KangSoo Kim & JeongWhon Ryoo

May 22-23 2007

Implementation System and Analysis Methodologies of the Preliminary Feasibility Studies (PFS)

1. Implementation and Management

2. Methodologies

• Guidelines

• Cost and Benefit

• AHP (Analytic Hierarchy Process)

3. Issues and Future Directions

Implementation and ManagementPart-01

3

Implementation

4

Management

□ Requiring expeditious development of high quality PFS and timelydecisions

□ Supply standard Data and Guidelines□ Establishing Study team and Advisory committee

□ Data Supply

PFS consists of a forecasting and an evaluation procedure

Minimizing analysis time for forecasting procedure by supplying

basic data and forecasted models

(ex : KTDB : Korea Transport Database)

5

Management

□ Guidelines for the PFS

PIMAC has issued guidance on how to appraise projectsStating what kind of cost and benefits should be included

□ Efficient and Independent Study Team

KDI is in charge of the management of study process and coordination between study team and related agencies

Advisory and Steering committees are set up to provide technicalsupport and review the results

Management/coordination, demand analysis, and cost analysis groups from engineering consulting firms, research institutes, universities as well as KDI.

GuidelinesPart-02

77

Guidelines

□ Purposes

to present results of technical appraisal work logically and clearlyto maintain the consistency across different PFSto improve the reliability and accountability of the PFS results

□ Development of the guidelines

The first guideline was launched on 1999. Updated three times inthe years of 2000, 2001 and 2004

General guidelines and the standard guideline by each area • road, railway, airport, harbor, culture · tourism · sports · R & D

88

Guidelines

□ Technical guide but which has real impact

The guidance is binding on government departments and execute agencies, especially for proposals that require funding from central government.

□ Used by all Feasibility appraisers

The guidance's procedure has been written to help specialist andcommissioners of appraisalsTriggered establishment of evaluation guidelines of line ministries

99

Guidelines

1. Project overview

examining project background, objectives, history and project contents, derive on the main reason for the research

2. Economic feasibility

Economic feasibility assessment: B/C ratio, NPV and IRR Fiscal feasibility assessment: In order to predict the size of fiscal costs, evaluate the profitability of the project

□ Contents

1010

Guidelines

3. Policy Analysis

Degree of lagging regional development, promoting regional economy, possibility of receiving fiscal support, consistency with related plans, environmental impact assessment, etc.

4. General evaluation using AHP technique

Based on the outcome of economic feasibility analysis and policyanalysis, evaluate the feasibility of the project in a comprehensive manner reflecting the opinions of research team

Part-03 Cost / Benefit Analysis

1212

Cost

□ Cost of environmental impact

□ Constructions costs

□ Cost for design, supervision, survey

□ Cost for land and property acquisition

□ Operating or maintenance costs

□ Reservation cost

1313

Benefits

□ Value of time savings (wage rates), both work and non-work

□ Vehicle operating cost savings

Changes in fuel and oil consumption, tire wear, vehicle maintenance, depreciation

□ Safety improvement (Accident Reduction)

number of fatalities, number of injuries, number of accidents

□ Noise and Air pollution Reduction

□ Parking cost savings

□ Non-option value

1414

Discount Rate

□ Discounting is used to compare costs and benefits that occur in different time periods.

People prefer to receive goods and services now rather than later

□ Discount rate is set at 6.5% real (2004)

It was 7.5% real (Rail, Road, Port), 6.0% real (water resource developmentproject)7.5% real → 6.5% (2004) real For the water resources development projects : for the first 30 years 6.5 % real, next 20 years 5.0% real. Lower rates is set for appraisals over the long term (i.e. 50years)

Part-04 AHP (Analytic Hierarchy Process)

1616

AHP

□ Cost-Benefit analysis does not comprise all effects

regional economic developmentthe number of job generated, improved network accessibility

□ Developed in order to remedy this situation so relevant but missing effects can be included in the analysis.

This is made possible by combining cost-benefit analysis and multi-criteria analysis.

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□ STRUCTURE (AHP)

ImplementationImplementationImplementation Status QuoStatus QuoStatus QuoAlternativesAlternativesAlternatives

Economic analysis Balanced regional development analysisPolicy analysisLevel 1

PFSPFS

Level 2 Consistency with Related plans

Project RiskSpecific evaluation items

Level 3

(optional)(optional)

(optional)(optional)

(optional)(optional)

(optional)(optional)

Regional B

ackwardness

Analysis

Regional B

ackwardness

Analysis

Regional Econom

y Impact

(MR

IO)

Regional Econom

y Impact

(MR

IO)

(optional)(optional)

1818

□ ASSIGNED WEIGHTS RANGE (AHP)

To reflect regional economic development more importantly, prior max and min weights are assigned to each decision criteria

<Max and Min Assigned Weights to Each Decision Criteria in PFS>

15 ~ 2525 ~ 3540 ~ 50

Balanced regional development analysis

Policy AnalysisEconomic AnalysisEconomic Analysis

Part-05 ISSUES / FUTURE DIRECTIONS

2020

How are the costs and benefits distributed across different groups in society ?

Proposals might have differential impacts on individuals according to their : income, gender, age.

Any distributed effects should be explicitly stated and quantified as much as possible

The monetary costs and benefits of a proposal can be weighed to take account of distributional impacts.

□ Distributional Impacts

2121

□ Optimism Bias

<Cost overrun and Demand over forecasting >- Road Projects (Completed in 2004, 2005 and 2006) -

Demand Forecasting Inaccuracy

0

5

10

15

20

25

30

35

40

-100 -80 -60 -40 -20 0 20 40 60 80

Inaccuracy(%)

PER

CEN

T

Cost and time overrun, demand over forecasting

2222

Widespread tendency for appraisers to be over optimistic

Worldwide phenomenon : not just in the public sector but in theprivate sector

Affects many elements of appraisals : capital costs, operationalcosts, project duration, works duration, and benefits shortfall

To mitigate optimism, sensitivity testing should be used to assess by how much costs can be allowed to increase, or benefits to fall short

□ Optimism Bias

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1. AHP

Decision makers : who, how many (now 8 experts)

Tree Structure and Criteria : what, how important (prior weight), how included (e.g regional backwardness analysis)

2. Discount Rate

Optimal discount rate (now 6.5% real) exists?

Different discount rate for different sector ? (now 5.0% real for water resources development project after 30 years)

□ AHP and Discount Rate

THANK YOUTHANK YOU

KangSoo Kim & JeongWhon Ryoo