Division 2.3.1 Key steps of economic analysis

The economic analysis should be carried out in constant accounting (shadow) prices and shall be undertaken taking the financial analysis cash flows as a starting point.

Economic analysis includes the following steps:

1. 1..

   Fiscal corrections to exclude indirect taxes (e.g. VAT, excise duties), subsidies and pure transfer payments granted by a public entity (e.g. payments from national healthcare systems) from the economic analysis. Where indirect taxes/subsidies are intended to correct for externalities, these shall be included in the economic analysis, if considered to adequately reflect the social marginal value of the related externalities and provided that there is no double-counting with other economic costs/benefits.

2. 2..

   Conversion of market to accounting (shadow) prices by applying conversion factors to financial prices to correct for market distortions. If conversion factors are not available from a national planning office and in the absence of significant market distortion for simplification the conversion factor can be set at one (CF=1). Conversion factors may be higher (or lower) than unity when accounting prices are greater (or smaller) than market prices.

3. 3..

   Monetisation of non-market impacts (corrections for externalities): externalities shall be estimated and valued, as appropriate, using stated or revealed preference method (e.g. hedonic pricing) or other methods.

   Economic analysis shall consider direct effects only in order to avoid double-counting while generally shadow pricing and monetisation of externalities account for indirect effects.

   Financial revenues in the form of user fees, charges and tariffs shall be excluded from the economic analysis, and replaced with estimation of the direct effects on users, either through ‘willingness to pay’ or accounting prices. User fees, charges and tariffs especially in sectors not exposed to market competition, in regulated sectors or strongly influenced by political considerations should not be used as a proxy for ‘willingness to pay’ of user.

4. 4..

   Discounting of the estimated costs and benefits: once the stream of economic costs and benefits is estimated, the standard discounted cash flow methodology shall be applied using a social discount rate (SDR).

   On the basis of Social Rate of Time Preference (SRTP) the following benchmarks for social discount rate are estimated: 4,95 % for Cohesion Member States and 2,77 % for other Member States. For simplification as a general rule a social discount rate of 5 % shall be used as a benchmark in Cohesion Member States (Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia, Slovenia) and 3 % in other Member States (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Spain, Sweden, United Kingdom).

   Member States may establish a benchmark for the social discount rate which is different from 5 % or 3 %, on the condition that they:

   1. (1)

      provide justification for this reference on the basis of economic growth forecast and other parameters determining the SDR under the SRTP approach; and

   2. (2)

      ensure its consistent application across similar projects in the same country, region or sector.

   Information on the different benchmark shall be made available to beneficiaries and the Commission at the start of the operational programme.