Economic & Financial Analysis
Infrastructure projects often require economic analyses to determine their overall importance and benefit to society. Infrastructure projects are social projects, and it is important to justify the investment made towards them from the perspective of the community impacted by the changes the project will bring.
The assessed benefits (reduction in the travel time of passengers/cargo, vehicle operating costs, accident reduction, etc.) of the project are weighed against the costs. The costs include the initial improvement cost (investment made towards ensuring safety to passengers and pedestrians), the environmental and social mitigation costs, and the maintenance cost.
The benefits are weighed against the costs for both “with project” and “without project” scenarios to arrive at the following indicators, which are used to express the economic viability:
- The Economic Internal Rate of Return (EIRR);
- The Net Present Value (NPV) in relation to the Government’s current opportunity cost of capital; and
- The Benefit/Cost ratio (B/C).
In order to assess the likely avenue of funding the projects, it also helps to gauge the attractiveness of projects with private sector participation through BOT, and the level of budgetary support required, if any. The viability is evaluated in terms of the Project IRR (Financial Internal Rate of Return on total investment) and the Equity IRR (Financial Internal Rate of Return on equity investment), using discounted cash flow analysis, where both costs and revenues have been indexed to take inflation into account.