2010

Joint Transport Research Centre
ROUND TABLE
21-22 October 2010, ParisDISCUSSION PAPERS

18

the practice of cost benefit
analysis in the transport
sector: a mexican perspective
Vladimir RAMÍREZ SOBERANIS,
Unidad de Inversiones, Mexico

JOINT TRANSPORT RESEARCH CENTRE

Discussion Paper No. 2010-18

Prepared for the OECD/ITF Round Table of 21-22 October 2010
(Instituto Mexicano del Transporte, Querétaro, Mexico), on

Improving the Practice of Cost Benefit Analysis in Transport

THE PRACTICE OF COST BENEFIT ANALYSISIN THE TRANSPORT SECTORA MEXICAN PERSPECTIVE

Vladimir RAMÍREZ SOBERANIS
Unidad de Inversiones
Secretaría de Hacienda y Crédito Público
MexicoThe views expressed in this paper are the author´s and do not represent the opinions of theSecretaría de Hacienda y Crédito Público of Mexico, the Investment Unit, the ITF or the OECD.

Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF 2010

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TABLE OF CONTENTS

1. Introduction
2. Institutional Framework (Stages of the Public Investment Process)a) Planningb) Cost‐Benefit Analysisc) Prioritizationd) Programming and budgetinge) Monitoring and Ex‐post Evaluation
3. The role of Cost‐Benefit Analysis in Decision‐making process
4. Key Elements of Cost‐Benefit Analysisf) What Costs and benefits are taken into account?
g) Structure of the Cost‐Benefit Analysish) Specific Methodologies
5. Potential Development of Projects Assessments Proceduresi) Gateway Processj) Eligibility index of PPPsk) Methodology for the whole investment cycle
6. Conclusion

Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF 20103

ABSTRACT
Mexico´s public investment process is strengthen by an institutional framework that ensuresthat projects with a high social return are given preference. The Federal Law of Budget and
Financial Responsibility establishes as prerequisite for federal investments the obligation topresent a Cost‐Benefit Analysis (CBA), and to get the Investment Unit approval. This paper
describes the use of CBA for the social and economic evaluation of transport infrastructure
in Mexico and is made from the point of view of the role of the Ministry of Finance’s
Investment Unit in the appraisal process.

Introduction
Mexico has an institutional framework that seeks to strengthen the process of planning,
selection and prioritization of investment projects. At the beginning of the process, many actors
participate including the Ministry of Finance –SHCP‐, the Ministry of Transport –SCT‐, theInfrastructure National Fund ‐FNI‐, the National Development Bank for Public Works andServices – BANOBRAS‐, private actors, and the Congress (who has the final decision of approving
the Federal Expenditure Budget –PEF‐).
This process ensures that investment projects with a high social return are given preference.
The Federal Law of Budget and Financial Responsibility (LFPRH) establishes as prerequisites forfederal investments:i) to present to the SHCP a planning document where federal entities identify and prioritize
their investment needs for the next 6 years,ii) to present to the SHCP a cost ‐ benefit analysis (the SHCP may request that such analysis
is judged by an independent expert),iii) to obtain the project approval in SHCP´s Investment Portfolio System,iv) The Inter‐ministerial Commission for Financing and Expenditure (CIGFD) will analyze anddetermine the projects prioritization for their inclusion in the draft budget of
expenditure considering the following criteria: social profitability, regional development
and synergies, among others.
A key element which has allowed organizing the process of project selection is the obligation, bylaw, to present a Cost Benefit Analysis (CBA) in order to demonstrate its profitability and toaccess public funding. If a project´s Social Internal Rate of Return does not exceed the minimum
required (12%) it will not have access to public funds and may not be executed. This instrument
will allow financing projects socially worthwhile.
Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF 2010

5

The Investment Unit (UI) of the Ministry of Finance plays a fundamental role in this process. It is
responsible for integrating and managing the Investment Portfolio System and reviewing andapproving the CBA. Each time a project proves to be socially worthwhile, the UI assigns aregistration code which identifies the project and makes it possible to receive public funding
either through the Federal Expenditure Budget or the National Fund of Infrastructure.
This document describes the use of cost ‐ benefit analysis for the social and economic
evaluation of transport infrastructure. The description is made from the point of view of the roleof UI in the investment process, and does not consider internal evaluations in SCT and in otherfederal entities involved in the definition, selection, evaluation and financing of projects.
Mexico is currently carrying out an effort to improve the quality of public investment. In thisprocess the UI will play a more active role starting from the conception of alternatives to solve atransport problem until the definition of the project and its evaluation; it will delve deeply intorisk analysis and in the determination of the best financing scheme either through pure federal
expenditure or Public ‐ Private Partnerships.

Institutional Framework (Stages of the Public Investment Process)
Cost ‐ benefit analysis in Mexico is not an isolated practice but rather part of an integral processthat seeks to influence the preparation, selection, evaluation, financing and monitoring of aninvestment project.
Currently, Mexico has an institutional framework that gives support to the National Public
Investment System. This institutional framework can be explained by the different stages of theinvestment cycle which are described in the next paragraphs.

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Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF, 2010

Planning. In order to guide the actions and efforts in the development of infrastructure, there
are planning tools that allow to identify and to define what will be the priority projects todevelop at any particular moment. This stage is considered crucial since it depends on thecorrect identification of the needs of public investment, the analysis of feasible alternatives andthe deepness of necessary studies in order to reduce the uncertainty of a project. The expected
outcome at this stage is a strong investment expenditure planning (multi annual investment
planning). In the specific case of Transport projects, these tools are:• National Development Plan (6 years). It establishes the general objectives that the
government plans to achieve concerning the transport sector.
• National Infrastructure Program (6 years). Defines in a more precise way thestrategies and lines of action to follow concerning the transport sector. It also
defines in a quantitative matter the goals to achieve (kilometers, ports and airports
to construct, among others) and what are the main projects to boost, as well as thesource of their financing.
• Planning Document (updated every year) with the purpose of detecting thenecessities of investment in medium term, the SCT must elaborate a plan which
identify and prioritize their investment needs for the next 6 years.
Cost‐Benefit Analysis. By Law, all federal projects have the obligation to present a cost ‐ benefit
analysis in order to demonstrate its social profitability and to access public funding. It is

Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF 20107

important to note that the elements that help homogenize criteria and promote transparency
and certainty in the process are:• Clear guidelines and parameters for the evaluation of costs and benefits. In order topromote the same process for all projects there´s a general methodology that helps in
the evaluation and selection of projects with high social return. Also, there´s specificmethodologies for highways, rural roads, massive transport, etc.
• An independent expert opinion. The new projects which investment amount is greaterthan 500 million pesos1 have the obligation to present an analysis examined by anindependent expert, before initiating the construction. The opinion deal with thetechnical, economic and environmental feasibility. This only applies for the energy,
water and transport sectors.
• Training Center for the Preparation and Evaluation of Projects (CEPEP). It is the think tankof the UI. The CEPEP helps in the development of new methodologies, assists in theanalysis of complex projects and provides training in these methodologies to federal
entities and local governments.
• Investment Portfolio System. It is a bank of projects that demonstrates, through a costbenefit analysis, high social return. If a project is socially worthwhile the UI assigns aregistration code. This code (equals to UI´s approval) is a prerequisite for their inclusionin the draft budget and for accessing to public funding.
• Transparency. With the purpose of giving greater transparency in the use of publicfunding for projects, the Investment Portfolio System is available in the SHCP web pageand can be consulted in this link:
http://www.apartados.hacienda.gob.mx/sistema_cartera_inversion/index.html
Prioritization. Programs and projects registered on the Investment Portfolio System will beanalyzed by the Inter‐ministerial Commission for Financing and Expenditure (CIGFD), which will
determine the priority for inclusion in the Federal Expenditure Budget Draft, as well as theorder of its execution. This process intend to establish an order in all the programs andprojects, and maximize the impact they may have to increase the social benefit, primarily
observing the following criteria:a) Social‐economic profitability;b) Extreme poverty reduction;c) Regional development, andd) Synergies with other programs and investment projects

1

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Approximately 50 million dollars.
Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF, 2010

Programming and budgeting. Since it is a prerequisite to have a registration code in theInvestment Portfolio System in order to receive public funds, Federal Expenditure Budget andInvestment Portfolio System are linked at this stage.
• The Draft Federal Expenditure Budget that the President sends to the Deputies Chamber
only incorporates investment programs and projects which have registration code, itmeans, that has a CBA and meets with the established profitability parameters.
• Once the Federal Expenditure Budget is approved, new projects that are incorporated
must present a CBA and have the UI´s approval.
Monitoring and Ex‐post Evaluation. At this stage it seeks to monitor the development of the
project, cheking that ex ante estimated benefits are actually attained. The following instruments
are used:• Monitoring the physical and financial progress, provides information about investment´soutlays and construction progress.
• Profitability monitoring, reviews the behavior of the profitability indicators at theoperation stage.
• Ex – Post evaluation. Compares observed benefits of the project once it is on operation,
against the planned benefits.
The role of Cost‐Benefit Analysis in the decision‐making process
In Mexico, as in many other countries, there are multiple needs for transport and very few
resources to attend them. In addition to this, transport projects face an important politicaldebate, having a huge impact on the Federal Expenditure Budget.
In this respect, the cost‐benefit analysis is the most important instrument in the decision
making process. The principle behind the CBA is the seeking of the best possible way to use thepublic resources available to finance any project.
Due to the fact that this process involves many actors, both within Government and outside it,
the CBA allows establishing criteria in order to identify, quantify and value costs and benefits forthe lifetime of the project in a uniform, clear and transparent way.
By law, investment projects which financing sources are public, must:i) present a Cost‐Benefit Analysis,ii) have the Investment Unit approval (registration code) andiii) be part of the investment portfolio.

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CBA is a prerequisite to acquiring UI´s approval and for public funding.

The role of Cost‐Benefit Analysis in decision‐making process
Planning Process

Transport Projects

Technical feasibility

Source of funding

Guidelines

Type of projects

National Development Plan

High Ways

National Infrastructure Plan
Planning Document

Roads
Rural roads
TrainsParticipants

Ports

Ministry of Transport (SCT)BRT´sFederal Budget

YES
Congress (new projects)

Ministry of Transport (SCT)(CBA)*

Pure concession

NO(no public funds)
PPP`s

Society

Infrastructure Funds
GrantsPrivate sector
Politicians

subsidies
guarantees
PFI like projects*/ The Ministry of Transport review the technical feasibility of the project and elaborates a CBA

10

CBA Required

Ministry of Transport

Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF, 2010

YES

YES
+
Value for MoneyIn this way, to be able to execute a project it is necessary to demonstrate through a CBA that
this project has high social return; otherwise the project cannot be undertaken. This is regulatedon the Federal Law of Budget and Financial Responsibility (LFPRH). This institutional frameworklooks at both, the projects that do not belong to the National Infrastructure Plan at the
beginning, and those that are included in it, must have to prove (through a CBA) its social
profitability in order to accede to Infrastructure Funds.
Thus, infrastructure projects that claim for federal funding, or those that are realized by a PPP
needing support and subsidies from the Government (through the National Infrastructure Fund)must submit a CBA and receive the authorization from the Investment Unit to initiate
construction.

Approval of PFI Transport Project
MoF
Investment Unit

Line Ministry
Investment Unit

Line Ministry
Identifies
needsLine Ministry
Analyzes and approves
the
CBA (social return)PreparesCost-Benefit
Analysis (CBA)Line Ministry

Compares PPP vs
Traditional
Procurement*

Project Finance
Structuring
Possible
supportApprove
Final PPP
Evaluation*

MoF
BANOBRAS

MoF

FNI

TenderingprocessAward

Finance
Structuring

MoF
PrivateBANOBRAS banking
FNI
sector*Only in PPS (PFI~like projects)

MoF= Ministry of Finance
BANOBRAS = National Development Bank for Public WorksLine Ministry= Ministry of Transport
FNI= Infraestructure National FundIn the transport sector there are Services Provision Contracts (PFI like Projects). In this PPP
scheme a CBA and UI´s approval is a prerequiste before the Value for Money Analysis.

Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF 201011

Key Elements of Cost‐Benefit Analysis
The Cost‐Benefit Analysis aims to prove from the Net Present Value–NPV‐ and the Internal Rateof Return (IRR) assessment, that a project generates net benefits to society. Depending on theinvestment amount, the depth of analysis changes according to the size and type of the project,however, it is required that all the information is supported by reliable and precise data whichallows adding a detailed monetary costs and benefits assessment.
Types and level of studies for CBA
The depth in the analysis depends on the type and the amount of the projectType of CBAMillions of Dollars (MD)Technical notes
CBA
CBA
Type
(Idea and Project(Pre‐feasibility(Feasibility level)
Definition level)
level)
Infrastructure
Project< 5 MD< 50 MD

Maintenance
Project< 15 MD< 50 MD> 50 MD> 50 MD

Below is described the process of a CBA:
• The first step is to identify the transport need to be solved. If the need or problem is notclearly defined, the CBA is sent back to SCT.
• It has to be reviewed whether is possible to “optimize” the current situation, looking foractivities that would be carried out if the project is not undertake (i.e. upgrade theexisting infrastructure, administrative measures to improve the current situation).
• There has to be an analysis of the alternatives proposed, examine each one anddemonstrate why the one chosen is the best of all.
• The project costs and benefits have to be identified and quantified, and then calculate
the profitability indicators (NPV, IRR).
• Finally, the project behavior is faced with stress scenarios.

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There are key issues to be addressed in the structure of CBA• What is the problem/need to be solved?
• Is the Project the best alternative? What others alternatives have been considered to solve
the need?
• Is it technical, economical and environmentally viable? The rights of way are available?
• What are the components of the project? ¿Does It require complementary public works?
• Is the optimal time to start the project?
• Is the optimal size and scale?
• What are the main risks and how to control them?
• What is the impact in the transport network? ¿Is there a program to replace/ or reordering
the transport operators routes?

a) What Costs and benefits are taken into account?
In some cases there´s a lot of pressure to deliver results in projects that are not necessarily thebest solution. In order to solve this issue the CBA tries to includes only those variables that are
the most objectives, so the cost and benefits are well known and there´s no controversy about
them. The cost and benefits are as far as possible quantified and expressed in monetary terms.
For example the comfort and safety conditions, accidents, service quality level are consider as
no–monetary benefits so they are not taken into account. In the case of rural roads and otherinter regional transport projects the impacts on local or regional economic development areconsider as no‐monetary benefits too. The CBA only consider social benefits, therefore it´s not afinancial evaluation
In general terms the costs and benefits are:Costs
• Investment• Maintenance• Operation• Re‐investments• Disruption cost
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Benefits
The main benefit is the reduction in transport costs (generalized cost of travelling). This applies
for the direct users and in some cases to the indirect users whose benefit comes from a releaseof capacity in the transport network which helps to alleviate congestion and reduce thetransport cost.
•
•
•
•
•

Travel Time Savings 2
Vehicle Operating Cost Savings 3
Operation and Maintenance Savings
Emission Cost Savings
Salvage Valueb) Structure of the Cost‐Benefit Analysis
The general structure of a CBA is as follows
1. Executive Summary. Gives a global vision of the Project and describes the main
components and characteristics.
2. The “No Project scenario” and alternatives analysis. Define the problem that needs tobe solved, evaluates the proposed alternatives. Analyze what happens to transport
costs if the project is not undertaken. It must consider measures to optimize thewithout project situation. This scenario must be properly defined before using it as thebase case from which to measure incremental cost and benefits.
3. Project Description. Project is defined broadly to include what is the project´s purpose,
what are the components, scale and scope of the project.
4. Project Scenario. Compare the optimized “no project” situation with the “projectsituation” to calculate the incremental benefits and costs.
5. Project Evaluation. Identifies the cost and benefits that are only associated with the
project (and exclude those that would exist without the Project being undertaken).
Measures the impact of costs and benefits streams on an incremental basis. Calculates

2

3

To calculate time travel savings there are different values of time depending on what is the travel purpose (business, leisure,freight, etc).
World Bank´s Vehicle Operating Cost Model is used to calculate these savings.

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the Social Net Present Value (NPV) and the Social Internal Rate of Return (IRR), using
12% as social discount rate.
6. Sensitivity and Risk Analysis. Measures the impact of changes in the main variables on
NPV and IRR. It answers the question, what are the main risks and how can they be
managed?
7. Recommendations.

c) Specific Methodologies
There are specific methodologies to facilitate and promote transparency and uniform criteria toevaluate the costs and benefits of each type of transport mode.
Highways‐ Construction‐ Modernization‐ Road bypasses‐ Road junctions
Rural Roads‐ Productive roads‐ Connectivity roads
Railway projects‐ Rail bypasses‐ Rail terminals’ reallocation
Massive Transport Projects‐ BRT´s Bus Rapid Transit‐ Light rail train‐ Interurban train

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Methodology for Massive Transport Systems (BRT´s, Light rail train, interurban railroad)
The main elements analyzed in this type of evaluation are:Supply (Characteristics of the current Transport System)• Operating hours• Number and total capacity of all transport modes• Age of vehicle fleet, and its costs of operation and maintenance• Existing routes that provide the service (distance, number of lanes, etc.)• Travel time by route, and traffic light system’s description• Route section• Number of stops, their location and the distance between them (preferably present a
diagram)• Frequency of transport by congestion Schedule (high, medium and low)
Demand• 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.
Supply and Demand Interaction (What is the Problem?)• Higher transport costs because of low speed of transport that mean more hours fortransportation• High operation and maintenance costs of public transportation by passenger• Inefficient transport system’s operation (stopping in prohibited places, not allowed useof lanes, per road signs), which causes an increase in transport cost of private vehicles

Benefit Identification• Benefits for a shorter travel time spent by passengers carried by• Benefits for the reduction of pollutant emissions to the environment (intangible)• Reduced operating and maintenance costs by using more efficient technologies withhigher capacities
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• Benefits for shorter travel time, operating and maintenance costs get by the vehicles thatmove on a path that was decongested by the project.
• Earnings per release of resources, by recovering the value of the units that have finishedtheir useful life, even that is realized when the Project goes into operation• Salvage value at the end of project evaluation horizon.

Potential Development of Project Assessment Procedures
Mexico is currently carrying out an effort to improve the quality of public investment. In thisprocess the UI will play a more active role starting from the conception of alternatives to solve atransport problem until the definition of the project and its evaluation; it will delve deeply intorisk analysis and in the determination of the best financing scheme either through pure federal
expenditure or Public ‐ Private Partnerships.
This effort seeks to strengthen the role of UI:• To form specialized teams• To follow the project´s evolution• To help in defining the scope and size of major projects in earlier stages• To focus the attention in major projects• Deeper risk analysis
To consolidate these efforts the UI is formulating and working on three new approaches toevaluate a PPP project:a) Gateway process reviewb) Eligibility index for PPP´sc) A new methodology for the whole investment cycle (not shown here)
Gateway Process Review
There´s plenty of room to improve the PPP analysis trough a gateway process reviews. Throughall these gateways the UI will seek to get the best VFM for PPP projects.

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*/ this is a preliminary version (still work in progress)
PPP´s Eligibility index
The UI is working on a new methodology to strengthen the identification and selection processof PPP´s projects. The first requisite is preparing a CBA and identify if the project is sociallyworthwhile.

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Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF, 2010

NO

Project is not
implemented

Social NPV > 0?

YES
Traditional public
investment analysis
The project is perceived
by the authority to be executed
as a PPP

NO

NO

NO

The project has aninvestment of more than
USD 100 million

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

YES

YES

YES
PPP feasibility study

YES

Is it economic
or social
infrastructure?

Economic infrastructure
F&VFM Analysis

F&VFM Analysis

Contingent PPP-

NO

Traditional public investment
with limited budgetary
resources available

F&VFM Analysis
Pure PPP
Pure VFM PPP

Combined VFM PPP

Cost of public provisionrisk-adjusted

Traditional public investment
with limited budgetary resources
availableNO

Social infrastructure

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

Cost of private provisionrisk-adjusted

YES
VFM max > 0?

The project is
executable as PPP

Notes:
VFM: Value For Money
F&VFM: Financial and Value For Money*/ this is a preliminary version (still work in progress)
Vladimir Ramirez Soberanis — Discussion Paper 2010-18 — © OECD/ITF 201019

Conclusion
In recent years Mexico has strengthen the institutional framework and the proceedings ofthe different stages of the investment cycle through changes in law:
• The obligation in the Federal Law of Budget and Financial Responsibility (LFPRH) to
present and get the UI´s approval of Cost Benefit Analysis as prerequisite to accesspublic funding.
• The proceedings for project prioritization for their inclusion in the Budget of
Expenditure Draft considering social profitability, regional development andsynergies, among other criteria by the Inter‐ministerial Commission for Financing andExpenditure (CIGFD).
• The constitution was amendment to include the possibility of multiannual investment
outlays for bigger infrastructure projects.
• The implementation of the Investment Portfolio System (every request for CBAapproval it has to be made by internet, no paperwork is necessary).
• Clear guidelines and parameters for the evaluation of costs and benefits in specificmethodologies for different transport sectors.
• A PPP Law.
There is room to make improvements in the use and role of CBA in the decision making ontransport infrastructure, mainly to foster its use in the earlier phase (planning stages). The
big challenge is to involve more key actors in the use of CBA in this process.

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