance with EU law (environmental,competition and others) and conformity with EU policies


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National CBA Guidelines

Being developed jointly by Romanian Authorities (MESD – MEF)and JASPERS

National CBA Guidelines to be consistent with EC and Romanianrequirements (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


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STRUCTURE OF CBASTRUCTURE OF CBASTRUCTURE OF CBASTRUCTURE OF CBA

1. Option and Feasibility Analysis1. Option and Feasibility Analysis1. Option and Feasibility Analysis1. Option and Feasibility AnalysisHow can an objective be achieved? Are the selected optionsfeasible?

2. Financial Analysis2. Financial Analysis2. Financial Analysis2. Financial AnalysisDoes the project need cofinancing?Does the project need cofinancing?Does the project need cofinancing?Does the project need cofinancing? How much money isnecessary to implement the option selected?

3. Economic Analysis3. Economic Analysis3. Economic Analysis3. Economic Analysis

Is the project worth cofinancing?Is the project worth cofinancing?Is the project worth cofinancing?Is the project worth cofinancing? What is the impact on thearea where the project is going to be implemented?

4. Risk Analysis4. Risk Analysis4. Risk Analysis4. Risk AnalysisWhich are the most likely financial and economic results?

CBA mainelementsCBA mainelements

General CBA Structure


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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


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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 SOPobjectives


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Definition of Project Objectives

Objective 1 Provide adequate water and sewerage services, at accessible tariffs

Objective 2 Provide adequate drinking water quality in all urban agglomerations

Objective 3 Improve the purity of watercourses

Objective 4 Improve of the level of WWTP sludge management

Objective 5 Create innovative and efficient water management structures

SOP Objectives – Priority Axis 1

Example Project Objectives

Specific Objective Values without project Expected value after

completion

1. Increase in coverage of waterand sewerage services

% of population connected towater supply and sewerage

systems

% of population connected towater supply and sewerage

systems

2. Improvement of quality of

drinking water to meet EU

standards (98/83/EC)

% of population with drinking

water meeting EU standards

% of population with drinking

water meeting EU standards

3. Increase of coverage ofwastewater treatment to meet

Urban WWT Directive

Number of agglomerations withadequate wastewater treatment

Number of agglomerations withadequate wastewater treatment

4. Establish efficient operators

and associated structures

(ROCs, IDAs)

Number of ROC/IDA with

adequate set up and capacity to

manage water/ww systems

Number of ROC/IDA with

adequate set up and capacity to

manage water/ww systems


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Option Analysis and Selection

Assessment of existinginfrastructures

Identification of problems

(How/Why objectives are not met)

Identification of options(What can we do to meet

objectives)

First screening and shortlistMulticriteria analysis

Comparison of retained options(technical and economic)

Selection ofpreferred option

ProjectObjectives

Nationalpolicy and

SOPObjectives


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Financial Analysis

To establish the level of financial self-sufficiency, financialperformance 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 costsavings)

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 withoutscenario


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Establishing scenarios

With Project Without project

Macroeconomic data Shall be valid for all projects (NSRF)

Population dynamics Same in both scenarios

Service levels

Connections and metering rate

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 Polluter pays Principle!!

Affordability constraints Equity considerations!!


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Project profitability indicators

Incremental cash flows used to determine financialperformance indicators before and after EU grant “before” FNPV/C needs to be


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Only for revenue generating projects (as per Art. 55 ofRegulation 1083/2006

If project revenues do not cover O&M costs, then theproject 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, preparedby the Commission in August 2006

Funding Gap (1)


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Funding gap rate: DIC

DNR DIC R

−

=

Funding

gap

The “funding gap” is the part of the investment cost

which is not going to be paid back by the project netrevenue. The funding-gap rate is the complementaryto 100% of the gross self-financing margin.

* Discounted net revenue = + discounted revenue

– discounted operating costs + discounted residual value

DIC: Discounted Investment cost

DNR: Discounted Net Revenue*

Funding gap

R%

Gross self-financingmargin

(100-R)%

Funding Gap (2)


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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 ofthe 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 servicesshould not exceed certain commonly accepted thresholds.


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Tariff setting and Affordability

MESD policy on Affordability: 4% of income for the poorest 10% of households @ per capita 75 litres/day.

Higher tariffs may be required if financial sustainability of ROC isendangered. In these cases, special measures to reduce the financial

burden on the poorest households

Total cost to

be coveredby tariffs(Polluter

Pays)

Rationalefor

FundingGap

Affordability Limit


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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


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Project benefits and Negative Externalities

Project Benefits

Type Base for calculation Monetary value Comments

Access to drinking water Nr. Of households inproject service area

148 Euro/household/year(2008 value)

Values for following years ofprojection to be increased byreal 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 byreal GDP growth

Improvement of water bodies(non use value)

Nr. Of households inproject service area

0.004 – 0.011

Euro/household/year/KMriver

See Annex

Cost savings to customers –private well

Nr. Of households newlyconnected

315 Euro/household/year

Cost savings to customers –sewage disposal

Nr. Of households newlyconnected

348 Euro/household/year

Cost savings to operator – waterabstraction

Incremental watersavings (in m3)

Water abstraction fee(Apele Romane)

To be detailed in technical FS

Cost savings to operator – energyconsumption

CO2 emission savings (intonnes)

From 25 Euro/tonne in 2010 to45 Euro/tonne in 2030

To be detailed in technical FS.

Negative Externalities

Type Base for calculation Monetary value Comments

Increase in CO2 emission –sludge digestion

CO2 emission (in tonnes) From 25 Euro/tonne in 2010 to45 Euro/tonne in 2030


Increase in CO2 emission –

sludge transportation

CO2 emission (in tonnes) From 25 Euro/tonne in 2010 to

45 Euro/tonne in 2030



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Adjusting Costs

Economic costs (conversion factors):


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Sensitivity and Risk Analysis (1)

Purpose is to assess the robustness of the projectfinancial and economic profitability indicators (FRR/C,FNPV/C, ERR, ENPV)

First, identification of key variables and their impact interms of changes in the profitability indicators

Second, calculate “switching values” for those variablesfor which a variation of 1% results in a variation of more

than 5% in the profitability indicators


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Sensitivity and Risk Analysis (2)

Finally, estimate probability distributions for theprofitability indicators based on the probabilitydistribution of all the key variables (Monte Carlo)


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CBA Conclusions

Standard format for presenting CBA results(Application Form info requirements)

Does the project needs co-financing??

Financial analysis FNPV/C


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THANK [email protected]

4 Meth for C1BA Preparation

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