#CostBenefitAnalysis: Improving National & EU Guidelines

2. Interaction of national and European Commission guidelines on Cost-Benefit Analysis: - common misunderstandings in their application - potential for improvement Krzysztof Kasprzyk MA for OP Infrastructure and Environment Ministry of Regional Development, Poland Ministry of Regional Development -

3. Background information • CBA Guide – what has to be added • Overview of Polish national guidelines • Common misunderstandings: how outsiders use CBA • Comparison between projects? • Option analysis for a given project? • Check of a given project’s desirability? • Major project approval? • CBA of CBA requirements – what is next? Ministry of Regional Development -

4. Background information • For each major project cost-benefit analysis, including risk assessment is required (Art. 40 of Regulation 1083) • The Commission shall provide indicative guidance on the methodology to be used in carrying out the cost-benefit analysis (Art. 40) – Working document no. 4 • For revenue-generating projects eligible expenditure (and, indirectly, co-financing amount) is based of funding gap (Art. 55) Ministry of Regional Development -

5. Background information • CBA Guide provides key methodological background, accompanied by some indicative parameters (eg. reference periods in some sectors), but it leaves some important questions unanswered • In order to ensure consistency within a Member State, it is proposed that Member States develop their own guidance frameworks taking account of specific institutional settings, particularly for the transport and environment sectors (WD4) Ministry of Regional Development -

6. CBA Guide – what is not there • Numerical values for non-monetary costs and benefits (eg. value of time, environmental externalities), conversion factors • Precise definition of some general concepts used (reference periods, residual value…) • Economic assumptions (demand models, elasticities, macroeconomic forecasts, demographic trends…) • Methods for estimating capital expenditure (total cost of a project) Ministry of Regional Development -

7. Overview of Polish guidelines • General guidelines concentrate on funding gap calculations: • Key parameters defined (exchange rate, nominal and real discount rates, categories of costs to be included, residual value, methodology, …) • Minimal reference periods are defined; longer periods can be used if benefits passed on customers • Obligatory elements to be included in sensitivity analysis (eg. what % deviation from original capex estimate should be considered) • Qualitative risk analysis rather than quantitative one recommended by the Guide Ministry of Regional Development -

8. Overview of Polish sectoral guidelines • Guidelines for environment (waste-water and solid waste) • Developed in previous financial perspective, updated by JASPERS (key features maintained) • Specific, detailed rules for estimation of future demand, profit margins, etc. • Thresholds for affordability – tariffs dependent on median income in a given area (differentiated by region and size of municipality) • Requirement to forecast future financial statements • Different treatment for replacement of short-term equipment (to be more in line with accounting habits) Ministry of Regional Development -

9. Overview of Polish sectoral guidelines • Guidelines for transport („blue book”) • Developed in cooperation with JASPERS, based on a document prepared in the end of the previous perspective • Key variables identified and valuations provided (based on HEATCO and national data) • Economic analysis before financial analysis • Variables selected for sensitivity analysis • For each subsector, a template for „results of CBA” is provided – this document summarizes the main results of CBA and is being assessed by national authorities • ERR used in some competitive calls for proposals as one of many project selection criteria Ministry of Regional Development -

10. And the result of all these guidelines is… ? • Consistent assessment of projects among EU countries (eg. ability to compare their effectiveness?) - NO • Significant assumptions differ between countries (EU provides no common valuations) • Significant assumptions differ between projects (even detailed guidelines do not cover everything and a smart consultant can strongly influence the final result) • There is no standard methodology for economic modeling and practically in no area there is a big enough sample to validate the assumptions used • Proper option analysis for a given project? - NO - in most cases, only the selected option is analyzed - even if other options are presented, their selection is often limited and strongly influenced by the fact that the choice was made before the analysis is prepared Ministry of Regional Development -

11. And the result of all these guidelines is… ? • Check of a given project’s desirability?– QUALIFIED YES • the worst lemons are identified if the institution involved is able to verify data provided – if projects are relatively uniform, national guidelines may be very helpful; simplicity of guidelines is the key factor • even if numbers are wrong, consistent framework provides for more transparent identification of project’s strengths and weaknesses • some better options for using the funds can still be overlooked (unless there is real competition and the results are used to select the best projects) • incentive compatibility is supported for revenue generating projects by connecting financial and economic analysis Ministry of Regional Development -

12. Factors influencing quality of assesment • CBA is not a part of an actual decision-making procedure and is prepared ex-post. • It is too complex and considered almost a „rocket science”: decision makers and people outside the field have huge problems grasping even the overall picture. • There is no clear link between certain parts of the analysis and actual benefit from conducting analysis: the most apparent example is the risk analysis which is checked on purely quasi-academic basis with no attempt in most cases to draw a single workable conclusion from it • Distortions arecreated by possible lack of incentive compatibility which are not clearly dealt with or even referred to • National guidelines have only limited possibility to ameliorate the problems: both because EC checks the application without regard to them (this is difficult, but it can be changed), and because of lack of sufficient institutional capacity Ministry of Regional Development -

13. Proposed topics to move forward • Simplifyby: • Assessing which parts have negligible impact on overall results (are below a margin of error created by uncertainty inherent to cost forecasting etc.) • The parts which serve only academic purpose (however interesting) with no practical implications • Emphasize practical benefits from each part of CBA – eg. by transforming risk analysis into a tool for project development (more use of switching values) • Recognize and identify incentive compatibility issues • Provide common benchmarks and valuations for the simplified model • Put more emphasis on economic modeling • Start discussion early before next financial perspective Ministry of Regional Development -

14. Krzysztof KasprzykDepartment for Coordination of Infrastructural ProgrammesManaging Authority Operational Programme Infrastructure and Environment 2007-13Krzysztof.Kasprzyk@mrr.gov.plwww.pois.gov.pl Thank you for your attention Ministry of Regional Development -