Guide to Cost-Benefit Analysis of Investment Projects
Introduction
The present guide to Cost-Benefit Analysis (CBA) of investment projects updates and expands the previous edition of 2008. The guide has been revised with consideration for the recent developments in EU policies and methodology for cost-benefit analysis and international best practices and builds on the considerable experience gained in project preparation and appraisal during the previous programming periods of the cohesion policy.
The objective of the guide reflects a specific requirement for the European Commission to offer practical guidance on major project appraisals, as embodied in the cohesion policy legislation for 2014-2020. As with previous versions, however, the guide should be seen primarily as a contribution to a shared European-wide evaluation culture in the field of project appraisal. Its main objective is to illustrate common principles and rules for the application of the CBA approach into the practice of different sectors.
The guide targets a wide range of users, including desk officers in the European Commission, civil servants in the Member States (MS) and in candidate countries, staff of financial institutions, and consultants involved in the preparation or evaluation of investment projects. The text is relatively self-contained and does not require a specific background in the financial and economic analysis of capital investments. The main change with respect to the previous edition concerns a reinforced operational approach and a stronger focus on the investment priorities of the cohesion policy.
The structure of the guide is as follows.
Chapter one presents the regulatory requirements for the project appraisal process and the related decision on a major project. The project appraisal activity is discussed within the more comprehensive framework of the multi-level governance planning exercise of the cohesion policy and its recent policy developments.
Chapter two discusses the CBA guiding principles, working rules, and analytical steps that shall be considered for investment appraisal under EU funds. The proposed methodological framework is structured as a suggested agenda and checklist, both from the standpoint of the investment proposer, who is involved in assessing or preparing a project dossier, and the project examiner involved in project appraisals.
Chapters three to seven include outlines of project analysis by sector, focusing on transport, environment, energy, broadband, and research & innovation sectors. The aim is to make explicit those aspects of the CBA that are sector-specific, such as typical economic costs and benefits, evaluation methods, reference periods, etc.
To facilitate the understanding and practical application of CBA in the different sectors covered by the Guide, a number of case studies are provided. The case studies are solely intended as worked examples of the general methodology described in Chapter 2 and the sector-specific methodologies. Although the project examples used in the case studies may be partially based on real projects, these have been simplified and modified in many ways to fit the intended purpose, which is why they are not necessarily representative of the complexity of any real project. Also, the projects selected are only illustrative examples of a vast variety of possible project types within each infrastructure sector and should not be seen as a standard project for the given sector. Similarly, none of the specific assumptions featured in any of the case studies are meant to be seen as representative or standard for any other project, in any sector or country, but rather as illustrative examples. Finally, it should also be noted that for reasons of space limitations in this Guide, the case studies have been generally kept as short as possible and thus many details had to be left out in many ways.
A set of annexes cover the following topics: financial discount rate; social discount rate; approaches for empirical estimation of conversion factors; shadow wage; tariff setting, polluter pays principle and affordability; willingness to pay approach; project performance indicators; probabilistic risk analysis; other appraisal tools. The text is completed by a bibliography.
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