I MPLEMENTING ACT ON THE METHODOLOGY FOR THE COST - BENEFIT ANALYSIS OF MAJOR PROJECTS Expert Group Meeting, 26 September 2013

S ECOND DRAFT OF IMPLEMENTING ACT ON CBA METHODOLOGY - M AIN CHANGES General comments: Better harmonisation between CBA Implementing Act and Formats for Major Projects Some elements now covered in Delegated Act on Revenue Generating Operations Some comments relevant for CBA guide update

S ECOND DRAFT OF IMPLEMENTING ACT ON CBA METHODOLOGY - M AIN CHANGES 2.1 Presentation of the socio-economic context, identification of the project, feasibility of the project with demand and option analysis Issues raisedMS which raised the issueChange in Implementing Act Clarification for simplified CBA needed CBA to be prepared after FS misleading Option analysis too simplified BG, CZ CZ More clarification provided on p.7; additional guidance will be given in CBA guide Changed to "as soon as possible in the project preparation phase, usually at the end of the preliminary design stage" More information provided on p.6- 7, two-steps approach recommended

S ECOND DRAFT OF IMPLEMENTING ACT ON CBA METHODOLOGY - M AIN CHANGES 2.2 Financial analysis Some key elements now covered in Delegated Act on revenue generating operations, namely: - Discounted cash flow methodology and Financial Discount Rate - Other principles: incremental method, reference periods by sector, residual value - Data required: Investment costs, Replacement costs, Operating costs, Revenues and plus polluter-pays principle, full-cost recovery, affordability Note: MS comments on above issues considered in DA

S ECOND DRAFT OF IMPLEMENTING ACT ON CBA METHODOLOGY - M AIN CHANGES 2.2 Financial analysis cont'ed Issue raisedMS which raised the issueChange in Implementing Act Financial analysis to be carried out in constant prices where current prices are adjusted by Consumer Price Index CPI Remove condition requiring cumulative cash-flows to be positive EE PL No change: one common approach ensures homogeneity and consistency across projects No change: this can help MS selecting beneficiaries in good financial health

S ECOND DRAFT OF IMPLEMENTING ACT ON CBA METHODOLOGY - M AIN CHANGES 2.3 Economic analysis Issue raisedMS which raised the issueChange in Implementing Act Minimum economic benefits Clarification on cohesion and non-cohesion MS under SDR Adjust SDR to current economic situation SDR is indicative and MS can define their own benchmarks CZ Several PL Minor change: main economic benefits to be considered, others can be added if needed and justified Corrected on page 11 "New" rates proposed: 3% for non-cohesion MS (and continue 5,5% for cohesion MS) IA on page 11 gives this flexibility under two conditions: justification and consistency

S ECOND DRAFT OF IMPLEMENTING ACT ON CBA METHODOLOGY - M AIN CHANGES 2.3 Economic analysis cont'ed Issue raisedMS which raised the issueChange in Implementing Act Section on climate change should be more detailed Conditions for the use of cost- effectiveness analysis too narrow PL More guidance will be provided in CBA guide and application form Minor change: this method should only be used only in exceptional situations; however, "no relevant externalities" replaced by "no significant externalities"

S ECOND DRAFT OF IMPLEMENTING ACT ON CBA METHODOLOGY - M AIN CHANGES 2.4 Risk assessment Issue raisedMS which raised the issueChange in Implementing Act Include Risk Matrix as part of risk analysis Parameters in the definition of critical variables are too high (1% variation resulting in 5% variation of NPV or IRR) Sensitivity analysis not practical, scenario analysis is more useful. IT PL Description on how the risk matrix should be presented included on p.14 Changed to 1% variation resulting in 1% variation of NPV or IRR. It is useful as it forces the beneficiary to deal with the concept of uncertainty. Scenario analysis is part of sensitivity analysis.