Economic and

financial analysis
Warsaw
6-7 August 2009

Cost-benefit analysis
A project involves combining resources
w h i c h a r e c a r e f u l l y d e fi n e d a n d
programmed over time
To bring about an improvement in the
well-being of society

Cost-benefit analysis
The aim of the financial and economic analysis is
to determine and qualify the costs and benefits
of projects in order to facilitate certain decisions
which have to be made thought the project cycle
Cost-
benet
analysis
Financial
analysis

Economic
analysis

Decision-making help
PHASE

Decision-making help concerning

...
IDENTIFICATION

Broad asibility of the project

concept
Selec6on of possible project
op6ons

FORMULATION
(APPRAISAL)

Planning of nancially sustainable

and economically protable project
Financing methods

...

Types of projects
Projects with tangible products, i.e. products which can
be valued in monetary terms
Projects with non-tangible products, i.e. products
which cannot be accurately valued in monetary terms
without either carrying out research which is likely to
exceed 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

Financial Analysis (FA)

The main purpose is to compute the project s
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 by
the project

FA Incremental method
The project is evaluated on the basis of the
differences 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 Financial return on investment

(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 the
expected revenues
(Financial Rate of Return)
Is defined as the discount rate that produces a
zero FNPV. It measures the capacity of the net
revenues to remunerate the investment cost

FA Financial return

FA - Financial sustainability
A project is financially sustainable when it does
not 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 cash
transfers) 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

FA Financial return on capital

Look into the project performance from the perspective
of 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

Economic analysis(EA)
Assess the project from the view of
society as a whole
Appraises projects contribution to the
economic welfare of the region or
country
Rationale: project inputs should be
valued at their opportunity costs and
outputs at consumers willingness to pay

EA - Methodology
The methodology is summarised in following
steps:
conversion of market to accounting
(shadow) prices
monetisation of non-market impacts
inclusion of additional indirect effects
discounting of the estimated costs and
benefits

EA Accounting prices
Observed prices, as set by markets or by
governments, sometimes do not provide a
good measure of the social opportunity cost
of 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 Non-market impacts
To include in the appraisal those project
impacts that are relevant for society, but
for which a market value is not available
They are identified, quantified, and given a
realistic monetary value
Transport: savings in travel and waiting
time
Healthcare: life expectancy /quality of life

EA Correction of externalities
Some impacts may be generated that spill
over from the project to other economic
agents without any compensation
Can be negative a new road increasing
pollution levels
Or positive - a new railway reducing
traffic congestion on an alternative road
link

EA Discounting
Costs and benefits occurring at different
times must be discounted
The discount rate in the economic
analysis of investment projects - the
social discount rate (SDR) - reflects the
social view on how future benefits and
costs should be valued against present
ones

EA Indicators
(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

FA/EA When used

Budget cretirea: project size is large
relative to the national economy (ERDF for major projects, 25 mln EURO)
Doubts exist as to the implications for key
actors/entities of the project
It is important to know the precise impact
of the project on certain actors/entities
etc...

Useful links
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 costbenefit 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