The Economic Appraisal of Investment Projects at the EIB

224 Pages·2013·2.1 MB·English

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European Investment Bank The Economic Appraisal of Investment Projects at the EIB

The Economic Appraisal of
Investment Projects at the EIB

Projects Directorate

March 2013
(Under review)

30/10/2020 – Note to the Reader

The EIB Projects Directorate conducts technical and economic appraisal of the projects
financed by the Bank, and JASPERS includes economic appraisal in its project preparation
assistance. Economic appraisal plays a central role in the operations of the EIB. It allows the
Bank to judge whether an investment project will contribute to the economic growth and
cohesion of the EU and the economic progress of its partners.

This guide, which was published in April 2013 in the EIB website, illustrates how the Bank
conducts economic appraisal across the sectors of the economy where it operates.

The transformation of the EIB into the EU Climate Bank, as well as research advances in some
of the elements of the appraisal require that the guide be revised. Amongst some of the
elements requiring revision there are: the cost of carbon, the value of time (VoT) in transport
and the value of transport safety.

This version under review provides links to updated documents for their use until the
new version of the guide is available by end of 2021 at the latest.

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European Investment Bank The Economic Appraisal of Investment Projects at the EIB

Table of Contents

List of Abbreviations and Acronyms ....................................................................................... 3
Contributors ............................................................................................................................ 6
Foreword 8
1 Introduction ......................................................................................................... 9
PART 1: METHODOLOGY TOPICS: CROSS-SECTOR .................................................... 14
2 Financial and Economic Appraisal ................................................................... 15
3 Defining the Counterfactual Scenario ............................................................... 20
4 Incorporating Environmental Externalities ........................................................ 24
5 Land Acquisition and Resettlement .................................................................. 28
6 Wider Economic Impacts .................................................................................. 31
7 Economic Life and Residual Value ................................................................... 41
8 The Social Discount Rate ................................................................................. 44
9 Multi-Criteria Analysis (MCA) ........................................................................... 53
10 Risk Analysis and Uncertainty .......................................................................... 66
PART 2: METHODOLOGY TOPICS: SECTOR-SPECIFIC................................................. 72
11 Security of Energy Supply ................................................................................ 73
12 The Value of Time in Transport ........................................................................ 79
13 The Value of Transport Safety ......................................................................... 81
14 Road Vehicle Operating Costs ......................................................................... 82
15 Traffic Categories in Transport ......................................................................... 84
16 Risk-Reduction Analysis in Water .................................................................... 92
PART 3: SECTOR METHODS AND CASES ...................................................................... 97
17 Education and Research .................................................................................. 98
18 Renewable Energy ......................................................................................... 106
19 Electricity Network Infrastructure .................................................................... 110
20 Energy Efficiency and District Heating ........................................................... 115
21 Health ............................................................................................................. 118
22 Private Sector Research, Development and Innovation (RDI) ....................... 125
23 Software RDI .................................................................................................. 132
24 Research Infrastructure .................................................................................. 137
25 Manufacturing Capacity .................................................................................. 142
26 Telecommunications ....................................................................................... 146
27 Biofuel Production .......................................................................................... 156
28 Tourism ........................................................................................................... 160
29 Interurban Railways ........................................................................................ 165
30 Roads ............................................................................................................. 171
31 Urban Public Transport................................................................................... 178
32 Airports ........................................................................................................... 182
33 Seaports ......................................................................................................... 186
34 Regional and Urban Development ................................................................. 189
35 Public Buildings .............................................................................................. 196
36 Solid Waste Management .............................................................................. 201
37 Water and Wastewater ................................................................................... 205
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European Investment Bank The Economic Appraisal of Investment Projects at the EIB

List of Abbreviations and Acronyms

3G: Third generation (of mobile telecommunications technology)
ACP: Africa, Caribbean and Pacific Mandate of the EIB
AIC: Average incremental cost
B/C: Benefit-cost (ratio)
BGC: Behavioural generalised cost
BREEAM: Building Research Establishment Environmental Assessment Method
CAPM: Capital asset pricing model
CBA: Cost-benefit analysis
CCGT: Combined cycle gas turbine
CEA: Cost-effectiveness analysis
CF: Conversion factor
DDGS: Dried distiller grains and solubles
DH: District heating
DSL: Digital subscriber line
EC: European Commission
EE: Energy efficiency
EIA: Environmental impact assessment
EIB: European Investment Bank, or “the Bank”
EIRR: Economic internal rate of return (also referred to as ERR)
ENPV: Economic net present value
EPO: European Patent Office
ERDF: European Regional Development Fund
ERIAM: Economic Road Infrastructure Appraisal Model
ERP: Enterprise resource planning
ERR: Economic rate of return (also referred to as EIRR)
ETS: (EU) Emissions Trading Scheme
EU: European Union
FDI: Foreign direct investment
FEMIP: Facility for Euro-Mediterranean Investment and Partnership
FIRR: Financial internal rate of return (also referred to as FRR)
FNPV: Financial net present value
FP: (EU Research) Framework Programme
FRR: Financial rate of return (also referred to as FIRR)
FTTH: Fibre to the home
FTTx: Fibre to the (home/building/curb)
GC: Generalised cost
GHG: Greenhouse gas
GJ: Giga Joule
GMO: Genetically modified foods
GDP: Gross domestic product
GSM: Global System for Mobile Communications
HEV: Hybrid electric vehicle
HGV: Heavy goods vehicle
HR: Human resources
HSPA+: Evolved high-speed package access
HV: Heavy vehicle (transport context) or high voltage (energy context)
IATA: International Air Transport Association
ICE: Internal combustion engine
ICT: Information and communications technologies
IFI: International financial institution
ILUC: Indirect land-use change
IM: Infrastructure manager
IO: Input-output
IP: Intellectual property
IPPC: Integrated Pollution Prevention and Control
IRR: Internal rate of return
IT: Information technology
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European Investment Bank The Economic Appraisal of Investment Projects at the EIB
JASPERS: Joint Assistance to Support Projects in European Regions
kV: kilo Volt
KWh: Kilowatt-hour
LC: Levelised cost
LCU: Local currency units
LCOE: Levelised cost of energy
LNG: Liquefied natural gas
LTE: Long-term evolution
LV: Light vehicle (transport context) or low voltage (energy context)
MBT: Mechanical biological treatment
MCA: Multi-criteria analysis
MLD: Mega litre
MV: Medium voltage
MVA: Megavolt-ampere
MW: Megawatt
MWh: Megawatt-hour
NPC: Net present cost
NPV: Net present value
OCF: Operating cash-flow
OECD: Organisation for Economic Co-operation and Development
O&M: Operations and maintenance
OPEX: Operating expenditure
OPS: Operations Department of the EIB
PC: Personal computer
PHEV: Plugged-in hybrid electric vehicle
PJ: Projects Department of the EIB
PPP: Public-private partnership
PSO: Public service obligation
PV: Present value
R&D: Research and development
RDI: Research, development and innovation
RI: Research infrastructure
RM: Risk Management Department of the EIB
ROA: Real option analysis
ROIC: Return on invested capital
RU: Railway undertaking
SAAS: Software as a service
SME: Small and medium-sized enterprises
SP: Stated preference
SPL: Structural programme loan
SRAS: Single radio access network
STPR: Social time preference rate
STS: Ship to shore
SW: Solid waste
SWM: Solid waste management
TAC: Track access charge
TEU: Twenty feet equivalent (container) unit
TSO: Transmission system operator
TTM: Time to market
TWh: Terawatt-hour
UGS: Underground gas storage
UMTS: Universal mobile telecommunications system
UNWTO: United Nations World Tourism Organisation (UNWTO)
VAT: Value-added tax
VHV: Very high voltage
VOC: Vehicle operating costs
VOT: Value of time
VPD: Vehicles per day
WACC: Weighted average cost of capital
W&S: Water and sanitation
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European Investment Bank The Economic Appraisal of Investment Projects at the EIB
WHO: World Health Organisation
WOP: Without project
WP: With project
WTO: World Trade Organisation
WTE: Waste to energy
WTP: Willingness to pay
WWTP: Wastewater treatment plant

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European Investment Bank The Economic Appraisal of Investment Projects at the EIB
Contributors

This guide was prepared by EIB staff members involved in project appraisal and economic
analysis, as detailed below.

The authors benefited from the advice of a panel of external academic advisors, comprising
Prof. Martin Buxton (University of Brunel), Prof. Ginés de Rus (Universities of Las Palmas and
Carlos III), Prof. Georg Erdmann (Technical University of Berlin), Prof. Per-Olov Johansson
(Stockholm School of Economics), and Prof. Reinhilde Veugelers (University of Louvain). The
role of the panel was purely advisory, and no errors or omissions should be attributed to its
members.

The authors of the document were the following:

Coordinator and introductory chapter: J. Doramas Jorge-Calderón

Part 1: Methodology topics – cross-sector

Financial and economic appraisal: Harald Gruber and Pierre-Etienne Bouchaud
Defining the counterfactual scenario: J. Doramas Jorge-Calderón
Environmental externalities: Edward Calthrop
Land take and resettlement: Edward Calthrop
Wider economic impacts: Edward Calthrop
Economic life and residual value: Diego Ferrer
The social discount rate: Armin D. Riess
Multi-criteria analysis: Christine Blades
Risk analysis and uncertainty: J. Doramas Jorge-Calderón

Part 2: Methodology topics – sector-specific

Security of energy supply: Nicola Pochettino
Value of time in transport: Diego Ferrer and Claus Eberhard
Value of transport safety: Claus Eberhard and Diego Ferrer
Road vehicle operating costs: Pierre-Etienne Bouchaud
Traffic categories in transport: J. Doramas Jorge-Calderón
Risk reduction analysis in water: Thomas van Gilst

Part 3 – Sector methods and cases

Education and research: Heikki Kokkala

Power generation: Jochen Hierl
Renewable energy: David Kerins and Juan Alario
Electricity network infrastructure: Jochen Hierl
Gas grids, terminals and storage: Nicola Pochettino
Energy Efficiency and district heating: David Kerins and Juan Alario

Health: Christine Blades

Private sector RDI: Antonello Locci and Tom Andersen
Software RDI: Anders Bohlin
Research infrastructure: Jacques Van Der Meer
Manufacturing capacity: Tom Andersen

Telecommunications: Jussi Hätönen

Biofuel production: Oliver Henniges
Tourism: Campbell Thomson

Interurban railways: Alfredo Díaz
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European Investment Bank The Economic Appraisal of Investment Projects at the EIB
Roads: Pierre-Etienne Bouchaud
Urban public transport: Mauro Ravasio
Airports: J. Doramas Jorge-Calderón
Seaports: J. Manuel Fernández Riveiro

Regional and urban development: Sebastian Hyzyk and Brian Field
Public buildings: Lourdes Llorens, Mariana Ruiz and Brian Field

Solid waste management: Patrick Dorvil
Water and wastewater: Thomas van Gilst and Monica Scatasta

The authors are grateful to colleagues who reviewed earlier drafts of the guide, including Ann-
Louise Aktiv Vimont, Edward Calthrop, Harald Gruber, Armin D. Riess and Timo Välilä. Thanks
also to colleagues who assumed coordinating roles within particular sectors, including Brian
Field, Harald Gruber, Jochen Hierl, and J. Doramas Jorge-Calderón, as well as to colleagues
who coordinated input from JASPERS, including Antonio Almagro, Alan Lynch, Tudor Radu
and Pasquale Staffini. José Luís Alfaro kindly commented on parts of the guide. Finally, the
authors thank Stéphanie Marion for assistance during the preparation and formatting of the
document and Mirjam Larsson for assistance with the preparation of tables.
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European Investment Bank The Economic Appraisal of Investment Projects at the EIB
Foreword

The EIB Projects Directorate conducts technical and economic appraisal of the projects
financed by the Bank, and JASPERS includes economic appraisal in its project preparation
assistance. Economic appraisal thus plays a central role in the operations of the EIB. It allows
the Bank to judge whether an investment project will contribute to the economic growth and
cohesion of the EU and the economic progress of its partners.

Some projects have poor financial performance, and therefore may not be financed by the
private sector at reasonable terms, or at all. Private sector investors evaluate projects using
standard financial appraisals that focus on private financial returns. Economic appraisal, in
turn, takes a broader view to include other benefits and costs to society, accounting for all
resources used by the project, whether human, technological, or natural, and gauges the value
the project generates to all stakeholders, to determine whether society at large gains from the
investment.

The economic viability of a project can be seen as synonymous with sustainability, cohesion
and growth in many respects. A project that is economically viable generates products or
services that are valued by society and that may contribute to improving productivity and growth
for the economy. Any employment generated by an economically sound project would involve
jobs that are sustainable over the long run. By accounting for environmental costs and benefits,
economic appraisal sees that any impact on the environment is not gratuitous, while giving full
credit to the benefits of environmentally efficient technologies. Finally, economic appraisal
ensures that any financial support by the government or from European funds to a viable project
is public money well spent.

This guide illustrates how the Bank conducts economic appraisal across all the sectors of the
economy where it operates. The Bank uses standard economic appraisal techniques, including
Cost-Benefit Analysis, Cost-Effectiveness Analysis and, more recently, Multi-Criteria Analysis,
taking into account the evolving circumstances of each sector. Indeed, economic appraisal is
not a static discipline. The development of new sectors and technologies, and the
advancement of techniques and publication of new findings by academia, require that the
methodologies and parameters used in project appraisal evolve. For this reason, the Bank
continuously engages in revisions of methodologies and updates key variables used in
appraisals, most often in cooperation with academia and other consultants, as will become
apparent to the reader.

Given the wide range of sectors, the treatment of each in the guide is necessarily schematic.
Still, by combining discussions of the application of techniques to each sector with case studies,
the document provides a comprehensive picture of appraisal practice in the Bank. Methodology
themes of particular interest are treated separately in more detail and, whereas the guide is
intended for as wide an audience as possible, technical precision is provided where needed for
the benefit of the specialist reader.

The guide should allow the reader to gain a thorough understanding of how the EIB looks
beyond commercial considerations to ensure that investment projects are supported for their
contribution to cohesion, employment, growth and sustainability of the EU and its partners.

Christopher Hurst
Director General, Projects Directorate

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