TUTORIAL SCHEDULE & KSA STUDY Project Evaluation & Management Semester 1, 2017 Faculty of Business, Government & Law Tutorial Discussion Exercises ==================================================== Week 2 23rd February 2017 Context of evaluation All students should be prepared, each week, for class discussion of these exercises based on the Kingsford Smith Airport (KSA) case that involved the construction of a third runway. You should examine the KSA case and use this case as a guide for understanding your own chosen project or programme on which you are building your assignments. You will be asked in tutorials to use your case to illustrate the ideas as we move through the topics of the semester. Context of Evaluation • What is being evaluated? (Object) • What is the stage of implementation of the program? (State) What is the temporal relationship between the evaluation and program development and delivery? (Timing) • What are the purposes (desired impacts) of the evaluation? • Why is the evaluation being undertaken? (Orientation or purpose). • How will the evaluation be utilised? • On what aspect(s) of the program should the evaluation concentrate? • What is the Focus of the evaluation? • Who are the key players? (Stakeholders) • What is the most appropriate underlying epistemological approach? (Method) • What are acceptable methods of collecting and analysing relevant information? -Collection Is sampling important? Are there secondary data sources? How will the data be collected? -Analysis How will data be analysed? • What standards of conduct will apply? -privacy & other rights of participants • What is the budget and how will it be managed? • How will the results be reported? -format? -timing? -Are recommendations required? • How will the evaluation be disseminated? Third runway at Kingsford Smith Airport (KSA) Components of CBA: The Third runway at Kingsford Smith Airport (KSA) will be used to provide an example of the issues and methodologies of cost benefit analysis. The intention is to give guidance on the practical issues involved in undertaking a cost benefit analysis. The following exercises are provided for the course participants to work through an example of cost benefit analysis. • List the Components of CBA and how you intend to handle them. What is the problem? This is the most important component of CBA. The project should be placed in a broad context to examine if the legitimacy of the problem and the adequacy of the project in addressing the problem. (see Workshop on Logframe analysis) Third runway: description. What are the objectives? This should flow from the definition of the problem but be more specific including target beneficiaries. (see Workshop on Logframe analysis) Third runway: description using Logframe categories. What are the alternatives? The ‘do nothing’, ‘base case’ or ‘without project’ is the most important alternative because it determines the incremental costs and benefits of the project. (see Workshop on Logframe analysis) All alternatives should ideally be subject to a full CBA. Typically resource constraints do not allow this. However where only one CBA is feasible, careful consideration should be given to the selection of the project to be subjected to CBA. Alternative projects can be qualitatively assessed as part of a CBA report. Third runway: descriptive list of alternative projects with reasons for excluding from CBA. What are the constraints (Assumptions)? These limit the projects ability to meet its objectives and can include finances, equity issues, managerial, environmental, etc. Some of these will not be known with certainty. (see Workshop on Logframe analysis) Third runway: descriptive list in Logframe format. What are the benefits and costs? Causation needs careful assessment to ensure that benefits do come from the project. Benefits can include sales, avoided costs, increased productivity, reduced unemployment, non-marketed or underpriced outputs (environmental, health etc) and so on. Care should be taken to avoid double counting as some these benefits are not mutually exclusive. (see exercise Workshop on Identifying costs & benefits) Costs include capital expenditures, operating expenditures, labour, other inputs, research costs, external costs etc. Tax, subsidies, transfer payments, depreciation, ‘sunk’ and interest costs are typically excluded. Third runway: descriptive list in Logframe and Planning Balance Sheet formats, more detailed list in CBA format which excludes double counting and transfers. Discounting (aggregating over time) Benefits and costs accrue over a period of time and it is necessary to make comparisons between time periods. In order to do this benefits and costs are expressed in present values. To do this future benefits and costs are assumed to be worth less than present benefits and costs and are discounted by a factor (eg 5% per annum). Benefits and costs over the entire project life can then be summed to give a present value for benefits and costs. This reduces benefits and costs which accrue over different time periods to a common denominator, their present value. (see Workshop on selecting a discount rate). Third runway: use difference between long term Commonwealth bond rate and inflation rate. Decision criteria Decision criteria are a summary measure indicating whether the project is worthwhile. There are a number of decision criteria. Net present value is the preferred measure. It is the difference between the present value of benefits and the present value of costs. Other criteria include a ratio of benefits to costs (benefit/cost ratio) and a rate of return on the investment (internal rate of return). Unfortunately the ranking of project worth can vary according to the criteria chosen so care is needed in their use. Third runway: use NPV, apply discount rate to annual values table. How can the costs and benefits be valued? To compare costs and benefits a common measure is required. The most common measure is in money units (dollars). For most benefits and costs market prices are the best measure of value. However for a number of benefits and costs market prices are not available or are poor measures of the value to society. (see Workshop on determining values). Benefits and costs which cannot be valued in money terms (intangibles) should be included in the CBA report in a qualitative (descriptive) assessment. Even if they cannot be quantified and valued costs and benefits should never be ignored. Third runway: full list which identifies measurement technique to be used (eg market price, surrogate market, contingency valuation) and includes annual cash flow table for market prices and annual valuation of other items. Sensitivity Analysis (Uncertainty) Risk and uncertainty can be major problem because many of the benefits and costs are based on forecasting which may prove to be inaccurate. This can be addressed by using probability weights or by sensitivity analysis (use of a range of values). (see Workshop on estimating sensitivity). Third runway: rework NPV with high and low estimates for aircraft use, discount rate etc. Distributional Analysis Equity or distribution issues can be addressed by weighting costs and benefits according to their impact on target groups. Alternatively a distributional impact matrix (planning balance sheet) can be used to set out the identity of gainers and losers, the size of the gains and losses. (see Workshop on estimating distributional impacts). Third runway: apply values (where possible) to descriptive list in Planning Balance Sheet. END OF WEEK 2 Week 3: Thursday 2nd March 2017 Seminar Exercises Defining existing situation & alternatives (Impact Chart & Logframe) • What is the existing situation? This should describe the problem which the project is designed to address and the project itself. KSA is approaching its maximum aircraft landing capacity at peak periods. This may result in a constriction on growth in the arrival of overseas tourists who are important contributors to the tourism industry, employment and foreign exchange earnings. The third runway project is to construct a runway parallel to the existing north-south runway. The third runway will extend even further into Botany Bay than the existing runway. The components include: • reclamation of land from Botany Bay; • diversion of the Mill Stream outlet to Botany Bay; • alteration of the protective breakwater at the southern end of the existing north-south runway; • construction of the proposed third runway and associated taxiways and aprons; • relocation of the airport control tower and other facilities; • establishment of new rescue and fire fighting services; • establishment of corporate facilities on part of the reclaimed land;. • What are the objectives of the project? Project objectives can be categorised as a hierarchy (as in the Logframe project planning methodology). • At the bottom of the third runway hierarchy of objectives are the activities undertaken in the project (eg prepare EIS; construct a sea wall; fill behind sea wall with dredged material from Botany Bay; and seal over the runway). • Next up the hierarchy is the project’s output (a third runway). • Next is the purpose for constructing the runway (more aircraft landing capacity). • Finally the goal is a higher order objective (expand tourism industry) to which an individual project is simply part of a larger package. • Prepare a project Logframe. Logframe: Framework for Summarising Project Design Narrative Summary Measurable Indicators Means of Verification Important Assumptions Goal: (sector or program objective) 1. Improve Australian’s average standard of living . 2. At least maintain SoL of low income Australians 1. Positive average net present value. 2. Positive net present value to low income Australians. 1. Cost Benefit Analysis. 2. Distributional Analysis. Goal to Super Goal Purpose: (aim or impact) 1. Increased aircraft movement capacity 2. Reduced aircraft movement delay End of Project Status 1. Increased number of international flights landing at KSA 2. Reduced time waiting for a landing slot. 1.1 FAC Annual Report Purpose to Goal 1. The extra aircraft landings increase passenger numbers 2. Terminal capacity is sufficient 3. Extra passengers spend Outputs: (deliverables or terms of reference) 1 .Third runway 2 Externality damage: noise, congestion, air pollution, damage to Botany Bay Basic terms of reference for each output 1. Third runway x metres by x metres. Completed by x. 2 Increased air & road traffic, dredging, filling 1.1 End of project report Output to Purpose 1. Parallel runway expands landing capacity 2. The extra landing slots are used by international aircraft - price - access (frequency/timing) Activities: (key clusters or work breakdown structure) 1. Environmental Impact Statement 2. Construct sea wall 3. Dredge Botany Bay & fill runway 4 .Surface runway & taxiways 5. Increased airport operations inputs 6. Externality mitigation: Inputs: (budget, people, material, time, cost) Consultant Labour, concrete etc Dredging equipment etc EIA submitted to DASET Construction reports FAC Annual Report NSW EPA reports Activities to Output EIA accepted by government Technology is feasible Fill is available Construction standards met Capacity of complementary infrastructure is sufficient or expanded Externalities are acceptable Conditions Precedent Government approval • What are the alternatives? Ideally the analyst should evaluate fully every possible project which can achieve the set objective. In practice it is too expensive to do this. However all the potential projects should be identified and evaluated briefly to help select the best project which can then be subjected to a fuller evaluation. Do nothing: This is the standard against which most CBA is carried out. It identifies the extra costs and benefits which come from the third runway. Do nothing, does not mean nothing happens. It means what would happen if the project does not proceed. More intensive use of existing KSA runways: This could be achieved by better scheduling of take off from originating airports; by better air traffic control; by fewer small aircraft (which take longer to land). It is claimed that this will meet the growth in demand up to 265,000 aircraft movements per year. More intensive use of other existing Sydney airports: Smaller planes (principally for freight) could be sent to Bankstown, Schofields, Hoxton Park and Camden airports. This could be achieved by regulation or landing charges. It is claimed these airports are unsuitable. Second Sydney airport. A single runway at Badgery’s Creek Airport will be able to handle about twice as much traffic as the third runway at KSA. It is claimed that even with BCA a third runway at KSA would be needed. • What are the assumptions? What would stop the project achieving its objectives? (see assumptions in the logframe) For example "cost blow out" "forecast landing slot demand is not realised" and "extra landings do not bring in the forecast extra passengers". END OF WEEK 3 Week 4: Thursday 9th March 2017 Identifying costs and benefits Seminar Exercises: • Who are the stakeholders in the project and what are their points of view? Stakeholders are all the significant groups who are directly or indirectly benefited or penalised by the project. Their point of view is the level of their interest in the project. Stakeholder Point of view Objective Federal Government (decision-maker) National maximise social welfare of nation State Government State maximise social welfare of State Tourism industry Industry increase sales Federal Airports Corporation Company • return dividends to Federal Government • empire building Airlines Company profits Construction firms Company profits Local business Company profits Local community Individual quality of life Passengers Individual travel • Prepare a project Planning Balance Sheet. Incidence of costs and benefits of the third runway at KSA Participant group COSTS BENEFITS Passengers Time savings from avoided landing delays Local community Loss of amenity from Botany Bay. Increased aircraft noise to the north. $200m Increased road congestion. Reduction in noise to east and west. $199.9m Botany Bay fisheries Reduced fish stocks and catches Construction industry Resources used Revenue from construction Airlines Profits from extra international visitors. Fuel savings Local business Profits from extra international visitors Federal Airports Corporation Expansion of complementary infrastructure. Interest & principal Profits from extra international visitors. Finance received Government Resources for expansion of complementary infrastructure Dividends from FAC. Extra taxes Finance industry Finance provided Interest & principal Tourism industry Profits from extra international visitors figures in italics are non-economic (financial or transfer payments) • Identify (and quantify) the costs. CBA costs must be real resources that are used up by the project and are unavailable for alternative uses, ie opportunity costs. Quantifying the costs is not normally required in CBA. Third runway: construction material, labour etc, (physical units are probably too diverse to aggregate eg tonnes of concrete, labour days, metres of steel, etc). land (hectares). extra airport operations costs (physical units are probably too diverse to aggregate eg labour days, items of equipment etc)*. extra airline operations costs (physical units are probably too diverse to aggregate eg labour days, items of equipment, litres of fuel etc)*. loss of amenity from Botany Bay (intangible but could be valued). increased aircraft noise (decibels). increased road congestion (minutes of delay, litres of petrol)*. reduced fish stocks in Botany Bay (tonnes of fish). expansion of complementary infrastructure (number of buildings, items of equipment etc)*. • Identify and (quantify) the benefits. CBA benefits must be real resources that are created by the project and are wanted, ie there is a willingness to pay. Quantifying the benefits is not normally required in CBA. Third runway: reduced aircraft noise (decibels). airline savings (litres of fuel etc ). passenger’s time savings (minutes per passenger). extra passengers transported (number of passengers per year)*. extra tourism activity (physical units are probably too diverse to aggregate)*. multiplier impacts (physical units are probably too diverse to aggregate)*. residual value (number of buildings, items of equipment etc). *excluded if it is assumed that without the third runway the passenger and landing growth would still be accommodated but would cause longer delays. Economic vs financial impacts • Identify financial & economic costs. Financial costs are resources that are paid for (monetary payments) by the project owners. Economic costs must be real resources that are used up by the project and are unavailable for alternative uses, i.e. opportunity costs. Third runway: construction material, labour etc., (financial & economic). land (financial & economic). extra airport operations costs (financial & economic). extra airline operations costs (financial & economic). loss of amenity from Botany Bay (economic). increased aircraft noise (economic). increased road congestion (financial & economic). reduced fish stocks in Botany Bay (financial & economic). expansion of complementary infrastructure (financial & economic). • Identify financial & economic benefits. Financial benfits are outputs that are paid for (monetary payments) by the project recipients. Economic benefits must be real resources that are created by the project and are wanted, ie there is a willingness to pay. Third runway: reduced aircraft noise (economic). airline savings (financial & economic). passenger’s time savings (economic). extra passengers transported (financial & economic). extra tourism activity (financial & economic). multiplier impacts (financial & economic). residual value (financial & economic). Financial vs economic impacts of 3rd Runway Impact Financial (money) Economic (real) Costs Labour Wages Time lost Materials Market price Alt. output (next best use) Water quality Commercial fishing GM Lost fish, retained inputs (market prices) (recreation & commercial) Benefits Time (passengers) Extra wages More output or leisure Fuel savings $ savings Alternative use of fuel (reduced fuel payments) Less air pollution $ savings Health (reduced medical payments) END OF WEEK 4 Week 5: Thursday 16th March 2017 This week we will revise elements of economic theory and any arithmetic issues needed for an understanding of Cost Benefit Analysis. We can use the KSA case to show the relevance of theoretical constructs. Topics include: • The basics of the demand curve for a product or industry • The supply curve – why do they slope upwards? • Consumers’ surplus & its measurement • Producers’ Surplus & its measurement • Notions of optimality • The concept of economics welfare and judgements about improvement in economic welfare • Prices and information • Market competition • Market distortions • Externalities See an introductory or intermediate microeconomic text book for revision. END OF WEEK 5 Week 6 Thursday 23rd March 2017 Selecting a discount rate Seminar Exercises: • How do you intend to estimate the discount rate? Benefits and costs accrue over time. Therefore time affects the value of costs and benefits. Looking forward to consuming an ice cream in ten years time and consuming the same ice cream now will have quite different values to most people. A dollar of benefits or costs accruing in the future is valued less than the same benefit or cost accruing now. This is the reason banks must pay depositors an interest rate above the inflation rate. Without a real interest payment most depositors would consume their income now rather than save it. This can be applied to society and is called social time preference. It is society's preference for a current dollar of consumption rather than a future dollar of consumption. In cost benefit analysis future costs and benefits are discounted to reflect this social time preference. The discount rate used in the cost benefit analysis is typically the government long term bond rate adjusted to remove inflation. This real interest rate represents society’s (via Government) willingness to sacrifice future income (to repay the bond holder) rather than reduce consumption now (by substituting higher taxes for borrowings), ie the social rate of time preference. The long term government bond rate needs to be adjusted for inflation because the values to be discounted are expressed in real terms. In theory the discount rate will vary over time. But in practice it is too difficult to measure future changes to the discount rate. It is necessary to determine what year is the project’s starting point and estimate the discount rate for that year. This will be applied to each year of the project evaluation. Third runway: Discount rate equals the average interest rate on 10 year Commonwealth Bonds (December 1992) less the annual CPI in 1992 (8.95-2.52=6%) source: Reserve Bank of Australia Bulletin February 1993. • What will be the project’s expected life? Assume ten years because the introduction of aircraft capable of carrying around 600 passengers is likely in the next ten years and this would make the analysis difficult past that point. • How do you intend to estimate the NPV? Net Present Value (NPV) is the difference between each year’s benefits and costs adjusted for the discount rate and summed over the life of the project. The adjustment for the discount rate involves multiplying each year’s cost, benefit or net benefit by a discount factor. The discount factor varies according to the discount rate selected and the length of time away from the first year of the project. Discount factors are given in Table VI.1 in DoF p. 126-127. To calculate NPV you need to identify and value the costs and benefits in each year of the project's life. Third runway: assume project life is 10 years; discount rate is 6% and costs and benefits are known. 1992 dollars (hypothetical) Year 1 2 3 4 5 6 7 8 9 10 Total Total cost 1,000 100 100 100 100 100 100 100 100 100 1681 Total benefit 0 50 60 70 80 90 100 110 120 130 586 Net benefit -1,000 -50 -40 -30 -20 -10 0 10 20 30 -1095 Discount factor 1 .9434 .8900 .8396 .7921 .7473 .7050 .6651 .6274 .5919 NPV -1,000 -47 -36 -25 -16 -7 0 7 13 18 -1,093 To calculate present values in an Excel spreadsheet you can use the formula =NPV(6%,B52:U52) where you insert the discount rate (6% in this example) and the range of value over which the discount rate is applied (from cell B52 to cell U52 in this example). End of Week 6 Week 7: Thursday 30th March 2017 NO TUTORIALS THIS WEEK DUE TO THE MID-SEMESTER TEST TO BE HELD IN THE LECTURE TIME SLOT. FULL DETAILS WILL BE ANNOUNCED IN LECTURES AND BE POSTED ON THE MOODLE SITE. Week 8: Thursday 6th April 2017 NO CLASSES IN THE NON-TEACHING WEEK ------------------------------------------------------------------------------------- Weeks 9 & 10: Thursday 13st and 20th April 2017 Determining values (Valuation Techniques) This topic will cover 2 tutorial session. Seminar Exercises: • How do you intend to value the costs and benefits? Costs and benefits were identified in the Planning Balance Sheet (Distributional Incidence Table). Cost-Benefit Analysis of the third runway at KSA (1991-2010) Net Present Values in 1991. $ million Definition Valuation Present Value Benefits Passenger time saving Less time spent waiting for a landing slot: minutes per passenger times passengers per year. Value of time: valued at $15/hr. 414 Aircraft operating costs saved Less time spent in flight waiting for a landing slot: minutes per plane times annual landings. marginal operating costs by type of aircraft assuming 65% capacity utilisation and using market prices 1,302 Extra aircraft landings Number of extra aircraft movements above the 2 runway capacity * FAC landing fee: monopoly which may need to be shadow priced. Economic multiplier impacts Spending by the extra passengers generates flow-on impacts thru increased spending* GEM multiplier adjusted to only include formerly unemployed resources ($215m undiscounted) Reduced noise New runway alignment will reduce the number of houses under flight path Property value approach Preventative expenditures (sound proofing) Contingency valuation 290 Costs Land sunk cost market price 0 102 Airport Development market price of inputs 233 Operations Increased aircraft movements * market prices Lost fisheries Dredging in Botany Bay will destroy fish breeding grounds & cloud the water Compensation payment to fishing industry from FAC (acceptance of compensation) Changes in value of output 1 Pollution Air pollution will damage buildings and human health* Water pollution will require purification for industrial users* Loss of earnings Preventive expenditures Replacement cost Contingency valuation Road congestion Extra local traffic * travel cost: valued at $15/hr Net benefit Notes: *excluded if it is assumed that without the third runway the passenger and landing growth would still be accommodated but would cause longer delays. BENEFITS Passenger time savings Reason: Without the third runway increased congestion will cause planes to wait longer to be allocated a landing slot. By removing this delay the project will free passenger time for other uses. Valuation technique: The number of passengers is multiplied by time delay and valued at $15 per hour. Consequential delays on connecting flights were not included. The delay is varies between international, domestic and commuter planes. It is increased over time rising from around 2 minutes per plane in 1991 to around 25 minutes per plane in 2010. It assumed the project reduces delays to the level of 1991. The number of passengers also increased over time. Value: PV 1991$ 414 million Aircraft delay Reason: Without the third runway increased congestion will cause planes to wait longer to be allocated a landing slot. By removing this delay the project will save resources such as fuel, maintenance and labour for other uses. Valuation technique: Cost savings (loss of earnings) The third runway’s reduction in delays to aircraft were valued using estimates of hourly cost by type of plane. These estimates were based on marginal operating costs for aircraft, assuming an average load factor of 65% of passenger capacity. Source: Kinhill (1990) Proposed Third Runway. Sydney (Kingsford Smith) Airport. Draft Environmental Impact Statement, Federal Airports Corporation, Mascot, pp.3-33 & 7-26. Department of Transport and Communications (1989) Review of traffic management arrangements at Sydney (Kingsford Smith) Airport Value: PV 1991$ 1302 million Noise Reason: High levels of noise, such as that experience under an aircraft flight path, causes distress and illness to people and damage to property. Valuation technique 1: Hedonic pricing • econometric modelling of the determinants of house prices in a sample area to estimate impact of aircraft noise; • estimation of the number of dwellings that would be affected (categorised by ANEF contour interval) as a result of development of the proposed third runway, compared with the 1988 base case; • extrapolation of the model results to other types of dwellings and to other areas in order to estimate the impact of aircraft noise on property values. Kinhill (1990) Proposed Third Runway. Sydney (Kingsford Smith) Airport. Draft Environmental Impact Statement, Federal Airports Corporation, Mascot, pp.23-25. Value: The third runway will change the distribution of aircraft noise from the east and west to the north. Because fewer people live to the north their increased cost of noise is less than the noise reductions of the east and west and there is a net reduction in the cost of noise. Property value impacts of third runway at KSA East of airport 89.8 West of airport 110.1 North of airport -175.5 Total 24.4 Source: Kinhill (1990) Proposed Third Runway. Sydney (Kingsford Smith) Airport. Draft Environmental Impact Statement, Federal Airports Corporation, Mascot, pp.23-31. Valuation technique 2: Prevention cost Estimated total cost to insulate residences Scenario Cost range ($ million) All residences exposed to noise levels greater than 20 ANEF, for 1988 base case. 890-1,210 All residences exposed to noise levels greater than 20 ANEF, for the long-term scenario with proposed third runway. 460-630 All residences exposed to noise levels greater than 20 ANEF, for the long-term scenario, with proposed third runway and having a noise exposure less than this level for the 1988 base case. 170-230 Noise reduction from proposed third runway 430-580 Note: Australian Noise Exposure Forecast (ANEF) Source: Kinhill (1990) Proposed Third Runway. Sydney (Kingsford Smith) Airport. Draft Environmental Impact Statement, Federal Airports Corporation, Mascot, pp.22-40. Value: I used the prevention cost saving of $580 million and spread that over the 16 years to 2010 at $36.3 million. This discounted back to a present value in 1991 dollars of $290 million. COSTS Construction Reason: The resources (goods and services) used up in the construction of the third runway have alternative uses which are lost to society when the resources are used in construction Valuation technique: market prices The construction resources are available in competitive markets which are good measures of social value. Therefore market prices used in budgeting for the project are used. Estimates of construction costs of the proposed third runway and associated facilities ($ millions June 1990 dollars) Item Year of outlay Total 1 2 3 4 Reclamation - 48.0 48.0 - 96.0 Pavements - 5.4 21.6 9.0 36.0 Drainage - 5.8 3.7 - 9.5 Fencing-perimeter road - - 1.5 - 1.5 Electrical-airfield lights - - 2.0 1.9 3.9 Taxiway bridge - 9.3 - - 9.3 Control tower-navigation aids - - 10.5 12.2 22.7 Corporate aviation • hangars - - - 34.5 34.5 • car park - - - 1.9 1.9 • apron - - 7.1 - 7.1 • access road-bridge 1.1 - - - 1.1 Rescue-fire fighting - - 3.1 1.0 4.1 Relocations 3.3 - - - 3.3 Design 18.3 - - - 18.3 Contingency 0.5 10.3 11.5 1.6 23.9 Total 23.2 78.8 109.0 62.1 273.1 Multiplier flow-on to Sydney 18.2 61.9 85.7 48.8 Employment (no. of jobs) Runway construction 45 155 260 205 Multiplier flow-on to Sydney 48 164 276 217 Source: Kinhill (1990) Proposed Third Runway. Sydney (Kingsford Smith) Airport. Draft Environmental Impact Statement, Federal Airports Corporation, Mascot, pp.20-10. Value: Present value in 1991 dollars is $233 million. Loss of fisheries Reason: Dredging in Botany Bay for materials used to fill the runway will cause turbidity in the water and lower the fish population. Fewer fish will be caught be professional and amateur anglers for the four years after 1991. This is a loss of resources caused by the project. Valuation technique: market prices Estimates of annual loss to fisheries Value per Professional Amateur Percentage Loss to Loss Species kg catch catch loss commercial to amateur fishery fishery ($) (kg) (kg) (%) ($) ($) Yellow-finned bream 4.82 21,717 16,870 34.0 35,582 27,647 Tarwhine 3.12 2,352 355 45.2 3,317 501 Luderick 0.86 18,770 4,955 83.1 13,414 3,669 Trumpeter whiting 2.43 3,063 245 15.0 1,116 89 King prawns 12.38 58,674 ? 6.2 45,274 ? Total 118,444(1) 31,906 (1)increased by 20% for under reporting. Source: Kinhill (1990) Proposed Third Runway. Sydney (Kingsford Smith) Airport. Draft Environmental Impact Statement, Federal Airports Corporation, Mascot, pp.18-24. Value: Present value in 1991 dollars is $0.5 million. Cost Benefit Analysis of the third runway at Sydney’s Kingsford Smith Airport $million Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Benefits Passenger savings 0.0 0.0 0.0 0.0 21.7 27.8 34.5 41.6 49.3 57.3 -2.9 9.8 26.7 43.0 60.4 78.9 98.6 119.4 141.6 165.1 Aircraft savings 0.0 0.0 0.0 0.0 83.0 103.1 123.5 144.4 165.5 187.1 7.4 50.6 94.9 140.3 186.8 234.3 282.9 333.8 386.1 439.7 Noise reduction 0.0 0.0 0.0 0.0 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 36.3 Total benefits 0.0 0.0 0.0 0.0 140.9 167.2 194.3 222.3 251.1 280.7 40.8 96.7 157.8 219.6 283.5 349.5 417.7 489.5 564.0 641.0 Costs Construction 23.2 78.8 109.0 62.1 Fisheries 0.0 0.2 0.2 0.2 0.2 Total Costs 23.2 79.0 109.2 62.3 0.2 Net Benefit -23.2 -79.0 -109.2 -62.3 140.8 167.2 194.3 222.3 251.1 280.7 40.8 96.7 157.8 219.6 283.5 349.5 417.7 489.5 564.0 641.0 IRR 0.4 Total NPV $ million Net Benefit Passenger savings Aircraft savings Noise reduction Total benefits Construction Fisheries Total Costs 1773.3 414.0 1302.4 290.2 2006.5 232.7 0.5 233.2 Prepared by Greg Barrett, University of Canberra. END OF WEEKS 9 & 10 Week 11: Thursday 27th April 2017 Distribution Analysis Seminar Exercises: • How do you intend to do distributional analysis? Identify the stakeholders (participants) describe and value the costs and benefits they experience. A Planning Balance Sheet (Distributional Incidence Table) is a useful tool for summarising this information. The project's stakeholders are identified in the table below. Passengers and airlines are the major beneficiaries through the reduced delays. However, at least part of this benefit is returned to the Federal Airports Corporation via a special noise charge. The construction industry bears the major cost in the form of lost resources but is compensated by payment from the Federal Airports Corporation. The fishing industry will lose some fish but the commercial industry is compensated via a payment from the Federal Airports Corporation. The local community to the west and east of the airport experiences reduced noise while the community to the north experiences increased noise. In the worst areas compensation is provided in the form of noise insulation. Overall it is the community north of the airport who bear the largest uncompensated cost. Incidence of costs and benefits of the third runway at KSA Participant group COSTS BENEFITS Passengers higher ticket prices Time savings from avoided landing delays; increased number of passengers Local community Loss of amenity from Botany Bay, increased aircraft noise to the north, increased road congestion. Reduction in noise to east and west Botany Bay fisheries Reduced fish stocks and catches Compensation payment Construction industry Resources used Revenue from construction Airlines Higher landing charges Profits from extra passengers; fuel savings Federal Airports Corporation Expansion of complementary infrastructure; interest & principal Revenue from extra passengers; finance received Government Expansion of complementary infrastructure Dividends from FAC, extra taxes NB italics represent financial costs and benefits. END WEEK 11 Week 12: Thursday 4th May 2017 Sensitivity Analysis - RISK! Seminar Exercises: • How do you intend to do sensitivity analysis? Identify high and low values of crucial assumptions. Rework NPV at each of these values. What are the crucial assumptions in the project design? The crucial variables for measuring the risk or uncertainty of the project are those which are risky enough and large enough to change the conclusions of the CBA. In this project passenger and aircraft savings are the largest variables. They both depend on the estimate of increasing delays over time as congestion increases without the project. This type of projection is typically very uncertain. Therefore these variables are selected for sensitivity analysis. There are several ways in which sensitivity analysis can be presented. A common method is to take optimistic and pessimistic views of the variable and recalculate the decision criteria (eg NPV). For the third runway a pessimistic view of delays might be the instead of increasing to around 25 minutes per aircraft without the project the delay only increases to 10 minutes. An optimistic view could be that the delay rises to 40 minutes. The impact can be shown in a table. Combined passenger and aircraft savings, present value in million 1991 dollars NPV Pessimistic: 10 minute delay 1,000 1,057 Base case: 25 minute delay 1,716 1,773 Optimistic: 40 minute delay 3,000 3,057 Another way to present sensitivity analysis is to calculate the switching value. This is the value of the selected variable which would change the decision. In the case of the third runway it would be the aircraft and passenger delay which drove the NPV down to zero. Because the noise reduction benefit is already larger than the total cost, the delay would have to decrease after the project in order for the NPV to be zero. The conclusion from both these sensitivity analyses is that the project is very robust and can accommodate very large negative changes and still be worthwhile. The positive net benefit is very reliable. End of Week 12 Week 13: Thursday 11th May 2017 The tutorial sessions will be devoted to offering final assistance with your project. You should bring a printed draft of your work to the class so as to discuss issues with your tutor. Highlight issues where you might be unsure as to how to apply a concept to your project. It essential that you have a plan of your project with the word count for each section so that your tutor can advise you on areas such as section headings, structure, and style of presentation of the report. Little can be done if you do not have a draft at this stage! Appendix. SUPPLEMENTARY MATERAIL FOR THE COMPLETION OF THE KSA STUDY Air pollution costs Response Estimated Damages from atmospheric emissions (1987 $US per ton) A Emissions of particulate matter Category of Damages Marginal Damage Mortality point estimate 1,200 upper limit 7,200 lower limit 240 Acute Morbidity point estimate 1,000 upper limit 2,100 lower limit 0 Chronic Morbidity point estimate 100 upper limit 120 lower limit 100 Soiling point estimate 250 upper limit 480 lower limit 50 Total point estimate 2,550 upper limit 9,900 lower limit 390 Missing categories of damage: Visibility impairment, soiling and materials damage in manufacturing, acid deposition effects, and impacts on climate. Source: US Environmental Protection Agency, Office of Planning and Evaluation. B. Emissions of Sulphur Oxides Category of Damages Marginal Damage Morbidity point estimate 1 upper limit 63 lower limit 0 Materials Damage point estimate 40 upper limit 73 lower limit 9 Crop Losses point estimate 1 upper limit 2 lower limit 0 Visibility Losses point estimate 141 upper limit 771 lower limit 44 Sulfate Particulate point estimate 454 Morbidity & Soiling upper limit 703 lower limit 238 Total point estimate 637 upper limit 1,612.5 lower limit 290 Missing categories of damage: acid deposition effects, mortality, impacts on climate. Source: Memo from John R. O'Commor, Director, Strategies and Air Standards Division, EPA on SO2 Domestic Policy Council Work Group, Benefits Subcommittee Analyses and Industrial Boiler SO2, New Source Performance Standards. C. Emissions of Nitrogen Oxides Category of Damages Marginal Damage Visibility Loss point estimate 77 upper limit 115 lower limit 38 Eye and Throat point estimate 118 Irritation upper limit 283 lower limit 0 Materials Damage point estimate 35 upper limit 35 lower limit 17 Total point estimate 230 upper limit 433 lower limit 55 Missing categories of damage: NO2 chronic health effects, non-user effects. Source: Economic Benefits of NOx Control: Design and Application for the Eastern United States. Draft Report, Energy and Resource Consultants, Inc., prepared for Mark Thayer, Office of Policy Analysis, August 10, 1987. Repetto R (1991) Environmental Productivity and Why It Is so Important, Challenge, Vol.33, no.5, September, pp33-38. Dose Air pollution from KSA(increases to 2010 from 1988 levels) emissions (kg/d) ambient levels (mg/m3) April airport(1) surrounding suburbs(2) HC 5,635 4.8 (112%) 1.4 (135%) NOX 3,195 0.5 (23%) 0.3 (49%) CO 12,777 PM 781 SO2 780 Source: Kinhill (1990) Proposed Third Runway. Sydney (Kingsford Smith) Airport. Draft Environmental Impact Statement, Federal Airports Corporation, Mascot, pp.26-13. (1) simple average of predicted maximum one hour concentrations at domestic terminal, international terminal, north boundary and south boundary. (2) simple average of predicted maximum one hour concentrations at Dolls Point, Brighton-Le-Sands, Kogarah, Arncliffe,Dulwich Hill, Lewisham, Marrickville, Newtown, Waterloo, Kensington,, Eastlakes, Mascot and Botany. Figures in brackets are percentage increase. Value Pollutant Dose Damage Exchange rate Value per year emissions (kg/d) 1987 $US per ton $'000 HC 5,635 na na NOX 3,195 230 0.7 383 CO 12,777 na na PM 781 2,550 0.7 1,038 SO2 780 637 0.7 259 Total 1,680 Logframe: Framework for Summarising Project Design Narrative Summary Measurable Indicators Means of Verification Important Assumptions Goal: (sector or program objective) Goal to Super Goal Purpose: (aim or impact) Externalities: End of Project Status Purpose to Goal Outputs: (deliverables or terms of reference) Externalities: Basic terms of reference for each output Output to Purpose Activities: (key clusters or work breakdown structure) Externality mitigation: Inputs: (budget, people, material, time, cost) Activities to Output Conditions Precedent Stakeholder Point of view Objective • Identify and quantify the costs CBA costs must be real resources that are used up by the project and are unavailable for alternative uses, ie opportunity costs. • Identify and quantify the benefits CBA benefits must be real resources that are created by the project and are wanted, ie there is a willingness to pay. Incidence of costs and benefits Participant group COSTS BENEFITS Costs and benefits in italics are financial not economic. Cost-Benefit Analysis Definition Valuation technique Benefits Costs