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ATM CBA for Beginners

Document information Project title Business Case Maintenance, Support and Coordination

Project N° 16.06.06

Project Manager EUROCONTROL

Deliverable Name ATM CBA for Beginners

Deliverable ID D06-05

Edition 00.01.00

Abstract

This document presents the essentials of cost benefit analyses in support to the air traffic management world.

Project ID 16.06.06 D06-05 - ATM CBA for Beginners Edition: 00.01.00

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Authoring & Approval Prepared By Name & company Position / Title Date

Agnieszka Wegner / EUROCONTROL CBA Expert 15/07/10

Rodolphe Salomon / EUROCONTROL Business Case Expert 17/12/10

Reviewed By Name & company Position / Title Date

Nicolás Suárez Tetzlaff / AENA Project Member 22/11/10

Philippe Malinge / AIRBUS Project Member 22/11/10

Franco Scolaris / ALENIA Project Member 22/11/10

Flavien Gueudre / AVTECH Project Member 22/11/10

Lars Lindberg / AVTECH Project Member 22/11/10

Anne Baleras / EUROCONTROL Project Member 22/11/10

Hilde Craninx / EUROCONTROL Project Member 22/11/10

Vesna Cohen / EUROCONTROL Project Member 22/11/10

Marco Gibellini / EUROCONTROL Project Member 22/11/10

Paula Leal de Matos / EUROCONTROL Project Manager 22/11/10

Kirsteen Purves / EUROCONTROL Project Member 10/12/10

Rodolphe Salomon / EUROCONTROL Project Member 22/11/10

Agnieszka Wegner / EUROCONTROL Project Member 22/11/10

Vladimir Coca / INDRA Project Member 22/11/10

Mike Bennett / NATS Project Member 22/11/10

Tahir Latif / NATS Project Member 22/11/10

Nigel Tay / NATS Project Member 22/11/10

Herve Goutelard / Thales Project Member 22/11/10

Philippe Jasselin / Thales Project Member 22/11/10

Approved By Name & company Position / Title Date

Paula Leal de Matos / EUROCONTROL 16.06.06 Project Leader 17/12/10

Peter Martin / EUROCONTROL Sub WP 16.6 Leader 17/12/10

Mike Bennett / NATS Project Member 17/12/10

Philippe Malinge / AIRBUS Project Member 17/12/10

Philippe Jasselin / Thales Project Member 17/12/10

Vladimir Coca / INDRA Project Member 17/12/10

Nicolás Suárez Tetzlaff/ AENA Project Member 17/12/10

Franco Scolaris / ALENIA Project Member 17/12/10


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Document History Edition Date Status Author Justification

00.00.01 15/07/2010 Issued Agnieszka Wegner Published 00.00.02 08/12/2010 Draft Rodolphe Salomon Change of template;

Incorporation of NATS comment; Made more generic.

00.01.00 17/12/2010 Revised Draft Rodolphe Salomon Version for approval by Partners

Copyright © 2010 The European Organisation for the Safety of Air Navigation (EUROCONTROL)

This document is published by EUROCONTROL for information purposes. It may be copied in whole or in part, provided that EUROCONTROL is mentioned as the source and to the extent justified by the non-commercial use (not for sale). The information in this document may not be modified without prior written permission from EUROCONTROL.


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Table of Contents EXECUTIVE SUMMARY .................................................................................................................... 5

1 INTRODUCTION........................................................................................................................... 6

1.1 PURPOSE AND SCOPE OF THE DOCUMENT............................................................................. 6 1.2 INTENDED AUDIENCE ............................................................................................................... 6 1.3 STRUCTURE OF THE DOCUMENT............................................................................................. 6 1.4 ACRONYMS AND TERMINOLOGY ............................................................................................. 6

2 WHAT IS A CBA AND HOW IS IT RELATED TO A BUSINESS CASE? .......................... 8

2.1 EUROPEAN OPERATIONAL CONCEPT VALIDATION METHODOLOGY ..................................... 8 2.1.1 E-OCVM V1 - Scope ...................................................................................................... 9 2.1.2 E-OCVM V2 - Feasibility................................................................................................ 9 2.1.3 E-OCVM V3 - Pre-industrial development & integration .......................................... 9

3 FINANCIAL CONCEPTS MOST OFTEN USED IN CBA .................................................... 10

3.1 STAKEHOLDER ....................................................................................................................... 10 3.2 BENEFIT.................................................................................................................................. 10 3.3 COST ...................................................................................................................................... 10 3.4 COST AND BENEFIT MECHANISM .......................................................................................... 11 3.5 TIME VALUE OF MONEY, AND INFLATION.............................................................................. 12 3.6 DISCOUNT RATE .................................................................................................................... 12 3.7 TIME HORIZON ....................................................................................................................... 13 3.8 CASH FLOW............................................................................................................................ 13 3.9 DISCOUNT RATE AND NET PRESENT VALUE (NPV) ............................................................ 14 3.10 UNCERTAINTY AND RANGES OF INPUTS ........................................................................... 15 3.11 SENSITIVITY ANALYSIS....................................................................................................... 16 3.12 NPV RISK PROFILE............................................................................................................ 17

4 CBA PROCESS, TIMELINE AND PARTIES INVOLVED.................................................... 18

4.1 PARTIES INVOLVED ................................................................................................................ 18 4.2 CBA ROADMAP ...................................................................................................................... 19

4.2.1 Understanding the project ........................................................................................... 19 4.2.2 Building an initial version of the model...................................................................... 20 4.2.3 Workshop....................................................................................................................... 20 4.2.4 Refining the model ....................................................................................................... 20 4.2.5 Writing a CBA report .................................................................................................... 21

4.3 EFFORT VERSUS ELAPSED TIME ........................................................................................... 21 4.4 DIFFERENCES IN CBA ACTIVITIES DEPENDING ON E-OCVM PHASE.................................. 22

5 CBA CODE OF PROFESSIONAL CONDUCT...................................................................... 23

6 REFERENCES ............................................................................................................................ 24


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List of tables Table 1: Example of the cash flow for Trabzon..................................................................... 13 Table 2: Cash flow and Net Present Value for Trabzon (5% discount rate) ......................... 14 Table 3: Differences in the CBA activities based on E-OCVM lifecycle phases ................... 22

List of figures Figure 1: Example of ADS-B RAD (i.e. with radar) Benefit Mechanism................................ 11 Figure 2: Tornado diagram for Trabzon, showing the variations of NPV when inputs vary .. 16 Figure 3: Example of the NPV risk profile for Trabzon.......................................................... 17 Figure 4: The CBA in V2 Feasibility Phase: Process, Typical Effort and Parties Involved ... 19


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Executive summary This document intends to help its readers to understand the essentials of Cost Benefit Analysis (CBA) in support to the air traffic management world. This understanding includes the purpose of CBA and how it relates to business cases, the financial concepts that underlie CBA practice, as well as how to generally conduct a CBA, both in terms of process and of professional conduct.


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1 Introduction

1.1 Purpose and scope of the document The main purpose of this document is to present the basics of assessing costs and benefits in the ATM world, generally in order to create a Cost Benefit Analysis (CBA). It covers the main financial concept definitions and their usage in the CBA calculation. In addition, the recommended CBA process, responsibilities and timeline are presented. While it gives an overview of how to conduct a generic CBA in this context, it does not address the specificities of SESAR projects.

1.2 Intended audience This document is aimed at project managers and contributors who conduct CBA or Assessment of Benefits and Costs (ACB)1 in the context of a European air traffic management projects, including, but not restricted to, those for SESAR. No previous knowledge of financial theory is required.

1.3 Structure of the document Section 2 addresses the question: ‘What is a CBA and how is it related to a Business Case?’

Section 3 develops the ‘Financial Concepts Most Often Used in CBA’.

Section 4 gives a general understanding of the ‘CBA Process, Timeline and Parties Involved’.

Section 5 highlights the ‘CBA Code of Professional Conduct’.

Finally section 6 is the list of References made in this document.

1.4 Acronyms and Terminology Term Definition

ACB Assessment of Costs and Benefits

ADS-B Automatic Dependent Surveillance - Broadcast

ANSP Air Navigation Service Provider

ATC Air Traffic Control

ATM Air Traffic Management

CBA Cost Benefit Analysis

E-ATMS European Air Traffic Management System

E-OCVM European Operational Concept Validation Methodology

NPV Net Present Value

RAD Radar

1 An ACB is performed by a project when they need to provide inputs to a higher level CBA (e.g. at Programme level) but do not need to produce a complete CBA themselves.


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Term Definition

SESAR Single European Sky ATM Research Programme

SJU SESAR Joint Undertaking (Agency of the European Commission)

SJU Work Programme

The programme which addresses all activities of the SESAR Joint Undertaking Agency.

SESAR Programme The programme which defines the Research and Development activities and Projects for the SJU.

STATFOR EUROCONTROL Statistics and Forecast Service http://www.eurocontrol.int/statfor

TMA Terminal Control Area

WP Work Package


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2 What is a CBA and how is it related to a Business Case? A CBA is an objective study in which the costs and benefits of a particular project or set of projects are fully quantified in economic terms, taking full account of the times at which costs are paid and at which benefits accrue (See [1] for more information).

A Cost Benefit Analysis will help you:

Identify all costs and benefits

Calculate the economic value of the project

Make a cash flow projection

Select the best alternative among different options

Classify costs & benefits by order of importance

Determine the critical factor(s) of success

A business case includes not only a CBA but other qualitative and quantitative assessments in areas such as Safety, Security, Environment, Human Performance and Strategic Fit. A Business Case is produced through a structured process that prepares evidence for decision-makers and impacted stakeholders on the advantages (positive impacts) and disadvantages (negative impacts) of different possible alternatives by assessing their potential impacts from a multi-criteria perspective, including synergies and trade-offs. The assessment can range from qualitative expert judgement to, whenever possible, quantitative and monetary impact.

Thus the Business case goes beyond CBA. The purpose of both the CBA and Business Case is to facilitate and support better informed decision-making for key investment decisions.

2.1 European Operational Concept Validation Methodology E-OCVM, the European Operational Concept Validation Methodology [1], was created as a framework to provide structure and transparency in the validation of air traffic management (ATM) operational concepts as they progress from early phases of development towards implementation. Its aim is to achieve consistency in the collaboration of independent R&D organisations, aiming at a coherent approach and comparability of results across validation activities and projects, while leaving freedom to define the most practical planning and execution of individual activities. It provides validation practitioners, as well as experienced programme and project managers, with both a common understanding of what is required to perform validation and the framework necessary to collaborate effectively. Since 2005 it has been mandatory to apply the E-OCVM in collaborative ATM R&D projects of the European Commission and EUROCONTROL

The E-OCVM defines eight lifecycle phases; V0 where ATM Needs are identified, V1 to V3 where solutions are identified and researched and V4 to V7 which cover the period from industrialisation to decommissioning of the solution.

The CBA activities vary depending on the phase of E-OCVM cycle the project is in. This document is mostly addressing CBAs that are focusing on projects in lifecycle phases V1 to V3 which cover the research and development activities.


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2.1.1 E-OCVM V1 - Scope This lifecycle phase identifies the operational/technical solutions for meeting the target performance identified in V0, ATM Needs.

The output from this lifecycle phase will be a V1 CBA.

2.1.2 E-OCVM V2 - Feasibility The main objective of this phase is to develop and explore the individual concept elements and supporting enablers until the retained concept(s) can be considered operationally feasible or it can be established that further development is no longer justified.


2.1.3 E-OCVM V3 - Pre-industrial development & integration The objective of this phase is threefold:

To further develop and refine operational concepts and supporting enablers to prepare their transition from research to an operational environment;

To validate that all concurrently developed concepts and supporting enablers (procedures, technology and human performance aspects) can work coherently together and are capable of delivering the required benefits;

To establish that the concurrent packages can be integrated into the target ATM system.



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3 Financial Concepts Most Often Used in CBA Throughout this section a real life example of implementation of surveillance application of ADS-B at Trabzon Airport (in Turkey) is used. Trabzon Airport had no radar surveillance sources. Consequently, procedural separation was used, which resulted in several operational inefficiencies. ADS-B implementation would alleviate these inefficiencies. For more information on Trabzon Airport case, see [4].

The CBA calculation in this document will be simplified for training purposes and will consider the costs and benefits to all stakeholder groups at the same time2.

3.1 Stakeholder

Stakeholders are organizations and entities who will have to pay for or will be impacted by the project directly or indirectly.

Examples in the ATM world are ANSP’s, airports, military, passengers, residents around an airport, etc.

The stakeholders at Trabzon Airport include: ANSP, Airport and Airspace Users

3.2 Benefit

Benefit is a positive impact of monetary value to stakeholders3.

Benefits should cover costs for the project to be economically viable. Examples of benefits are additional revenues or cost savings to stakeholders.

At Trabzon Airport, the savings to airspace users because of reduction of holding times of aircraft amount to 11,498 euro in the second year.

3.3 Cost

Cost is monetary value used up to produce or acquire the benefit.

For example, training of controllers at Trabzon Airport to use ADS-B will amount to 240,000 € in the first year.

2 Performing CBAs from each stakeholder’s viewpoint allows each of them to assess the impact of the changes on their situation, e.g. a CBA looking at all stakeholder groups at the same time may provide positive results but does not show if one stakeholder is paying most of the costs while another is receiving most of the benefits. 3 Benefits which cannot be measured in monetary terms are captured in the Business Case.


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3.4 Cost and Benefit Mechanism

Benefit mechanisms are a cause-effect description of the improvement proposed by the project. They show how benefits are delivered.

Cost mechanisms are a description of the potential costs of the project broken down into relevant cost categories (e.g. investment, operating).

Figure 1 shows an example of a benefit mechanism. A benefit mechanism can be described in a script text format as a set of

arguments or in a graphical and more formalized way using influence diagrams and models.

Figure 1: Example of ADS-B RAD (i.e. with radar) Benefit Mechanism4

RAD

InfrastructureCost

RouteCharges

InfrastructureCost

RouteCharges

ControllerSituationalAwareness

SafetyPosition

Update RateATCO Tools

Quality

ControllerSituationalAwareness

SafetyPosition

Update RateATCO Tools

Quality

PositionAccuracy

ANSPCost

StructuralDelay

SectorCapacity/

ProductivityThroughput

ANSPIncome

RouteCharges

Un-predictable

Delay

Emissions

Airline OpsEfficiency

FlightEfficiency

PositionAccuracy

ANSPCost

StructuralDelay

SectorCapacity/


ANSPIncome

RouteCharges

Un-predictable

Delay

Emissions


FlightEfficiency

ANSPCost

StructuralDelay

SectorCapacity/


ANSPIncome

RouteCharges

Un-predictable

Delay

Emissions


FlightEfficiency

4 The format of Benefit Mechanisms is not standardized, however within SESAR there is guidance material which projects should follow, Refer to ‘SESAR 16.06.06, Guidelines for Producing Benefit Mechanisms’ for CBAs in the SESAR programme.


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3.5 Time Value of Money, and Inflation

Time Value of Money means that the same (nominal) amount of money received at different points in time has different value.

Notice that the examples of costs and benefits above always specify the time in which a given benefit or cost has occurred. This is because 100€ received today is not equivalent to 100€ in ten years.

100€ received today is a preferable option. In ten years time, various risks could result in the money not being received at all.

If you were to receive the money today, you could also invest it to get some income. By receiving the money in ten years, you will lose ten years of income on these 100 euro. Thus, when talking about costs and benefits, two dimensions should always be specified: the amount of money as well as the point in time when a given money inflow or outflow occurs.

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

When the general price level rises, each unit of money buys fewer goods and services. Consequently, inflation also reflects the erosion in the purchasing power of money – a loss of real value of that money.

3.6 Discount Rate

Discount Rate is a way to capture the time value of money. This is a percentage that represents the increase in the amount of money needed or estimated to keep the same value as one year ago.

Discount Rate relates to the concept of Time Value of Money (See § 3.5). The discount rate can be interpreted as the interest charged on borrowing money, or as the interest served on invested money.

This means that €100 today will have the same value as €100 x (1+discount rate) in one year’s time.

Conversely, € 100 in one year’s time will have the same value as €100 / (1+discount rate) of today’s money.

Thus: n

amount

ratediscount+1

converts the value of “amount” at the beginning of year 1 (of the project) into the value earned or spent at (the end of) year “n” (of the project).

To decide on a discount rate, please refer to “Standard Inputs for EUROCONTROL Cost Benefit Analysis” [5].

A positive discount rate means that the value of money decreases with time: because more money is needed to maintain the same value as it had one year ago.


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3.7 Time Horizon

Time horizon refers to a definite time period during which all cost and benefits related to a given project occur.

Time horizon is not necessarily the same as useful life of an investment: the useful life of an investment is the time after which It has to be replaced by a new one.

The useful life of a radar station is 20 years, whereas an ADS-B ground station reaches the end of its operational life after only 12 years. So for Trabzon a time horizon of 20 years was chosen to help understanding how ADS-B and radar technology compared over the period.

3.8 Cash Flow

Cash flow is the difference between the cash inflows and outflows related to the project during the time horizon in which they occur.

Costs of the project lead to cash outflows and benefits to cash inflows.

Table 1 illustrates the calculated cash flow for the Trabzon example. Year 1 is the start date of the project, and it is when the ADS-B implementation (i.e. investments) starts. A negative sign on the cash flow in Year 1 means that the cash outflow is greater than the cash inflow. Positive signs in Years 2-20 mean that the cash inflow is greater than the cash outflow.

Table 1: Example of the cash flow for Trabzon

Year(n)

ActualYear

Benefits (€)[a]

Investments (€)[b]

Cash Flow (€)[c]=[a]-[b]

1 2008 - 688.500 -688.5002 2009 494.383 26.000 +468.3833 2010 512.840 26.000 +486.8404 2011 531.966 26.000 +505.9665 2012 551.761 26.000 +525.7616 2013 572.226 26.000 +546.2267 2014 593.360 26.000 +567.3608 2015 615.164 26.000 +589.1649 2016 637.636 26.000 +611.636

10 2017 660.778 26.000 +634.77811 2018 684.589 26.000 +658.58912 2019 709.070 26.000 +683.07013 2020 734.220 151.000 +583.22014 2021 760.039 26.000 +734.03915 2022 786.527 26.000 +760.52716 2023 813.686 26.000 +787.68617 2024 841.513 26.000 +815.51318 2025 870.009 26.000 +844.00919 2026 899.175 26.000 +873.17520 2027 929.011 26.000 +903.011


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3.9 Discount Rate and Net Present Value (NPV)

Net Present Value (NPV) is the sum of all discounted cash inflows and outflows during the time horizon period.

NPV is the present estimation of the value of the project: when positive it means the project is economically viable.

Note that a project with a negative NPV could be undertaken if there are significant benefits in other areas (for example, safety increase): CBA is only one of all aspects covered by a Business Case. Decision makers should consider a complete Business Case in order to make a decision on a project.

In order to compare cash inflows and outflows that happen in different periods, they are discounted (see § 3.6) to the same point in time, namely the beginning of year 1

When discounting, it is often assumed that all cash inflows and outflows happen at the end of the relevant year. Other possibilities are to consider they all happen at the beginning of the year, or all in the middle of the year; this assumption needs to be explicitly stated.

Table 2 shows the discounted cash flows and NPV for the Trabzon example. The discount rate used is 5%. For simplicity of calculations in the example, all cash inflows and outflows are assumed to happen at the end of the relevant year

Table 2: Cash flow and Net Present Value for Trabzon (5% discount rate)

Year(n)

ActualYear

Benefits (€)[a]

Investments (€)[b]

Cash Flow (€)[c]=[a]-[b]

Discounting Factor %

[d]=1/1,05n

Discounted Cash Flow (€)

[e]=[c].[d]

Cumulative discounted cash flow (€)

[g]n =[e]n +[g]n-1

1 2008 - 688.500 -688.500 95% -655.714 - 655.7142 2009 494.383 26.000 468.383 91% 424.837 - 230.8773 2010 512.840 26.000 486.840 86% 420.551 189.6744 2011 531.966 26.000 505.966 82% 416.259 605.9335 2012 551.761 26.000 525.761 78% 411.948 1.017.8816 2013 572.226 26.000 546.226 75% 407.602 1.425.4837 2014 593.360 26.000 567.360 71% 403.212 1.828.6958 2015 615.164 26.000 589.164 68% 398.769 2.227.4649 2016 637.636 26.000 611.636 64% 394.266 2.621.730

10 2017 660.778 26.000 634.778 61% 389.699 3.011.42911 2018 684.589 26.000 658.589 58% 385.063 3.396.49212 2019 709.070 26.000 683.070 56% 380.359 3.776.85113 2020 734.220 151.000 583.220 53% 309.294 4.086.14514 2021 760.039 26.000 734.039 51% 370.740 4.456.88515 2022 786.527 26.000 760.527 48% 365.826 4.822.71116 2023 813.686 26.000 787.686 46% 360.848 5.183.55917 2024 841.513 26.000 815.513 44% 355.806 5.539.36518 2025 870.009 26.000 844.009 42% 350.703 5.890.06819 2026 899.175 26.000 873.175 40% 345.545 6.235.61320 2027 929.011 26.000 903.011 38% 340.335 6.575.949


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3.10 Uncertainty and Ranges of Inputs

As seen in the previous paragraph, the mathematical calculation of NPV is rather straightforward. The complexity of a CBA calculation comes from the fact that the exact values of all costs and benefits are often not known. Therefore, they need to be estimated and thus low, base and high values of inputs are often used as they capture the uncertainty in the actual value. The range of an input is the difference between its high and low value.

For example, at Trabzon Airport, one of the inputs used in the cost-benefit mechanism is the STATFOR Long-Term Forecast for traffic in Turkey. The low value for traffic growth during the time horizon of the CBA is 2.2%, the base value is 2.5%, and the high value is 2.8%.


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3.11Sensitivity Analysis

Sensitivity refers to the impact one given input to the model has on the overall NPV.

Different NPV values are calculated by varying one given input between its low and high values, while keeping all other inputs at their base values.

Sensitivity analysis is often represented in the form of a Tornado diagram where the top axis shows the NPV scale, centered on the NPV base value (i.e. when all inputs take their base value). Each row underneath corresponds to an input parameter (name and unit). In front of each input name a rectangle shows the possible values of the input between its estimated lowest and highest. The input rectangle is centered on the input base value, which corresponds to the base value of the NPV. The rightmost and leftmost sides of the input rectangle correspond, respectively, to the highest and lowest value the NPV takes when the input is the only one that varies (i.e. all

other inputs are maintained at their base value). The input values are shown on the sides of the rectangle.

In a Tornado diagram, the inputs are usually ordered according to their impact on the NPV, the input with the highest impact at the top (under the NPV scale) and the one with the lowest impact at the bottom. This gives a diagram that recalls the shape of a tornado, hence its name. Notice that the number of inputs considered is often limited to only show the most significant ones (usually less than 7): those inputs with a limited impact are not represented. This allows further efforts to be focussed on the inputs which have the biggest impact on the results.

Figure 2 illustrates how NPV of the Trabzon project varies when inputs vary. For example, if a cost of one minute of ground delay is 7 euro then the overall NPV is approximately 4.8 million euros. If, however, the cost of one minute of ground delay is 37 euros then the NPV is approximately 7.8 million euros.

Figure 2: Tornado diagram for Trabzon, showing the variations of NPV when inputs vary (inputs ordered according to their impact on NPV, from highest impact to lowest impact)

Cost of ground delay minute [euros]

2009 ground delay savings per year [minutes]

2009 savings for departures [NM]

Net Present Value [millions of euros]

8654 7

7 37

1.5 4.5

15 5


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3.12 NPV Risk Profile

NPV Risk Profile is the range of values the NPV of the project might take along with the associated cumulative probabilities.

The corresponding diagram shows at a glance whether there is a chance that the NPV might be negative5, as well as the range of NPV values (including the minimum and maximum values): the

narrower the range (the steeper the slope of the diagram), the less risky the project.

When we calculate the final NPV of the project, we will also calculate low, base and high values of the NPV using low, base and high values of the inputs. Thus, we are coming up with the range of possibilities for the NPV.

Figure 3 shows that in the Trabzon example the NPV is always positive (starting at €3 Millions) with a 10% probability to earn less than € 4.5 Millions.

Figure 3: Example of the NPV risk profile for Trabzon

5 In which case the NPV risk profile shows a strictly positive cumulative probability for an NPV equal to zero. This is not visible in the current example.


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4 CBA Process, Timeline and Parties Involved As said in § 2.1, the CBA activities vary depending on whether the CBA is performed in the V1, V2 or V3 phase of the E-OCVM lifecycle. Thus, we distinguish between the different types of CBA’s: V1 CBA, V2 CBA and V3 CBA.

The detailed discussion of the process below refers to a V2 CBA.

4.1 Parties Involved The parties involved in the CBA process, as shown in Figure 4, are

The CBA project manager or contributor who will develop the CBA.

In some cases the CBA project manager may need to be helped by a CBA expert to support the CBA tasks.

The project team who works on a given change in technology and/or procedures and/or regulations.

The stakeholders as defined in § 3.1.


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4.2 CBA Roadmap The typical CBA project is conducted to assess the benefit of an ATM evolution, usually due to a change in technology and/or in the ATM procedures and/or in the regulations.

The CBA roadmap is shown on Figure 4.

Figure 4: The CBA in V2 Feasibility Phase: Process, Typical Effort and Parties Involved

4.2.1 Understanding the project This step will be taken by the CBA project manager and the project team. Effort varies depending on their prior involvement in the project. If the CBA project manager comes from within the project team, he does not need any time to understand the background of the project. If the CBA project manager does not come from the project team, the effort spent will be about one week. During this time he/she will review the existing documentation on a given change in technology and/or procedures and/or regulations and interview the project team in order to build a sound initial understanding of the project, its impact on the stakeholders and the future benefits.

Understanding the project

Refining Model

CBA Report Preparation

Initial Model

Workshop

1 week

2 weeks

1 week

6 weeks

2 weeks

CBA project manager

CBA expert

Project team

Stakeholders

Legend


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4.2.2 Building an initial version of the model This step will be conducted mainly by the CBA project manager. A half day session with the CBA expert to review the initial version of the model could be organized at this stage if needed.

The CBA project manager is in charge of building an initial version of the model. An initial version of the model is a model built with all cost and benefit mechanisms in place as understood in the previous step. The model is also populated with data, but at this stage some data are estimated or even guessed. It is initial in the sense that it needs to be refined, either in the current phase, or at a later one. The main focus is on the structure of the model, not on the data. Frequent interactions between the CBA project manager and the project team occur to clarify the cost and benefit mechanisms further.

Towards the end of this step, data in the model are refined using the knowledge of the project team, data available internally within the Organization leading the project as well as data available in “Standard Inputs for Eurocontrol Cost Benefit Analyses” [5]

This step takes about two weeks.

4.2.3 Workshop This step will be conducted by the CBA project manager, representatives of the project team as well as stakeholders involved (for example airport economists and representatives, ANSP economists and representatives, etc).

The typical workshop takes two days. By the end of the workshop a first version of the model is built. All benefits and costs mechanisms are understood and agreed, so that benefits and costs are mapped into the € value. Inputs are further refined, sources to even further refine the inputs are established and actions on who will supply the information are determined. Also, through sensitivity analysis of the model inputs, it becomes clear at this step which inputs have the biggest impact on the result, so that further effort can be prioritised.

Effort from the side of the CBA project manager adds up to one week, which consists of conducting the workshop for two days and about three days of preparation for the workshop, including logistics and agenda. The total cost of the workshop consists of effort of all participants of the workshop as well as the cost of their travel. For small workshops for local CBA the participants include: CBA project manager, project team representative and about two stakeholders. Travel costs include the cost of travel of CBA project manager and the project team representative to the location of a workshop. For CBA’s on clusters of projects or projects with a large geographical location, the participants of the workshop include: CBA project manager, representative of the project management team as well as ten to fourteen stakeholders. Usually, a majority of the workshop participants need to travel to one common location.

4.2.4 Refining the model This step will be conducted by the CBA project manager and stakeholders involved (for example airport economists and representatives, ANSP economists and representatives, etc).

Data requests are made to appropriate points of contact identified in the previous step as well as the analysis to derive data and improve the assumptions is conducted. The refined inputs, with decreased ranges, lead to a refined version of the model.

This step takes about six weeks.


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4.2.5 Writing a CBA report This step will be conducted by the CBA project manager. It is always good practice to have this report reviewed and commented by fellow CBA practitioners at this point.

This step takes about two weeks effort plus the time allowed for a review. It is possible that comments from a CBA expert review may lead to iteration and further work in point 4.2.4-Refining the model.

The CBA report should discuss the project (change in technology and/or procedures and/or regulations), cost and benefit mechanisms, assumptions on inputs and ranges, timeline and discount rate, the result, NPV risk profile and relative importance of the inputs. Document [4] is an example of a CBA report.

4.3 Effort versus elapsed time For a V2 CBA a rough estimation of 12 weeks of effort of the CBA project manager is a good starting point [See Figure 4]. The effort required is usually higher in case of repeated iterations. Repeated iterations are initiated by reviews as well as by new information becoming available along the project’s life (for example changes in potential benefits due to alterations of the technology under development).

It is important to understand the difference between effort and elapsed time. Elapsed time is impacted by:

Scheduling times between different steps in the CBA process (for example waiting time for availability of all stakeholders to attend the workshop).

Waiting time for the data.

The elapsed time will vary depending on the above points.


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4.4 Differences in CBA activities depending on E-OCVM phase Table 3 illustrates the differences in the CBA process, timeline and parties involved depending on the R&D E-OCVM lifecycle phases. The main differences stem from the fact that during V1 (Scope) phase the process is shortened: the V1 CBA model is built but no workshop is organized and data are not refined. Therefore local stakeholders do not need to be involved in such an early stage of E-OCVM.

V3 (Pre-industrial development & integration) phase differs from V2 because more data is available so the amount of iterations grows. In addition, local CBAs might be built which significantly increases the effort required. Local CBA’s are stand alone CBA’s which focus on a given change in technology and/or procedures and/or regulations at a specific geographical location. Their results are useful for both the project at the specific location as well as inputs for the V3 CBA (which has a broad geographical scope).

Table 3: Differences in the CBA activities based on E-OCVM lifecycle phases

E-OCVM Phase V1 - Scope V2 - Feasibility V3 - Integration

CBA project manager

YES YES YES

CBA expert YES YES YESStakeholders possibly internal YES YESProject team YES YES YES

Understanding the project

YES YES YES

Initial modelYES

with cost and benefit mechanisms

YESwith first estimates

YESMultiple models for

local CBA’s

Workshop NOYES

with stakeholders

YESMultiple workshops for

local CBA’s

Refining the inputs

NO YESYES

Multiple activity for local CBA’s

Writing a CBA report

YESV1 CBA

YESV2 CBA

YESV3-CBA

Multiple activity for local CBA’s

Effort 4 weeks 12 weeks 36 weeks

Typical CBA project manager’s effort

Parties involved

CBA roadmap


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5 CBA Code of Professional Conduct It is imperative that the CBA project manager stays neutral and objective while conducting the CBA. As CBA is often used as one of the most important factors impacting a decision on whether to continue the project or not, a temptation might exist to exaggerate the benefits and minimize the costs, so that the overall project NPV is positive. As CBA works with ranges which are often estimated by using expert judgements and assumptions, manipulation and omitting certain “unfavourable” information is possible. Transparency and proper documenting of all assumptions made and their rationale are critical. Also, the CBA project manager could experience pressure from the project team as well as the natural human desire to continue the project rather than not. Thus, objectivity is the cornerstone of the code of professional conduct of the CBA project manager.


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6 References Reference to Main Documentation, Delete If Not Required

[1] EUROCONTROL, Guidelines for the Economic Appraisal of EATM Projects – the effective use of cost benefit studies, 2000

[2] EUROCONTROL, European Operational Concept Validation Methodology, 3.0, 2010

[3] EUROCONTROL, EMOSIA, the European Model for Strategic ATM Investment Analysis

[4] EUROCONTROL, Cost Benefit Analysis for ADS-B Implementation at Trabzon Airport, 1.0. 2007

[5] EUROCONTROL, Standard Inputs for Eurocontrol Cost Benefit Analyses, ,4.0, 2009


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