ITF-OECD Round Table on
ITF“Improving the Practice of Cost
Cost-Benefit Analysis in Transport”

THE PRACTICE OF COST BENEFITANALYSIS IN THE TRANSPORTSECTORMEXICO PERSPECTIVE

Vladimir Ramirez Soberanis
Unidad de Inversiones
SHCP
October 21, 20101

Contents:
I.

Institutional Framework (Stages of the Public
Investment Process)II. The role of Cost – Benefit Analysis in Decisionmaking process
III. Key Elements of Cost – Benefit Analysis
IV. Potential
Development
Assessments ProceduresofProjects

V. Conclusion

2

I. Institutional Framework•The purpose of the Institutional framework is tostrengthen the process of planning, selection andprioritizationi iti ti off investment
itt projects.
j t•Prerequisites for federal investments:
i.iii.
iiiiii.
iv.

FederalFd l entities
titi
mustt presentt a planninglid
documentt withithpriority investment needs
Present cost – benefit analysis
Obtain the project approval in the Investment Portfolio
The Inter-ministerial Commission for Financing andExpenditure (CIGFD) will analyze and determine theprojects prioritization for their inclusion in the draft budgetof expenditure

3II. Institutional FrameworkStages of the Public Investment ProcessgPlanning

Ex – Post
Evaluation

Cost-Benefit
Analysis

Monitoring

Prioritization

Budget Approval4

1. Planning
Planning Tools

NationalDevelopment

NationalInfrastructure
Program

Planning
DocumentPlan(6 years))(anually)(6 years)5

2. Cost - Benefit Analysis•Clear guidelines and parameters for the evaluation of costs andbenefits. In order to promote the same process for all projects there is a
general methodology that helps in the evaluation and selection of projects
with high social return.

•An independent expert opinion. For projects which investment amountis greater than 500 million pesos (approximately(appro imatel 50 million dollars).
dollars)•Training Center for the Preparation and Evaluation of Projects(CEPEP). It is the think tank of the UI.

•Investment Portfolio System. It is a bank of projects that demonstrates,
through a cost benefit analysis, high social return.

•Transparency. The Investment Portfolio System is available in the SHCP
web page:(http://www.apartados.hacienda.gob.mx/sistema_cartera_inversion/index.html)

6Priorization - Programming and Budgeting - Monitoringand Ex-Post Evaluation
3. Priorization•The Inter-ministerial Commission for Financing and Expenditure(CIGFD) will analyze and determine the projects prioritization for
their inclusion in the draft budget of expenditure.

4 Programming and Budgeting
4.
•

Federal Expenditure Budget and Investment Portfolio System
are linked at this stage.

5. Monitoring and Ex- Post Evaluation•Seeks to monitor the development
pof the pproject,jcheckingg thatex – ante estimated benefits are actually attained.

7III. The role of Cost – Benefit Analysis
in decision-making process•Is the most important instrument used by the government indecision-making process.

•CBA allows homogenizing criteria in the evaluation of projects
and promote transparency and certainty.

•By law,
law all federal investment projects have the obligation to:i) Present a Cost – Benefit Analysisii) Have the UI approval (registration code)iii) Be included in the investment portfolio•

In order to execute a project is necessary to demonstrate
through a CBA that this project has high social return.

8IV. Key elements of Cost – Benefit Analysis•The depth of the analysis depends on the investment
amount.

Type of CBA
TypeLevel

IInfrastructure
f t t
Project
Maintenance
Project

Millions of Dollars (MD)Technical notes
CBA(Idea and ProjectDefinition level)(Pre‐feasibility level)< 5 MD< 50 MD< 15 MD< 50 MD

CBA(Feasibility level)> 50 MD> 50 MD9

Process of a CBA• Identify a need or problem• Review if it is possible to improve the current
situation• Propose alternative solutions• Evaluate alternatives and improved current
situation• Apply a decision criterion to choose the bestoption
10

Transport Evaluation•

Costs, Benefits and Indicators

Costs

Benefits

NPVIRR

11

Transport Evaluation
Structure of a CBA•1• Executive Summary

2• The “No Project scenario” and alternatives analysis

3• Project Description

4• Project Scenario

5• Project Evaluation

6• Sensitivity and Risk Analysis

7• Recommendations.
12Specific Methodology
We have specific methodologies to facilitate and promotetransparency and uniform criteria to evaluate the CBA,
which are:•Highways•

Rural Roads•

Railway projects•

Massive Transport Projects

13Methodology for Massive Transport Systems
Some elements analyzed in this type of evaluation are:•Supply (Characteristics of the Transport System)
a)
b)
c)
d)
e)

•

Number and total capacity of all transport modes
Existing routes that provide the service (distance, number of lanes, etc.)
Travel time by route, and traffic light system’s description
N b off stops,
Numberttheirth i llocation
ti andd th
the didistancetb
betweentththemFrequency of transport by congestion Schedule (high, medium and low

Demanda)
b)
c)
d)
e)
f)

Origin and destination of passengers
Classification of passengers by travel’s motivation
Amount of user’s time
Estimated average number of passengers up and down daily and the distance
Traveled by the time of congestion (high, medium and low)
Average occupancy rate of each transport mode by congestion schedule.

…
14

Methodology for Massive Transport Systems
Some elements analyzed in this type of evaluation are:•Supply and Demand Interaction (Identify the Problem)
a)
b)
c)

•Higher transport costs
High operation and maintenance cost
Inefficient transportp system’syoperation
pBenefit identification
a)
b)
c)
d)
e)

Benefits for a shorter travel time ((users and no users))
Benefits for the reduction of pollutant emissions to the environment (intangible)
Reduced operating and maintenance costs
Earnings per release of resources
Salvage value at the end of project evaluation horizon.

15

V. Potential development of project assessment
procedures
In order to improve the quality of public investment, the UI:•Will play a more active role (conception(and definition)f)•Will focus more deeply into risk analysis•

Will ddeterminet
i ththe b
bestt fifinancingi schemeh((pure ffederald l
expenditure or PPP)•Is working
g on 3 new approachesppto evaluate a PPP p
project:ja) Gateway process reviewb) Eligibility index for PPP´sc) A new methodology for the whole investment cycle

16

V. Potential development of project assessment
procedures
Gateway Process Review• Cost Benefit Alnaysis (Social IRR & NPV)
Gateway
project is socially worthwhile?

The first step is to analyze if the0Gateway1

Gatewayy
2• PPP Elegibility
gy The p
project
jis feasible and viable as a PPP?.

• PPP Scheme The third step select the best PPP Scheme (Concession, Services
Contract, BFO, etc)

• Value for Money The fourth step make a comparison of PPP scheme against thepublic sector comparator taking into consideration the benefits, opportunities, andvalues of public sector retained risk. This Gateway (Public Sector Comparator)
Gatewayy
includes Risk Analysis and Financial Modeling.
3

Gateway
4• Information The fifth step evaluates all aspects of project as a whole.

17

PPP´s Eligibility index
NO

Project is not
implemented

Social NPV > 0?

YES
Traditional public
investment analysis
The project is perceived
by the authority to be executedas a PPPNONONOThe project has aninvestment of more than
USD 100 million

Does the project havean investment of more than
USD 100 million?

YESYESYES
PPP feasibility study

YES

Is it economic
or socialinfrastructure?

Economic infrastructure
F&VFM Analysis

F&VFM Analysis

Contingentg
PPP-NO

Pure PPP
Pure VFM PPP

Cost of private provisionrisk-adjusted

YES
VFM max > 0?

Traditional public investment
with limited budgetary
resources available

F&VFM Analysis

Combined VFM PPP

Cost of public provisionrisk-adjusted

Traditional public investment
with limited budgetary resourcesavailableNOSocial infrastructure

Combined PPPContingent VFM PPP
VFMmax =Is it eligible
for PPP?

The project is
executable as PPP

Notes:
VFM: Value For Money
F&VFM: Financial and Value For Money

18

Conclusion

ITF-OECD Round Table on
ITF“Improving the Practice of Cost
Cost-Benefit Analysis in Transport”

THE PRACTICE OF COST BENEFITANALYSIS IN THE TRANSPORTSECTORMEXICO PERSPECTIVE

Vladimir Ramirez Soberanis
Unidad de Inversiones
SHCP
October 21, 201020