National Institute Of Construction

Management, Pune.

SCBA

Submitted by
Submitted to;
P91107 Anoop Nimkande
Date
P91119 Vijaydatta Patil
15th Dec 2014

Prof. V.
Date:

POSCO CASE STUDY

1. What was the context of study? Why was the study conducted?
Steel industry buoyant
(NSP-2005) lays stress on accelerating growth in domestic production and
consumption of steel to achieve global competitiveness in terms of cost
quality and product mix, efficiency and productivity
Production target of 100mn tonnes by 2020 from existing 38mn
POSCO entered in 2005, target of 6.3 MN tonnes of steel in SEZ in Orissa
Rs.528.13 Billion
o DTA Rs.77.9bn - development of iron ore mines and related
infrastructure
o SEZ Rs.450.23bn integrated steel works with linked
infrastructure
Steel sector weakness inadequate infrastructure
2. How were the Social Costs & Benefits of the project identified and
quantified?

POSCO alternatives
o Stop at iron ore mining stage

Output Multiplier 1.4

Employment Multiplier 0.35
Additional employment of 50,000 person years annually for
the next 30 years.
Rs.20 billion of additional output for Orissa would contribute
1.3 per cent to Orissas State Gross Domestic Product (or
SGDP) by 2016-17

Use mined ore for making steel

Output Multiplier 2.36
Employment Multiplier
- 0.69
8,70,000 person years of additional employment each year
over the next 30 years
Rs.298 billion of additional output for Orissa.
contribute 11.5 per cent to Orissas SDP by2016-17

Economic cost of iron ore =

cost of extraction extraction

= Average ( Incremental cost of depletion premium computed yearwise )
depletion premium

Depletion premium
$ 10.18 for a steel producer located within Orissa

$ 27 for a raw mineral exporter from Orissa for value addition

elsewhere

Average Incremental Economic Cost ( AIEC )= present economic valueof

operation
( investment
value of quantity of ou

3. Comment on Discount Rate used

o

o
AIEC
o
o
o

AIEC is the average price needed per tonne for the project
to earn 12 % EIRR
Test Discount Rate = Economic Opportunity Cost of capital
of crude steel
Finer Process
= $308 per tonne lest cost
Blast Furnace Process
= $345 per tonne
Forecasted steel slab price post 2006 =
$450
per
tonne
competitiveness of Indian steel

4. Comment on Sensitivity and Risk Analysis

Sensitivity Analysis
o EIRR of POSCO project calculated to be 16.6%
o Even if sales falls 10% short of expected, EIRR would be 13.9%,
higher than the hurdle rate of 12%
o Economic impact is calculated to be $2.5bn at test discount rate of
12%
Infrastructure development proposed
o Roads proposed
6.7- km coastal road from Paradip to POSCO-Indias SEZ site
11-km access roads from the SEZ to NH-5A andSH-12.
o Make power receiving equipment like towers, cables and
transmission hardware in the DTA.
o Indian township and Korean township to house all employees
Cumulative tax revenue
= Rs 174,970 Cr
o The Government of Orissa share
=Rs 77,870 Cr
Opportunity Cost = Tax revenue assuming project in DTA Tax Revenue
from project in SEZ
o Rs.3689 Cr or $0.8bn
o 33% of social benefits

TRANSPORT CASE STUDY

1. What was the context of study? Why was the study conducted?
Context of this study is to conduct appraisal of the available project options
for road improvement in Vietnam and Combodia by ADB, called Greater Meakog
Subregion (GMS) southern coastal corridor (SCC) project.
The SCC is 1 of 10 high priority subregional road projects identified in a
Subregional Transport Sector Study completed in 1994 to facilitate cross border
trade and support economic development in the GMS countries. Regional
cooperation and integration in the transport sector has been given high priority
in the GMS because the poor state of transport infrastructure is a major
constraint to intra-regional trade and economic growth.
The project is designed to enhance cross-border facilities at the borders between
Cambodia and Thailand at Koh Kong, and between Cambodia and Thailand at
Preak ChakXa Xia and to provide capacity building support to the two
governments to address coordination failures between them and to ensure
adequate road maintenance is carried out. Although the project covers two GMS
countries, for the purpose of the appraisal, the project is treated as a single
project in the economic
analysis using the approach of the original analysis.
The agencies responsible for project implementation are public sector bodies: the
Viet Nam Roads Administration and the Government of Cambodia Ministry of
Public Works and Transport. The private sector might have been involved through
build-operate-transfer schemes, but in the current context of Viet Nam this
option had yet to be explored and no private firms had expressed an interest in
playing such a role. Therefore, the judgment in the original appraisal was that
public sector investment in the project does not crowd out potential private
sector involvement.
Roads are not the only transport mode over the distance covered by the project.
However, neither improved rail nor water links provide a viable alternative. Rail
connections are not well developed and a rail alternative between the
Cambodian border and either Nam Can or Ca Mau in Viet Nam would involve very
heavy capital investment in new track that would not be economically viable at
current and projected levels of traffic. At present, water transport is the main

alternative mode to the road improvement. However, goods movement by water

is slow and carrying capacity is limited. Initial approximate calculations suggest
that the full benefits of intra-GMS trade along the corridor cannot be achieved
with continued heavy use of water transport and that improvement to the
current road network offers considerably higher returns.

2. How were the Social Costs & Benefits of the project identified and
quantified?
Time saving is a potentially important factor in most transport projects. once time saved
has been estimated
it must be valued and its monetary value must be included in cost savings. The benefits
of transport facility improvements are defined in terms of cost savings. For road projects,
these are VOC savings plus time savings and savings for non-motorized transport. For
rail, they will be savings on the rail network. For road projects, the main elements of cost
savings for vehicles will be fuel and oil, depreciation, tires, and spare parts. Time savings,
which are part of the generalized cost savings, include that of the crew for commercial
freight, and of drivers and passengers for private cars and commercial buses. For nonmotorized transport (such as bicycles, carts, and pedestrian walking time), the main cost
savings will be in time and possibly some savings in depreciation due to less wear and
tear. VOC savings will vary considerably by vehicle typeand good practice requires at a
minimum a distinction between cars, trucks, buses, and motorcycleswith, if possible, a
further distinction by engine size. VOC savings by vehicle type will vary with factors like
road surface, gradient, speed of travel, and quality of maintenance.
The effects of air pollution arising from particulate matter and other chemicals, such as
nitrogen oxides and sulphur dioxide, will vary with factors like location, population in the
areas affected, prevailing wind direction, as well as the nature of the transport activity
and the height of the emission source. Considerable work has been done in the European
Union on costing these pollutants in terms of health damage costs, using the cost-ofillness, human capital, and stated preference survey approaches.

For economic appraisal, VOC savings at financial prices need to be converted to

economic prices. This requires decomposing the different benefit and cost
categories into tradables, nontradables, labor, and transfers. As the analysis is
carried out using domestic price units the appropriate conversion factors are the
SERF of 1.111 for tradables, 1 for nontradables, a shadow wage rate factor

(taken to be 0.75 for all types of work time and 1 for leisure) and zero for
transfers.

The breakdown of VOC savings and road maintenance expenditure savings into
various primary input categories is shown in Table 7.12.

A change in numbers of accidents as a result of a project can also be a significant

aspect of some transport projects, creating a benefit in the form of cost savings
(where accidents are reduced) and a cost (where they increase). While in the
past these effects received relatively little attention in a development context,
there is now a greater recognition of their potential importance and of the need
to estimate their monetary equivalent value as a project externality.
The effects of air pollution arising from particulate matter and other chemicals,
such as nitrogen oxides and sulphur dioxide, will vary with factors like location,
population in the areas affected, prevailing wind direction, as well as the nature
of the transport activity and the height of the emission source. Considerable
work has been done in the European Union on costing these pollutants in terms

of health damage costs, using the cost-of-illness, human capital, and stated
preference survey approaches.

3. Comment on Discount Rate used

I.

Discount rate considered for all projections is 12%.

II.

A net figure of $122.56 million is generated at 12% discounting factor

which indicates loss to the government.

III.

The shadow exchange rate is 11% above the market rate which is taken to
be due to trade taxes.

IV.

Government loses direct tax revenue due to reduced VOC, but on the
other hand, there is extra foreign exchange expenditure as a result of the
project.

4. Comment on Sensitivity and Risk Analysis

Transport projects are generally sensitive to capital costs, projected traffic flows,
and fuel costs. Traffic flows are generally sensitive to per capita income growth
and the price elasticity used in traffic forecasts. For this case study, as traffic
flows will be governed by income growth, income elasticity, changes in VOC, and
price elasticity, the impact of changes in these parameters on the NPV and EIRR
were examined separately.

These results indicate that a rise in capital cost of 54% above the base case
estimate is needed to render the project marginal. As fuel price is a significant
element in VOC, the level of project benefits rises with the fuel price; however,
only when the assumed fuel price falls by 29% will the project become marginal.
The present value of benefits from generated traffic is $33.26 million, which
represents a 17.8% reduction from the base case value of $40.45 million. The
resulting NPV of $57.72 million and EIRR of 16.6% indicate that the project is still
acceptable, which is expected since the sensitivity analysis has shown that the
project can be justified on the grounds of cost savings for normal traffic alone.
Risk analysis incorporates simultaneous changes in all key variables. The project is
tested for risk by varying key parameters simultaneously within what are considered to
be a reasonable range. Table 7.19 gives the parameters that are varied and the range
within which they vary. Modest variation of capital cost and much higher variation of the
fuel price are allowed for, as well as changes in income growth and price elasticity of
demand. The key result is the probability of project failure, defined by a negative NPV.
This probability is about 10% and while there is no unique cut-off rate for acceptable risk
levels (although 25% is sometimes used as a rule of thumb), the project appears to be
low risk.

NAM THEUN 2 HYDROELECTRIC PROJECT

1. What was the context of study? Why was the study conducted?
The case study is based on the
1,000-MW Nam Theun 2 (NT2)
hydroelectric project located in the Lao PDR and selling most of the
generated electricity (around 97%) to Thailand.
The NT2 project was developed by a private company, Nam Theun 2
Power Company (NTPC)
The project construction period was around 5 years, commencing in 2005,
with predevelopment costs starting in 2004. Project commissioning was
expected in 2010.
From the perspective of Lao PDR, the projects objective is to develop
hydroelectric power as a key source of foreign exchange and, secondly, to
devote a small part of the output to domestic consumers as a low-cost
source of supply.

The advantages put forward for private sector undertaking the project
were:

I.

I.

Efficient, effective and on-target implementation

II.

Access to global capital

III.

Access to state-of-the-art technology

Recognizing institutional capacity constraints,

the
project
was
developed as a public-private partnership (PPP) under a build-ownoperate-transfer scheme.
For least cost analysis of this project, the World Bank and EGAT conducted
an evaluation with the NT2 project competing for a place in sector
expansion plan along with:
I.

Oil fired steam

II.

Coal fired steam

III.

Gas fired combined cycle gas turbines (CCGT)

IV.

Reconditioned thermal units

The evaluation found that NT2 was the cheapest alternative among all
available options.

2. How were the Social Costs & Benefits of the project identified and
quantified?

Project cost include:

I.

Development and pre-operating expense

II.

Construction costs

III.

Operation and maintenance (O & M) costs

IV.

Dedicated transmission line funded in Thailand funded by EGAT.

Investment and O&M costs in financial prices are adjusted to reflect

the economic resource cost of project inputs in terms of the domestic
price numeraire.

Costs are allocated into traded goods, non- traded goods, foreign skilled
labor, local skilled labor, local unskilled labor, fuel, and transfer
payments, and are adjusted by the appropriate conversion factors.

Traded costs (including fuel) are

multiplied by the
shadow
exchange rate factor (SERF), and unskilled labor costs are
multiplied by the shadow wage rate factor (SWRF).

Project benefits include:

I.

Incremental benefits (pertaining

Thailand, valued at WTP

to

project

sales

to

Incremental benefits of electricity to Thailand consist of the

sales revenue of EGAT and the consumer surplus.
II.

Non-incremental benefits (pertaining to domestic sales,

valued at resource cost savings).
Non-incremental benefits of electricity to Lao PDR are valued
based on the economic cost of purchase of electricity from
Thailand without the project.

3. Comment on Discount Rate used

The gain to Thailand becomes negative, indicating that the
return to the country is below the 12% discount rate, which is
taken as reflecting the opportunity cost of the funds committed
to the project. This 28% price rise is a switching value price for the
project since at this level the project will not be attractive for
Thailand.

4. Comment on Sensitivity and Risk Analysis

The project is not sensitive to changes within an expected range
with switching
values of around 55% for a capital cost
increase and around 50% for a fall in sales to EGAT.
Risk analysis was undertaken from the regional perspective
using the @Risk software. Four variables were allowed to vary :
I.

Capital cost

II.

Price elasticity ( both Thailand and Lao PDR)

III.

Sales to EGAT during peak hours

IV.

Price elasticities for both Thailand and Lao PDR

Normal distributions were assigned to the first two variables and

triangular distributions to the price elasticities. Within a 90%
confidence interval, the likely minimum and maximum values of

500

these variables fall close to a 0.1 standard deviation from the

mean.
Risk analysis was conducted based on 10,000 iterations, with
the output variable being the probability-weighted NPV.
There is a 90% chance that the NPV will fall to $211 million or rise
to $558 million, indicating that the project is robust against
simultaneous changes in key variables.
The key result is the probability of project failure, defined by a
negative NPV, which is well below 5%, indicating a very low risk.