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TRANSCRIPT
Cost Benefit Analysis and its role in defining the funding needs from a CEF
perspective
Julien Bollati – INEA R1 - Financial Engineering Manager
National CEF Infoday- Den Haag, 11 November 2016
Agenda
The role of CBA in CEF Transport Calls
CBA in practice
Recommendations
CBA to identify funding need
The role of CBA in CEF Transport Calls
Why CBA is relevant?
• TEN-T Regulation Article 7.2.c • "A project of common interest shall be economically viable on the basis
of a socio-economic cost-benefit analysis." •CEF Regulation Article 10.6 • "The amount of financial assistance (…) shall be modulated on the basis
of a cost-benefit analysis of each project, availability of Union budget resources and the need to maximize the leverage of Union funding."
How is it used?
• Additional evidence of socio-economic performance (impact criterion) – Economic analysis
• To identify cases of potential overfunding – Financial analysis
Which methodology?
• The European Commission methodology developed for the Cohesion Policy (DG REGIO)
•Applicable to both Cohesion and General calls
RECOMMENDED
CBA in practice
What does it mean in practice?
• A CBA is required for works and mixed proposals (with sectorial exceptions for compliance driven projects – e.g. ERTMS, SESAR, Rail freight noise) • Specific CBA assessment has been
embedded since the evaluation of CEF 2015 call projects proposals
• Dedicated experts are involved during the assessment of applications to review the CBAs.
CBA is reflected in the Impact criterion
• CBA analysis is a complementary source of information for the assessment of the 'Impact' criterion
• CBA-specific experts provide to the traditional external experts a CBA Assessment Report with their analysis
• Findings related to CBA are taken into consideration in the evaluation and scoring of "Impact"
CBA is an additional input
What is it meant by "major weakness in CBA"?
• The impossibility to achieve one of the two objectives defined by the Regulations:
•When on the basis of the financial analysis it is not possible to conclude on the magnitude or concludes on the absence of the need for CEF funding (as per CEF Regulation Art 10.6)
•When on the basis of the economic analysis it is not
possible to conclude or concludes negatively on the socio-economic impact (as per TEN-T Regulation Art 7.2.c)
Recommendations
CEF Transport 2015 calls
• The quality of the CBAs submitted was very diversified and usually reflects the experience of Countries with CBAs and how developed is the CBA practice within the particular mode.
• For some projects it was not always possible to conclude on the presence of net revenues and the need to apply the funding gap.
• Information in the different parts of the application (Forms A, D, CBA, Feasibility Studies) is sometimes conflicting.
• In some cases the CBAs are in national languages and only a very limited summary is available in English.
General Findings
Recommendations
• CBA should part of the project preparation process to improve
projects (not treated only as an obligation).
• The CBA should include both economic and financial analysis. The REGIO methodology includes also technical feasibility, environmental sustainability and a risk assessment.
• Single unit of assessment. In some cases the CBA should target the global project not only the action (e.g. unconnected – isolated action is meaningless). MoS is an exception as more than one CBA (using the same scenario) might be necessary (it is not necessary to prepare and submit a combined CBA).
General
Recommendations
• Make sure the funding gap calculation is correct and includes all
cash revenues directly borne by users of the infrastructure in relation to the single unit of assessment.
• Provide additional qualitative information on revenues (number of sources, formalisation/contractualisation of the revenue streams).
• Unless transferred to users by a reduction of fares or compensated by an equal reduction in the operating subsidy, cost savings are considered as revenues and therefore impact the funding gap.
• Taxation is a common source of mistakes. It should be excluded, especially in the economic analysis.
Financial Analysis
Recommendations
• Labour shall be treated as a cost (yet probably lower than the market
value). Efficiency enhancing projects often forget to consider the employment reductions in the analysis.
• Make sure traffic volume forecasts are in line with national and EU planning (when relevant), otherwise explain the variance. Optimistic demand could overestimate socio-economic benefits.
• Some CBAs use scenarios "without the project" which are not relevant. For example MoS projects in SECA area adopting a scenario where they keep emitting sulphurous gases (which is no more allowed since January 2015). This leads to an overestimation of benefits and investment costs.
Economic Analysis
CBA to identify funding needs
Non-revenue generating projects
However, if they are able to demonstrate their socio-economic profitability they may qualify for public funding.
Initiatives that do not generate revenues are not financially self-sustainable and will not be implemented by private promoters.
• Lump sum subsidy (grant) • Fiscal incentives
• Operational deficit coverage
EU
MS 80%
20%
Non-revenue generating projects
However, if they are able to demonstrate their socio-economic profitability they qualify for public funding. If the project can demonstrate EU added value part of the funding might be contributed from EU sources via grants.
Initiatives that do not generate revenues are not financially self-sustainable and will not be implemented by private promoters.
• Lump sum subsidy (grant) • Fiscal incentives
• Operational deficit coverage
If the project can demonstrate EU added value, part of the funding might be contributed from EU sources. It is expected that national public funds are still allocated from local authorities for the remaining part. The share of EU contribution to the project is therefore called co-funding
Net revenue generating projects
The EU co-funding rates need to be modulated to take into account the share of funding already available from net revenues.
Of course projects generating few revenues still need funding but at a lower intensity
EU
MS
Funding Gap
50
DNR
DIC
80%
20%
Funding and Financing
FUNDING Area of intervention for grants
FINANCING Area of intervention for financial instruments
EFSI
CEF (ESIF, etc.)
EU offering
Financial instrument cannot substitute grants. Projects with funding issues need grants (which addresses funding) not Financial Instruments (which addresses financing).
Calculate the Discounted Net Revenues
DNR = Discounted Revenues – Discounted Operating Costs + Discounted Residual Value
DNR = Discounted Revenues – Discounted Operating Costs + Discounted Residual Value
Is the project “Revenue generating”?
YES> 0
NO≤ 0
Apply the EU co-funding rate to the Eligible cost
Discounted Revenues – Discounted Operating Costs
Discounted Revenues – Discounted Operating Costs
Define the Funding Gap amount
Funding Gap = Discounted Net Revenues – Discounted Investment Cost
Funding Gap = Discounted Net Revenues – Discounted Investment Cost
Calculate the Funding Gap rate
Funding Gap rate = Funding Gap / Discounted Investment Cost
Funding Gap rate = Funding Gap / Discounted Investment Cost
Modulate the EU co-funding rate
Apply the modulated EU co-funding rate to the Eligible cost
Modulated EU co funding rate = EU co-funding rate * Funding Gap rate
Modulated EU co funding rate = EU co-funding rate * Funding Gap rate
Funding Gap
Co-funding rate and funding gap
Application of the funding gap rate
Calculation of the funding gap rate
Modulation of the EU grant
FG = (DIC – DNR)/DIC
= (100 – 50)/100 = 50%
EU grant = EC x (EU rate x FG)
= 100 x (20% x 50%)
= 100 x 10% = 10
where FG is the funding gap rate (%) DIC is discounted investment cost DNR is discounted net revenue EU rate= max EU Co-funding rate EC = Eligible Costs
DIC DNR
For simplicity here DIC=EC