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8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI
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Warsaw6-7 August 2009
Economic and
financial analysis
8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI
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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
8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI
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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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8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI
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8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI
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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
8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI
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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)
8/17/2019 Presentation Economic and Financial Analysis INTERACT ENPI
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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)
•
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
•
They are identified, quantified, and given arealistic monetary value
•
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
•
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
•
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
•
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