This chapter sets out guidance for carrying out a robust project appraisal methodology that assesses the strategic alignment and value for money of infrastructure proposals. The Guidelines, structured as an 18-step checklist, also evaluate and assess the risks associated with infrastructure proposals. Thus, they allow officials to select a preferred project based on a wide range of important criteria. The chapter explains the relevance of each step of the checklist and gives examples of their use. It also provides examples of further tools and resources that can be used for project appraisal and selection.
Efficient and Sustainable Infrastructure in Egypt
Advancing Service Delivery, Green Transition and Private Investment
Abstract
These guidelines provide step-by-step instructions and general guidance on carrying out infrastructure project appraisal and selection. They are designed to support the assessment of feasibility studies, as required by item 9 of the Evaluation Criteria for Investment Projects. In particular, the guidelines are designed to support MPEDIC officials with assessing the strategic alignment and economic viability of project proposals, as part of an assessment of overall feasibility. The guidelines can also be used by public entities when developing feasibility analyses when seeking sovereign funds, to guide the development of projects. The Project selection checklist sets out the requirements that agencies must meet to comply with the guidelines.
These Guidelines provide a structured and systematic approach to evaluating infrastructure projects. By applying these guidelines to the analysis of feasibility studies, MPEDIC will be better-placed to make well-informed choices based on thorough assessments, data-driven analysis and clear criteria, leading to better project selection. Applying the guidelines will also demonstrate that projects are being prioritised in a systematic, consistent manner based on evidence, demonstrating MPEDIC’s commitment to transparency and accountable decision-making.
The Guidelines are structured as an 18-step checklist covering the key steps in project appraisal and selection (see Figure 3.1). The first section, “Strategic Alignment”, sets out how to develop a longlist of project options that are strategically, politically and technically feasible. The second section, “Potential Value for Money”, sets out the steps of analysing these options in depth, considering their social, environmental and economic benefits, costs and impacts. In addition, the Guidelines provide support with evaluating the risks associated with each investment option, which is an important part of investment decision-making given risks can impact the expected return on investment. By following the guidelines, officials will have a preferred option based on a wide range of information and input from stakeholders. When applying the guidelines, it is important that users undertake regular reviews of the information and assumptions that have been made at earlier stages. For example, key information that may have a significant impact on the outcomes could change, such as the government’s strategic goals or Egypt’s infrastructure needs. In addition, new information or developments could emerge, such as new market capacities or new stakeholders. For this reason, it is recommended to review all information gathered at the completion of the “Strategic Alignment” and “Potential Value for Money” stages, updating information where necessary. If updates are required, it may be necessary to re-evaluate and revise the project options.
Finally, while the guidelines should be applied to all public investments, they must be right-sized for the scale and risk of the project. For example, the level of analysis required will be different between a minor municipal water treatment plant upgrade project with few new environmental or social impacts and a major multi-regional transport project with complex engineering and environmental risks which affect many stakeholders. But it is important to note that a systematic method does not necessarily need to be complex, detailed or expensive. Even a high-level calculation can be logical and methodical. Determining the appropriate level of analysis will require judgment on the part of MPEDIC and the relevant entities seeking project funds, with the view to ensuring that the potential range of benefits, costs and risks have been identified and enough analysis has completed on each of these factors.
For further details on specific topics, a Tools and Resources section can be found at the end of the Guidelines.
Source: Author
Source: Authors
A comprehensive understanding of the strategic context is essential for effective project appraisal. This includes assessing national policies, regional development plans and sectoral strategies to identify potential needs and opportunities and considering the availability of funding.
It is important to articulate the case for change and the necessity of infrastructure investment. This involves identifying needs and gaps and articulating how investment could address those needs.
Identifying and engaging relevant stakeholders early in the process allows sufficient time for meaningful input and collaboration. Involving stakeholders in needs evaluation and communicating the case for change can build trust and credibility that is vital throughout project development and implementation.
Identify the factors that are critical for success at an early stage ensures officials can focus on options that are strategically and technically feasible.
Before starting project appraisal and selection, it is important to understand the strategic context and articulate the case for change. Project appraisal and selection should be grounded in the Government’s strategic objectives to ensure that investments align with the nation’s long-term vision and contribute to sustainable development. Understanding, at a high level, how an investment can address concrete problems and contribute to achieving those strategic objectives is essential to directing resources towards projects that deliver tangible solutions.
In Egypt, these types of objectives can be found in strategic direction-setting documents, such as the Egypt Vision 2030 (EV2030), the National Climate Change Strategy 2050 (NCCS2050) and relevant sectoral and regional plans.
To ensure infrastructure projects are aligned with Egypt’s strategic direction, it is critical that Egypt’s strategic context is clearly articulated and understood. Because all infrastructure practitioners are operating with scarce public resources, there is always a need to prioritise infrastructure activities that can have the largest social, economic and environmental impacts at the lowest cost. In this regard, the strategic context helps steer public works practitioners towards where they should be prioritising their time and resources.
A clear strategic context will clearly articulate any public policy goals that are to be prioritised. A robust strategic context will also include key performance indicators (KPIs) and targets so that authorities can quantifiably measure the extent to which infrastructure decisions are contributing to public policy goals.
These matters are covered in more detail in the following steps.
3.3.1. Identify the relevant public policy goals
EV2030 lists several policy goals that are relevant for this exercise. Some relevant examples come from the four goals listed under the “Well-developed Infrastructure” pillar of EV2030, which are:
1. Providing basic and adequate services;
2. Providing secure and sustainable transportation systems;
3. Promoting sustainable energy resources and systems and;
4. Developing communication and information systems (Ministry of Planning, Economic Development and International Cooperation, 2023[1])
These have been identified as examples, and do not exhaustively set out the strategic context for infrastructure. In developing infrastructure proposals, officials should further consult EV2030, NCCS2050 and relevant sectoral plans in full.
Not every individual project must achieve the entire strategic context. Instead, officials should look at how across a programme of infrastructure activities, all the relevant public policy strategies, goals and actions are being achieved. For example, some water infrastructure will be able to address deteriorating water quality but may not be able to provide desalination; similarly, some transport infrastructure can help reduce congestion but may not be able to improve road safety.
3.3.2. Identify the relevant measures and targets (key performance indicators)
A KPI is a quantifiable measure used to evaluate whether a public works activity has achieved – or is on track to achieve – its intended objectives. It is important to identify all relevant KPIs that are associated with public policy goals at the national level at this stage of project development so that it is possible to later evaluate and monitor whether particular projects are helping to achieve public policy goals.
If a project’s KPIs are not being satisfactorily met, they can help decision-makers manage risk by giving them information about when and how to make changes so that the relevant public policy goals can be met.
KPIs must be independently observable and measurable, so that they can be monitored and evaluated. To be effective, KPIs must be:
1. Specific
2. Measurable
3. Achievable
4. Realistic
5. Time-limited
Relevant examples from EV2030 for infrastructure include:
1. Thermal efficiency of electrical power generation (%)
2. Quality of Road Infrastructure Index (ranking out of 141 countries)
3. Road Connectivity Index (ranking out of 141 countries)
4. Infrastructure Pillar in the Global Competitiveness Index (ranking out of 141 countries)
5. Share of renewable energy in electricity generation (%)
In addition to using existing data, KPIs can be measured by collecting new data and information. The following methods enable the collection of new data and information (OECD, 2024[2]):
1. Self-assessment: the main source of the qualitative information collected.
2. Surveys and questionnaires: new and harmonised information can be collected through standardised surveys sent to local governments, sectoral representatives and national ministries.
3. Participatory approaches: Another way of collecting data is to involve a wide range of stakeholders through interviews, consultations, workshops or the establishment of expert panels.
More information on how to set KPIs can be found in section 3.3.6 (Define the Benefits).
3.3.3. Infrastructure needs assessment
An infrastructure needs assessment reviews what infrastructure will be required to deliver on a country’s long-term aspirations. An important part of a needs assessment is to identify future trends impacting infrastructure, which can help officials to understand the future challenges, threats, shocks or opportunities that may impact a community, region, country or the international community. In turn, this helps ensure infrastructure is designed in a manner that mitigates the effects of these events or makes the most of the opportunities that they present. It is important to note that a needs assessment is not about identifying particular investment solutions, but about identifying the broad issues that need to be addressed.
The timeframe to be considered for this exercise should be aligned with the life of the asset. There are potentially a wide range of economic, social and environmental scenarios to consider, such as:
1. economic (e.g. regional growth or decline, shifting employment centres, rate of urban development)
2. environmental (e.g. impacts from climate change, air quality, water quality)
3. social (e.g. technological adoption, social preferences, cultural customs, demographic changes).
One method for identifying future trends is to identify the current state and response. Examples are as follows:
Example 1: climate change adaptation
Current state: climate change is causing rising temperatures and more severe and frequent storm events, which are expected to get worse over time
Response: investment and renewals of infrastructure will need to protect people from these effects
Example 2: population growth
Current state: population growth will place increasing pressure on infrastructure and services, despite ongoing financial constraints to deliver more
Response: public works and infrastructure activities will need to focus on a balance of new construction as well as prolonging the life of existing infrastructure.
3.3.4. Stakeholder planning
A stakeholder is someone who has a direct or indirect interest or impact on project activities, and may be in contact with it daily, or just occasionally. Examples include elected representatives, public bodies, NGOs, affected property owners, academia, media and the general public.
Involving stakeholders in decisions about public investments can help de-risk investment by identifying issues with a proposed investment (such as its proposed route or location), minimising the likelihood of cost increases and delays, and helping build trust. For stakeholder engagement processes to be most effective, authorities must be transparent about their plans as early as possible in the investment process. This helps build trust and confidence between stakeholders, which can help ensure the proposed investment can progress as smoothly as possible.
From the very outset, it is vital to identify all relevant stakeholders, how they could potentially impact new infrastructure and to consider the role you may wish for them to play in helping implement your infrastructure programme. Many of the stakeholders will play an important role at various stages, so identifying them early ensures all the relevant stakeholders participate when their involvement is most valuable. However, new stakeholders may emerge over time, making it important that the stakeholder engagement approach is reviewed and confirmed at the beginning of each lifecycle stage.
It is particularly important to involve stakeholders who may hold useful information or take an interest in the outcomes agreed during the following stages:
Infrastructure needs assessment (section 3.3.3)
Identifying the options and developing a shortlist (section 3.3.8)
Determining potential value for money (section 0), in particular the following stages:
Identify the project benefits, costs and impacts
Identify wider (or indirect) effects
Undertake distributional analysis
Select the recommended option
Determine the recommended option’s affordability and the funding required (particularly stakeholders within the Ministry of Finance and potentially other funding partners).
Develop a stakeholder engagement plan
To choose which stakeholders to involve, organise a workshop with those closely involved in delivering the project as well as officials who have an in-depth understanding of the technical, political and strategic considerations when delivering infrastructure. Then complete the following steps:
List all relevant stakeholders – consider as wide a group of stakeholders at this stage as possible, including those that may only have very minor interest or influence in the project
Assess each individual stakeholder’s level of influence and interest on a project:
Influence = the stakeholder’s ability to impact whether the proposal goes ahead e.g. a minister or mayor will have high influence
Interest = how directly affected a stakeholder is by a proposal e.g. a stakeholder whose property would be affected by a proposal is highly impacted.
Group the stakeholders into units (e.g. local community, politicians, NGOs, media, etc.)
Identify each stakeholder group’s key concerns, existing and future communications methods and key messages.
Refer to Figure 3.2 and Table 3.2 for guidance on these steps, using the influence/interest matrix to plot stakeholders.
3.3.5. Problem definition
Problem definition involves identifying and clearly articulating the specific challenges or issues that an infrastructure investment is meant to address. It ensures there is a logical rationale for why a proposed investment should be pursued and how it contributes to achieving Egypt’s strategic goals as set out in EV2030, NCCS2050 and other strategic plans. Identifying the problems and benefits at the beginning of an investment process ensures the widest possible range of options can be considered at the project selection phase.
Defining the problem being solved and identifying the intended benefits of infrastructure proposals requires understanding the following:
The status quo – this requires understanding what is currently happening. The description of the status quo should be neutral, non-judgmental depiction of existing public outcomes without identifying any particular solutions. During the longlisting stage, the status quo will form the basis of the “business as usual” scenario (section 4.3)
e.g. water quality is poor and deteriorating.
The performance gap – this requires comparing whether current infrastructure is performing against the outcomes as intended, including any unexpected outcomes that may be occurring
e.g. current water infrastructure is inadequate for delivering the necessary level of water quality.
Identifying the positive outcome which can later be assessed for whether the benefit was achieved.
e.g. increase in water infrastructure investment, renewals and upgrades.
Officials should hold a problem definition workshop to confirm the problem that is being addressed and the benefits that are expected. This should include a single-page depiction of how an infrastructure project can contribute to public policy goals and how this will be measured (see Figure 3.3 for an example). It should be written in a simple way so that a person unfamiliar with the proposal or concepts involved could understand it.
There should be 2 – 4 problem statements and at least 1 benefit attributed to addressing each problem. It is possible to have more than 1 benefit attributed to each problem statement. Percentage weightings need to be added to each problem statement and benefit, measuring the significance of each.
At this stage of the process, it is important to avoid finding solutions and to stay focused on the public outcomes that are being sought. Therefore, the problem statements and expected benefits should describe a public outcome, not describe a solution.
3.3.6. Define the benefits
The purpose of this step is to:
identify the KPIs and measures and potentially targets and timelines that the infrastructure will need to deliver; and
specify how the delivery of the benefits will be measured and reported.
There should be between 4 – 6 KPIs per project. More than this and a proposed scheme is likely to lack focus and is more likely to fail or significantly exceed costs and under-deliver. Figure 3.3 includes examples of relevant KPIs in the context of addressing regional economic decline.
Performance against KPIs should be regularly assessed by the officials responsible for the project and used to track and report to management the performance of a project. KPIs should also include baselines, which measure the extent to which the measure is performing today, and targets, which measure whether a project has delivered its benefits.
KPIs should also be reported on as part of routine auditing and included in service delivery agreements during the construction, operations and maintenance phases on a continuous, rolling basis.
This process should be led by the responsible officials, given the need for benefits and targets to be technically feasible and achievable. It may also require participation from other infrastructure officials who can bring a good strategic and technical understanding of infrastructure so they can advise on what is realistically achievable given a country’s level of capacity, capability and access to other services and supplies. It may also be valuable to involve officials from other infrastructure sectors who may have related goals that the infrastructure project could also partially achieve. For example, officials responsible for transport, water and electricity infrastructure may benefit from co-developing their problem statements and benefits if they are contributing to projects that rely on all three infrastructure types, such as housing developments.
It may not be necessary for senior officials to directly participate in the process, but it is important for them to understand and to approve the problem definition and expected benefits because this will significantly shape all upcoming decisions on infrastructure.
In addition, to retain a diversity of thought and ensure the widest possible range of factors are considered, it is important to include people from a wide range of professions, backgrounds, gender and ethnicity.
It is also recommended to use an independent facilitator who is not involved with delivering infrastructure and therefore does not have a strong preference for any particular infrastructure outcomes. This helps ensure that the widest possible range of problems and benefits are considered, which will ultimately lead to the widest possible range of solutions being considered.
Officials are developing a regional development project aimed at bolstering economic prosperity and enhancing quality of life for local communities. Before identifying options, the officials must identify and define the problems being addressed and the benefits that are expected from addressing the problem.
The officials prepare an investment logic map that describes the problem and the expected benefits. The map depicts the logic that underpins the problem investment, representing an ‘agreed investment story’. It should be written in a simple way so that a person unfamiliar with the investment or concepts involved could understand it.
Source: Adapted from (Department of Finance and Treasury, 2017[4])
3.3.7. Critical success factors
Critical success factors (CSF) are attributes that are essential for the successful delivery of the proposed investment. They are used to form a longlist of proposals, ensuring that those undertaking the appraisal can focus only on options that are well-placed to solve the identified problem. CSFs also help proactively manage project risk by eliminating proposals that are undeliverable, unaffordable or unachievable.
The CSFs must be:
1. Critical to the success of a proposed investment, not only desirable
2. Broad enough to not unreasonably exclude important options before project appraisal begins
3. Broad enough that they capture all dimensions of a proposed investment (e.g. strategic, economic, financial benefits, costs and risks)
Infrastructure proposals that do not achieve all the CSFs factors should be eliminated. Applying CSFs to each proposal in a longlist ensures those undertaking the appraisal can focus only on options that are well-placed to solve the identified problem. Identifying CSFs helps avoid the risk of public resources being allocated to investments and initiatives that will not generate the highest possible return on social investment to the public.
The CSFs should be broad enough in coverage that they capture all dimensions of a proposed investment (e.g. strategic, economic, financial benefits, costs and risks). Table 3.3 provides examples of suitable CSFs that should apply to all investments. In some cases, additional factors may be added, but if a proposal’s objectives, constraints and dependencies are correctly understood this is rarely the case.
3.3.8. Longlist of options
A longlist is a wide range of realistic and possible options that align with the CSFs and potentially address the problems and delivers the expected benefits. Establishing a longlist ensures a wide range of options for delivering maximum social value and value for money with public resources has been explored. It ensures a wide range of value for money options are considered, reducing the risk of public resources being allocated to low value investments.
Useful sources of information for developing a longlist include relevant reports, best practices from other countries, and expert practitioners. For larger investment programmes that impact a wide range of people, it may be appropriate to invite a wide range of stakeholders to help develop the longlist.
To compare different options against the status quo, a longlist must include “business as usual” and a realistic “do minimum” options. “Do minimum” is an option that meets core investment requirements and would require minimal new investment. The longlist should contain a reasonable balance of supply-side, demand-side and regulatory solutions:
1. Examples of supply-side solutions include new capital investments and asset upgrades. As well as new capital investments, supply-side solutions should also include options for prolonging the life of existing assets, such as through minor upgrades or investment in data to make more informed choices about the management of assets.
2. Demand-side solutions could include user charges to manage the demand on networks and defer capital investment.
3. Regulatory solutions could include, for example, allowing medical appointments to take place online to reduce the pressure on physical medical facilities.
Figure 3.4 shows an example of longlist options and how these can be appraised against the CSFs, with decisions about whether the options should be carried forward for further assessment. This example reflects the range of supply- and demand-side options that officials should consider, and shows the possibility of combining long-list options in order to achieve the CSFs.
At the longlisting stage, it is too early to consider risks, transparency and accountability - this takes place during the value for money assessment as part of a more detailed assessment of a smaller number of options. However, assessing options against CSFs should eliminate any options that pose insurmountable risks that would make the proposal unaffordable, unachievable etc.
Source: Authors
The longlist options should include estimations of indicative social costs and benefits, including the cost of risks that result from different options. These indicative values should be expressed as ranges. As the appraisal process progresses and knowledge increases, accuracy will improve, resulting in a narrowing of these ranges. While absolute certainty is not a realistic expectation, unbiased estimates within reasonable ranges accompanied by plans to manage uncertainty are a requirement.
3.3.9. Confirm the shortlist
As a result of the longlisting step, there should now be approximately 3 to 5 options that meet the CSFs and are proven to address the problem and have the potential to deliver benefits. These options should have broad indications of their costs and benefits, with costs expressed in ranges. The shortlist should also include the “business as usual” option, which serves as a baseline to assess the value for money of other options.
The key decisions, including the assessment of the longlist and confirmation to proceed with the shortlisted options, should be recorded in a summary document. Once approved, the document should state that it has been formally approved by its governing entity. This document should be made available to all stakeholders involved with identifying and assessing the options and those involved with delivering future stages of the investment proposal. This ensures all decisions relating to the investment proposal are transparent and can be used to inform future decisions relating to the investment proposal.
Rigorous data collection, analysis and evaluation are the cornerstones of effective project appraisal and selection. It is crucial to base decisions on sound evidence and comprehensive assessment of all options.
The principles of evidence-based evaluation should be applied to all infrastructure projects, regardless of scale or sector. By adhering to the same principles of appraisal and selection, decision-makers can ensure a fair and transparent process that makes the most efficient use of resources.
At the same time, appraisal processes should be proportionate to the size and risks of the investment. A scalable approach strikes a balance between ensuring rigorous evaluation for significant investments and facilitating efficient decision-making for smaller and lower-risk projects.
Successful project appraisal and selection requires the active engagement of diverse stakeholders, including ministries, agencies, private sector partners, communities, and experts. Engaging stakeholders early and throughout the process fosters inclusive decision-making and better outcomes
Several of the steps described in this section require high levels of expertise, and not all countries will be able to apply these steps immediately. Rather than trying to achieve aspirational steps, the OECD recommends building up the tools, frameworks and expertise for the fundamental elements first. The sections above identify the steps that are more aspirational.
3.4.1. Identify the project benefits, costs and impacts
When determining potential value for money, a more detailed assessment of the benefits, costs and risks should take place that builds on the benefits identified during the assessment for strategic alignment. The importance of comprehensive analysis of costs and benefits is vital for making effective strategic decisions, as it helps determine whether the proposed investment will yield a good return on public resources. This is important because there is always competing demand for public resources, which means money and time allocated to one investment cannot be allocated to another investment or activity. It is therefore essential to conduct a precise evaluation to ensure that funds and time are allocated to projects that provide the greatest possible value while avoiding expenses that cannot be recovered. Focusing on future costs and potential benefits also leads to more rational and objective decision-making. Finally, there should be clear communication between high-level assessments and detailed evaluations, as initial findings can influence how detailed assessments are conducted and prioritise certain options.
This step should take place once a shortlist is confirmed, with each shortlisted option individually appraised for its benefits, costs and impacts.
A cost is the monetary value of goods and services that producers and consumers use and purchase. Costs can be direct (directly linked to doing the work of the project, such as materials, labour) or indirect (costs are not specifically linked to a proposed investment but are the general costs incurred by a ministry, municipality or other entity). Sunk costs, those that have already been incurred, should not be considered in determining value for money.
A benefit is an outcome of an action or decision that contributes towards reaching one or more objectives. Benefits can be tangible (i.e. financial savings, revenue increases, business continuity) or intangible (improved quality of service, quality of life, reputation increase). Box 7.5 provides an example of how intangible benefits can be quantified to inform public investment decision-making.
Impact is typically the measurement of benefits or costs particularly to the wider public and society undertaken after an investment has been delivered. One method of identifying the impacts is to ask throughout the project selection process: who benefits from the proposed investment and how? Project impacts can be economic, social or environmental and can be positive or negative.
A scaling approach must be applied to potential investments so that projects that carry greater costs and risks should be subject to a more detailed assessment of the benefits, costs and impacts. Potential investments at the lower end of the scale will not require as thorough an assessment of benefits, costs and impacts, but these should still be clearly identified, analysed and articulated as part of the investment plan. For example, proposed investments valued below a threshold may only require a simplified cost-benefit analysis (CBA) considering only financial costs (i.e. market prices).
3.4.2. Identify the project benefits, costs and impacts
When determining potential value for money, a more detailed assessment of the benefits, costs and risks should take place that builds on the benefits identified during the assessment for strategic alignment. The importance of comprehensive analysis of costs and benefits is vital for making effective strategic decisions, as it helps determine whether the proposed investment will yield a good return on public resources. This is important because there is always competing demand for public resources, which means money and time allocated to one investment cannot be allocated to another investment or activity. It is therefore essential to conduct a precise evaluation to ensure that funds and time are allocated to projects that provide the greatest possible value while avoiding expenses that cannot be recovered. Focusing on future costs and potential benefits also leads to more rational and objective decision-making. Finally, there should be clear communication between high-level assessments and detailed evaluations, as initial findings can influence how detailed assessments are conducted and prioritise certain options.
This step should take place once a shortlist is confirmed, with each shortlisted option individually appraised for its benefits, costs and impacts.
1. A cost is the monetary value of goods and services that producers and consumers use and purchase. Costs can be direct (directly linked to doing the work of the project, such as materials, labour) or indirect (costs are not specifically linked to a proposed investment but are the general costs incurred by a ministry, municipality or other entity). Sunk costs, those that have already been incurred, should not be considered in determining value for money.
2. A benefit is an outcome of an action or decision that contributes towards reaching one or more objectives. Benefits can be tangible (i.e. financial savings, revenue increases, business continuity) or intangible (improved quality of service, quality of life, reputation increase). Box 7.5 provides an example of how intangible benefits can be quantified to inform public investment decision-making.
3. Impact is typically the measurement of benefits or costs particularly to the wider public and society undertaken after an investment has been delivered. One method of identifying the impacts is to ask throughout the project selection process: who benefits from the proposed investment and how? Project impacts can be economic, social or environmental and can be positive or negative.
A scaling approach must be applied to potential investments so that projects that carry greater costs and risks should be subject to a more detailed assessment of the benefits, costs and impacts. Potential investments at the lower end of the scale will not require as thorough an assessment of benefits, costs and impacts, but these should still be clearly identified, analysed and articulated as part of the investment plan. For example, proposed investments valued below a threshold may only require a simplified cost-benefit analysis (CBA) considering only financial costs (i.e. market prices).
The New Zealand Treasury, equivalent to the MoF, uses a tool that quantifies the direct and indirect benefits and costs of a proposed investment over a 50 year period under different scenarios. The tool, known as CBAx, guides the Minister of Finance and Cabinet colleagues when selecting investments as part of the annual budget process where there is a limited fiscal envelope.
The tool contains a database of monetised social, environmental an economic impacts for the government and wider society, which the user can choose from in order to calculate the overall wider economic costs of a proposal. The impacts database includes impacts for the wider government budget as well as from a whole-of-society perspective. Examples of monetised impacts in CBAx include:
Cost per hour of a person’s time (- NZD$32)
Cost to health system after a fatal car crash (- $18,635)
Physical health gain from walking per km (+ $6)
Social cost of a loss of life (per person) (- $5,783,615)
Cost of living in a cold house (per year) - often/always (- $7,027)
People’s willingness to pay to prevent extinction of up to 3 susceptible native species ($31 per year per person)
One point change on individual wellbeing (scale: 0 – 10) (midpoint + $15,511)
Cost of violent offences per incident for society (- $26,076).
CBAx auto-generates CBA calculations based on the data that is pre-populated within the tool. CBAx also applies pre-set social discount rates on a year-by-year basis. The Treasury gathers the quantified impacts from the relevant line ministries, which are regularly updated. The CBAx template also allows users to apply sensitivity analysis, whereby users can apply different impacts to test whether an investment would perform under different scenarios. Once applied, CBAx calculates a benefit cost ratio and a return on investment for the government and wider society over a 50 year period, with a social discount rate applied.
As the monetised impacts can never be precise at all times, CBAx is intended to help guide ministers to a decision, while also taking in to account wider economic, environmental and social factors. Tools like CBAx are not expected to generate absolute answers that ministers and officials must therefore follow.
3.4.3. Identify wider (or indirect) effects
Many advanced countries also identify wider or indirect effects as part of establishing value for money. These are effects which are not a direct result of the project, often produced away from or as a result of an investment. They are also sometimes referred to as second or third level impacts, or secondary impacts. Indirect effects may include growth-inducing effects and other effects related to the induced changes in the pattern of land use, population density, or growth rate, and related effects on air and water and other natural systems, including ecosystems.
However, it is important to note that this is an advanced level of analysis that not all countries have the capacity to apply. Before attempting to identifying indirect effects, it is important to first establish robust tools, frameworks and expertise with establishing the direct benefits, costs and impacts describe above.
Table 3.4 includes examples of wider (or indirect) effects that, where applicable, must be taken account of as part of a thorough cost benefit analysis.
3.4.4. Set valuations (market and non-market)
Market and non-market valuations can have a significant influence on whether a recommended option, or shortlisted options, is worth pursuing. Valuations avoid the risk of missing significant benefits or costs during the appraisal of investment options.
Market valuations are costs and benefits that can be quantified in monetary terms through a market price. Market valuations should take account of values that will be relevant to all stages of an investment’s lifecycle (e.g. construction, operations, maintenance, decommissioning).
Market prices for inputs to investment proposals are often collected in unit price databases (e.g. price of a square metre of concrete or steel) from bids submitted in tenders. A price database reduces the reliance on ad-hoc information, improving project appraisal and investment decision-making. Consistent price data can also be used to directly inform cost estimates when project design is mature, inform cost variation formulae, provide more robust pricing advice to contractors, and help monitor price movements in anti-collusion investigations.
For benefits or costs that cannot be directly monetised, many advanced countries set non-market valuations where a market price is not available. Given this is an advanced form of analysis, it is recommended to first focus on developing the tools and expertise needed so that a full range of market prices can be applied during the value for money stage. Examples include environmental effects, health benefits and costs, benefits of energy efficiency, the value of a statistical life, travel times, amenity value and access to recreational services. The effort undertaken to monetise non-market values should be proportionate to the scale and risk of the project. There are several methods of estimating non-market prices:
1. Applying market prices where there is a closely comparable market.
2. Shadow prices, e.g. the European Commission provides guidance on setting shadow prices for certain inputs (e.g. carbon, labour, land, utilities and commodities).
3. Revealed preferences, which involve inferring an implicit price that a consumer places on a good by examining their behaviour in a similar or related market e.g. methods such as hedonic pricing study different in-house sale prices before and after a particular good or service is introduced to a local neighbourhood to infer the value people place on that good or service.
4. Willingness to pay: understanding how much people are willing to pay for a good or service, often conducted via surveys.
5. Willingness to accept or prevent: understanding how much people are willing to pay to accept a loss or prevent an event from happening, also often conducted via surveys.
In principle, common parameters for determining valuations should be set at the national level and not calculated on a project-by-project basis. For example, the European Commission’s Economic Appraisal Vademecum 2021-2027 provides values and sources for setting valuations across a range of sectors (European Commission, 2021[7]) (see Box 3.4).
Infrastructure projects emit greenhouse gases (GHG) into the atmosphere either directly (e.g. through fuel combustion or production process emissions) or indirectly (e.g. through purchased electricity and/or heat). In addition, many projects result in emissions reductions or increases when compared to what would have happened in the absence of the project.
In a perfectly functioning market economy, the prices of goods and services internalise the total cost of producing them, including environmental costs. This implies that the price attached to GHG is sufficiently high to prevent the consequences of climate change. However, emissions are often not priced, and the shadow carbon price is intended to enable the harms associated with emissions (or benefits of reductions) to be taken into account in investment decisions.
For EU-funded projects in the 2021-2027 period, the European Commission recommends using the shadow cost of carbon values established by the European Investment Bank as the best available evidence on the cost of meeting the temperature goal of the Paris agreement (i.e. the 1.5 ⁰C target).
3.4.5. Quantify the risks of each option
Quantifying risks helps define the likelihood of each short-listed option’s benefits and costs materialising. Understanding this likelihood is important because decision-makers need confidence that the benefits and costs of their recommended option are likely to manifest before proceeding with a chosen investment. For example, if the projected benefits of a proposed investment are high, but the likelihood of realising them is low, this undermines the proposed investment’s overall value proposition.
Quantifying risks requires objectively based estimates of the percentage likelihood of a risk occurring. It can involve calculating the costs incurred if a risk materialises, calculated on an expected value basis. Expected values result from multiplying the expected impact if the risk occurs by the expected likelihood of it materialising.
The next step of risk management is to develop contingency plans and making arrangements to proactively manage risks. The section of Risk Management (page 1) sets out details for identifying, prioritising and recording information about risks. However, this level of analysis is not required in the formation of a longlist. Instead, a detailed risk management plan should be developed when a preferred option is selected but before it has been formally approved. And as noted in the Guidelines: asset management section, a detailed risk management plan should be applied and regularly updated throughout the life of an asset.
To calculate the value for money of the shortlisted options, officials must quantify the associated risks. To do this, they need to understand the impact of the risk and the likelihood of its occurrence, which can be done by using the following methods.
Single point probability analysis estimates the value of a risk of a cost overrun. However, to quantify the risk of more than one cost scenario occurring (high, medium and low), officials can use multi-point probability analysis:
Real options analysis is applied to understand the risks presented by delivering different sections of the project over different timeframes, including the expected benefits under different demand scenarios.
3.4.6. Rank the short-listed options by Net Present Value and Benefit-Cost Ratio
Shortlisting the options ensures the expected costs and benefits of an intervention are estimated and the cost of risks and risk management are known. Options can be ranked by Net Present Value and Benefit-Cost Ratio.
Net Present Value (NPV) is a generic term for the sum of a stream of any future values that have been discounted to bring them to a present value. NPV is the present value of a stream of future costs and benefits to society (that are already in real prices) and that have been discounted over the life of a proposal.
NPV is a financial metric that seeks to capture the total value of an investment opportunity. The idea behind NPV is to project all future costs and benefits associated with an investment in monetary terms, discount all these future cash flows to the present day, and then add them together. The resulting number after adding all the positive and negative cash flows together is the investment’s NPV. A positive NPV means that, after accounting for the time value of money, the benefits of the investment will be greater than the costs.
To calculate NPV, you need to estimate the timing and amount of future costs and benefits and pick a discount rate equal to the minimum acceptable rate of return (see Box 3.6 for more information on selecting a discount rate). The discount rate may reflect your cost of capital or the returns available on alternative investments of comparable risk. If the NPV of a project or investment is still positive, it means its rate of return will be above the discount rate.
NPV can be calculated using the following formula:
Where:
F = Future costs or benefits in period t
i = Discount rate (see Box 3.6)
t = the number of periods in the future the costs or benefits are being calculated.
The social discount rate (SDR) is a tool of cost benefit analysis that measures the opportunity cost of resource use over time and serves to compare projected revenues and costs (net cash flows) over different periods.
Discounting is a standard financial technique and the basis of intertemporal choice in economics. When making intertemporal choices, economic players make decisions on the trade-off between costs and benefits present at various times. Discounting creates the future and present equivalence of financial instruments. In a general case, the social discount rate is the rate at which the whole of society is willing to trade current benefits for future benefits. It is applicable for all project types, but it is most necessary to be used for long-life investments that will generate benefits and costs over several decades or more, such as infrastructure assets.
Setting discount rates is a technical exercise that relies on specialised expertise. The OECD has provided advice to countries on setting discount rates, which can be viewed here: OECD, Chapter 8: Discounting, Cost-Benefit Analysis and the Environment: Further Development and Policy Use, 2018. OECD (https://doi.org/10.1787/9789264085169-en).
Source: (OECD, 2018[9])
Benefit-Cost Ratio (BCR) is defined as a ratio of the NPV of benefits to the NPV of costs. It provides a measure of the benefits relative to costs. A positive BCR indicates the investment is creating more benefits than its cost; a negative BCR indicates that the investment is using resources without generating enough benefits to create net value.
To calculate the BCR, divide the net present benefits (NPB) by the net present costs (NPC). For example: NPB (2,000,000) divided by NPC (1,000,000) equals a BCR of 2.
3.4.7. Assess the short-listed options under different scenarios
Alternative scenarios are useful in considering how options may be affected by future uncertainty and provide a valuable way of assessing risk, especially where there is a known risk of significant variations in external conditions.
Scenarios should be chosen to draw attention to the major technical, economic and political uncertainties on which the success of the proposal depends. Then assessing the ranked options in different scenarios via the tools listed below helps choosing the recommended option based also on the probability of the scenarios. Best-practice methodologies for testing shortlisted options under different scenarios include:
1. Sensitivity analysis: modifying a key assumption or variable in the analysis and reviewing outputs. Multiple sensitivity analyses can be done sequentially to examine the effects of changing a larger number of variables. Sensitivity analysis often seeks to identify switching values: values of a critical assumption (e.g. usage rates, costs of a key input) that results in an inflection point between favourable and unfavourable outcomes, such as a positive and negative NPV.
2. Scenario analysis: modifying multiple key assumptions or variables and reviewing outputs. Scenarios are often designed to be more favourable (optimistic or best case) and less favourable (pessimistic or worst case). Scenario analysis is a form of ‘what if’ analysis that is useful where there are significant future uncertainties. Scenarios may be chosen to explore significant technical, economic and political uncertainties which will affect the success of an intervention. Scenario analysis must always be proportionate to the costs and risks involved. Low cost, low risk proposals may look at simple ‘what if’ questions. More expensive, higher risk options may require modelling exercises which test the impact of different states of the world on expected costs and benefits.
3.4.8. Distributional analysis
Distributional analysis assesses the impact of investments on different groups in society. Investments may have different effects on individuals according to their characteristics (e.g. income level or geographical location). These effects could be a deliberate government objective or the unintended consequences of an investment.
Distributional analysis need not be purely quantitative; providing qualitative assessments of perceived impacts can be useful context for informing decision makers. The level of detail and complexity devoted to the analysis should be proportionate to the likely impact on those affected. Assessment of distributional impacts could range from a simple quantitative or descriptive approach where the scale of the effect is relatively low, to an in-depth appraisal and detailed calculation of distributional effects where the scale is relatively high.
In practice, the use of distributional weighting is challenging. This is due to uncertainty in the assumptions relating to the groups between whom redistribution is measured and uncertainty in estimation of distributional weights. Therefore, distributional analysis should be undertaken in a systematic way and presented with the acknowledgement that it may not present a fully accurate picture of distributional effects.
To complete distributional analysis, undertake the following steps:
1. Identify the key stakeholder groups that stand to gain or lose.
2. Allocate the quantitative and qualitative costs and benefits already identified to one or more of these groups (see market and non-market valuations in section 3.4.4).
3. Consider whether any of these costs or benefits may be shifted to another group.
4. Acknowledge any uncertainty in the distribution of costs and benefits.
When assessing project alternatives, costs and benefits are typically aggregated across individuals, without taking into consideration who receives the benefit or who pays the cost. Distributional analysis acknowledges that economic externalities from a project accrue to different stakeholders.
Policy makers can use distributional analysis to assess benefits and costs for specific regions or groups. For example, a transport project may lead to overall time-travel savings but worsen congestion in disadvantaged areas. Disaggregated data can also help determine the highest-impact policies and highlight the need for mitigating measures to avoid negative impacts on disadvantaged groups. It can therefore result in projects with low benefit–cost ratios progressing through the appraisal process where they benefit disadvantaged groups or regions.
Some countries, such as the United Kingdom and New Zealand, require distributional analysis, in which appraisers quantify how project costs and benefits accrue to different socioeconomic groups.
Sources: ((n.a.), 2020[10]) (ITF, 2022[8])
3.4.9. Select the recommended option
This step involves selecting a recommended option from the shortlisted options. The recommended option should be a balanced judgement based on:
1. Net Present Value (NPV)
2. Benefit Cost Ratio (BCR)
3. Level of risk and the extent to which these risks can be controlled and mitigated
While in some cases the selection process is largely an exercise in totalling the quantified costs and benefits identified at earlier stages, it also requires judgment regarding how to weigh risks against potential benefits, how to factor in any unquantified benefits or costs, and which option to select when the differences in net benefits between different options is marginal. Where this is the case, it is essential to involve stakeholders in the decision-making process.
Often the choice will remain between high cost/high benefit options and low cost/low benefit options. In these circumstances, a decision is required on the extent the higher benefits are worth paying for. Risk can play a part in that a high cost/high benefit option may be considered too risky to undertake, and an intermediate option might show a more optimal balance of risk.
Table 3.8 shows an example of what a summarised set of quantified benefits and costs looks like, taking account of all the steps described above.
3.4.10. Determine the recommended option’s affordability and the funding required
Affordability is about determining whether a project is financially feasible within the context of the resources that are available for capital investment. Projects which are selected for implementation must provide not only value for money but must be affordable within a multi-annual expenditure framework. There is no point in pursuing a project that cannot be funded even if that project offers good value for money. There is also an opportunity cost for every project, where opportunity cost is the value of the funding in its most productive alternative use.
The affordability of a proposed project must be regularly assessed. The authorities should take account of new cost information and timing of payments which may emerge during the tendering process, as well as the up-to-date position regarding the medium-term expenditure framework.
The table captures different types of costs and benefits in the following table, includes the application of a social discount rate and sensitivity analysis to generate best and worst case scenarios to test whether the option would still produce net benefits under different scenarios. The table also calculates the estimated cost of the identified risks materialising.
Source: Authors
The example finds that the option is unlikely to deliver net benefits, unless the best case scenario materialises. From here, officials can recommend the following options:
To not recommend any new investment, instead proceeding with the “business as usual” option.
Explore scaling down the capital, operations and maintenance costs of the option, to reduce costs overall and achieve sufficient net benefits.
Undertake more analysis of the short-listed options to better understand the benefits, costs and impacts, to refine the NPV and BCR.
Return to the longlisting stage and redo the steps that follow, to ensure that the widest possible range of options have been considered for shortlisting.
References
[10] (n.a.) (2020), Well Spent, International Monetary Fund, Washington, D.C., https://doi.org/10.5089/9781513511818.071.
[4] Department of Finance and Treasury (2017), Investment Management Standard, https://www.dtf.vic.gov.au/infrastructure-investment/investment-management-standard.
[7] European Commission (2021), Economic Appraisal Vademecum 2021-2027: General Principles and Sector Applications, https://ec.europa.eu/regional_policy/en/information/publications/guides/2021/economic-appraisal-vademecum-2021-2027-general-principles-and-sector-applications.
[5] HM Treasury (2022), The Green Book, https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-government/the-green-book-2020#generating-options-and-long-list-appraisal.
[3] International Atomic Energy Agency (n.d.), Stakeholder Analysis, https://www.iaea.org/resources/nuclear-communicators-toolbox/methods/planning/stakeholder-analysis.
[8] ITF (2022), Broadening Transport Appraisal: Summary and Conclusions, ITF Roundtable Reports, No. 188, OECD Publishing, Paris, https://doi.org/10.1787/a0e2e0a6-en.
[1] Ministry of Planning, Economic Development and International Cooperation (2023), 2030 Vision of Egypt: the national agenda for sustainable development, Egypt’s Updated Vision 2030, https://mped.gov.eg/Files/Egypt_Vision_2030_EnglishDigitalUse.pdf.
[2] OECD (2024), Measuring Progress in Adapting to a Changing Climate.
[9] OECD (2018), Cost-Benefit Analysis and the Environment: Further Developments and Policy Use, https://www.oecd-ilibrary.org/environment/cost-benefit-analysis-and-the-environment/environmental-cost-benefit-analysis-foundations-stages-and-evolving-issues_9789264085169-5-en.
[6] The Treasury (New Zealand) (2024), The Treasury’s CBAx Tool, https://www.treasury.govt.nz/publications/guide/cbax-spreadsheet-model.