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Procedia Engineering 165 (2016) 1197 – 1202

15th International scientific conference “Underground Urbanisation as a Prerequisite for

Sustainable Development”

The efficiency and financial feasibility of the underground

infrastructure construction assessment methods
Varvara Dikareva a,*, Nikolay Voytolovskiy b
a
Moscow State University of Civil Engineering, Yaroslavskoye sh. 26, Moscow, 129337, Russia
b
Saint-Petersburg State Economic University, Sadovaya st. 21, St. Petersburg, 191023, Russia

Abstract

The article presents the research results of the efficiency and financial feasibility of the underground infrastructure construction
assessment methods. The efficiency types, performance criteria, basic assessment principles for project efficiency throughout the
accounting period are considered. The assessment algorithm of the project efficiency is worked out.
© 2016The
© 2016 TheAuthors.
Authors. Published
Published by by Elsevier
Elsevier Ltd. Ltd.
This is an open access article under the CC BY-NC-ND license
Peer-review under responsibility of the scientific committee of the 15th International scientific conference “Underground
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Urbanisation as aresponsibility
Peer-review under Prerequisite of
forthe
Sustainable Development.
scientific committee of the 15th International scientific conference “Underground Urbanisation as a
Prerequisite for Sustainable Development
Keywords: Efficiency, underground infrastructure, financing, algorithm, investment criteria, project.

1. Introduction

In practice only 5-10% of proposed investment projects is cost effective and obtains financing. At the pre-
investment phase during the document preparation process the issues on prospective investments economic
expediency are resolved. In order to make a final conclusion on whether a proposed investment project is profitable,
worked out assessment methods of project economic and financial feasibility are used. These methods are mostly
based on the comparison of the necessary expenditures and the derived revenues. A project is considered attractive
and efficient if it meets the objectives and interests of the participants, i.e. the best results are achieved at the lowest
cost [1,14].

* Corresponding author. Tel.: +7-916-588-50-81.

E-mail address: dikareva-va@rambler.ru

1877-7058 © 2016 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the scientific committee of the 15th International scientific conference “Underground Urbanisation as a
Prerequisite for Sustainable Development
doi:10.1016/j.proeng.2016.11.839
1198 Varvara Dikareva and Nikolay Voytolovskiy / Procedia Engineering 165 (2016) 1197 – 1202

Since the project should meet the objectives and interests of the participants it is necessary to determine the
optimal level of investment project’s net productivity for the investor. And therefore, it is necessary to identify the
investors’ interests and to take into account the external environment conditions and external environment changes
(especially under the conditions of modern economic insecurity). In addition, it is also important to take into account
the fact that assessment should be made over a long period of time.

2. Experimental part

When choosing an investment project several alternatives are considered and economic efficiency of every option
is compared.
The investment project efficiency is assessed at the following stages [6,10,16]:

x The development of the investment proposal and the Declaration of Intent (rapid appraisal of the investment
proposal);
x Project feasibility study;
x The implementation of the investment project.

At the present time, assessment can be undertaken with the help of the methodological guidelines on the
economic efficiency assessment of the investment project. These guidelines are based on the existing regulations:
primarily on the Federal Law of 25 February 1999 № 39-FL "On Investment Activity in the Russian Federation
being implemented in the form of capital investments", as well as on the existing Building Codes "Regulations on
the composition of the expenditures on the output and realization of the products ... The expenditures are included in
the prime cost of the product ... ". The guidelines are also based on the documents which present mainstream rate of
tax and other legal norms.
In the guidelines it is recommended to assess:

x The efficiency of the overall project;

x The efficiency of participation in the project.

The project efficiency assessment at large is aimed at the determination of the potential attractiveness of the
project to potential participants as well as at the search for funding sources (Figure 1):
Budget efficiency presents the financial revenues to the federal, regional and local budgets as a result of the
project implementation.
Social efficiency presents the positive impact on the living standards of the population, on the level of new
services provision as well as on the improvement of the quality of the given services, on the quantity increase of the
given services and on the accessibility of these services.
Economic efficiency presents the ratio of the project costs and benefits both nationwide and on a region scale. It
can be expressed by such factors as the growth of exports [3,7].
 Varvara Dikareva and Nikolay Voytolovskiy / Procedia Engineering 165 (2016) 1197 – 1202 1199

Fig. 1 Types of project.

It is commercial efficiency which is the most interesting part of this work. It characterizes the financial results of
the investment project implementation for each participant. When assessing the project commercial efficiency the
stream of real money is used. The inflow and outflow of funds determine the balance of real money, the balance of
accumulated real money. On the basis of these data efficiency criteria are worked out [5,12].

3. Results

The main project efficiency assessment principles include the following:

x assessment of the project during all the stages of the life cycle;
x forecasting cash flows for the accounting period;
x compatibility of condition comparisons of different projects;
x positivity and the maximum effect principles;
x taking into account the time factor which is connected to the disparity of cash flows;
x taking into account the upcoming payments and revenues only;
x comparison of the states "with the project" and "without the project", i.e. consideration of the consequences of
refusal of the project implementation;
x consideration of all the most significant outcomes of the project;
x taking into account the availability of different project participants, their interests and capital cost estimates,
expressed in the discount rate;
x multiple stages assessment;
x taking into account the impact of the need for operating capital on the project efficiency;
x taking into account the effect of inflation and also the possibility to use several different currencies in the project
(multicurrency);
x taking into account the effect of uncertainty and risk.

For the investment project efficiency assessment an algorithm has been worked out (Fig. 2), which clearly shows
the division of the efficiency assessment process into two stages.
1200 Varvara Dikareva and Nikolay Voytolovskiy / Procedia Engineering 165 (2016) 1197 – 1202

Fig.2. Algorithm of the project efficiency assessment.

At the first stage the project efficiency assessment at large is intended to make up an integrated economic
appraisal of design solutions and to create necessary conditions for finding investors. In order to achieve these goals
social significance of the investment project is determined. We can determine social significance by expertise
considering the part of the population which is affected by the implementation of the given project. Projects can be
global and affect the economic, environmental and social situation in the world. They can also be national-economic
and large-scale and influence the economy within the country or region. We should not underestimate the
importance of the project social significance assessment, because it can happen that, all other things being equal,
commercial efficiency is high, however the implementation of the project is impossible because of creating risks of
endamagement for the society or the environment of the region [2,15]. Furthermore, if the social significance of the
project is recognized as high, you can expect to receive state support and the possibility to assess the commercial
efficiency at a reduced discount rate.
If it is decided that the project is socially or commercially efficient, we can move on to the second phase. At this
stage the efficiency of participation in the project is determined, i.e., the list of participants, financial feasibility and
efficiency of participation in the project of each of them are approved.
It can happen that the result of the project efficiency assessment at the first stage is positive, but the efficiency
 Varvara Dikareva and Nikolay Voytolovskiy / Procedia Engineering 165 (2016) 1197 – 1202 1201

calculations at the second stage have negative results for one of the participants. Such conflicts between interests
may occur on account of an incorrect determination of the discount rate at the first stage, or on account of an
underestimated calculations of the balance values of the investor’s cash flow compared to the project initiator
calculations [4].
The main condition of the financial feasibility of the investment project is the situation when the balance between
inflows and outflows is not negative at each project stage.
Investment project assessment principles are the same at all stages. The assessment may have its own
characteristics according to the type of the efficiency assessed, as well as according to a set of starting data. It also
depends on how accurately starting data are described.
In calculating the commercial efficiency criteria a number of specific principles are identified:

x The application of both current and target prices for material resources, goods, services provided by the project;
x The calculations of the cash flow should be made in the same currency in which the payment for resources is to
be made;
x Remunerations (including the payment of insurance premium) are included in operating costs;
x If several activities are allowed for in the project, revenues and payments are calculated for each type separately.

The efficiency of the project is assessed throughout the whole accounting period, i.e. from the beginning of the
project up to its completion. An accounting period is a period of the project implementation. It is divided into equal
parts (steps). They are the timelines within which the data integration is performed. The received data are used to
assess the financial efficiency. A step of the period may be equal to, for example, a quarter or a year. Everything
depends on the state of the investment climate and the level of predictability of cash flows. The more reliable the
forecast is, the longer the project step lasts (The steps of the period don’t usually exceed one year). Steps are
numbered (0, 1, ...).
The investment project creates cash flow. Cash flow is determined as the whole complex of cash payments and
revenues within the accounting period. First we need to assess the balance of cash flow (or net cash flow) both at
every step and in the whole. But in itself a positive cash flow balance is not the criterion of the investment project
efficiency, though it is the criterion of its financial feasibility.
Cash flows can be expressed either in current price, or target price, or deflated price depending on the prices in
which cash flows are expressed at each step of the calculation of their inflows and outflows.

4. Discussions

In the project efficiency assessment along with the cash flow, accumulated cash flow (accumulated inflows,
outflows and balance) is used, the characteristics of which are defined at each step of the accounting period as the
sum of the corresponding cash flow characteristics for the given step and for all the previous steps.
As a rule, the initial stages of the project are characterized by a negative value of net cash flow, as cash is
invested. Then, as the revenue grows during the project implementation, the value of cash flow becomes positive. In
general, the framework of the cash flows with the participation of both the company initiator and the creditor bank in
the implementation of the underground infrastructure projects is provided in Table 1.

Table 1. The framework of the cash flows with the participation of the company initiator and the bank.
Company initiator Creditor bank
Revenues Revenues from products sale; revenues from the surplus property Receipt of credit interests; receipts of credit
sale; other revenues. principal repayment
Payments Investments in the basic capital and working capital connected Credit granting activity; payment of taxes
with the project implementation; current production expenditures
and the expenditures connected with the implementation; taxes and
fees.
1202 Varvara Dikareva and Nikolay Voytolovskiy / Procedia Engineering 165 (2016) 1197 – 1202

5. Conclusion

The main problem we may face in the planning of the investment activity in the economy taken as a whole is the
lack of resources (investments) and the choice of funding sources. The market is developing; new instruments and
mechanisms that allow raising capital appear. Therefore, for the successful implementation of the investment project
construction organizations must arrange the funding process correctly. For example, they should use not only their
own sources and bank funds, but also raise funds by selling shares on the stock market. Construction companies
should also use investment resources through the issue of liabilities and take advantage of leasing more actively.

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