Presentation Economic and Financial Analysis INTERACT ENPI

8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI

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Warsaw6-7 August 2009

Economic and

financial analysis


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•

A project involves combining resourceswhich are carefully defined and

programmed over time

•

To bring about an improvement in the

well-being of society

Cost-benefit analysis


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The aim of the financial and economic analysis isto determine and qualify the costs and benefits

of projects in order to facilitate certain decisionswhich have to be made thought the project cycle

Cost-benefit analysis

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Projects with tangible products, i.e. products which canbe valued in monetary terms

• Projects with non-tangible products, i.e. productswhich cannot be accurately valued in monetary terms

without either carrying out research which is likely toexceed the time and resources usually available to

analysts, or making "major assumptions.

•

The approach adopted for such projects is limited in

scope and aims just to minimise costs

•

Benefits for such projects are estimated as the

tangible "results" and expressed in physical quantities

Types of projects


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The main purpose is to compute the projects

financial performance indicators

! identify and estimate flows of money

!

estimate the borrowing requirements

!

calculate the return on capital

!

Estimate the financial assistance

•

Only cash flows are considered, i.e. the actual

amount of cash being paid out or received bythe project

Financial Analysis (FA)


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The project is evaluated on the basis of thedifferences in the costs and benefits between the

scenario with the project and alternative scenario

without project

• Is the situation, which will result from the

implementation of the project

• Is the situation, which is most likely to occur if the

project is not implemented

FA – Incremental method


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(Financial Net Present Value)

•

Is defined as the sum that results when the

expected investment and operating costs of the

project are deducted from the value of theexpected revenues

(Financial Rate of Return)

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Is defined as the discount rate that produces azero FNPV. It measures the capacity of the net

revenues to remunerate the investment cost

FA – Financial return on investment


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FA – Financial return


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A project is financially sustainable when it doesnot incur the risk of running out of cash in the

future

•

Cash proceeds and payments – how sources of financing (incl. revenues and any kind of cashtransfers) will consistently match disbursements

year-by-year

•

What resources the project will draw on when

the EU grants are no longer available

FA - Financial sustainability


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FA - Financial sustainability


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Look into the project performance from the perspectiveof the assisted entities

Usually focus on the funds provided by

the beneficiary

(Financial Net Present Value of the capital)

• FNPV(K) is the sum of the net discounted cash flows that

accrue to the project promoter due to the implementation

of the investment project(Financial Rate of Return on capital)

• FRR(K) determines the return for the national beneficiaries

FA – Financial return on capital


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FA – Financial return on capital


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Assess the project from the view of society as a whole

•

Appraises project’s contribution to the

economic welfare of the region or

country

•

Rationale: project inputs should be

valued at their opportunity costs andoutputs at consumers’ willingness to pay

Economic analysis(EA)


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The methodology is summarised in followingsteps:

! conversion of market to accounting

(shadow) prices

! monetisation of non-market impacts

! inclusion of additional indirect effects

! discounting of the estimated costs andbenefits

EA - Methodology


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Observed prices, as set by markets or bygovernments, sometimes do not provide a

good measure of the social opportunity costof inputs and outputs

•

This happens when:

•

real prices of inputs and outputs are

distorted because of inefficient markets;

•

Government sets non cost-reflective

tariffs of public services

EA – Accounting prices


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To include in the appraisal those projectimpacts that are relevant for society, but

for which a market value is not available

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They are identified, quantified, and given arealistic monetary value

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Transport: savings in travel and waitingtime

•

Healthcare: life expectancy /quality of life

EA – Non-market impacts


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Some impacts may be generated that spillover from the project to other economic

agents without any compensation

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Can be negative – a new road increasingpollution levels

•

Or positive - a new railway reducing

traffic congestion on an alternative roadlink

EA – Correction of externalities


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Costs and benefits occurring at differenttimes must be discounted

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The discount rate in the economic

analysis of investment projects - thesocial discount rate (SDR) - reflects thesocial view on how future benefits and

costs should be valued against present

ones

EA – Discounting


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(Economic Net Present Value)

• ENPV is the difference between the discounted

total social benefits and costs

(Economic Internal Rate of Return)

•

ERR is the rate that produces a zero value for the

ENPV

• B/C ratio – between discounted economic

benefits and costs

EA – Indicators


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• Budget cretirea: project size is largerelative to the national economy (ERDF -

for major projects, 25 mln EURO)

•

Doubts exist as to the implications for keyactors/entities of the project

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It is important to know the precise impact

of the project on certain actors/entities

•

etc...

FA/EA – When used


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EuropeAid Eco-Fin Manual:•

http://ec.europa.eu/europeaid/multimedia/publications/

documents/tools/europeaid_adm_manual_ecofin_en.pdf

DG Regio Guidelines on the methodology of cost-

benefit analysis: • http://ec.europa.eu/regional_policy/sources/docoffic/2007/

working/wd4_cost_en.pdf

DG Regio Guide on cost-benefit analysis for

investment projects:

• http://ec.europa.eu/regional_policy/sources/docgener/

guides/cost/guide2008_en.pdf

Useful links

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Presentation Economic and Financial Analysis INTERACT ENPI

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