guide2008_en

Table 2.17 Simple multi-criteria analysis for two projects

* 0: zero impact; 1: scarce impact; 2: moderate impact; 3: relevant impact; 4: very high impact.

2.7.3Economic impact analysis

As regards major projects, Article 40(e) 1083/2006 EU Regulations requires Member States or managing authority to provide the Commission with a cost-benefit analysis, including ‘the foreseeable impact on the sector concerned and on the socio-economic situation of the Member State and/or the region and, when possible and when appropriate, of other regions of the Community.’’

The discussion of the socio-economic context, as in section 2.1.1 will usually deal at least qualitatively with some project impacts at national, regional or sector level, but CBA is intrinsically a micro-economic approach. The overall social impact is captured by the ENPV and this would be a sufficient statistic of welfare changes. When mega-projects (very large projects relative to the economy) are considered, they are likely to have a macroeconomic impact (technically they are going to change the shadow prices because they are non-marginal). In such (infrequent) cases, an economic impact assessment may be carried out as a complement to CBA.

Economic impact analysis is a tool to assess the impact of a given intervention or programme on its socioeconomic environment. This kind of analysis focuses on macroeconomic indicators and forecasts the influence of the project on these indicators. The results of economic impact analysis often determine whether public support should be provided on the grounds of economic benefits to a given area.

The results should be helpful at:

-sector level, in identifying critical areas and defining policy actions;

-the macroeconomic level, in defining relative contributions.

For example, the method can be used to assess the wider economic impacts of a facility or an event/attraction on a target locality. In the context of the Structural Funds, the social, economic and environmental impacts of an intervention are all interlinked. The various types of impact assessment may therefore need to be combined in an integrated impact assessment, the nature of which will vary according to the type of intervention, and the aims of cost-effectiveness of the overall impact assessment package.

Rather than an alternative to CBA, economic impact analysis is therefore recommended as a complementary tool, at least to the extent that economic impact analysis provides additional information, not deliverable by CBA, on the macro effects of project implementation (e.g. impact on regional trade, impact on GDP growth, etc.).

EXAMPLE: ECONOMIC IMPACT ANALYSIS FOR PROJECTS BELONGING TO THE TEN-T AXIS

Recent evidence shows the use of Economic Impact Analysis for major transport projects, as, for example, the Oersund Fixed link, operative since 2000 and connecting Denmark (Copenhagen) with Sweden (Malmoe).

Beyond a CBA, the economic impact of the link was evaluated, as it was built with the objective of strengthening the economic and cultural ties between Denmark and Sweden. In particular, before project implementation, the Oeresundsbro Konsortiet (the project operator) defined and evaluated the possible impacts of the link at regional level as follows:

-creation of a balance between the relatively high level of unemployment in Skane (Sweden) and the acute demand for labour in Denmark (especially Copenhagen);

-relief of the overheated housing market in the Copenhagen area whereas housing in Skane is more reasonably priced and capacities are available;

-creation of a domestic market comprising 3.6 million consumers and 220,000 Danish and Swedish companies.

Source: EVATREN (2007).

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CHAPTER THREE

OUTLINES OF PROJECT ANALYSIS BY SECTOR

Overview

This chapter extends the concepts expressed in the preceding sections, with reference to some sectors supported by EU Funds and with a particular focus on transport, environment, industry and other productive investments.

The main purpose of the chapter is to show, on the one hand, the established methods that should form the basis of a good appraisal and, on the other, some issues that deserve particular attention.

The outlines of all the sectors are organised, as far as possible, in the same way. The outlines start with an introduction to the projects through the description of the main objectives and characteristics. The scope of the feasibility section is to summarise the main inputs that should, ideally, be included, including demand forecasts, options for consideration etc., before entering the financial and economic evaluation sections, which are supported also by the case studies presented in Chapter 4.

Some sectors are treated in a more simplified way, focusing on what are considered to be the most important or complex issues for each sector. Where helpful, checklists have been provided. The outlines are based on the approach described in Chapter 2 and follow the suggested steps. Each sector presents a general description of possible project objectives as well as the main inputs for the financial and economic analysis. For some sectors this is not a trivial task. Although projects belonging to the same sector may differ substantially, the outline tries to indicate - for each sector - the main sources of social benefits and costs. As uncertainty and risk concerning variable trends and values are important points to be considered when appraising investment projects, the list of the most critical factors has been included for each sector.

Many issues raised in the chapter are treated in more detail in the Annexes. It is assumed in the outlines that there is a continuous dialogue between project evaluators and project proposers, with the common aim to select the best possible project seeking good value for money.

3.1Transport

This section illustrates the investments for the development of new or existing transport infrastructures. These may include new transport lines or links, or the completion of existing networks, as well as investments intended to upgrade existing infrastructures. The proposed methodology mainly focuses on road and rail transport modes. However, the general principles may also be applied to other modes; for example, sea and air.

3.1.1Transport networks

3.1.1.1Project objectives

The socio-economic objectives of transport projects are generally related to the improvement in travel conditions for goods and passengers both inside the study area and to and from the study area (accessibility), as well as improvements in both the quality of the environment and the well being of the population served.

In more detail, the projects will deal with the following type of transport problems:

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-the functional incorporation of the designed infrastructure into the existing or planned transport system (urban, regional, interregional or national), in order to consider network effects;

-the consistency of the designed infrastructure and of its management and operation with national and European transport policies: fiscal policies (i.e. taxes on fuel), proposed pricing schemes, environmental constraints or target, other incentives/transfers to the sector, technological standards;

-the degree of consistency with any other development project and/or plan that may be drawn up for the investment area, also taking into consideration projects and/or plans related to sectors that could have impacts on transport demand (land use, development plans).

Regulatory framework

Regulation of the transport sector has significantly evolved over the past ten years. This evolution has arisen from the need to overcome the inefficiency of monopolistic systems by introducing competition for transportation services and regulation instruments for ‘natural monopolies’, i.e. for infrastructures.

From a Community viewpoint, the European Union has gradually developed specific actions and recommendations for the Member Countries, starting in the 1990s. As regards actions, Community interventions have mainly focussed on the development of the infrastructure network (Trans European Network – Transport, TEN-T), on regulation and competition among and between modes, and on setting prices correctly (including charging for infrastructure use and internalisation of external costs).

REGULATORY FRAMEWORK

White papers

Future development of the Common Transport Policy - White Paper/COM/1992/494

Fair payment for infrastructure use: a phased approach to a common transport infrastructure charging framework in the EU - White Paper /COM/1998/0466 final

European transport policy for 2010: time to decide - White Paper/ COM/2001

Keep Europe moving - Sustainable mobility for our continent Mid-term review of the European Commission’s 2001 Transport White Paper/COM/2006/314

Trans European Network - Transport (TEN-T)

Decision 1996/1692/EC of the European Parliament and of the Council of 23 July 1996 on community guidelines for the development of the trans-European transport network

Decision 2004/884/EC of the European Parliament and of the Council amending Decision 1692/96/EC on community guidelines for the development of the transEuropean transport networks

TransEuropean Networks: Towards an integrated approach, COM/2007/0135

Community financing

Regulation 2004/807/EC of the European Parliament and the Council amending Council Regulation (EC) 2236/95 laying down general rules for the granting of the Community financial aid in the field of trans-European networks

Pricing

Directive 2006/38/EC ‘Eurovignette’ amending Directive 1999/62/EC on the charging of heavy goods vehicles for the use of certain infrastructures (see following box)

Directive 2004/49/EC amending Directive 2001/14/EC on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification

Airport charges COM/1997/154

Green Paper on seaports and maritime infrastructure COM/1997/678)

3.1.1.3Feasibility and option analysis

Analysis of the demand

The estimation of the existing demand and forecasts for the future are complex and critical tasks that often consume a substantial share of the resources allocated to the feasibility study. As to the reference scenario (BAU or the do-minimum scenario), the following aspects should be made clear:

-the area of influence of the project: it is important to identify the demand without the project and the impact of the new infrastructure, as well as identifying other transport modes that should be considered (e.g. corridors, where there are often several modes in competition: road, rail and air transport);

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Option analysis

The construction of a reference solution and the identification of promising alternatives are two aspects that will influence all the results of the following evaluations. The reference solution will generally correspond to a BAU scenario. The BAU scenario should not be a ‘catastrophic’ one, resulting in traffic paralysis and in very high social costs.

In the case of strong congestion phenomena, whether at present or in the future, the reference solution should include those interventions (management, maintenance, etc.), which will probably be put into action in the absence of the project.

The analysis of alternative project solutions is equally critical. After defining the BAU scenario and analysing the critical aspects in terms of a demand/capacity ratio (see below), it is necessary to identify all promising technical alternatives on the basis of physical circumstances and available technologies.

The main potential for distorting the evaluation is the risk of neglecting relevant alternatives, in particular low-cost solutions, such as managing and pricing solutions, infrastructure interventions that are considered as not ‘decisive’ by designers and promoters, etc.

Investment costs and operating costs

For the BAU scenario, and for each alternative, the preliminary step is to estimate all the investment costs and expenses for maintenance, ordinary and extraordinary, and for renewals, and then to allocate these costs over the time horizon.

It is necessary to ensure that the project will include all the works required for its functioning (for example, the links to the existing networks, the technological plants, etc.) as well as the relevant costs of each alternative. The estimates of costs and times need to be realistic and preferably ‘on the safe side’ given the uncertainties involved; the latter point is particularly important for those projects which may be of significant relevance for the local community.

For collective transport modes, it will be necessary to design an operating model and to calculate its costs. For example, a hypothesis put forward for the operation of the railway, should include the number of trains which may be offered by type of train (goods, passengers, by making a distinction between short and long-distance traffic), where each service is associated to the relating costs. The same applies for node infrastructures, such as ports and airports.

Pricing policies

Fares, tolls and other pricing policies will influence the expected volume of demand and the distribution of demand across transport modes. It is therefore important whenever a different pricing hypothesis is introduced, to reconsider the demand estimates and allocate the correct traffic volumes to each mode.

The pricing criteria for transport infrastructures are a complex issue and may generate some problems when comparing the financial and economic evaluations. It is important to distinguish between:

-the fares which maximise the proceeds for the managers/constructors of infrastructures: these kinds of fares maximise the capacity for self-financing;

-the efficiency fares: these take into consideration the social surplus and consider also the external costs (congestion as well as the environmental and safety costs).

Efficient pricing should, in principle, be based on social marginal costs and requires the ‘internalisation of external costs’ (Polluter Pays Principle), including congestion and environment costs. Social efficiency requires that users pay all the marginal private or internal and external costs that they impose on society. An efficient structure of charges confronts users with the marginal social costs of their decisions.

In the case of transport infrastructures, marginal social costs comprise:

-the producer’s marginal costs: infrastructure wear and tear, e.g. in the road sector, damage from heavy goods vehicles increases as the fourth power of the axle weight;

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-the marginal external costs: congestion costs, environmental costs, external accident costs, i.e. those costs generated by the transport activities that do not fall on those individuals whose choices have caused them, but on other individuals, or on society as a whole.

Efficient pricing should generally involve low tolls where, or when, there is no congestion (so as to maximise the use of the infrastructure) and high tolls where, or when, this phenomenon occurs. If the infrastructure is not congested, there might be a conflict between financial need and the optimal use of the infrastructure: in this case, tolls intended to recover a fraction of the investment costs can cause a suboptimal use of the infrastructure. It is therefore important to clarify the pricing criteria that have been applied.

FOCUS: RAIL NETWORK ACCESS TOLLS

The pricing regimes of the railway sector represent an important factor and should be analysed with great care. There are two opposite strategies: average cost tolls (the ‘Anglo-German strategy’) featuring very high values and marginal cost tolls (the ‘French strategy’) featuring very low values.

These will not completely solve either the problem of congestion tolls (when demand exceeds supply) or the problem of track allocation criteria. In fact, special services, for example at a local level, may enjoy partial or total benefits. The allocation of tracks (i.e. of capacity) may be subject to constraints for the protection of the incumbent operator (‘grand-father’s right’). Tolls and regulatory constraints outline a framework, which is quite complex for the correct evaluation of the flows of future proceeds, especially in the longer term.

THE EUROVIGNETTE DIRECTIVE

The harmonization of rules regarding crossing freight traffic is one of the main targets of the EU Commission in order to set a road-pricing system. On 17 May 2006 the European Parliament and the Council adopted Directive 2006/38/EC amending Directive 1999/62/EC on the charging of heavy goods vehicles for the use of certain infrastructure (so called ‘Eurovignette Directive’). The Directive does not oblige Member States to introduce road pricing for trucks: Member States are free to decide whether or not to introduce so called ‘user-charges’ or ‘tolls’.

Member States may maintain or introduce tolls and/or user charges on the trans-European road network for purposes such as dealing with environmental damages, tackling congestion, minimising infrastructure damage, optimising the use of the infrastructure concerned or promoting road safety.

The mark-ups are the new instrument introduced in the amended Directive, allowing Member States to add 15% or 25% to the average toll on roads in mountainous area, according to some conditions:

-the road sections must be subject to acute congestion or the vehicles using these roads sections must cause significant environmental impacts;

-the revenues must be invested in priority projects of the TEN-T networks;

-the maximum level for mark-ups is 15% (25% in case of cross-border projects);

-tolls must be proportionate to the objective pursued;

-tolls must be transparent and not discriminatory.

The amended Directive, moreover, allows Member States to differentiate the tolls depending on the EURO emission class, or the time of day, the type of day or season.

While Directive 1999/62/EC applies to vehicles over 12 tonnes, the new Directive introduces taxes on vehicles over 3.5 tonnes, but Member States will be required to extend this obligation until 2012.

The Directive recommends that the vignette revenues should be used to optimise the entire transport system (not just for roads). As this recommendation is not legally binding, some Member States may also use the revenues for non-transport purposes. The financial analysis of a road project will consider the Eurovignette revenues only when this is consistent with the national legislation.

3.1.1.4Financial analysis

The financial analysis will generally be conducted from the viewpoint of the infrastructure manager (which might differ from the service operator). If required, it may first be carried out for the owners and the operators, and then consolidated.

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Financial investment costs are an outcome of the technical analysis, usually disaggregated by the type of works into which the intervention may be broken down and allocated over the construction time. The cost analysis should distinguish the elementary cost components (labour force, materials, carriage and freight) so as to facilitate the subsequent application of the conversion factors for converting financial into economic costs.

Financial inputs will be represented by the proceeds from the tolls/tariffs applied for the sale of welldefined services. The estimate for the proceeds must be consistent with the demand elasticity and trends of explanatory variables (see the previous paragraph about pricing criteria). The financial analysis of nonrevenue generating infrastructures will show the net present cost for the public sector.

With regard to the recourse to private funding or Public Private Partnerships, attention should be paid to possible inefficiencies which may result from cost recovery policies. These may, in turn, affect the quantity demanded (under-utilisation).

3.1.1.5Economic analysis

The economic evaluation of transport investments relies on a well developed and straightforward framework and differs substantially from the financial analysis, since many of the benefits and costs are public goods, or goods without a market. Moreover, following a long and established tradition, the economic evaluation is based on a partial equilibrium approach (see box in Chapter 2).

With regard to the economic investment and operating costs of vehicles, if market prices are deemed to reflect the opportunity cost of resources, it will be necessary only to eliminate transfers from the financial costs by applying a conversion factor to each elementary cost component and to take tax burdens into account. If market prices are not deemed to reflect the opportunity cost of resources for some components, it will be necessary to apply shadow prices to correct the costs (see the general methodology described in Chapter 2).

Benefits result from variations in the area below the transport demand curve, as well as from the variations in economic costs, including external costs. Social benefits are obtained by adding the following components:

-variations in the consumer’s surplus: change in generalised transport costs, which incorporate the money costs travel, (i.e. the perceived cost: fares, tariffs and tolls, and vehicle costs perceived by the users9);

-variations in road user producer’s surplus: the unperceived costs of the private the road users enter into the calculation of the road users producer’s surplus as they are considered as producers of the services they supply to themselves (car users) or to their customers (trucks). The difference between the total costs of producing these services and the vehicle operating costs perceived is defined as ‘unperceived operating costs’(e.g. tyres, maintenance and depreciation). These costs enter into the calculation of the road users producer’s surplus and are then added to the consumer’s surplus;

-variations in infrastructure and services operator producer’s surplus: profits and losses of infrastructure managers, if available, and transport service operators;

-variations in taxes and subsidies for the government;

-variations in external costs (emissions, noise, accidents).

The calculation of the consumer’s and producer’s surplus and the external costs, will take into account goods that have no market (see below) and whose estimate may require special techniques. When calculating the benefits, it is recommended that a distinction be made between:

lower than the real cost. In fact, for instance, car users tend just to take into account fuel expenses and underestimate other expenses. The difference between the operating costs and the perceived costs is defined as ‘unperceived operating costs’.

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