Lecture Notes
ECON 437/837: ECONOMIC
COST-BENEFIT ANALYSIS
Lecture One
0
COST-BENEFIT ANALYSIS:
An Integrated Approach
1
The Role of Investment Appraisal
• To stop bad projects – bad policies
• To prevent good projects from being destroyed
• To determine if components of projects are consistent
• To assess the sources and magnitudes of risks
• To determine how to reduce risks and efficiently
share risks
2
Questions addressed by an Integrated
Investment Appraisal
• Is the project financially viable or fiscally sustainable?
• Does the project contribute to the economic growth of the country?
i.e., positive expected economic NPV?
• Who are beneficiaries of project and by how much?
• Who are the interest groups (stakeholders) who could distort the
investment decision or affect the project’s performance?
• What are the sources and magnitudes of risk?
• What are the risks associated with the benefits accruing to the
stakeholders? Sources of political risks?
• Are poverty alleviation goals being addressed?
• What are the fiscal impacts?
• What is the personality of the project?
3
Impact of Analysis
•
Quality of analysis has been shown by the World Bank to
be a key determinant of the success of a project’s
performance.
•
A proper analysis will cause the project to be redesigned
so that it is less likely to fail.
•
World Bank experience shows that the probability of
failure for poorly prepared projects within 3 years of a
project’s life is 7 times that of well-prepared projects.
•
Poorly prepared projects have 16 times as high a
probability of failure within 5 years as compared to wellprepared projects.
4
Incrementality of Projects
•
One of the important concepts when defining a project is to measure the impact of the
project’s cash flows and net benefits and costs on an incremental basis.
•
We should carefully identify the benefits and costs that are only associated with the
project, and not include any other benefits that would exist “WITHOUT” the project
being undertaken.
•
It is normal for the benefits and costs to change over time for the “WITHOUT”
project case.
•
The “WITHOUT” project scenario must be properly defined before using it as the
base case from which to measure incremental benefits and costs produced by the
“WITH” project case.
•
It is an optimized “WITHOUT” project situation that should be compared with the
“WITH” project situation to calculate the incremental benefits and costs.
•
There is another perspective “before the project” versus “after the project” scenarios.
“Before the project” is NOT the appropriate base case from which to measure
incremental benefits and costs.
5
Project Cycle:
Stages in Project Appraisal
A. Idea and Project Definition
B. Pre-Feasibility Study
C. Feasibility and Financing
D. Detailed Design
E. Project Implementation
F. Ex-Post Evaluation
6
A. Key Questions at Idea Stage
a. Where is the demand?
b. Is this project consistent with the
organization’s expertise, current plans and
strategy for the future? Can the project be
implemented and operated in a reasonably
efficient matter?
7
Project Definition
•
Project definition is defined broadly to include the scope and
specification of the objectives of the project, its output, its
different stakeholders, its economic and social benefits, and
the data requirements.
•
Most of the project’s data requirements are identified in the
pre-feasibility and feasibility stages of the project where the
project’s variables and parameters are analyzed in detail.
8
B. Pre-Feasibility Study
• Examines overall potential of project
• Should maintain same quality of information across all
variables
• Wherever possible should use secondary information
Key questions:
a. Is this project financially and economically feasible
throughout the project’s life?
b. What are the key variables?
c. What are the sources of risk?
d. How can the risk be reduced?
9
C. Feasibility Study
• Focus is on improving accuracy of the key variables
• Alternatives for reducing risk are examined in detail
• Some primary data may be needed
Key questions:
a. Is project financially attractive to all interested parties
in activity?
b. What is level of uncertainty of key variables?
c. How is the project financed?
d. Can final decision for approval be taken?
10
Modules of Pre-Feasibility
and Feasibility Studies
The data for a pre-feasibility study are generally arranged in what
is referred to as “building blocks” because they constitute the
foundation for the different types of analyses.
Building Blocks:
A. Demand Module
B. Technical Module
C. Environmental Assessment Module
D. Human Resources and Administrative Support Module
E. Institutional Module
Analysis Modules:
F. Financial/Budget Module
G. Economic Module
H. Social Appraisal or Distributive and Basic Needs Analysis
11
Building Block A: Demand Module
• Study of sources of demand, nature of market, prices and
quantities
• Major distinction between domestic versus internationally
traded goods and services
• For internationally traded goods, prices are given to the
project by world markets
– Secondary information most important
• For domestic market, primary research more important
Output of Module:
a. Forecast of quantities and real prices for project life
b. Taxes, tariffs, subsidies, public regulations, technological
trends
c. Environmental impacts
12
Building Block B: Technical Module
• A study of input requirements for investment and
operations and their costs
• In this module, secondary information can be used very
effectively
• Need to avoid conflict of interest between supplier of
technical information and seller of investment equipment,
or contractor for construction
Output of Module:
a. Technology and life of project
b. Quantities of inputs by type needed for investment and
operation
c. Labor required by type and time
d. Input prices and sources of supply
e. Environmental impacts
13
Building Block C: Environmental Assessment Module
• Environmental assessment augments information for the
economic analysis
• Identification of environmental impacts and risks
• Where possible, quantify the environmental impacts
Key Questions:
a. What are the likely environmental impacts from undertaking
project?
b. What is the cost of reducing the negative impact?
c. Are the environmental impacts and risks with and without
technical measures taken to reduce these impacts?
d. Are there alternative ways of supplying the good or service of
project without incurring these environmental costs? What are
the costs of these alternatives?
14
Building Block D: Human Resources and
Administrative Support Module
• What are managerial and labor needs of the
project?
• Does organization have the ability to get the
managerial skills needed?
• Is timing of project consistent with quantity and
quality of management?
• What are wage rates for labor skills required?
• Manpower requirements by category are
reconciled with availabilities and project timing.
15
Building Block E: Institutional Module
• This module deals with the adequacy of the institution responsible
for managing the different stages or phases of the project.
• Insufficient attention to the institutional aspects creates serious
problems during the implementation and operation phases of the
project.
Key Questions:
a. Is the entity that is supposed to manage the project properly
organized and its management adequately equipped to handle the
project?
b. Are the capabilities and facilities being properly utilized?
c. Is there a need for changes in the policy and institutional set up
outside this entity? What changes may be needed in policies of the
local, regional and central governments?
16
Analysis Module F: Financial Module
What is done:
• Integration of financial and technical variables from demand
module, technical module, and management module
• Construct cash flow profile of project
• Identify key variables for doing economic analysis
Key questions:
a. What is relative certainty of financial variables?
b. What are sources and costs of financing?
c. What are minimum cash flow requirements for each of the
stakeholders?
d. What can be adjusted to satisfy each of the stakeholders?
17
Analysis Module G: Economic Module
What is done:
• Examines the project using the whole country as the
accounting entity
• Evaluation of externalities including environmental
Key questions:
a. What are differences between financial and economic values
for a variable?
b. What causes these differences?
c. With what degrees of certainty do we know values of these
differences?
d. What is the expected value of economic net benefits?
e. What is the probability of positive economic feasibility?
18
Analysis Module H: Stakeholders and Basic Needs Analysis
What is done:
• Identification and quantification of extra-economic impacts of project
• Income, cost, and fiscal impacts on various stakeholders
• Poverty alleviation and political necessities
• Basic Needs: Evaluate the impact of project on achieving basic needs
objectives
– Basic needs will vary from country to country
Key Questions:
a. In what ways does project generate beneficial and cost impacts on stakeholders?
b.
c.
d.
e.
f.
g.
What stakeholders could the project impact?
Who benefit and who pay the costs?
What are the basic needs of the society that are relevant in the country?
What impact will the project have on basic needs?
What alternative ways are there to generate desirable social impacts?
Is project relatively cost effective in generation of desirable social impacts?
19
Integrated Projects
• Integrated projects can get very complex and need to be approached
cautiously to avoid costly errors.
• It is possible for the bundled project to be financially and economically
viable even though some of the components are not.
• Dropping the components that generate negative returns will maximize the
project’s benefits.
• Defining and understanding the objectives of the project is particularly
important when analyzing integrated projects.
• Ultimately, the ‘bundle’ that succeeds the most in accomplishing the desired
objectives should be undertaken.
• If the objective of the project is to maximize the wealth of people in country,
then the component or bundle that yields the highest economic NPV should
be undertaken.
20
ECONOMIC VALUE
ECONOMIC
VALUE
=
FINANCIAL
VALUE
=
+
TAX IMPACT
+
NET BENEFITS TO
CONSUMERS
+
NET LABOUR
BENEFITS
FINANCIAL
VALUE
TAX IMPACT
NET LABOUR
BENEFITS
NET
BENEFITS TO
CONSUMERS
21
General Relationship
NPVECOeco. dr= NPVFINeco. dr+ PVEXTeco. dr
- Holds when all benefits and costs are
discounted using same discount rate.
22
Alternative Points of View
• Critical in analysis: to evaluate financial outcome of
project from the point of view of each interested party
• Conventional analysis considers:
a. Point of view of owner
b. Point of view of all investors combined
(Banker’s point of view or total investment point of view)
c. Point of view of economy
Other Perspectives:
•
•
•
•
Point of view of government budget
Point of view of suppliers of inputs
Point of view of downstream processors
Point of view of competitors
Analyses of Investment Decisions from
Alternative Points of View
Type of Analysis
Financial
Economic
(I)
(II)
(III)
(IV)
Banker (Total Investment)
Yes
No/Yes
Yes
No
Owner
Yes
No/Yes
Yes
No
Government Budget Office
Yes
No/Yes
Yes
No
Country
No
Yes
Yes
Yes
Viewpoint:
Stakeholder Basic Needs
24
Analyses of Investment Decisions from Different Viewpoints
Note: Exchange premium=10%; Receipts & Equipment 100% tradable; Tradable Operating cost =100
Analysis 
Financial
Economic
Financial
Banker’s (Total
Viewpoints:
Year:
Investment)
Owner
Country
Govt. Budget
(A)
(B)
(C)
(D)
0
1
0
1
0
1
0
1
Receipts
400
400
440
40
Operating Cost
-140
-140
-150
-10
Equipment
-1000
Operating Subsidy
Taxes
950
-1000
950
-1100
1045
-100
95
50
50
-50
-100
-100
100
Loan
500
Interest
-500
-50
Environ. Externality
-190
Opp. Cost of Land
-30
-30
-30
-30
-30
-30
Net Resource Flow
-1030
1130
-530
580
-1130
1115
-100
175
Summary of Project Decision Criteria
1.
Financial NPV
2.
Financial IRR
3.
Annual DSCRs
4.
LLCRs
5.
Economic NPV
6.
Economic IRR
7.
PV of impact on stakeholders
8.
Probability of unacceptable outcome
Project Owner’s View
Banker’s View
Country’s View
Distribution Analysis
for each of indicators above (risk simulation)
Risk Analysis
26
APPRAISAL OF REGIONAL
AFRICAN SATELLITE PROJECT
RASCOMSTAR-QAF
27
Objectives of Project
i)
Expand telephone coverage into rural areas of Africa by
providing an alternative way of connectivity to telecom
operators
ii)
Interconnect existing public switch telephone networks
(PSTNs) otherwise known as fixed lines
iii) Provide bandwidth lease service (BLS) to internet providers
and TV broadcasters
28
Objectives of Appraisal
1) Does project ensure the least-cost way of expanding
telecommunication services in Africa?
2) What is magnitude of financial benefits realized by RSQ and
telecom operators?
3) What are cashflow implications for RSQ in terms of servicing its
debt obligations?
4) To what extent does this project contribute to African economy?
5) Who are stakeholders and by how much do they benefit, or lose,
as a consequence of project?
6) What are risk factors that affect project and how can uncertainty
and risk exposure be mitigated?
29
Rural Telephony Service (TES)
▪ Allow African telecom operators to expand their coverage
over hard-to-reach rural areas
▪ Telecom operators will deploy terminals in phone booths,
tele-centers, private or residential sites in rural areas
30
Connectivity on-demand (TRS: Trunking Service)
PSTN
City x
gateway
Terrestrial
PSTN
Infrastructure
Regional City
gateway n
?
Regional
gateway
Gateway
PSTN
PSTN
Regional City
gateway 2
Mission Control Center
▪ Through satellite, participating
African telecoms can link
directly with each other,
instead of resorting to costly
international satellites
▪ In order to participate in the
exchange, telecoms need to
install gateways that will link
their existing telephone
networks with that of other
countries via the satellite
31
Bandwidth Lease Service (BLS)
GSM Backhaul
▪ This service targets TV broadcasters, internet service
providers and big corporations with fixed annual
subscriptions
▪ Services include trunking, broadcasting, internet services,
global system of mobile communication (GSM) backhauling,
private or corporate networks and news gathering services
32
Project Cost and Financing
• Total capital cost is estimated at US$ 357 m in 2005 prices
- Space segment (e.g., satellite) and ground segment (e.g., gateway)
• Financing
- Equity: US$ 151 m
- Loans
- LAFB: US$ 85 m, nominal interest rate is 4.68% p.a.
- AfDB, IsDB, EIB, etc.: US$ 126 m, interest rate is 4.68% p.a.
• Timing and Project Life
- Construction of satellite started in June 2003
- Satellite launched in October 2006
- Operation starts in January 2007 for 15 years
33
Project Cost and Financing (cont’d)
Satellite
Launcher
Insurance
Ground control system
Launch campaign, LEOP, IOT/Scc/ttc (Ariane)
Ground design
Ground infrastructure development
Terminals
Other ICS and BLS development
Pre operating expenses
License fees
Contingencies
Total capital expenditure
A
B
C
A
A
D
E
F
2003
35.9
4.6
3.5
1.1
12.2
3.0
60.3
2004
40.7
5.2
4.0
3.2
4.4
57.5
2005 2006
27.6 15.6
2.0 46.0
4.2 38.2
3.5
2.0
2.7
1.5
10.2 33.0
20.5 4.7
1.6
6.3
3.9
0.8
2.3
82.4 144.0
2007 Total
119.8
7.0 55.0
42.5
15.3
11.7
4.2
43.2
20.5
6.3
4.8 31.5
3.0
3.0
11.8 355.9
34
Key Assumptions
• Decrease in real TES,TRS tariffs per annum at 7.32%
• Decrease in real annual charge for BLS transponders 2.5% per
year
• Transponders not used by TES and TRS are sold to BLS
subscribers at a discount: capacity of satellite is fully used at
all times
• US inflation rate 2.5% (base case)
• Daily traffic per terminal 70 minutes/day in 2007 increases to
74 in 2008 and stays constant thereafter
• No liquidation value for satellite
• Real opportunity cost of equity capital of 15% per year
35
RSQ’s Cash Flow Statement Real, 2005 Prices
(US$ million)
Year
INFLOW
TES
TRS
BLS
Change in accounts receivable
Residual value
Total Inflow
OUTFLOW
Investment Costs
Operating Costs
General operating costs
Labor
Change in accounts payable
Change in cash balance
Income tax
Total Outflow
NET CASH FLOW
BEFORE FINANCING
Add: Loan disbursement
Less: Loan repayment plus interest
NET CASH FLOW
AFTER FINANCING
2003
2004
2005
-
-
-
63.1
59.2
82.4
63.1
59.2
-
-63.1
24.5
1.2
-59.2
52.9
0.1
-39.8
-6.4
2006
140.5
-
2007
2008 2009 2010
2011 2012
2013
2014
2015 2016
2017
2018
1.9
5.3
38.2
-10.5
34.9
29.6
8.9
34.0
-6.6
65.8
57.9 67.8
66.7 62.3
16.4 19.8
19.8 19.6
28.3 24.9
23.5 22.4
-7.6 -3.2
-0.4
0.3
95.0 109.4 109.6 104.7
57.7
19.5
21.4
0.4
99.0
53.5
18.6
20.7
0.5
93.2
49.6
17.5
20.1
0.5
87.6
45.9
16.5
19.4
0.4
82.4
42.6
16.4
18.8
0.2
78.0
39.6
16.3
18.3
0.2
74.3
11.5
-
-
-
-
-
-
-
-
-
-
-
12.9 12.9
2.8 2.8
0.0 0.0
0.0 0.0
1.0 1.7
16.7 17.4
11.9
2.8
0.1
-0.1
2.1
16.8
10.8
2.8
0.1
-0.1
2.1
15.7
9.7
2.8
0.1
-0.1
2.1
14.5
8.6
2.8
0.1
-0.1
2.0
13.4
7.6
2.8
0.1
-0.1
1.9
12.3
6.6
2.9
0.1
-0.1
1.8
11.3
6.0
2.9
0.0
-0.1
1.7
10.6
5.5
2.9
0.0
-0.1
1.6
10.0
5.0
2.9
0.0
-0.1
1.6
9.5
2.7
2.7
85.1
143.2
13.1
2.7
-1.5
2.0
0.0
27.8
-85.1 -143.2
10.4 109.3
0.0
1.3
7.1
14.8
3.2
49.1 77.6
2 43.4
92.6
40.6
93.9
37.9
90.2
35.3
85.6
32.8
80.9
30.4
76.4
14.0
71.7
13.0
68.0
12.0
64.8
-
-74.7
18.8
47.4 34.2
51.9
56.0
54.8
52.8
50.5
62.3
58.7
56.0
64.8
-35.3
ADSCR
-
-
-
-
-
-
-
-
1.79 2.28 2.48 2.55 2.61 2.66 5.45 -
-
-
-
-
LLCR
-
-
-
-
-
-
-
-
2.76 2.99 3.17 3.38 3.69 4.23 5.54 -
-
-
-
-
FNPV @ ROE
FIRR:
15% Real:
20.8% Real
75.6 US$ million
36
Telecoms’ Cost and Financing
▪ Telecoms will purchase and install terminals and gateways
▪ Total cost of telecoms participation in project is US$ 253 m in
2005 prices
▪ Assumed that telecoms will finance their investment costs by
equity
▪ Subscription of terminals is expected at 13,240 by 2007 and
increase to 94,288 by year 2012
▪ Telecoms are responsible for maintenance of rural terminals and
gateways
▪ Telecoms pay RSQ for airtime on both outgoing and incoming
calls; but they collect revenue only on outgoing calls
▪ Telecoms’ real cost of funds (equity) is 15% per year
37
Telecoms’ Cash flow Statement Real, 2005 Prices
(US$ million)
Year
INFLOWS
TES
TRS
Change in accounts receivable
Residual values
Total Inflows
OUTFLOWS
Investment Cost
Operating Cost
Airtime cost
Operating & maintenance costs
Labor
Change in accounts payable
Change in cash balance
Income tax
Total Outflows
NET CASH FLOW
2007
2008
2009
2010
4.4 68.9 134.7 157.7
22.2 36.9 68.5 82.6
-6.2 -19.0 -25.5 -14.3
20.5 86.8 177.8 226.0
19.9
42.5 111.0
56.1
7.2 38.5 74.4 87.6
3.0
9.3 25.7 33.5
1.5
3.7
7.8
9.8
-2.7 -9.2 -13.3
-5.9
1.8
6.0
8.6
3.8
4.5 16.1 27.9 31.4
35.2 106.8 242.1 216.4
-14.7 -20.0 -64.3
9.6
2011
2021
2022
155.7 146.3 137.7 129.7 122.3 115.3 111.9 109.2 106.5 103.9 101.4
82.4 81.9 81.2 77.3 73.4 72.9 72.3 71.8 70.6 69.2 67.8
-6.3
-4.4
-4.3 -3.4 -3.2 -3.8 -4.4
-4.4 -4.2 -4.1
-4.0
231.9 223.8 214.6 203.6 192.4 184.4 179.9 176.6 173.0 169.1 165.2
34.3
53.4
87.7
17.0
2012
3.1
2013 2014
1.5
0.6
2015 2016 2017
0.4
0.4
0.4
2018 2019 2020
0.4
0.2
0.1
0.1
-
86.5 81.9 77.2 72.0 67.1 62.5 59.0 55.9 54.6 53.3 52.1 35.2 34.8 34.2 33.5 32.7 32.0 31.2 30.5 29.8 29.1 28.4 10.3 10.2 10.2 10.1 10.0 9.9
9.8
9.7
9.7 9.6
9.5 -1.0
0.4
0.5
0.7
0.7 0.6
0.4
0.3 -0.1 -0.1
-0.1 20.3
0.7
-0.3
-0.4 -0.5 -0.4 -0.4 -0.3
-0.2
0.0 0.0
0.0 -13.2
30.2 28.7 27.6 26.0 24.4 23.8 24.0 24.2 23.7 23.2 22.6 178.8 159.0 150.8 142.4 134.8 128.8 124.5 120.8 117.9 115.2 112.6
7.1
53.0 64.8 63.7 61.2 57.7 55.6 55.3 55.7 55.0 53.9 52.6 80.6
FNPV @ ROE 15% Real: 102.4 US$ million
FIRR:
37.3%
38
Key Issues in Economic Analysis
• Economic analysis from point of view of whole African
continent
• Economic value for TES rural users is measured by examining
the willingness to pay by end users
• Benefits: coping costs decline at 9% p.a. for TES service and
7.32 % p.a. for TRS service; hence net economic benefits decline
every year
• Cost savings in TES and TRS are fully passed through to end
users by telecoms
• Real economic cost of capital is 11% per year in Africa
• Foreign exchange premium 9% in Africa
39
Economic Resource Flow Statement Real,
2005 Prices (US$ million)
Year
BENEFITS
TES
TRS
BLS
Change in accounts receivable
Residual values
Total Benefits
COSTS
INVESTMENT COSTS
RSQ
Telecoms
OPERATING COSTS
RSQ
Operating & maintenance costs
Labor
Change in accounts payable
Change in cash balance
Telecoms
Operating & maintenance costs
Labor
Change in accounts payable
Change in cash balance
Net benefits flown out of
the African continent
Total Costs
NET RESOURCE FLOW
2003
2004
2005
-
-
-
67.9
-
63.6
-
86.8
-
-
-
-
-
-
-
67.9
-67.9
63.6
-63.6
2006
-
2007
2008 2009
2010
2011 2012 2013 2014
14.9 227.8 439.7 508.2 494.6 456.7 420.1 386.7
50.3 83.5 155.0 186.8 186.5 185.2 183.7 175.0
48.4 42.8 36.9 33.4 31.8 30.7 58.9 86.2
-26.2 -55.5 -64.0 -22.3
3.6
9.3
2.3
3.4
87.4 298.6 567.5 706.0 716.5 681.9 665.0 651.3
147.2
-
-
285.5 266.9 249.9 234.2
156.5 153.9 150.9 147.8
182.2 24.4 23.7 23.1
-0.2 41.3
4.8
4.5 93.5
54.8
624.0 486.5 429.3 409.6 148.3
16.0
2.9
1.3
0.5
0.3
0.3
0.3
0.3
0.2
0.1
0.1
14.7
2.6
0.0
0.0
14.6
2.6
0.0
0.0
13.3
2.6
0.1
-0.1
12.0
2.6
0.2
-0.1
10.6
2.6
0.2
-0.1
9.3
2.6
0.2
-0.1
8.0
2.6
0.1
-0.1
7.2
2.6
0.1
-0.1
6.6
2.7
0.1
-0.1
6.0
2.7
0.1
-0.1
5.5
2.7
0.1
0.0
5.3
2.7
0.0
0.0
5.1
2.7
0.0
0.0
4.9
2.7
0.0
0.0
-
-
14.8
2.5
-1.7
2.0
-
2.8
1.4
-0.6
1.8
8.7
3.5
-1.4
6.0
24.2
7.3
-3.6
8.6
31.5
9.2
-1.7
3.8
33.1
9.7
-0.4
0.7
32.7
9.6
0.1
-0.3
32.1
9.5
0.1
-0.4
31.4
9.4
0.2
-0.5
30.7
9.4
0.2
-0.4
30.0
9.3
0.2
-0.4
29.4
9.2
0.2
-0.3
28.7
9.1
0.2
-0.2
28.0
9.0
0.2
0.0
27.3
9.0
0.2
0.0
26.7
8.9
0.2
0.0
-
89.3 149.8
-89.3 -149.8
-
305.6
157.7
160.1
0.1
623.5
52.8
2.5
-
328.2
158.8
136.7
2.2
626.0
2022
39.6 104.5
-
-
356.2
165.2
112.1
3.3
636.8
2019 2020 2021
12.5
18.8
2.5
-
2015 2016 2017 2018
-
-
-
-
-
0.6
-0.7
6.2
-13.2
3.4 24.7 39.5 47.2 47.9 46.0 43.7 41.4 38.9 36.6 34.7 33.1 32.0 31.2 30.5
57.7 98.6 197.9 158.8 121.4 104.3 98.4 93.2 89.0 85.2 82.1 79.3 77.4 75.6 73.9
-7.1
29.6 200.0 369.7 547.3 595.0 577.6 566.6 558.1 547.8 540.7 541.3 544.7 409.1 353.7 335.6 155.4
ENPV @ EOCK 11%
EIRR:
2,338.3 US$ million
45.8%
40
Distribution of Project Net Benefits
(US$ million in 2005 prices)
• Stakeholders:
- Rural Users: $ 1,387.3 m
- PSTN Users: $ 460.5 m
- BLS Subscribers: $ 212.8 m
- Governments: $ 26.8 m
Total Externalities: $ 2,087.5 m
• Investors other than foreigners: $ 251.9 m
41
Sources of Risk
• Risk variation in project outcomes because of uncertainty in
key project variables
• Main contributors to this variation include:
i) Annual real decrease in tariffs
ii) Daily traffic per terminal
iii) Deployment of terminals
iv) Investment cost over-runs
Nature of Risk
• There is a high uncertainty surrounding annual rate of real
tariff reduction. New technologies will cause tariffs to fall
faster than expected
• Usage rate of terminals is critical and uncertain
• Actual deployment of terminals may be different from the
subscriptions received from telecoms operators
• Investment cost may exceed the amount estimated
42
Risk Assumptions
43
Risk Analysis Outcome: FNPV RSQ
Forecast: Financial NPV (RSQ)
9,912 Trials
Frequency Chart
.023
232
.018
174
.012
116
.006
58
Mean = 46.41
.000
0
-7.69
17.95
43.58
69.21
94.85
Certainty is 0.67% from -7.69 to 0.00 US$
▪ Expected value is US$ 46.4 m
▪ Probability of FNPV being less than zero is 0.7%
▪ Maximum possible loss is US$ 7.7 m, about 1.7% of
investment value
▪ Maximum possible gain is US$ 94.9 m, about 21.6% of
investment value
44
Risk Analysis Outcome: FNPV Telecoms
Forecast: Financial NPV (Telecoms)
9,889 Trials
Frequency Chart
.024
239
.018
179.2
.012
119.5
.006
59.75
Mean = 79.30
.000
0
23.85
48.95
74.05
99.15
124.24
US$
▪ Expected value is US$ 79.3 m
▪ Probability of FNPV being less than zero is 0%
▪ Minimum possible gain is US$ 23.9 m, about 9.7% of
investment value
▪ Maximum possible gain is US$ 124.2 m, about 51.5% of
investment value
45
Results of Risk Analysis
RSQ
NPV
(US$ m)
Deterministic Value
Annual Debt Service Coverage Ratio
2009
2010
2011
2012
2013
Loan Life Cover Ratio
2014
2009
2010
2011
2012
75.6
1.79
2.28
2.48
2.55
2.61
2.66
2.76
2.99
3.17
3.38
Mean
46.4
1.55
2.03
2.28
2.43
2.58
2.73
2.60
2.86
3.11
3.40
Standard Deviation
19.1
0.20
0.25
0.28
0.29
0.30
0.31
0.18
0.22
0.27
0.31
Range Minimum
-7.7
1.01
1.33
1.31
1.54
1.64
1.75
2.07
2.28
2.18
2.40
Range Maximum
94.9
2.04
2.71
3.32
3.50
3.99
4.50
3.09
3.45
4.24
4.97
Prob. Unacceptable
0.6%
0%
0%
0.1%
0%
0.1%
0%
Rsik Statistics
0.0%
0.0%
0.0%
0.1%
46
Risk Mitigation Measures
▪ RSQ can manage cost over-runs by using turn-key contracts
▪ RSQ should get long-term commitment from telecoms and
assist them in deploying terminals quickly
▪ RSQ may be able to negotiate a price floor on TES rates for an
extended period of time (e.g. five years due to large economic
benefits to consumers)
▪ Governments might be approached to give volume guarantee
on TES usage
47
Conclusion
• Financial and economic outcomes indicate that project is a viable
project
• The net cash flows seem enough to service its debts to lenders
• Telecoms should be willing to participate in project
• Net impact on stakeholders is positive, indicating project will
improve the economic well-being of Africa as a whole
• Great economic impact on rural Africa
• Although project is financially and economically viable, there is
risk that project sponsors may not be fully compensated for their
investment
48