Cba makassar port (english)

Cost Benefit Analysis and Value for
Money
17 June 2014

2
Contents
Cost Benefit Analysis
1. Introduction to Cost Benefit Analysis
2. Defining the problem
3. Methodology for Makassar
4. Results for Makassar
Value for Money Analysis

3
Benefit-Cost Analysis (BCA)
• Benefit-Cost Analysis is a systematic process for
calculating and comparing benefits and costs of
a project for two purposes:
o to determine if it is a sound investment
(justification/feasibility)
o to see how it compares with alternate projects
(ranking/priority assignment)
• Benefit-Cost Analysis works by defining the
project and any alternatives; then by
identifying, measuring, and valuing the benefits
and costs of each.

4
When to Use Benefit-Cost Analysis
• Benefit-Cost Analysis is most applicable for evaluating
proposed projects that meet the following criteria:
o The potential project expenditure is significant enough
to justify spending resources on forecasting, measuring
and evaluating the expected benefits and impacts.
o The project motivation is to improve efficiency rather
than to meet some legal requirement or social goal.
o Environmental or social impacts that are outside of the
transportation system efficiency measurement are either:
• negligible in magnitude
• measurable in ways that can be used within the
benefit-cost framework; or
• to be considered by some other form of project
appraisal outside of the benefit-cost analysis.

5
When to Use Benefit-Cost Analysis
• Benefit-Cost Analysis is neither necessary nor desirable to
justify all transportation projects. It may not always be
appropriate in the following cases:
o Projects motivated by a need to meet legal requirements
— such as safety standards or environmental impact
standards.
o Projects motivated primarily by a need to address
distributional equity concerns — i.e., legal, political or
moral desires for fairness.
o Projects that are merely maintaining, renovating or
rehabilitating already-built transportation facilities, which
are necessary to avoid losing the already-demonstrated
benefits of those existing facilities (unless there are viable
alternatives present)

6
BCA vs Economic Impact Assessment (EIA)
• Economic impacts are the effects a project or policy has on
the economy of a designated project area
• Economic impacts can result from various sources, including
time savings to businesses, operating cost savings, the
strengthening of local and regional market connectivity, etc.
• Economic impacts arise because a transportation investment
causes a change in prices, or a change in business behavior
that improves business investment, attraction, expansion,
retention, or competitiveness

7
BCA EIA
A systematic evaluation of the
economic advantages (benefits)
and disadvantages (costs) of a
set of investment alternatives.
Exercise to determine how a
project or policy affects the
amount and type of economic
activity in a region. This kind of
analysis focuses on
macroeconomic indicators and
forecasts the influence of the
project on these indicators.
Addresses whether society is
better off by performing a
certain action (such as building
a road/port) versus doing
nothing.
Addresses how an economy is
likely to change as a result of an
action.

8
BCA EIA
Compares benefits and costs of
a project to calculate net change
in welfare.
Calculates change in output,
income, value add and
employment. This tells how the
economy has changed.

9
Difference between financial and economic
analysis
Financial Analysis Economic Analysis
The analysis carried out from the
point of view of the project operator
to:
• verify and guarantee cash
balance (financial sustainability);
• calculate the indices of financial
return on the investment project
based on the net time-
discounted cash flows.
Analysis that is undertaken using
economic values, reflecting the
values that society would be willing
to pay for a good or service. In
general, economic analysis values all
items at their value in use or their
opportunity cost to society.
The main purpose of the financial
analysis is to use the project cash
flow forecasts to calculate suitable
net return indicators, particularly
from the market point of view of the
Investor.
The economic analysis appraises the
project’s contribution to the
economic welfare of the region or
country. It is made on behalf of the
whole of society instead of just the
owners of the infrastructure, as in
the financial analysis.

10
Consumer and Producer Surplus
• Consumer Surplus is
the difference between
the price that
consumers pay and the
price that they are
willing to pay. It is the
area between the
equilibrium price and
the demand curve
• Producer surplus is the
difference between the
price that a producer
receives and the
minimum amount that
the producer would be
willing to accept for the
good/service.

11
Consumer and Producer Surplus
• In the case of the expansion of the Port of Makassar,
there are three types of user benefits (Consumer Surplus)
as a result of a port expansion:
o Benefits to existing traffic from efficiency
improvements
o Benefits to diverted traffic (it is assumed that there is
no diverted traffic due to the high costs to use
alternative ports)
o Benefits to deterred traffic avoided
• In the case of the expansion of the Port of Makassar, the
producer surplus is the revenue generated through
operations less all operating and maintenance costs, also
subtracted is the revenue that would have gone to the
existing port for traffic that switches over to the new
port.
• It is assumed that none of the revenue would have been
directed to alternative container ports due to their
distance from Makassar.

12
Transport CBAs
• A key aim of an economic appraisal of a transport project is
to measure the magnitude of the economic impact resulting
from the investment.
• When it comes to transport, price alone is not an
appropriate measure of the consumer's WTP, instead
generalized cost is used.
Overall
Economic
Impact
Change in
transport
user
benefits
(Consumer
Surplus)
Change in
system
operating
costs and
revenues
(Producer
Surplus and
Government
impacts)
Change in
costs of
externalities
(Environment
al costs,
accidents,
etc.)
Investment
costs
(including
mitigation
measures)
= + + -

13
Project description
• Makassar Port is the largest port in Sulawesi and the fourth
largest container terminal in Indonesia The Makassar Port
Master Plan predicts that the Makassar Port would cater up
to 33M tonnes by 2022 and 64M tonnes by 2032, far
outstripping the current capacity of the port (over 7M tonnes
in containers and another 7M tonnes in general cargo and
bulk).
• Given the long term limitation in capacity under the current
configuration of the existing terminals at Makassar Port, the
2013 Makassar Port Master Plan suggests the development
of container terminal facilities in three phases to the north of
existing port.
• The master plan suggests that the capacity of the port would
thus be increased to approximately 3M TEUs by 2032.

14
Project objectives and impacts
• The development of the new Makassar Port will increase the
capacity to around 1,000,000 TEU p.a. with the first terminal
expected to have around one-third of this.
• It will also improve the efficiency of the existing traffic at the
current Makassar port.
• New Makassar Port will serve as a model for the preparation
of potential PPP projects by port administrations in future,
particularly because until now private investment in public
ports has been limited.
• New Makassar Port is expected to give significant
contribution to increasing economic growth in South
Sulawesi. The increasing trend of economic growth would be
attractive to international port investors.

15
Perspective and scope
• The perspective of the new Makassar Port benefit cost
analysis is taken from South Sulawesi viewpoints which
includes the stakeholders who incur some costs and
who receive the benefits:
o The consumers of port services (the exporters and
importers in South Sulawesi).
o The producer of port services (the port operator).

16
Time period
• The time period for the new Makassar Port benefit-cost
analysis is 30 years, starts with the first project
expenditures, and extends through the useful life of the
project which maximizes the estimated economic
efficiency of the project.

17
Level of effort
• Considering that the development of the Makassar Port
has very high costs and significant effects, it is clearly
worth considerable effort to determine whether
benefits exceed costs and to identify the most
economically advantageous alternative.
• It is necessary to compare the benefits and costs that
would exist in the event that the project was carried
out, with the benefits and costs without carrying out
the project by taking into account the key aspects of
port development such as engineering, financial, and
economic.

18
Defining the Base Case and project option
• The current Makassar port
constrained at an ‘efficient’
capacity of 550,000TEU p.a.
• It has been assumed that
the port can continue
accepting container traffic
beyond this capacity,
however this will introduce
additional delays.
• These delays will cause
waiting time to increase as
the capacity increases.
• The port will continue
accepting freight up until
the ‘hard’ capacity of
1,000,000TEU p.a.
BASE CASE
• Develop the new Makassar
Port with container
terminal facilities to the
north of existing port.
• The new Makassar Port will
have a capacity of around
1,000,000 TEU p.a. with the
first terminal expected to
have around one-third of
this.
ALTERNATIVE

19
Timing of costs and benefits
• With Phase 1 of the Port of Makassar expansion project,
the total container capacity will be increased to the
extent that Demand will not exceed supply until after
2030.

20
Discounting
A dollar today is worth more than a dollar five years from
now even if there is no inflation because today's dollar can
be used productively in the ensuing five years, yielding a
value greater than the initial dollar. Future benefits and
costs are discounted to reflect this fact.
The purpose of discounting is to put all present and future
costs and benefits in a common metric, their present
value. Discounting is present in all benefit-cost.
Discount rates are typically based on interest rates for
government borrowing, which has little risk, with the
inflation component removed, yielding the "real" interest
rate. Although some development agencies such as the
World Bank and ADB recommend using a standard 12% for
all projects.

21
Benefits Stream
Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Benefits 30 80 100 130 150 180
Costs 200 80 15 15 15 15 15
Net
Benefit
Stream -200 -50 65 85 115 135 165
Discount
Factor 1.000 0.893 0.797 0.712 0.636 0.567 0.507
PV
Benefit
Stream -200.0 -44.7 51.8 60.5 73.1 76.5 83.7
Net
Present
Value 101

22
Net Present Value
The sum of discounted costs are subtracted from the sum
of discounted benefits. Projects with positive net present
value should be considered; the greater the net present
value, the more justifiable the project.
However, a large project could have a higher net present
value than a smaller project, even if it has a lower benefit-
cost ratio.

23
Benefit Cost Ratio
To calculate the benefit cost ratio, total discounted
benefits are divided by the total discounted costs. Projects
with a benefit-cost ratio greater than 1 have greater
benefits than costs; hence they have positive net benefits.
The higher the ratio, the greater the benefits relative to
the costs.
It is important to remember that simple benefit-cost ratio
is insensitive to the magnitude of net benefits. Therefore if
comparing two project options it may favour the option
with the small costs and benefits over those with higher
net benefits.

24
Benefit Cost Ratio
Option A: Benefits $150m
Costs $100m
NPV $50m
BCR 1.5
Option B: Benefits $100m
Costs $60m
NPV $40m
BCR 1.66
Which option to choose?

25
Economic Internal Rate of Return (EIRR)
The EIRR determines the discount rate where the PV of benefits
is just equal to the PV of costs.
The EIRR is often compared to the discount rate to assess
economic viability. Often there will be a hurdle rate that the
EIRR must be above for the project to be accepted. Sometimes
this is the discount rate although it may be higher.
NPV BCR EIRR
If > 0 then >1 > Discount rate
If < 0 then < 1 < Discount rate
If = 0 then 1 = Discount Rate

26
Methodology for Ports
• In order to develop a CBA, it is necessary to compare the benefits
and costs that would exist in the event that the project was carried
out, with the benefits and costs without carrying out the project by
considering three types of user benefits as a result of a port
expansion:
o Benefits to existing traffic from efficiency improvements –
Improved efficiency of the existing port as throughput above
‘efficient’ capacity is shifted to new port.
o Benefits to diverted traffic – If traffic is diverted to alternative
ports due to capacity constraints this will impose extra costs on
cargo owners. The new port will remove those extra costs.
o Benefits to deterred traffic avoided – These are the benefits to
traffic that couldn’t be transported through the port at the
current capacity but can be transported if the capacity is
increased.
• In this case, benefits are represented by the consumer and
producer surplus and costs are represented by the capital and
O&M costs.

27
Fig. A) Case with competitive
alternative port
Fig. B) Case with non-competitive
alternative port
Supply and demand for port services before and after a port expansion

28
Case with competitive alternative port
• The supply is fixed at S0 which is the
current ‘hard’ capacity of the port.
• There is an excess of demand over
available supply made up by diverted (QS-
Q0) and deterred traffic (Q1 – QS).
• If capacity is expanded to S1 to meet
demand, then both the diverted traffic
and deterred traffic will use the existing
port.
• The consumer surplus is the difference
between the demand curve and the
generalised cost at the existing port GC0.
• The producer surplus is the price received
for port services multiplied by the quantity
of deterred traffic (Q1-QS).

29
Case with non-competitive
alternative port
• The Port of Makassar case is slightly
different because the only other port on
the island currently moving significant
container volumes could not be
considered a realistic alternative as it is
over 1000 km away from Makassar and
the costs to transport goods by road
would be prohibitively expensive.
• In this case where the generalised cost to
transport from the alternative port (GCS) is
above the willingness-to-pay, all demand
beyond the existing capacity is deterred
traffic. Therefore an expansion in port
capacity will result in a larger consumer
and producer surplus.

31
Methodology for Makassar
Estimating Benefits
o Benefits to existing traffic from efficiency improvements –
Improved efficiency of the existing port as throughput above
‘efficient’ capacity is shifted to new port.
o Benefits to diverted traffic – due to the high costs to use
alternative ports it is assumed that there is no diverted traffic
for Makassar.
o Benefits to deterred traffic avoided – These are the benefits to
traffic that couldn’t be transported through the port at the
current capacity but can be transported if the capacity is
increased. These have been treated separately for imports and
exports due to the different impact of each.

32
• The demand forecasts are used as the unconstrained
demand for container trade.
• Without detailed data regarding the shape of the demand
curve it is difficult to estimate the total consumer surplus.
• The approach taken is to use the average value-add of the
export volumes as an estimate of the profit margin which is
essentially the differences between the generalised cost of
transport and the consumer’s willingness-to-pay.
• Due to the difference in commodity types and economic
impacts of imports and exports, these have been treated
separately in the analysis.

33
Benefits to existing traffic from efficiency improvements
Queueing as a % of the time in port for a 660 m berth terminal
with random ship arrivals
(This assumes an average of 3 berth points with this ship profile)
0%
20%
40%
60%
80%
100%
120%
%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Berth occupancy
Queuing%

34

35
This additional delay is quantified using:
- the value of the containerised goods converted to a daily value
based on borrowing rates.
- The value of a shipping container converted to a daily value based
on borrowing rates.
- Daily charter rate of the average size ship on a per TEU basis.
Item Daily Cost
Daily charter rate per TEU IDR 77,050
Daily cost of container IDR 15,753
Daily cost of cargo per TEU IDR 40,485
IDR 133,288

36
Benefits to deterred export traffic
These are the benefits to traffic that couldn’t be transported through
the port at the current capacity but can be transported if the capacity
is increased.
An estimate of consumer surplus for each exported container has
been made using the average value-add of export products. This has
been calculated using a breakdown of trade products, production
quantities, estimated export percentages and value of products.

37
Benefits to deterred export traffic
The following charts shows the estimated quantity of export TEUs that
will move through Phase 1 of the new terminal, that would not have
otherwise been shipped due to capacity constraints.

38
Benefits to deterred import traffic
Manufacturing in Sulawesi relies on a much higher level of imported
products including machinery and chemicals than the Agriculture
industry. The manufacturing industry has been growing at an average
annual rate of 7.2%p.a (real) over the past decade and, for the
purposes for this analysis, has been assumed to continue growing at
6%p.a, in line with the GDP growth forecasts for South Sulawesi.
However, this growth rate assumes companies have the ability to
import and export at unconstrained levels. It is assumed that once
capacity is reached the excess demand for imported containers goes
unmet (due to the previously discussed lack of alternative container
ports).

39
Benefits to deterred import traffic

40
Producer surplus – benefit to new port operators
The producer surplus is the revenue generated through
operations less all operating and maintenance costs, also
subtracted is the revenue that would have gone to the
existing port for traffic that switches over to the new port.
The revenue from all throughput at the new port is
included in the producer surplus as it is assumed that none
of this revenue would have been directed to alternative
container ports due to their distance from Makassar.

41
Total Benefits

42
Discounted Benefits

43
Results for Makassar
Item
Value
(IDR million)
Benefits
Consumer Surplus – Existing Port Traffic
Efficiencies 2,530,096
Consumer Surplus – Deterred Imports 3,623,668
Consumer Surplus – Deterred Exports 12,725,680
Producer Surplus 319,033
Present Value of Benefits 19,198,478
Costs
Present Value of Costs 3,874,501
Net Present Value (NPV) 15,323,977
Benefit Cost Ratio (BCR) 5.0
Economic Internal Rate of Return (EIRR) 27%
Results of
the
economic
cost
benefit
analysis
• The result of a benefit cost ratio of 5.0 and an economic
internal rate of return of 27% shows the project will
provide a large net welfare benefit to the region.

44
• There are two elements to this project that result in the high
stream of benefits across the appraisal period:
o The strong growth in container traffic demand is forecast
to continue, quickly outstripping the capacity of the
current port and creating a large amount of unmet
demand.
o Due to the lack of an alternative container port in South
Sulawesi, coupled with the distance and poor
infrastructure connections to container ports in North
Sulawesi, once the existing port reaches capacity the
excess demand is unlikely to be able to shift to an
alternative port. Therefore the benefit to the shipper of
goods is not merely in reduced transport costs but in
providing the ability to economically import or export at
all.

45
Scenario
NPV
(IDR million) BCR EIRR
Base Case 15,323,977 5.0 27%
High Trade Forecasts 21,820,534 6.6 35%
Low Trade Forecasts 8,674,181 3.2 20%
High Discount Rate (14%) 10,401,958 3.8 27%
Low Discount Rate (10%) 22,638,490 6.6 27%
Results of
the
sensitivity
analysis
• The results of the sensitivity analysis demonstrates the
findings are quite robust with strong results even at the
lower trade forecasts or high discount rate.
• The positive result of the economic cost benefit analysis
highlights the crucial role the Port of Makassar plays in the
economy of South Sulawesi.

46
• Without significant capacity expansion the delays will
increase exponentially at the existing port adding additional
costs to freight transport costs.
• The financial analysis shows there is an opportunity for a
private operator to make a commercial return from the
facility.
• The economic benefits shown in this project arise without
the need for significant government support.
• For this reason, any government support required to
facilitate the success of the project such as providing
supporting transport connections, would represent excellent
value for money.

48
Value for Money (VFM) is the optimum combination of
whole-of-life costs and quality (or fitness for purpose) of
the good or service to meet the user’s requirements.
Broadly speaking, a PPP may provide value for money
compared to traditional procurement models if the
advantages of risk transfer combined with private sector
incentives, experience and innovation outweigh the
increased costs of contracting and financing. This raises
challenges for policy-makers: how to assess the value for
money of different procurement and delivery options—
that is, carry out “value for money (VFM) analysis”—and
how to use the results of this analysis in PPP decision-
making.

49
VFM analysis plays an important role in many PPP
programs: a recent OECD study found that 19 of 20
surveyed countries apply some kind of value for money
assessment to proposed PPPs. However, even in countries
with well-established PPP programs, the approach to and
use of this analysis is evolving, and is often the subject of
controversy and debate.

50
Achieving VfM in PPP projects is in large part derived from
their ability to transfer risk from the public entity to the
private partner (Aldrete et al., 2010).
The fundamental idea is that the private sector is more
skilled at managing certain types of risk than the public
sector (Mzikayise Binza, 2008).
Risk in PPPs can be defined as the chance that an expected
outcome for a project does not occur. More technically,
this can be stated as the chance that the benefits and
costs of a project are not allocated to the public and
private entities as expected at the project’s onset (Aldrete
et al., 2010).

51
A common misperception regarding the use of PPPs is that
as much risk as possible should be transferred to the
private entity. However, if a portion of the risk can be
more efficiently managed by the public sector, that risk
should be borne by the public sector; by transferring risk
to the private sector that can be more efficiently managed
by the public entity, money will be wasted since,
ultimately, the public sector must pay the private entity to
bear the risk.

52
VFM analysis typically involves a combination of qualitative and
quantitative analysis.
Qualitative VFM analysis typically involves sense-checking the
rationale for using PPP—that is, asking whether a proposed
project is of a type likely to be suitable for private financing.
“Suitability” criteria include the long-term, predictable need for
the service; the ability to allocate risk effectively; the likely
ability of the private sector party to manage risk and take
responsibility for delivery; presence of stable and adequate
policy and institutions; and a competitive bidding market.
“Unsuitability” criteria include projects that are either too small
or too complicated; sectors where needs are likely to change or
there is a risk of obsolescence (for example, PFI projects are no
longer used in the ICT sector in the UK); or where the
contracting authority is inadequately skilled to manage PPP.

53
Quantitative VFM analysis involves comparing the value
for money of a proposed PPP (or actual bids received) with
a “Public Sector Comparator” (PSC)—that is, a model of
the project if implemented through traditional public
procurement.
This is done by looking at the discounted cash flows from
both a PPP and public sector perspective. Generally, the
approach taken is to add back to the analysis the cost of
any significant risks that will be Transferred under the PPP
model—that is, risks that are retained by government
under both public sector and PPP models are assumed to
cancel out.

55
Port of Makassar - Value for Money
•Value-for-Money Analysis is designed to assess if a PPP
project represents better value for money than the
traditional government procurement model. In the case of
the ports sector DGST has not and does not operate ports
and therefore there is no way to have realistic PSC for a full
government owned and operated case.
•For other infrastructure such as water treatment, schools
and roads where the government does operate these
facilities it is possible to test a PPP case against a Public
Sector case because full government ownership and
operation is a possible alternative.

56
•The value for money question then turns to the structure
of the PPP project. There are several options available to
DGST to structure the project.
•If it is a BOT requiring no government support then the
issue of Value for Money is irrelevant because there is no
cost to governmental.
•In the case of Makassar there is likely to be VGF required
if the tariff is to remain at an acceptable level.
•The LOH case becomes the pseudo PSC because it is has
as much public ownership and involvement as is possible
under the current structure of the Indonesian port system.

57

58
•While, the landlord model provides better value for
money of the two modalities, the decision cannot be
based on value for money alone.
• Other factors such as the ability of the MPA to borrow
the required funds and manage the construction process
are critical.
•If due to these complications the BOT model is selected
the value for money proposition simply becomes allowing
the highest charges that are acceptable in order to
minimise VGF.

59
Problems with quantitative analysis
-Putting a dollar value on the transfer of risk can be
subjective. This can lead to the Public Sector Comparator
being manipulated to get a desired outcome.
-A major risk of quantitative VFM analysis is that the
results are seen as “overly-scientific” and that the results
are taken as proof of a particular outcome. In reality it is
an estimated based on a range of assumptions with
incomplete information.
-If a quantitative assessment is conducted the it should be
assessed alongside other factors.

60
VFM analysis in many countries is limited to social sector
PPPs that will be paid for entirely by Government
availability payments.
In economic sectors such as transport, user charging is
seen as the more economically efficient way to pay for
infrastructure, and as more politically and socially feasible
under a PPP—the decision to implement a project as a PPP
in these sectors is therefore driven by the financial viability
of the proposed project.

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