WasteCBAguidelines JASPERS

7/28/2019 WasteCBAguidelines JASPERS

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GUIDELINESFOR

COST BENEFIT ANALYSIS

OF

SOLID WASTEPROJECTS

TOBESUPPORTEDBYTHE

COHESION FUNDANDTHE EUROPEAN REGIONAL DEVELOPMENT FUND

IN 2007-2013

FINAL DRAFT

MINISTRY OF PUBLIC

FINANCE

MINISTRY OF

ENVIRONMENT

Authority for the Coordination

of Structural Instruments

Managing Authority for

Sectoral OperationalProgramme Environment


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May 2009


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The present guidelines were prepared under the coordination of Authority for theCoordination of Structural Instruments with JASPERS assistance1.The document reflects the consultations with the representatives of Ministry ofEnvironment and its consultants on the practical details of CBA analysis, as well asthe detailed guidance and clarifications received from the Romanian Desk and theEvaluation Unit in DG REGIO.

1JASPERS (Joint Assistance to Support Projects in European RegionS) is a major joint policy initiative of the

European Investment Bank (EIB), the European Commission (Regional Policy Directorate-General - DG Regio), theEuropean Bank for Reconstruction and Development (EBRD), and KFW. JASPERS is designed for twelve EUMember States to help them better prepare projects proposed for EU Fund financing. More information available at

www.jaspers.europa.eu

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Table of content

1.Reference framework..................................................................................... 6

2. Rationale and Objectives of the Guidelines...................................................72.1 Rationale of these Guidelines................................................................7

2.2 What is CBA and why to perform it........................................................7

2.3 When to perform a CBA.........................................................................8

3. General methodological approach.................................................................83.1 Steps to be performed within the CBA...................................................8

3.2 General policy considerations for projects in the sector.........................9

3.3 Strategic approach and definition of objectives......................................9

4. Demand 11

5. Option analysis and section of the most suitable alternative........................11

5.1 Identification of alternatives..................................................................115.2 Selection of the most suitable alternative.............................................13

6. Financial Analysis .......................................................................................14

6.1 Objectives and scope of the analysis ..................................................14

6.2 Calculation of financial flows................................................................14

6.3 Principles to follow in developing financial projections.........................15

6.4. Analysis of financial projections..........................................................16

6.5. Considerations on tariff/taxes increases..............................................18

7. Funding Gap calculation and financial profitability indicators ......................18

8. Aspects related to financing of solid waste projects under SOP ENV..........20

8.1 Specific financing aspects....................................................................20

8.2 Institutional issues ...............................................................................20

9. Economic analysis.......................................................................................21

9. Sensitivity and risk analysis.........................................................................23

10. Presentation of results...............................................................................25

Annexes..................................................................................................... 27ANNEX I - Model for the Preparation of Financial Projections of Waste

Management Projects....................................................................28

ANNEX II - Model for the Calculation of the Funding Gap, the ProfitabilityIndicators and Risk and Sensitivity Analysis..................................32

ANNEX III - Model for the Estimation of Economic Benefits in WasteManagement Projects....................................................................38

ANNEX IV - Assumptions and sources of data for forecasts to be performed inthe CBA ........................................................................................44

ANNEX V - Itemised Unitary values for Investment and Operating Costs........46ANNEX VI Template for Project Financing Plan...........................................48

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ANNEX VII - Note regarding the institutional structure for integrated wastemanagement projects in regional context .....................................49

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1. Reference framework

The Council Regulation (EC) 1083/2006 of 11 July 2006 lays down the general provision ruling

programmes and projects financed by the European Regional Development Fund (ERDF), theCohesion Fund (CF) and the European Social Fund (ESF).

In particular, as indicated in Art. 40 (e) of the Regulation, major projects seeking financial support fromthe Cohesion Fund (CF) and the European Regional Development Fund (ERDF) require thepreparation of a Cost-Benefit Analysis (CBA) as part of the applications:

Article 40. - The Member State or the managing authority shall provide the Commission withthe following information on major projects:

[]

(e) a cost-benefit analysis, including a risk assessment and the foreseeable impact on

the sector concerned and on the socio-economic situation of the Member State and/orthe region and, when possible and where appropriate, of other regions of theCommunity;

At the same time, the Regulation required the European Commission to develop indicative guidanceregarding the methodology to perform CBA.

For the programming period 2007-2013, the Commission has provided a set of working rules topromote consistency in the CBA for CF and ERDF applications (see Working Document 4: Guidanceon the methodology for carrying out Cost-Benefit Analysis2, from now on the WD4). The generalmethodological framework to carry out CBA in the context of EC Funding is provided in the Guide toCost-Benefit Analysis of Investment Projects, a manual published by the Commission in 2002 whichhas been recently updated3.

The WD4 provides for generic guidance, and recommends the Member States to produce moredetailed CBA guidelines, with the goal to ensure consistency across projects presented for financing inthe various sectors,and taking account of specific institutional settings, particularly for the transportand environment sectors.

In line with the above regulations, Romanian Government Ordinance HG nr. 28 of 9 th January 2008on the methodological rules for elaboration and approval of technical and economic documentationfor investment projects requires CBA as part of the technical-economic documentation related topublic investments. More specifically, HG 28/2008 requires the following steps to be performed andpresented as part of the documentation of the proposed investment:

1. investment identification and definition of objectives, including specification of referenceperiod;

2. option analysis;3. financial analysis, including the calculation of financial performance indicators: cumulated

cash -flow, NPV, Financial Rate of Return (FRR) and B/C;4. economic analysis, including the calculation of economic performance indicators: NPV,

Economic Rate of Return (ERR) and B/C;5. sensitivity analysis6. risk analysis

These national CBA Guidelines build on the following framework:

2 Available at http://ec.europa.eu/regional_policy/sources/docoffic/2007/working/wd4_cost_en.pdf3Now available athttp://ec.europa.eu/regional_policy/sources/docgener/guides/cost/guide2008_en.pdf

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- Romanian legislation comprising provisions related to the cost benefit analysis (in particular,the government decision HG28/2008 on the methodological rules for elaboration and approvalof technical and economic documentation for investment projects)

- the national programming documents for the implementation of actions to be co-financed bystructural instruments (ERDF and CF), namely the National Strategic Reference Framework(NSRF) and the relevant Sectoral Operational Programmes (SOPs);

- the relevant EC regulations and guidelines,- statistics, forecasts and other documents that may provide information to be considered for

the development of suitable methodological framework to carry out the CBA.

2. Rationale and Objectives of the Guidelines

2.1 Rationale of these Guidelines

The present document refers to Sectoral Guidelines for Solid Waste projects, and has beenprepared in the general context of the waste management projects included in the Action Plansbetween JASPERS and the beneficiary Member States. The intention was to close the gaps betweenthe existing guidance and the specifics of the projects in the sector, with focus on the information andoutputs required in the major project applications.

To that extent, while consistent with the general CBA framework mentioned above, the document isbased on the experience of project appraisal for the first round of projects applications assessedduring 2008.

The objective of these guidelines is to provide the basic structure and methodological tools for theCBA of projects in the waste management sector in the context of the preparation of Cohesion Fundand ERDF applications. The concept of CBA here has been expanded from the traditional economicanalysis to the wider concept used in the relevant EU regulations and related guidance documents:project definition, financial analysis including the calculation of the funding gap, economic analysis,and risk and sensitivity analysis. A high percentage of the inputs to carry out this analysis will come

from other parts of the project feasibility studies and more specifically from the technical feasibilitystudy.

With the exception of the calculation of the funding gap, which is specific to EU funding, themethodology here presented is quite standard and applicable to waste management project in any awide range of contexts.

2.2 What is CBA and why to perform it

CBA is an analytical tool which is used to estimate the socio-economic impact (in term of benefits andcosts) related to the implementation of certain policy actions and/or projects. The impact must beassessed against predetermined objectives and the analysis is usually made from the point of view ofthe society as whole, intended as the sum of all individuals concerned. Typically, CBA analysis workswith national boundaries so that the word society usually refers to the sum of the individuals in anation state.

The objective of CBA is to identify and monetise (i.e. attach a monetary value to) all possible impactsof the action or project under scrutiny, in order to determine the related costs and benefits. In principle,all impacts should be assessed: financial, economic, social, environmental, etc. Traditionally, costsand benefits are evaluated by considering the difference between a scenario with the project and analternative scenario without the project (the so called incremental approach).

Then the results are aggregated to identify net benefits and to draw conclusions on whether theproject is desirable and worth implementing. To that extent, the CBA could be used as a decision-making tool for assessing investment to be financed by public resources.

The term CBA within these guidelines and according to EU requirements encompasses both thefinancial and economic analysis of the project. More specifically, within the framework of preparationand appraisal of CF and ERDF project, the European Commission requires a CBA to:

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(1) To assess whether a project is worth co-financing.The goal is to answer to the questions: does it contribute to the goals of EU regional policy?Does it foster growth and boost employment? In simple words, if the net benefits for thesociety (benefits minus costs) of the project are positive, then society is better off with theproject because its benefits exceed its costs. The project should therefore receive theassistance of the Funds and be co-financed. If not, it should be rejected. This assessment isperformed using an Economic Analysis.

(2) To assess whether a projectneeds co-financing.Besides being desirable from an economic standpoint a project may also be financiallyprofitable without EU assistance, in which case it would not be co-financed by the Funds.To check if a project should be co-financed requires a Financial Analysis: if the financialvalue of the investment (project revenues minus project costs) without the contribution of theFunds is negative, then the project can be co-financed. In this case, the EU grant should notexceed the amount of money that makes the project break even, so that no over financingoccurs.

The CBA is therefore needed to provide evidence that, while fitting within the framework of EUregional policy objectives, the project is both desirable from an economic point of view and needs thecontribution of the Funds for it to be financially feasible.

Projects in the environment sector result in economic benefits like the improvement of quality of lifeor the improvement in ambient quality, which are difficult to quantify in monetary terms. For thisreason, it is anticipated that CBA for this type of projects is especially challenging and the problembecomes more evident during the calculation of the projects Economic Net Present Value (ENPV) orthe Economic Rate of Return (ERR).

2.3 When to perform a CBA

When submitting an application for funding under the CF and ERDF funds, information on the resultsof CBA is required only for Major Projects, which are defined as operations accomplishing a preciseand indivisible task whose total costs is in excess of:

- EUR 25 million for environmental projects- EUR 50 million for all other fields.

To that extent a full CBA (comprising both a Financial and an Economic Analysis along with a riskassessment) is compulsory only for Major Projects.

However, for smaller projects which are not subject to a preventive appraisal and approval by theEuropean Commission, the relevant Managing Authority could decide to include a requirement forresults of CBA to be assessed as part of the selection criteria. In those cases, the methodologydescribed by these Guidelines, or a simplified version of it, will apply.

Details of the methodology to be followed for smaller projects will be discussed with the ManagingAuthority and will be reflected in relevant calls for proposal and applicants guides.

3. General methodological approach

3.1 Steps to be performed within the CBA

The proposed sequence for the CBA in the framework of project preparation, which is consistent withthe recommendations of the European Commission, is the following:

- Strategic approach and definition of objectives- Identification and selection of the most suitable alternative (in most cases, deriving from the

master plan and the feasibility study)- Financial Analysis- Economic Analysis- Risk and Sensitivity analysis- Reporting conclusions

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Most, if not all of the inputs for the definition of project objectives, the identification of alternatives andeven the selection of the most suitable alternative will come from other parts of the project feasibilitystudies, and more specifically from the analysis of the projects technical, environmental andinstitutional feasibility. For these sections, what is expected in the CBA is a summary and apresentation of those findings in a rational and consistent way.

The following sections provide the general recommendations on the actions to be taken whenperforming each of the steps mentioned above.

3.2 General policy considerations for projects in the sector

Typically, waste management projects will aim at reducing the total amount of waste going to finaldisposal, in a manner consistent with the EU policy for the sector: This policy is formulated inCOM(2005)666 Taking Sustainable Use of Resources Forward: A Thematic Strategy on thePrevention and Recycling of Waste of 21 December 2005.

The ultimate goal of this strategy is the EU becoming a recycling society that avoids waste and uses

waste as a resource, with the expected impact of the strategy is less waste to landfills, with more andbetter recycling and more compost and energy recovery from waste. Roughly speaking, In order toachieve this objective the strategy revolves around three concepts: (i) life-cycle thinking, which aims atminimising environmental impact during the entire life cycle of the resources and not just during themanagement of the resulting waste; (ii) the application of the so-called waste hierarchyconcept for theoverall design of projects: first prevention, then re-use, then recovery of materials and, when feasible,energy and finally and as the worst option the disposal in landfill; and (iii) the concept of recovery vs.disposal, which is related to the waste hierarchy since it defines when waste is no longer waste andbecomes a resource again.

3.3 Strategic approach and definition of objectives

The basic strategic documents for the implementation of actions to be co-financed by the CF and

ERDF are the National Strategic Reference Framework (NSRF) and the relevant Sectoral OperationalProgrammes (SOPs)

As any other Member State, Romania has prepared a National Strategic Reference Framework(NSRF), coherent with the Community Strategic Guidelines on Cohesion4, which gives the strategicdimension to the Funds in line with the priorities of the Union. The NSRF is the document that definesthe strategy chosen by Romania to contribute to achieving those priorities, and lists the SOPs that itendeavor to implement.

The SOPs present the priorities of the Member State (and/or regions) as well as the way in which it willlead its programming5. Each SOP summarises the overall objectives and targets sought at a sectorallevel, as well as identifies the priority areas of interventions (priority axes), which, in turn, lists specificobjectives.

Table 1 summarises the objectives of SOP Environment6 agreed with the European Commission,while table 2 provide the details on the objectives of Priority Axis 1, under which water and wastewaterprojects have to be submitted.

Table 1: Objectives SOP Environment

Priority Axis 1 Improve the quality and access to water and wastewater infrastructure, by providingwater supply and wastewater services in most urban areas by 2015 and by setting

efficient regional water and wastewater management structures;

Priority Axis 2 Develop sustainable waste management systems, by improving waste management

and reducing the number of historically contaminated sites in a minimum of 30counties by 2015

Priority Axis 3 Reduce the negative environmental impact and mitigate the climate change caused

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Avalaible at http://ec.europa.eu/regional_policy/sources/docoffic/2007/osc/index_en.htm.5 Please see http://ec.europa.eu/regional_policy/atlas2007/romania/index_en.htmfor links to the approved NSRF andsummaries for the SOPs.6 Available at http://www.mmediu.ro/integrare/comp1/POSmediu/POS_Mediu_EN.pdf

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by urban heating plants in most polluted localities by 2015.

Priority Axis 4 Protect and improve the biodiversity and natural heritage by supporting theprotected areas management, including Natura 2000 implementation.

Priority Axis 5 Reduce the incidence of natural disasters affecting the population, by implementing

preventive measures in most vulnerable areas by 2015.

Table 2: Specific objectives Priority Axis 2 SOP EnvironmentObjective 1 Increase the population covered by municipal waste collection and management

services of adequate quality and at affordable tariffsObjective 2 Reduce the quantity of landfilled wasteObjective 3 Increase the quantity of recycled and reused wasteObjective 4 Set up efficient waste management structuresObjective 5 Reduce the number of historically contaminated sites

The objectives of the proposed actions and projects have to be defined in a manner consistent withthe overall objectives and priority axes of the SOP, including defining the extent the propose projectswill contribute to achieving the results the SOP is aimed at.

To that extent, as much as possible, reference shall be made to the set of indicator included in SOPEnvironment for priority Axis 2. Given the nature of these projects, it can be anticipated that most ofthe projects in the solid waste management sector will aim at achieving certain minimum standardsthat are necessary to comply with relevant EU Directives and commitments of the Member Stateduring the negotiations for accession.

In this context, the general objective of the project could be defined along the lines of the example inthe table 3 below.

Table 3: Example of definition of the projects general objective

General Objective: to develop a sustainable waste management system with reduction of environmentalimpacts in the region of [] by improving the waste management service and reducing the number of the

existing uncontrolled dump sites in line with EU practices and policies and in the context of the PriorityAxis 2 of the SOP Environment.

Having defined the general objective, the specific objectives of the project will be formulated in amanner consistent with the specific objectives of the above-referred Priority Axis. An example isprovided in Table 4. However, the objectives on this table should be adjusted to match the objectivesand values that are applicable for each project.

Table 4: Example of definition of the projects specific objectives

Specific Objective Value without project (*) Expected value after completion

1. Increase in coverage of

waste management services

[]% in urban areas and []% in

rural areas, with final disposal notin accordance with the relevant EUDirectives.

100% in both urban and rural areas,

with final disposal in accordancewith the relevant EU Directives.

2. Reduction of quantity oflandfilled waste

Percentage of total collected wastegoing to landfill: []%

Percentage of total collectedbiodegradable waste going tolandfilll: []%

Percentage of total collected wastegoing to landfill: []%

Maximum percentage of totalcollected biodegradable wastegoing to landfill (**): 50%

3. Increase of quantity ofrecycled or reused waste

Percentage of packaging wasterecovered and recycled: []%

Minimum percentage of packagingwaste recovered and recycled (***):60%

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4. Establishment of efficientwaste management structures

Collection of waste is fragmentedat the local level, with lowstandards of operation and costrecovery.

There are no proper institutional

arrangements for the operation offinal disposal facilities.

Collection of waste and operation offinal disposal facilities have beensuccessfully tendered to wastemanagement operators, with clearstandards of operation and clear

responsibilities of all partiesinvolved to ensure sustainability.

5. Reduction of number ofhistorically contaminated sites

Number of un-regulated dump sitesin beneficiary region: []

All un-regulated dumpsites closedand rehabilitated.

(*) Refers not to the current situation but to the projected situation at the date of the foreseen completionof the project if the project is not implemented

(**) Refers to the general benchmark of maximum of 75% in 2010, at least 50% in 2015 and at least 35%in 2020, with the figures from 1995 as baseline.

(***) Refers to the general benchmark for the different types of packaging waste, as for example therecycling of at least 60% of carton and paper by 2012.

The standards to be achieved through the project for each of the above-referred specific objectives(that is, the expected value after completion) will normally be closely related to the orientations of the

EU waste policy and the compliance with the relevant EU Directives.

Moreover, in most cases the target values after project completion will be set by those directives andalso by the commitments of the Member State during the negotiations for accession. In fact anddepending on the situation without project, these standards will be in some cases so ambitious that inorder to accommodate the project to the financial constraints of the final beneficiary, the finalstandards will have to be achieved in two or more phases and consequently a new set of sub-standardobjectives may have to be defined for the project.

4. DemandThe demand for waste management services in the project area will be estimated based on thefollowing variables: (i) current population and expected growth rate during the project horizon; (ii)

current waste generation per capita and expected changes during the project horizon; and (iii) currentwaste composition and expected changes during the project horizon.

The estimation of the demand, both in terms of quality and quality of the waste is key factor in theidentification of the project alternatives to define the type and capacity of the facilities that will benecessary to achieve the desired.

Other relevant aspects to be considered as part of the demand analysis, which will be also used forthe identification and comparison of alternatives are (i) composition and calorific value, (ii) socio-economic conditions and geographic distribution of the customer base, and (iii) potential market forwaste sub-products (i.e.: recyclables and compost).

5. Option analysis and section of the most suitable alternative

5.1 Identification of alternatives

In terms of scope, waste management projects will normally be defined from the perspective on anintegrated approach, which includes (i) improvement of the collection system (namely with separatecollection of different waste streams to facilitate recovery); (ii) a number of intermediate facilities thatare necessary for the optimal operation of the system, the minimization of waste going to finaldisposal, and the compliance with the relevant Directives (for example, sorting of mixed waste intodifferent fractions, composting of the biodegradable fraction, stabilization of mixed waste before finaldisposal or even recovery of energy through incineration); (iii) disposal solutions for special types ofwaste included in the scope of the project (i.e.: construction, electric and electronic, hazardous); (iv)final disposal facilities (i.e.: landfills) for the residual waste; and (v) logistics, equipment and transferstations to ensure the transport of waste between the different facilities.

The identification of alternatives will focus on the different options to achieve the specific objectives(and standards after completion) of the project. This is typically done within the framework of the

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technical feasibility study and, if properly done in the first place, there is no reason to duplicate it justfor the purposes of the CBA.

The identification of alternatives will normally be carried away at two levels: (i) global alternatives,which refer to the structure of the overall system and may imply, for example, the comparison of somewaste treatment plus a landfill for final disposal vs. incineration; and (ii) technological options, whichrefer to the type of technology the facilities already selected as a result of the analysis of the globalalternative (i.e.: type of furnace in the case of a waste incinerator).

The identification of alternatives will normally start at the level of a National Waste ManagementStrategy (NWMS) or equivalent document, which should provide the general context in terms of globalalternatives. As an example, the NWMS may indicate the need to maximize the separate collection ofthe different waste streams in order to optimize the efficiency of the waste treatment facilities andimprove the quality of waste sub-products (recycling of glass, paper, metals, and production ofcompost) for their sale in the market. Alternatively, the NWMS may recognize the difficulty of carryingout separate collection or the lack of market for the sub-products, and therefore the focus will be put inthe treatment of mixed waste for the stabilization of the organic content before disposal and/or the

production of refused derived fuel for incineration in cement kilns or other industrial facilities.Once the general context of the NWMS has been established, the steps normally followed for theidentification of alternatives are:

1. Given the basic structure of the project as a result of the NWMS or equivalent document (i.e.:

the most adequate global alternative), identification of a number of possible sites for the projectfacilities.

2. Definition of the technological options for the different facilities to be included in the project(again, based on the strategic assessment in the first point of this section).

3. Screening of the suitability of the possible locations and technologies based on qualitative

criteria, like for example the following:a. Potential capacity (i.e.: in the case of a landfill site, estimated economic life after all the cells

have been filled in).

b. Public acceptance (i.e.: chances of rejection by local communities and/or NGOs).

c. Hydro-geology (i.e.: type of soil, stability of slopes, risk of flooding, risk of seismicmovements, potential impact on water bodies and aquifers).

d. Accessibility (i.e.: proximity and quality of access roads).

e. Ownership and zoning (i.e.: land property and use).

f. Other factors (i.e.: minimum required distance to airports, negative impact on economicactivities in surrounding areas).

4. Taking into account only the sites and technologies that passed the minimal qualitativerequirement for each individual criterion above, definition of a number of valid alternatives forthe project.Each one of these alternatives have to be understood as a set of treatment anddisposal facilities, with their corresponding technologies, plus the necessary improvements inthe collection system, transfer stations and technical assistance (including changes in theinstitutional framework if necessary) so each alternative is self-sufficient to achieve the projectobjectives.

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a. If this is the case, the most suitable alternative is the one that delivers the expected impact in acost effective way. In principle, all the alternatives are originally defined to achieve the samespecific project objectives and those objectives in most cases have to do with achieving somestandards that are necessary to comply with the relevant EU policy and directives. For thisreason, in most of the cases the alternatives are expected to be comparable in terms of impactand therefore the relevant method for the selection of the most suitable alternative is least-costanalysis.

b. In those few cases in which the expected impact of the alternatives is significantly different,mainly because of different externalities, then the economic analysis will be necessary toincorporate those externalities and rank the different alternatives.

6. Financial Analysis

6.1 Objectives and scope of the analysis

The purpose of the financial analysis is to ensure the long-term financial sustainability of the project,

which implies the following: (i) estimation of the project revenues and costs and their implications interms of cash-flow; (ii) definition of the project financing structure as well as its financial profitability;and (iii) verification of the sufficiency of the projected cash flow to ensure the adequate operation ofthe systems and meet all investment and debt service obligations.

Finally, for the purpose of the preparation of the application for funding, the financial analysis isnecessary in order to provide the basis for the calculation of the funding gap of the selected option andsubsequently to calculate the eligible expenditure in revenue-generating projects according to Art.55(2) of regulation 1083/2006.

In practical terms, the financial analysis of the project requires the preparation of detailed financialprojections in order to produce a cash flow statement. A specific model for the financial projections isavailable in the Annex I of these guidelines.Either with this model or with an alternative one withsimilar outputs, the details for the analysis should meet the basic standards indicated below.

6.2 Calculation of financial flows

The analysis is typically made up of a series of tables that collect the financial flows of the project,broken down as total investment, operating costs and revenues, sources of financing and cash flowanalysis for financial sustainability.

Generally speaking, except in some cases in which project revenues and costs can be ring-fenced, theassessment of the financial sustainability of the project will require the preparation of financialprojections for the overall system. This is typical for projects in the water sector and wastemanagement sectors where the costs of the different components of the system have to be coveredwith the same source of revenues (i.e.: tariff revenues or collections fees).

The recommended methodology is the discounted cash flow analysis (DCF) 7, which uses anincremental method that compares a scenario with the project with an alternative scenario withoutproject.

The incremental method is applied as follows:

1. Projections are produced of the overall system operations cash-flows (in term of expectedrevenues and costs, for each year of operation) in absence of the proposed project

7 The DFC method has the following features: Only cash flows are considered; i.e. the actual amount of cash being paid out or received by the project. Non-

cash accounting items like depreciation and contingency reserves must not be included. Cash flows must beconsidered in the year in which they occur and over a given reference period

When adding or deducting cash flows occurring in different years, the time value of money has to be consideredusing a predetermined discount rate.

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(withoutproject scenario). When the proposed project is entirely new, the without projectscenario is a scenario of no operations.

2. Similar projections of the operations cash-flows are produced taking into account theproposed projects and its impact in term of system operations (with project scenario). Theproject promoter shall take into account the whole investment plan, account for changes inO&M costs; adjusts tariffs (if relevant), taking into account affordability of services.

3. A cash flow for the investment is the difference between the cash flows in the with projectscenarioand the without project scenario. In case the proposed project is entirely new, thewith-project scenario is the basis for the incremental cash-flow.

The result of the process above is the incremental impact of the proposed projects in term of afinancial cash-flows statement for all years of operation.

In light of the methodology used, particular care shall be used in the definition of the without and withproject scenario. For each scenario, the key assumptions used shall be duly presented in the CBAreport.

Clear assumptions shall also be made on financial performance indicators and tariff evolutions (seealso section 6.4 below).

All the assumptions mentioned above shall be clearly defined in a tabular format as an annex to thefinal CBA report, specifying the situation in the with and without scenario.

The beneficiaries are also requested to present a summary of the underlying assumptions for unitaryinvestments and operating costs as used in the financial analysis following the format attached inAnnex V. This shall include details on the specific cost savings that the project will allow to achieve.

These assumptions need to be equivalent to those used in the feasibility studies to estimate theinvestment and operating cost of the proposed priority investment.

Please note that failure to duly present, as an annex of CBA reports and in the required format, theassumptions used for the financial analysis can result in delays in project approval and, ultimately, inthe rejection of the Proposal.

6.3 Principles to follow in developing financial projections

The financial projections for the project should be prepared on the basis of a financial model under thefollowing principles:

Reference period and life of equipmentThe period of projection is the same as the projects reference period, which is typically 30 years(taking into account also the construction period), but can be different depending on the nature of theproject facilities. As a rule of thumb, the reference period can be set at the shorter period between 30years, and the design capacity of the landfill.

As regards to the technical life of equipment, which has an impact on the level of replacement coststhat needs to be taken into consideration during the reference period, it is recommended to split theassets into three main categories:

- Civil works (including operational buildings, reservoirs, access ways, etc...) 40 years- Trucks and containers 8-10 years- Equipment and installations-12 years

The CBA report shall include in the Annexes a table summarising the proposed investment split in thethree main categories above, with an indication of the first year for replacement, as well as the relatedreplacement costs taken into account in the analysis.

Financial discount rateThe financial discount rate (in real term) to be used is 5%, as recommended by the EuropeanCommission in WD4.

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Macroeconomic assumptionsMacroeconomic inputs shall be based on the relevant statistical sources and be consistent acrossproject proposals. The assumptions to be used for the forecasts, as well as the main sources for the

data to be used are detailed are detailed inAnnex IV.

Features of the financial modelThe projection should be done in local currency and nominal terms in order to reflect more accuratelythe reality under the assumption made for inflation. However, for better clarity, data in the modelshould be input in real terms and then expected the inflation should be added to the calculations.Ideally, all inputs should be concentrated in one spreadsheet.

The translation into euros is done using the so-called all-current method, by which income statementvalues are translated using the average exchange rate for the year, balance sheet values aretranslated using the ending exchange rate for the year (with the exception of the shareholders equity,which is translated at the historical rate), and the translation gain or loss is recorded directly into theshareholders equity as comprehensive income.

6.4. Analysis of financial projections

The relevant aspects to be considered for the analysis of the output of the financial model in order toensure that the financial projections for the project are acceptable are the following:

1.Justification and consistency of data: All relevant input data should be justified (in the CBA or

with reference to other parts of the project feasibility studies) and consistent with the conclusionsof the feasibility studies, the project description and the rest of the data in the financialprojections. In particular, this refers to the following: (i) beneficiaries; (ii) demand, in terms ofquantities of waste; (iii) investment costs; (iv) revenues; (v) operating costs; and (v) expectedchanges of those variables during the projection period. Also, there should be sufficient certaintyregarding the financial arrangements for the financing of the project, and in particular in the caseof direct contributions from national authorities and beneficiaries and loans from local lenders orinternational financial institutions.

2.Polluter pays principle: The chosen scenario for the collection and disposal fees should reflectthe correct application of the Polluter Pays Principle. In the case of waste management projectsand according to Art. 15 of Directive 2006/12/EC on Waste, this means that

Article 15. In accordance with the polluter pays principle, the cost of disposing ofwaste must be borne by:a. the holder who has waste handled by a waste collector or by and undertaking asreferred in Article 9; and/orb. the previous holders or the producer of the product from which the waste came.

The proposed cost recovery system should be clear and transparent, with detail of the differenttariffs and/or fees, whether these tariffs and fees are based on quantities of waste, andseparation of collection from final disposal (for example, there could be regular tariffs/fees paidby the customers for collection and also gate fees applied to the collection companies and/ornon residential customers when they take the waste to some collection points or even the finaldisposal sites).

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3.Affordability: Notwithstanding the above, Art. 55 of regulation 1083/2006 allows forconsiderations of equity linked to the relative prosperity of the Member State concerned, whichfor all practical purposes implies that the collection and disposal fees borne by the users shouldnot exceed certain commonly accepted thresholds. In order to ensure the affordability ofcollection and disposal fees for low income households, the following steps are required in theanalysis:

a. Estimation of the average household income for those households subject to the payment ofcollection and disposal fees.

b. Estimation of the number and income of low income households based on the lower decilesof a distribution of income for those households subject to the payment of collection anddisposal fees.

c. Verification that, with regards to collection and disposal fees, payments do not exceed 1.8%of the monthly average income for households in the lowest income decile.

The calculation above implies the definition of collection and disposal fees/taxes that areaffordable for all customers, but this does not mean that the same fees apply to all customers.That is, an affordability constraint for low income customer can be overcome with a tariffstructure with lower rates for low income customers, but the rest of the customers and inparticular the non-residential ones can be subject to different fees that are more consistent withthe Polluter Pays Principle. In any case, affordability refers to the total amount paid by thecustomers, and not just to the incremental fees paid as a result of the project.

4.Financial sustainability: The verification of the project financial sustainability implies a cumulativepositive cash flow for each year of the projection. Temporary shortfalls can be covered by arevolving credit (embedded in the models cash flow statement) provided that the assumptionsbehind this revolving credit are reasonable with regards to the local financial markets. Also,when the financing structure of the project includes a long-term loan to be paid with revenues

within the scope on the financial projections, a debt service coverage ratio (measured asEBITDA/DebtService, with EBITDA being the earnings before interest, taxes, depreciation andamortization) of at least 1.2 (or higher if required by the IFI co-financing the project), whenapplicable will be required for each year of the loan amortization period.

As regards the identification of revenues, the Beneficiaries are requested to include in their CBAReport and in the Application Form a tabulation clearly identifying the different revenue sources, withcorresponding allocation for each concerned services (see also section 8.2 of this Guidelines) :collection, transport, disposal and treatment.

In addition, the possible external revenues shall be clearly detailed (unitary fees / tariffs andcorresponding volumes / quantities), such as :

1. sale of heat or energy;2. sale of compost;3. revenues generated from the recycled waste;4. disposal fees for CUU on the regional landfill with the corresponding tariff adopted by the

IDA

In the same vein, any contribution from external stakeholders to the project should be clearly identifiedand reflected in the financial analysis. In particular for some waste producers (WEEE, batteries,packaging waste,) which, according to the relevant Community and national legislation, shallcontribute to the corresponding collection and treatment costs, whenever the project would includesome facilities or infrastructures in that respect.

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6.5. Considerations on tariff/taxes increases

In light of the points raised above, incremental tariffs or taxes8 increases shall be considered in thefinancial analysis with the goal to ensure an adequate level of recovery of the cost of providing theservice, as well as financial sustainability of operations once the project is implemented, while at the

same time respecting affordability constraints that might apply.

Nevertheless, as stated in WD 4, tariffs/taxes shall be set at a level adequate to cover operating andmaintenance costs, including replacement costs for the equipment with shorter lifespan, as well as asignificant part of the assets depreciation (meant as a proxy of the cost needed to replace theinfrastructure in the future).

It is expected that the technical feasibility study will establish the incremental cost per unit of producedwaste on the basis of an incremental analysis taking into account the overall integrated wastemanagement system at the level of a County.

This cost will have to be checked against affordability limits for the consumers, eventually split byurban and rural areas, on the basis of the quantity of waste produced, as forecasted in the feasibility

study. The average tariff or tax shall be then set at the maximum level allowed by the affordability limitdescribed above, and applied to all customers, with a view to have a unified tariff systems9.

For those cases where due to low affordability levels, the application of the affordability ceiling detailedabove, will cause tariffs to be set at a level that endanger the financial sustainability of the project ordo not ensure full cost recovery of operation, alternative or cumulative options shall be explored inorder to address the problem and ensure sustainability.

These alternative options, deviating from the affordability policy described above, shall be used only ifa sound justification exists, and must be discussed and agreed in advance with the ManagingAuthority. It is anticipated that such options shall include, as a minimum:

- a political decision to set tariffs above the affordability, while considering specific measures at the

level of IDA to reduce the affordability burden on the poorest households (vouchers, lower socialtariffs, etc)

- alternative and more sophisticated tariff systems are considered, allowing for example, differentiatedtariff systems, with higher tariff for non domestic consumers, up to a level to be agreed with themanaging Authority.

- a combination of both options above.

The CBA will have to duly describe the recommended tariff system.

7. Funding Gap calculation and financial profitability indicators

The calculation of the funding gap as well as of the project profitability indicators (i.e.: financial returnon the investment or FRR/C and financial return on own capital or FRR/K, and the correspondingfinancial net present values FNPV) and in accordance to the Working Document 4: Guidance on themethodology for carrying out Cost-Benefit Analysis (WD4), the analysis will be carried out in accordingto the incremental method by comparing the scenario with the project with an alternative scenariowithout project.

For the period 2007-2013, art. 55.2 of the Regulation 1083/2006 stipulates that, for revenuegenerating projects10, the determination of the level of EU co-financing is based on the concept offunding gap, intended as the portion of the proposed (eligible) investment that cannot be covered by

8 Taxes may be considered as direct revenues for the sake of the project and related funding gap calculations according to Art.

55 of Regulation 1083/2006, provided that beneficiaries can demonstrate that are purposely raised for the financing of the wasteservice and earmarked in that respect, with appropriate justification of the corresponding collection mechanism.9 As described above, an unified tariff system does not mean that the same fees apply to all customers, but rather than thesame set of tariffs, if needed differentiated by categories, are applied consistently across the all project area.

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the net revenues accruing for the investment itself, both expressed in term of their current (present)value.

The difference between the two values is considered as Eligible Expenditure when applying the co-financing rates specified in the relevant SOPs.

WD4 gives clear instructions, which are replicated in the box below.

STEPSTODETERMINETHE EU GRANT2007-2013 PROGRAMMING PERIOD

Step 1. Find the funding-gap rate (R):R = Max EE/DIC

where

Max EE is the maximumeligible expenditure = DIC-DNR (Art. 55.2)

DIC is the discounted investment costDNR is the discounted net revenue = discounted revenues discounted operating costs + discountedresidual value

Step 2. Find the decision amount (DA), i.e. the amount to which the co-financing rate for the priority axisapplies (Art. 41.2):

DA = EC*Rwhere

EC is the eligible cost.

Step 3. Find the (maximum) EU grant:EU grant = DA*Max CRpa

whereMax CRpa is the maximum co-funding rate fixed for the priority axis in the Commissions decision

adopting the operational programme (Art. 52.7).

In practical terms, the project incremental revenues and costs will be estimated by running twoscenarios of the financial projections: with and without project. These incremental revenues and costs,in nominal euros, will be translated into constant euros and discounted using a rate of 5% in real terms(unless otherwise justified or different instructions provided by the Managing Authority), according tothe regulations and more specifically according to the instructions in the Guide to Cost-BenefitAnalysis of Investment Projects and the Working Document 4: Guidance on the methodology forcarrying out Cost-Benefit Analysis. The resulting funding gap and subsequent grant rate will then feed-back to the financial projections in an iterative process.

The project profitability will be measured by FRR/C before Community assistance and FRR/K afterCommunity assistance.

The value of FRR/C before Community assistance is expected to be low or even negative, whichjustifies the need for co-financing by the EU funds. FRR/K after Community assistance should not behigher than the required return on equity for companies in the sector since that would show andexcessive return to the project promoters at the expense of the EU tax-payer.

10 According to the definition of Art. 55, a revenue generating project means any operation involving an investment ininfrastructure the use of which is subject to charges borned directly by the users, any operation involving the sale of rent of landor building, or any other provision of services against payments. On the basis of subsequent clarifications issued by theEuropean Commission, when the projects revenues (without taking into account the residual value of the infrastructure) cannotcover its operating costs, then it has not be considered as non revenue generating, and Art. 55 do not apply.

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Once the incremental revenues and costs have been established, the projects funding gap and thefinancial profitability indicators can be calculated using the model in presented in the Annex II of theseguidelines.

While the tariff increases based on the approach recommended in the previous section are the basisfor forecasting projects incremental revenues, the discounted cash flow analysis performed tocalculate the Funding Gap , however, should not include non-cash accounting items such asdepreciation and contingency reserves, as clearly stated in Working Document 4.

On the other side, replacement costs that are due to be incurred during the period of analysis (e.g., forequipment with a shorter economic life) are included in the Funding Gap calculation as (discounted)operating and maintenance costs.

8. Aspects related to financing of solid waste projects under SOP ENV

8.1 Specific financing aspects

When establishing the project financing plan, after the calculation of the Funding Gap, it has to betaken into account that the minimum contribution required by project beneficiaries is according to thefollowing table:

Maximum value of financing for total eligible costs 98% (80% ERDF + 18% State budget )

Minimum Contribuion of the beneficiary 211%

Also, when presenting the project financing plan, attention is draw to the fact that the projectbeneficiaries are Local Authorities, and only part of the VAT related to the investment can be

considered as reimbursed the VAT related to the funding gap contribution (according to theprovisions of OUG 29/2007).

The part of VAT related to the non-funding gap contribution, which is ensured through a co-financingloan, as well as to other non eligible expenditures shall be considered as a non eligible cost, and theFunding Gap adjusted using a pro-rata. The Beneficiaries are requested to present the projectfinancing plan following the model attached inAnnex VI.

Also, since in many cases the co-financing will be ensured by Local Authorities, either via contractinga loan or through their budgets, the project promoter is advised to present in the project sustainabilityanalysis a brief financial analysis of the Local Authorities in order to prove that they are capable tofinance the non-eligible expenditures (from the operating surplus) and that they are allowed to contractthe co-financing loan (based on the prevailing legal limitations regarding the maximum debt service

level of local authorities).

8.2 Institutional issues

As described above, the CBA analysis and the Funding Gap calculations are made on the basis of anincremental analysis taking into account the overall integrated waste management system at the levelof a County.

However, the responsibilities for the management of the various services: collection, transport(construction and maintenance of the) transfer stations, (construction and maintenance of the )landfills/treatment sites, will likely be different from project to project, on the basis of the politicalagreements reached between the County Councils and the participating municipalities.

For a more detailed explanation of the institutional set up for the solid waste sector, seeAnnex VII.

11 It has to be duly noted that the 2% minimum contribution from the Beneficiaries shall be strictly applied.

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These services, while integral part of the integrated system, will likely be subject of differentmanagement contracts, in some cases already in place. To that extent, the project beneficiary, oncedetermined the results of the financial analysis, shall present the prevailing institutional set up on thebasis of Annex VII, clearly identifying and describing how the various services will be integrated and,where possible, their respective contractual arrangements (existing or intended) as well as respectivefinancial inflows and outflows. The beneficiaries are also requested to include in their CBA Report atabulation clearly identifying the different revenue sources, with corresponding allocation for eachconcerned service.

9. Economic analysis

The purpose of the economic analysis is to ensure that the project has a positive net contribution tosociety and therefore, in the context of these guidelines, worth to be co-financed by the EU funds. Thisimplies the verification that, for the selected alternative, the project benefits exceed the project costsand more specifically that the PV of the project economic benefits exceeds the PV of the projecteconomic costs. In practical terms, this is expressed as a positive ENPV, in Benefit/Cost (B/C) ratiohigher than 1, or when the project ERR exceeds the discount rate used for the calculation of the

ENPV. Same as in the case of the funding gap and financial profitability indicators, the analysis will becarried out in according to the incremental method by comparing the scenario with the project with analternative scenario without project.

The calculation of the project economic costs involves the conversion of project investment andoperating costs from market to economic prices, which implies the breakdown of the project cost intothe different categories listed below, with the required treatment specified for each case:

a. Traded items: This category comprises all goods and services included in the project cost that

can be valued on the basis of world prices. In a context of an open economy with internationaltender for the procurement of the equipment, materials and services, this category willnormally cover most of the project costs. No specific conversion is required since marketprices are assumed to reflect economic prices.

b. Non-traded items: This category comprises all goods and services that have to be procured

domestically, like for example domestic transport and construction, some raw materials, andwater and energy consumption. The conversion from financial to economic prices is usuallydone through the Standard Conversion Factor (SCF). The SCF is usually computed based onthe average differences between domestic and international prices (i.e.: FOB and CIF borderprices) due to trade tariffs and barriers. However, given that costs within this category arenormally low with regards to the total project costs and that high percentage of the MemberState trade is internal to the EU and therefore by definition not subject to trade tariffs, the SCFshould be very close to 1 and therefore we can assume to be 1 unless otherwise justified. Inany case and since the SCF is common to all projects in the same country, its value should beprovided by the Managing Authority.

c. Skilled labour: This category comprises the labour component of the project cost that isconsidered scarce and therefore adequately priced in terms of opportunity cost. No specificconversion is required since market prices are assumed to reflect economic prices.

d. Non-skilled labour: This category comprises the labour component of the project cost that isconsidered in surplus (i.e.: in a context of unemployment) and therefore not adequately pricedfrom the economic point of view. The correction to reflect the opportunity cost of labour ismade by multiplying the financial cost of un-skilled workers by the so-called Shadow WageRate Factor (SWRF), which can be calculated as (1-u)*(1-t), where u is the regionalunemployment rate and t is the rate of social security payments and relevant taxes included inthe labour costs. In practice, the SWRF is accounting for the positive impact of the project in aregion with high unemployment, since SWRF (always lower than 1) decreases asunemployment increases, resulting in a lower economic costs and therefore a higher economicreturn. The SWRF is project-specific and therefore should be calculated for each project.

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e. Land acquisition: This category comprises the land implicitly used in the project, even when nofinancial cost is included as part of the project cost (for example if the land for the landfill wasprovided free of cost by the project beneficiary). Correction of land costs intends to adjust forthe net output that would have been produced on the land if it had not been used by theproject. Rather than applying a conversion factor to the financial cost like in the case of non-traded items or non-skilled labour, the economic cost of the land, which is also project-specific,has to be calculated separately. However, in those cases in which the land has been acquiredat market value, it can be assumed that the financial cost is a good proxy of the economic costsince the market value should reflect the present value of the future output.

f. Transfer payments: This category comprises indirect taxes (i.e.: VAT), subsidies, and puretransfers payments included in the market prices used to estimate the project costs. All thesecosts have to be eliminated for the purposes of the economic analysis. However, economicprices should be gross of direct taxes. Also, specific indirect taxes/subsidies intended tocorrect externalities do not need to be eliminated as long as there is no double counting

The table below summarizes the corrections from market prices to economic prices here

indicated. The financial costs are converted into the economic costs by multiplying by thecorresponding conversion factor. Also, note that the relevant costs to be considered for theeconomic analysis are the project incremental costs, regardless if the financial analysis wascarried out using the remaining historical cost method.

Table 5: Applicable conversion factor per cost item

Cost item Conversionfactor

Comment

Traded goods 1

Non-traded goods Close to 1 To be provided by the Managing Authority.

Skilled labour 1

Non-skilled labour SWRF Calculated as (1-u) x (1-t)

Land acquisition n.a. Case by case calculation instead of conversion factor

Transfer payments 0

The project economic benefits for waste management projects can be grouped into three maincategories: (a) resource cost savings; (b) reduction of visual disamenities, odours and direct healthrisks; and (c) reduction of greenhouse gas emissions. The specific details and suggestions for thequantification for each category are the following:

a. The resource cost savings are due to (i) the recovery of recyclable products and the

production of compost and energy; and (ii) the reduction of the total amount of waste finallygoing to final disposal, which extends the economic life of the landfills. The quantification ofthese benefits can be done based on (i) proceeds for the sale of recyclable products, compostand energy (which can be taken for the financial projections or the calculation of the projectfunding gap and financial profitability indicators); and (ii) when applicable to the project,avoided investment and operating costs at the landfill site (which can be estimated at a certainstandard amount per tonne of waste diverted from the landfill).

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b. The reduction of visual disamenities, odours and direct health risks is due to (i) theelimination of uncontrolled dump sites; and (ii) the avoidance or proper collection andtreatment of waste leachate. The quantification of these benefits can be done based on (i)increase in land values in the areas surrounding the rehabilitated dump sites (which can beestimated at a certain amount per hectare of rehabilitated dumpsite); (ii) avoided cleaningcosts for not having to treat impact of uncontrolled discharges of leachate and/or the cost todevelop alternative water sources when applicable (which can be estimated at a certainstandard amount per tonne of waste either diverted from the landfill or properly disposed at thelandfill).

c. The reduction of greenhouse gas emissions is due to (i) the avoidance (or propercollection) of methane and carbon dioxide emissions, which typically account for 64% and 34%in volume, respectively, of all gas generated from decomposing waste; and (ii) the emissionssaved when the project results in the generation of heat and/or electricity and the alternativesource for this heat and/or energy implies the use of fossil fuels. The quantification of thesebenefits can be done based on estimation of the annual expected reduction in tonnes ofmethane and carbon dioxide (CO2) due to the project, transformation of the methane

quantities into CO2-equivalent using a standard conversion factor and monetization of theresulting quantities of CO2 and CO2-equivalent using a standard value of EUR per tonne ofCO212.

The specifics and standard values for the above-referred methodology for the quantification ofeconomic benefits are specified in the Annex IIIof these guidelines, which also includes a model forthe calculation.

Note that the increase of economic activity in the region as a result of the project is not a projectbenefit per se since this is inherent to all projects involving employment generation regardless of theobjectives to be achieved. However, the economic impact of employment generation will indirectly beconsidered when correcting the cost of un-skilled labour with the shadow wage as explained with more

detail below. Also, these potential benefits may be minored by the negative effect (in terms ofdisamenities) in the areas surrounding the final disposal facilities.

The final step in the project economic analysis is the calculation of the projects ENPV, the B/C ratioand the ERR. The social discount rate for the calculation of the ENPV and B/C is 5.5%. Once theeconomic benefits have been estimated (as per Annex III of these guidelines) and the differenteconomic costs and corresponding conversion factors have been established, they need to betransferred to the model for the calculation of the projects funding gap and the financial profitabilityindicators (as per Annex II of these guidelines) for the automatic calculation of the projects economicprofitability indicators.

9. Sensitivity and risk analysis

The purpose of the sensitivity and risk analysis is to asses the robustness of the project profitabilityindicators. For this purpose, the first part of the analysis (sensitivity analysis) aims at identifying thekey variables and their potential impact in terms of changes in the profitability indicators, and thesecond part (risk analysis) aims at estimating the probability of these changes actually taking place,with the results expressed as a estimated mean and standard deviation for those indicators.

The relevant profitability indicators to be considered for the sensitivity and risk analysis are FRR/K andcorresponding FNPV/K (calculated after Community assistance), and ERR and corresponding ENPV.

The sensitivity and risk analysis consists of three steps, with the result of each one of them having tobe reflected in the application for funding:

12 If the project is generating savings in terms of greenhouse emissions, the possible subsequent revenues generated by thesale of green certificates will have to be taken into account also in the financial analysis. Would it be the case, attention will thenhave to be paid to avoid double counting in the economic analysis

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1.Identification of key variables: This basically implies the calculation of the values of theprofitability indicators after variations of +/- 1% in the following variables: (i) project outturn cost;(ii) revenues; (iii) operation and maintenance costs; (iv) economic benefits; (v) economic costs(investment); and (vi) economic costs (operation and maintenance). The +/- 1% variations will beapplied across the board to the annual costs for the base case scenario, and the results will bepresented in a like the following:

Table 6: Summary of results of sensitivity analysis

Variable tested new FRR/K

Variation ofFNPV/K

(in % of basecase)

new ERR

Variation ofENPV

(in % of basecase)

Project investment cost(decrease of 1%) [calculate] [calculate] n.a. n.a.

Project investment cost

(increase of 1%) [calculate] [calculate] n.a. n.a.

Revenues(decrease of 1%) [calculate] [calculate] n.a. n.a.

Revenues(increase of 1%) [calculate] [calculate] n.a. n.a.

O&M cost(increase of 1%) [calculate] [calculate] n.a. n.a.

O&M cost(decrease of 1%) [calculate] [calculate] n.a. n.a.

Economic benefits(increase of 1%) n.a. n.a. [calculate] [calculate]

Economic benefits(decrease of 1%) n.a. n.a. [calculate] [calculate]

Economic costs (investment)(increase of 1%) n.a. n.a. [calculate] [calculate]

Economic costs (investment)(decrease of 1%) n.a. n.a. [calculate] [calculate]

Economic costs (O&M)(increase of 1%) n.a. n.a. [calculate] [calculate]

Economic costs (O&M)(decrease of 1%) n.a. n.a. [calculate] [calculate]

Given the results of the table above, any variable for which a variation of 1% results in a

variation of more than 1 percentage point in the base case FRR/K of ERR or more than 5% inthe value of the base case FNPV/K or ENPV will be considered a key variable.

2.Calculation of switching values for the key variables: The key variables require the calculation ofthe so-called switching values, which is the maximum variation (in percentage) in the keyvariable that is permitted before the FNPV or ENPV (whichever is relevant for that specific keyvariable) turns negative.

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3.Estimation of probability distribution for the profitability indicators: First of all, this implies aqualitative assessment of the relevant factors that may affect the values of the key variables aswell as the mitigating measures already included in the project in order to the impact of thosefactors. For example, project investment cost could be a key variable, poor definition of thedifferent investments included in the project and their cost could pose a relevant risk in terms ofproject outturn cost, and the preparation of detailed designs and tender documents with realisticcost estimates as part of the feasibility studies could be a mitigating measure to control this risk.After this qualitative assessment, there are two options for the quantification of the level ofcertainty of the calculated values for the profitability indicators:a. If there is reasonable information to define a probability distribution for the key variables, then

the Monte Carlo method can be applied. This method consists on assigning random values toall the key variables simultaneously (assuming a normal distribution between a maximum andminimum possible value) for a number or repetitions sufficiently high in order to come up witha probability distribution for each one of the profitability indicators. Then each profitabilityindicator will be expressed as the mean and standard deviation of the values obtained afterall the repetitions.

b. If there is no reasonable information to define a probability distribution for the key variables,then the risk assessment will be carried out by defining an optimistic and a pessimisticscenario that includes all the key variables, and then calculating the two extreme values forthe profitability indicators based on those two scenarios.

10. Presentation of results

The conclusions of the CBA will be presented in a document with the following sections:

1.Project area and beneficiaries, with detail of the demand projections (in this case, wastegeneration with the corresponding waste flows through the different waste treatment anddisposal facilities before and after project).

2.Project objectives, with detail of the context within the relevant sector operational programmeand the main indicators (in terms of standards) before and after the project.

3.Project description and cost, with the following sub-sections: (i) description of the alternativesconsidered and their corresponding cost; (ii) justification of the selection of the alternativeconsidered as most suitable; and (iii) breakdown of project cost by component and type ofexpenditure.

4.Financial analysis, with details of the financial projections and conclusions of the analysis in

terms of application of the polluter pays principle, affordability, financial sustainability andprofitability indicators (FRR/C before Community assistance and corresponding FNPV, andFRR/K after Community assistance and corresponding FNPV).

5.Co-financing rate, with details of the assumptions made for the calculation (for example, theallocation of non-eligible costs between DIC and (DNR) and the results of the calculation.

6.Tariffs and affordability, with details of the proposed tariff and fee structure for and adequatelevel of cost recovery and compliance with the Polluter Pays Principle as well as how theaffordability constraints have been reflected in this structure.

7.Economic analysis, with identification and quantification in monetary terms of the projectbenefits, correction of project cost with economic prices and calculation of the ENPV, B/C ratioand ERR.

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8.Sensitivity and risk analysis, with details of the key variables, the switching value on each case,the relevant factors and mitigated measures related to changes in these key variables, and theestimated probability distribution for the financial profitability indicators or, failing that, simplytheir values under an optimistic and pessimistic scenario.

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Annexes

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ANNEX I - Model for the Preparation of Financial Projections of WasteManagement Projects

The purpose of the financial model (see attached spreadsheet FinWM.xls)

is to facilitate the preparation of financial projections for waste managementsystems in order to assess the financial sustainability of the service as wellas the corresponding projects. This annex provides the instructions to use themodel and explains the basic assumptions behind the calculations.

FinWM(Protected).xls

Structure of the spreadsheetThe model consists of three worksheets: (i) Input; (ii) Output; and (iii) Equiv EUR. Thecontent of each worksheet is the following:Input: All the necessary inputs for the calculations are entered in this worksheet, with the cellscoloured in four colours depending on the type of data: blue if the required data is non-monetarydata (like for example percentages or years), green if the require data is in nominal EUR, yellowif the required data is in constant EUR, and white for formulas. For the purpose of this model,constant EUR refers to the price level of the year immediately before the base year. Thespecific instructions to enter the data are provided in the next section.Output: This worksheet is the core of the model and it is here where the most of the relevantcalculations are carried out. These calculations result in the projected financial statements innominal local currency as well as the calculation of a number of relevant operating and financialratios. For this purpose, this worksheet is divided into five modules: revenues, incomestatement, cash flow statement, balance sheet and ratios.

Equiv EUR: This worksheet translates the financial statements from the Output worksheet(Income Statement, Cash-flow Statement and Balance Sheet) into current euros.

Specific instructions for entering the model inputsThe tables below provide specific instructions for entering the input data into the Inputworksheet. For simplicity, the worksheet has been divided into modules and each line isnumbered. Some of the information required will come from the project feasibility study (like inthe case of population, coverage of the services, waste generation, project investment costs),whereas some other information will have to will have to be estimated specifically for this model(like for example the user fees and other revenues, the operating costs of the whole system, andthe overall financial situation of the service, which includes for example the initial balance sheetwith existing assets and liabilities).

Sheet:Input

Module: GeneralParameters Lines: 1-13 Subject: General parameters

Remarks:

This module requires the input of general parameters for the projections. The projection period (line 3)should be consistent with the economic life of the project in the context of which the projections are beingprepared. Note that The financial projections are prepared for the overall service that contains the projectto be submitted to the European Commission to obtain the support CF or ERDF support. The modelcovers a period of up to 30 years of projections, but all years beyond the projection period will not show.The magnitude of units for local currency (line 5) tells the model whether the data will be entered in units,thousands or millions. For the exchange rate, there are two options: automatic calculation based on theexchange rate of the base year and the different inflation rates for the local currency and the Euro, ordirect input of the values based on official estimations. The selection of one or the other option in made in

line 12.

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Sheet:Input Module: Revenues Lines: 14-21 Subject: Waste generation

Remarks:

The headings for the different lines in this section are self-explanatory. The important remark here is thatany improvement in coverage of the services has to be supported with the corresponding investments

further below in the module Investment Plan, either as part of the project or in parallel to the project.

Sheet:Input Module: Revenues Lines: 22-32 Subject: Revenues

Remarks:

The revenues to be considered in the projection refer to the overall system and are split into three parts:user fees (lines 22 to 25), sale of sub-products (lines 26 to 31) and other revenues (line 32). Generallyspeaking, under the assumption that the user fees should cover all costs associated with the provision ofthe services and not just the collection, gate fees are considered transfer prices between the differentfacilities and not accounted for as revenues. That is, gate fees are ultimately paid by the users andtherefore embedded into the user fees. The percentage of taxes in user fees (line 25) is used only for thecalculation of the affordability of the used fees with regards to the household income, and nowhere else in

the projections. Finally, in the case of revenues from sale of sub-products (lines 26 to 31), average pricesshould be used when there are different types of sub-products into the same category (for example,paper, cardboard, ferrous metals, aluminium, etc. under recyclable materials; different qualities ofcompost under compost; or heat and power under energy).

Sheet:Input Module: Operating costs Lines: 33-45 Subject: Operating costs

Remarks:

For the purpose of the model, the operating costs of the systems have been split into the different stagesof waste management (collection, in lines 33 to 35; sorting and treatment, in lines 36 to 38; incineration, inlines 39 to 41; and landfilling, in lines 42 to 44). On each case, costs are divided into fixed costs andvariable cost, with the latter in the form or unitary cost per ton of waste going through each stage. Other

operating cost that cannot be included in any of the above-referred categories can be entered in line 45.Operating costs DO NOT include depreciation, provisions, financial costs, or income taxes.

Sheet:Inputs

Module: Investmentplan Lines: 46-47 Subject: Investment costs

Remarks:

Investment costs are entered in two lines. Line 46 refers to the project investment costs (i.e.: the eligiblecosts for the CF or ERDF project under the context of which the financial projections are being prepared),whereas line 47 refers to the non-eligible costs of the investments as well as any other relevantinvestments in the waste management system, including the replacement of the project assets. Theoverall investment costs (i.e.: project plus other) should be consistent with the expected improvements inthe system (for example the increase of coverage of the service) as well as the projected operating costs

in lines 33 to 45.

Sheet:Inputs

Module: Investmentplan Lines: 48-51 Subject: Depreciation

Remarks:

For the purpose of calculating the depreciation costs, fixed assets are divided into three categories:existing assets (lines 48 and 49), project assets (line 50) and other capital investments (line 51). With theexception of line 48, which requires entering the actual depreciation in the last three years, annualdepreciation is projected based on an annual percentage of the purchase values. This percentage shouldbe calculated by dividing 1 by the average economic life of the corresponding assets (i.e.: an estimatedaverage economic life of 20 years will result in an annual depreciation of 5%.

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Sheet:Inputs

Module: Investmentplan Lines: 52-56 Subject: Financing sources

Remarks:

This section refers to the project financing sources, which can be the support from the CF or ERDF (line52), a grant from the regional or central government (line 53), a loan from an IFI (line 54) or an equity

contribution from the project promoter (line 55). The remaining balance (line 56) is assumed to be coveredby internal cash generation and does not require any input because it is an automatic calculation. Thesepercentages are applied to the project eligible costs (line 46) to calculate the corresponding amounts. Thesources of financing for the project non-eligible cost, the replacement of project assets and otherinvestments (see line 47) are entered in lines 63 and 64. The IFI loan is assumed to be taken in euros,with the conversion to local currency at the exchange rate of the corresponding year.

Sheet:Inputs Module: Investment plan Lines: 57-62 Subject:

Debt service IFIloan

Remarks:

The service of the IFI loan is calculated by the model automatically based on the parameters to beentered in lines 57 to 62. The option in line 62 allows for the selection of either servicing the loan with a

constant annuity of principal and interest or with the payment of equal instalments of principal (or thereforedecreasing interest payments). The interest rate and other fees (line 59 to 61) are nominal, not real. Sincethe IFI loan is assumed to be taken in euros, the debt service is also in euros, at the exchange rate of thecorresponding year.

Sheet:Inputs Module: Investment plan Lines: 64-65 Subject:

Debt service otherloans

Remarks:

The service of other loans (either an already existing loan or a loan taken in addition to the IFI loan tofinance other investments) has to be entered manually, with separation of principal and interest payments.

Sheet:Inputs Module: Other financialparameters Lines: 66 Subject: Interest

Remarks:

The amount to be entered in line 66 is simply the actual net financial expenditures in the last three years.This for the income statement of the historical period before the projections and has no impact in theprojections themselves.

Sheet:Inputs

Module: Other financialparameters Lines: 67-70 Subject:

Taxes anddividends

Remarks:

Same as in the case of net financial expenditures in line 66, the income taxes paid during the last three

years has to be entered n line 67 (for the income statement of the historical period before the projectionsand with no impact in the projections themselves). Also, the applicable income tax rate for each year hasto be entered in line 68, the VAT rate in line 71 and the dividend pay-out rate in line 70. Line 69 providesthe option, for the calculation of the annual income tax, of compensating the income before tax with lossesfrom previous years.

Sheet:Inputs

Module: Other financialparameters Lines: 72-74 Subject: Working capital

Remarks:

The basis for the calculation of working capital needs is provided in this section with the percentage ofcollections (which applies to the total revenues) in line 72, the days of stock in line 73 and the days ofaccount payables in line 74, the latter two in relation to the total operating costs.

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Sheet:Inputs

Module: Other financialparameters Lines: 75-91 Subject: Balance sheet

Remarks:

The historical balance sheet for the three years before the projections is entered in lines 75 to 91, with thelast of these three years is used as the opening balance for the projections.

Sheet:Inputs

Module: Other financialparameters Lines: 92-94 Subject: Cash management

Remarks:

The projection of the cash-flow statement in the worksheet Output includes the automatic calculation of arevolving credit to provide liquidity in case of small shortfalls at the end of a given year. The basicparameters for this calculation are entered in lines 92 to 94 in the form of minimum cash in had required atthe end of each year, maximum credit in terms of days of revenues, and interest rate for the creditbalances.

Sheet:Inputs Module: Other financialparameters Lines: 95-96 Subject:

Accounts

receivablemanagement

Remarks:

Line 95 provides the option to regularise the accounts receivable balance at the beginning of theprojections, with manual write-offs during the first three years. For the rest of the projections, the write-offis calculated automatically. Also, line 96 provides to options for VAT regime: payment upon billing orpayment upon collections. This is particularly relevant when the collection rate is line 72 is low, since thereis an additional loss to the amount not collected if the VAT that was already paid upon billing.

Other commentsUsing the data from the Inputs worksheet, the Output worksheet

WasteCBAguidelines JASPERS

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