Traditionally, economic assessment is based on a comparison of two solutions: a solution with a proposed project and a reference solution (that is, a solution without a proposed project). In the case of a proposed expansion versus a greenfield project, the reference solution corresponds to a solution in which the existing port infrastructure would evolve without modernization or expansion.
The assessment is based on a differential costbenefit analysis. The costs and benefits are assessed in terms of economic value. This has a dual implication in terms of methodology:
The assessment of commercial benefits and costs does not pose any particular valuation problem because their value is determined by the market. However, assessing noncommercial benefits and costs is more difficult.
Socioeconomic discounted profit or net present value (NPV). In the field of public investment and port investment in particular, the principal criterion on which the investment decision is based is the socioeconomic discounted profit. This criterion enables the intrinsic value of the project for the community to be assessed, and only projects with a positive discounted profit should be selected. The discounted profit is defined as the difference between the discounted investment expenditure and the discounted value of the net benefits generated by the project during its lifetime. We also use the expression economic net present value or economic NPV.
For a project whose operations begin in year t, the discounted profit is calculated as follows:
C = Discounted investment cost
a = National economy discount rate
Ai = Benefits in year i
t = Year in which the infrastructure is put
into service
The discounted profit criterion enables government officials to decide on the appropriateness and interest of the project for the community. However, employing this tool does not provide any information as to the date on which it should be carried out. With certain hypotheses (for example, investment made at the beginning of a period, or net annual benefits increasing with time, unchanging chronicle of benefits with time) it can be shown that discounted profit reaches a maximum for a certain commissioning date, referred to as the optimal commissioning date. If the project is carried out before that date, the community loses benefits. Conversely, once that date is passed, the project should be carried out as quickly as possible.
Internal rate of return or economic IRR. The (positive or negative) value obtained when calculating the discounted profit is an absolute value (as opposed to a relative value) that does not allow public decision makers to weigh the relative merits among several projects or variants. To permit this weighing of alternatives, another way of tackling the economic assessment of a project is to consider the value of the discount rate at which the net discounted profit is zero, or the economic IRR of the project.
The economic IRR is the solution r of the equation:
C = Discounted investment cost
Ai = Benefits in year i
This second criterion enables us not only to assess the intrinsic interest of the project for the community by accepting only projects whose economic IRR is higher than the discount rate of the national economy, but also enables us to arbitrate among several projects or variants by choosing the one with the highest economic IRR.
Sensitivity studies. The economic assessment of a project is normally supplemented by a sensitivity study, which enables decision makers to ascertain the effect of changing a number of parameters on the value of the economic IRR.
By way of illustration in the port sector, we can test the effect of changes in traffic levels, investment costs, operating costs, and cargo handling productivity on any project’s discounted costs and benefits.
Assessment of market economic Costs. Traditionally, the market economic costs of a project consist of investment costs, maintenance and operation of equipment, and materials used in each solution (that is, the solution with the proposed project and without the project). In the case of a project to expand an existing infrastructure versus a greenfield project, the costs to be considered in the reference solution account for the normal expenses necessary to maintain the operating life and the normal safety conditions of port equipment and structures.
The inventory of project costs includes induced infrastructure costs, such as the new land service networks required by the project. For example, a greenfield project often requires the building of a new access road, for which the investment cost to the community can sometimes be higher than the cost of the port project itself.
Assessment of nonmarket economic Costs. The inventory of project costs must also take into account “nonmarket” economic costs. In the port sector, these include but are not limited to:
Assessing these economic costs is a particularly difficult exercise, but one that is essential to determine the economic rate of return of a project.
Assessing the economic benefits or positive externalities of the project. The economic benefits of a port project can be analyzed as an increase in real revenue for the various elements of the national economy. They can take the form of a direct increase in national added value corresponding to an increase in the wages created by net job creation, or an increase in company profits (new activities whose development depends on the realization of the project). Another benefit is a price reduction translating into an increase in real income for consumers and an increase in profits for companies. This covers, for example, reductions in ship turnaround times resulting from improved handling efficiency (theoretically leading to a fall in freight rates), benefits from economies of scale, lower insurance costs, reduced cargo inventory costs, lower inland transport costs, and more.
The benefits can theoretically affect all national economic agents who, in some way or another, are concerned with the production, marketing, transport, and handling of goods passing through the port in question.