Public sector infrastructure projects bring great public benefits. Their goals are aimed at enhancing public well-being, and their effectiveness is linked to both increased economic growth and improved quality of public services and the rational use of scarce budgetary resources. It is, therefore, particularly important that different parties evaluate infrastructure projects during the different stages of their life cycle.
Concerning a public project, five types of assessments are usually made: commercial, technical, financial, economic, and environmental.
The characteristics of these five types of assessment are briefly described in this chapter. Their relevance to the project is reviewed, and the key differences in the assessment of the financial and economic parameters of public and private infrastructure projects are highlighted.
TYPES OF EVALUATION - GENERAL CHARACTERISTICS
The assessment of infrastructure projects in the public sector is carried out at all stages of project generation: project identification, feasibility studies, feasibility studies of alternatives, and preparation of a detailed project. Five types of assessments are prepared in connection with a public infrastructure project.
Trade valuation
The commercial evaluation of the infrastructure project is linked to a study of the product markets and includes: identification and location of potential users; historical price trends, production and demand for services; information on current and future tariff policies of the country; current or expected regulatory framework, current and expected capacity of the enterprises of potential competitors, competitive characteristics of the infrastructure sector.
This market information is used to generate estimates for the demand for infrastructure services and the revenue from their provision. It is essential to clarify the indicative estimates underlying the market outlook, production volume, demand, and prices, operating and administrative costs, debt profile, insurance costs, tax rates, inflation rate, and regulatory policy of the government on price regulation.
Technical assessment
The technical evaluation of the infrastructure project is based on the technical description of the project and information provided by technical experts (designers and engineers). The task of the technical evaluation is to assess the degree of likelihood that the project will be completed within the planned deadlines and within the budget.
The technical assessment is also a basis to ensure that the site can be operated at the project level of performance, and technical factors will not limit that operation.
The technical evaluation shall address issues related to the appropriateness of the technologies used, the type of equipment and facilities, in accordance with national, local and environmental conditions; the timeliness of the timetable and the likelihood/ability to achieve the intended level of implementation location, plan and physical scale (size) of the infrastructure site; acquisition of land for the project; analysis of terrain and terrain conditions; conditions for the provision of services and conditions for access to resources; details of construction works; estimated costs for the construction, equipment and operation of the site; adequate management team and workforce.
Financial evaluation
The financial evaluation of the infrastructure project is intended to determine the viability and appropriateness of the project. This estimate is based on the annual cash flows of project implementation costs and the cash flows of the projected life expectancy of the project.
The objectives of the financial assessment are: to assess the extent to which the project will generate sufficient revenue to meet its financial obligations, evaluate incentives for economic agents involved in the project, to assess whether the expected demand or output corresponds to financial charges or available budgetary resources.
The financial evaluation determines the profitability of the project in terms of the economic agents involved. The profitability of the project depends on many factors, such as costs for construction and operation, the total expected financial return of the project, etc. A financial assessment is also needed to determine which of the different options will achieve the highest financial return.
Economic evaluation
The purpose of the economic assessment is to assess the potential contribution of the public sector infrastructure project and the priority of the infrastructure development project. Through economic evaluation, the monetary costs and revenues determined by the technical, commercial, and financial valuation are adjusted to reflect the real income and expenses of the society. The broader costs and benefits include the impact of the infrastructure project on the country's economic and social development - economic growth, employment in other sectors and areas of the economy, income distribution, and well-being of different groups of people. It is assessed how the outcome of the project and its impact on the holding may change as a result of changes in key factors such as cost of capital, demand, and income and environmental conditions.
Where possible, monetary values are given to the broader economic costs and benefits of the project. Where market prices do not reflect real resource costs due to distortions of different nature, shadow prices are used to estimate costs and benefits. These prices reflect the real national deficits caused by changes in the level of subsidies, taxes, wages, and rents.
For public projects, economic evaluation is especially important because it addresses real economic returns in the public sector as a whole, not just the financial returns of the project.
Environmental assessment
Environmental assessment is of particular importance in the development and implementation of the infrastructure project. Emphasis is placed on the environmental impact of the project in both the investment and post-investment periods and the specification of environmental rules and standards for project implementation.
The purpose of the environmental assessment is to determine the environmental risks, to determine the environmental consequences and the acceptable environmental impact, to set environmental standards, and to ensure compliance with these standards.
The environmental assessment should show the likely/possible impact of the project on all environmental media (air, water, soil, etc.) as well as stakeholders. The identified environmental impacts are evaluated, taking into account the rules of the applicable environmental legislation. The project contract establishes a system for reporting on environmental performance and for assessing unforeseen environmental impacts.
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Summary
Public infrastructure projects aim to improve public well-being and are linked to economic growth and better public services. Five types of assessments are made for these projects: commercial, technical, financial, economic, and environmental. This chapter briefly describes these assessments and their relevance to the project, highlighting key differences in assessing financial and economic parameters between public and private infrastructure projects.
Development stages of infrastructure projects
Infrastructure projects in the public sector are assessed at every stage of development, including project identification, feasibility studies, and preparation of a detailed project. There are five types of assessments prepared for public infrastructure projects.
The evaluation of the infrastructure project involves studying the product markets, identifying potential users, analyzing historical price trends, production, and demand for services, and considering current and future tariff policies, regulatory framework, the capacity of potential competitors, and competitive characteristics of the infrastructure sector.
Market information
Market information is used to estimate demand and revenue for infrastructure services. Clarifying indicative estimates is important for market outlook, production volume, demand, prices, costs, debt, insurance, taxes, inflation, and government regulation.
The technical evaluation of an infrastructure project relies on its description and input from designers and engineers. Its purpose is to determine the likelihood of completing the project on time and within budget. It also ensures that the site can operate at the desired level without technical limitations.
Evaluate the technology, equipment, and facilities used in accordance with national, local, and environmental conditions. Assess the feasibility of achieving the intended level of implementation location, plan, and physical scale of the infrastructure site. Analyze terrain and conditions for the provision of services and access to resources. Determine estimated costs for construction, equipment, and operation of the site. Ensure the presence of an adequate management team and workforce.
Financial evaluation and assessment
The financial evaluation determines if an infrastructure project is viable and appropriate by analyzing its annual cash flows and projected life expectancy. Its objectives are to assess revenue generation, incentives for economic agents, and demand/output alignment with budgetary resources. Profitability depends on factors like construction/operation costs and financial return. A financial assessment is also needed to determine the option with the highest financial return.
Economic assessment
The economic assessment evaluates the potential contribution and priority of a public sector infrastructure project. It adjusts the costs and revenues to reflect the real income and expenses of society, including the impact on economic and social development. Key factors such as cost of capital, demand, income, and environment are considered.
Monetary values are provided for the economic costs and benefits of the project. Shadow prices are used when market prices are distorted, reflecting the real national deficits caused by changes in subsidies, taxes, wages, and rents. Economic evaluation is crucial for public projects as it considers overall economic returns, not just financial returns.
Environmental assessment
Environmental assessment is crucial for infrastructure projects and focuses on the project's environmental impact during and after implementation. The assessment aims to identify risks, consequences, and acceptable impact, set standards, and ensure compliance. It evaluates the impact on all environmental media and stakeholders, following environmental legislation. The project contract includes a reporting system for environmental performance and unforeseen impacts.
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