1

Updated: May 16, 2007

Lecture Notes

ECON 622: ECONOMIC COST-BENEFIT ANALYSIS

Lecture 10

2

MEASUREMENT OF COSTS AND BENEFITS OF TRANSPORTATION

INVESTMENTS

3

ECONOMIC BENEFITS OF TRANSPORTATION PROJECTS

1) Improvement of existing mode

- Example of a road

2) Introducing new modes of transportation

- Example of a Buenos Aires- Colonia

bridge

4

COST - BENEFIT ANALYSIS OF TRANSPORTATION PROJECTS

1) ROAD IMPROVEMENT BENEFITS

• Cost Savings for Existing Traffic

- Savings in Vehicle Operation and Maintenance Costs

- Savings of Time

• Cost Savings for Newly Generated Traffic

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COST SAVINGS FOR EXISTING AND NEW TRAFFIC

Cost per vehicle-mile for type i

Traffic Volume of type i

cit

c`it

V`itVit

Di

D`i

E

FG

Cost Savings for Newly Generated

Traffic

Cost Savings for Existing Traffic

6

Cost Savings From Road Improvements

• Traffic Volume with Project: number of vehicles by type that we expect each year to use the road over its life after improvement for the each year;

• Traffic Volume without Project : the volume of vehicles by type that would travel on the road without the road improvement;

• Vehicle Operating Costs with and without the Project: the costs incurred by road users in terms of:

- consumption gasoline and oil; - The wear-and-tear on tires - The repair expenditures for vehicles

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Without Road Improvement With Road Improvement

• Diverted Traffic: The traffic that diverted to the upgraded road from other routes as a result of the road improvement.

• Generated Traffic: The traffic that will arise from people who now made the trip more frequently due to the reduction in the cost of using the road.

8

Savings of Time

• “Normal” traffic: For passengers and trucks the improved road allows their vehicles to travel at a higher speed as compared to the existing road, thus saving them time.

Example: Occupants of a vehicle value time at $20 per hour, vehicle speed is 30 kph

Time cost per km: 20/30= $ 0.66

If vehicle speed is 50 kph

Time cost per km is 20/50= $ 0.4/km

Value of Time Savings: 0.66-0.4= $ 0.26 per vehicle - km

• The value of savings is tied to the value placed on occupants’ time and therefore sensitive to the level of per capita income of the country.

• For Diverted and Generated passenger traffic the value of time savings is taken on average as half of the value of time savings for “normal” traffic.

9

Savings of Costs of Road Maintenance• The annual savings in resources used for maintenance is the

difference between the amount of resources spent on maintenance “without” road improvements minus the maintenance costs during the life of the road “with” the improvement.

• Road improvements or new roads will affect the pattern of traffic on other roads that are complements or substitutes to the road being improved.

• For complementary roads the maintenance requirements are expected to rise as the volume of traffic accessing or exiting from the improved roads increases.

• The increase in maintenance costs on the complementary roads should be included as a cost associated with the road improvement project.

• Substitute road maintenance expenses are expected to decrease due to the lower traffic levels.

• The cost savings are a benefit to the road improvement.

10

Accident Reduction• A road improvement can be important factor in the reduction of

the number of accidents.

• A road improvement may not automatically imply a substantial reduction in the rate and severity of accidents as there are other influencial aspects. Some of these factors are the geometric alignment of the road, the volume of slow traffic, effectiveness of law enforcement, vehicles mechanical conditions and drivers behavior.

• Steps to assess the benefits of accidents reduction:

– the rate of traffic accidents “with” and “without” the proposed improvements must be estimated. (Number of accidents per million vehicle-kilometer)

– the monetary value of accident reduction should be estimated which includes the savings in damages such as property and cargo damages. It is difficult to put a monetary value on injuries and fatalities.

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Calculation of Value of Savings in Transportation Projects

Step One: Estimate a projection over time of the traffic volume in the area for different types of traffic:

Where Vt is the expected volume of traffic in year t, V is traffic, i is a type of traffic, t is time.

Vt=Viti

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Step Two: Calculate the Average Speed

Sit=ƒ(Vt),

Where Sit is the average speed of the ith vehicle type.

Step Three: Estimate cit which is the average cost per vehicle-mile at time t for vehicle type i on the unimproved road. cit includes vehicle operating costs, depreciation, maintenance and time cost.

Step Four: Estimate c`it which is the average cost per vehicle-mile at time t for vehicle type i on the improved road.

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Step Six: Estimate M` and M , which are the annual road maintenance costs with and without the road improvement.

Step Five: Estimate the benefits of savings in cost of travel due to road improvement in year t:

i(cit - c`it)*Vit

and the present value of these benefits at discount rate r:

(1+r) -t* (cit - c`it)*Vit t i

t t

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Step Seven: Estimate the benefits of savings in road maintenance cost due to road improvement in year t, in some cases maintenance costs may rise

Step Eight: Estimate the present value of total benefits due to improvement (when volume of traffic remains constant after improvement):

(Mt - M`t)

(1+r)-t* (cit - c`it)*Vit + (1+r)-t*(Mt - M`t)t i t

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COST SAVINGS WITH AN INCREASE IN TRAFFIC VOLUME GROWTH AFTER ROAD IMPROVEMENT

Step Nine: There is an additional benefit in consumer surplus of generating new traffic volume due to road improvement.

Cost per vehicle-mile for type i

Traffic Volume of type i

cit

c`it

V`itVit

Di

D`i

E

F

G

EFG = ½(1+r)-t*(cit - c`it)*(V`it -Vit) t i

Gain in Consumer Surplus due to Improvement

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COST SAVINGS WITH AN INCREASE IN TRAFFIC VOLUME GROWTH AFTER ROAD IMPROVEMENT

Step Ten: The total present value of benefits due to road improvement with a traffic volume increase:

½(1+r)-t*(cit - c`it)*(V`it -Vit) t i

(1+r)-t*(cit - c`it)*Vit + (1+r)-t*(Mt - M`t)t i t

+

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Need to take into account all external benefits and costs:

Where:

Dit is the excess of benefits over costs associated

with a unit change in the level of activity, Xi at time

t,

X`it is that level in the presence of the project,

X0it is that level in the absence of the project.

EXTERNALITIES CONNECTED WITH ROAD PROJECTS

iDit*(X`it - X0

it)

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Externalities can be:

• Excess of marginal social cost over marginal social benefit for traffic on roads;

• Excess of marginal social benefit over marginal social cost for traffic on other modes such as railroads.

• Congestion impacts, a very important and pervasive externality.

EXTERNALITIES INVOLVING TRAFFIC ON OTHER ROADS

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There is a negative relationship between volume of traffic, V to speed of traffic S.

S = a - b*V

If H is the value of the occupant’s time per vehicle hour, cost can be approximated by time per vehicle-mile, or H/S, which is also the marginal private time-cost as seen by the typical driver. The total time-cost of all users will be VH/S, and the marginal social time-cost:

222**

S

aH

S

bVbVaH

SVS

VSH

VSVH

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Excess of marginal social cost, MSC, over marginal private cost, MPC, can be expressed as:

Where: MSC is the marginal social cost; MPC is the marginal private cost; S is actual speed; H is time per vehicle-hour; a is the average speed at low traffic volumes.

Example: a= 80 kph s= 60 kph Thus (80-50) / 50 = 0.60

Marginal Social Cost exceeds Marginal Private Cost by 60 per cent.

S

Sα

MPC

MPCMSC

SH

SH

SHa2

*

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EXTERNALITIES (CONGESTION) IN CASE OF COMPLEMENTARY ROAD

D`D` is an increase in traffic on the complementary road

EFIJ is the external costs

C

C` (private costs)

Cost per

vehicle-mile

Traffic Volume on Complementary Road

D

D`

S` (social costs)

V0 V1

D

D`

E

J

I

F

External costs associated with traffic increase

C0

C1

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EXTERNALITIES IN CASE OF SUBSTITUTE ROAD

D*D* is a decrease in traffic on the substitute (competitive) road

HGFE is the external benefits

C

C` (private costs)

Cost per

vehicle-mile

Traffic Volume on Substitute Road

D

S` (social costs)

V0V*

D

D*E

H

G

F

External benefits associated with traffic decrease

D*

C0

C1

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CALCULATION OF EXTERNALITIES FOR COMPLEMENTARY OR SUBSTITUTE ROAD

jk

jkjjk

j kjkjk s

saVfCE

0

00 ***

Where:

C0 is initial cost per vehicle-mile on the alternative road;

f is a fraction of C represented by time-costs;

V is the change in traffic volume;

j is a type of alternative road;

k is a volume interval on a road.

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INTRODUCTION OF NEW ROADS

Cost per vehicle-mile for type i

Traffic Volume of type i

c`it

V`it

Di

D`i

H

Since there was no traffic to the area before the new road, the whole triangle DiC`itH represents the total present value of benefits to road construction in year t.

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INTRODUCTION OF NEW ROADS

• If a new road is for developing a new mine or new tourist hotel where there are few existing inhabitants, then road is part of the investment for the mine or hotel and should not be evaluated separately.

There are other ways to estimate the benefits of a new road in an area.

Changes in Land Values

• In case of agricultural areas: the present value of incremental agricultural output less the present value of incremental costs of production.

• These ways of estimating the value of transportation project are mutually exclusive not an additional benefit.

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INTRODUCING NEW MODES OF TRANSPORTATION“Buenos Aires Colonia Bridge Project”

The BAC Bridge will introduce a new mode of traffic to the Buenos Aires-Colonia area: transportation for passengers crossing the river.

There is an alternative mode of crossing the river, a ferry.

Beneficiaries of the BAC bridge consist of both passengers diverted from ferry and newly induced bridge river-crossing passengers.

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The gross economic benefits of the diverted and induced passenger traffic is measured by the total willingness of the passenger to pay to cross the river using this new mode.

If the toll level is tB, the

quantity of trips demanded on the bridge should be equal to qB. At this quantity, the

economic benefits of the diverted and induced traffic is equal to the consumer surplus, (CBIJ), plus the value of the

tolls (OtBKqB), plus the value

of any taxes or other distortions associated with vehicle operating and time costs incurred to use the bridge (NPKtB).

Average Cost, $

BAC Bridge

O Bq

BVOC

BTC+

BC

BtN

R

J

P

K

BD

GCBD

Taxes and OtherDistortions on

VOCB and TCB

ImaxV

River Crossingper Year

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Economic benefits or costs could arise because of the reduction in activity of the alternative modes due to the quantity of traffic diverted to the bridge.

With no bridge, the demand for the alternative mode (the ferries) is shown as . With the introduction of the bridge, demand for ferries decreases and the quantity of ferry users falls

from q wob to q

wb . In this case, if the ferry toll were set at tA, which is above the relevant marginal cost of the ferry, there would be a loss in ferry profits of GEFH. If there were taxes (or subsidies) associated with vehicle operating and time costs incurred when using the ferry, then the reduction in this activity would create a further economic loss (or gain).

DGC

wob

MC

A B

E F

G H

L M

O

AC

At

AVOC

ATC

+

wbq

wobq River Crossing

per Year

AlternativeMode

$

Taxes and Other Distortions

on VOCA

, TCA

, and MCA

GCwb

D

GC

wobD

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Externalities Involving Railroad Traffic

• Major issue in North America, Europe, India and

China where roads are replacing parts of an

existing railway network.

• The problems involved in the relationships between

road and rail transport can be complex, given the

difficulty of isolating the relevant costs of rail

transport.

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RailroadRoad

Project of Road Improvement

Consequences: 1) traffic is diverted from rail to road 2) the railroad no longer has to bear the marginal cost of carrying diverted traffic

v1 v2

F

DR(C1)

DR(C0)

O

Fare on Railroad

v1 - the initial levels of unit costs and traffic volume on the road

v2 - the equilibrium levels after the road has been improved but before railway

abandoned

x1 - initial traffic on railroad before road is improved

x2 - level of traffic on railroad after road is improved

x2 x1

JG

M

R N

1D

'1D

3D

4D

3D'3D

4D'4D

- the demand curve for services of the railroad on the assumption that there is no improvement on the road

- the demand curve for services of the railroad after improvement on the road

- the measure of direct benefits of both existing users, v1, plus generated traffic (v2-v1)*1c MN

*2c

*1c MR

*2c - the benefit perceived by traffic that would have used the unimproved road in

any event

*2c

*1c

*1c*2c

MNR - represents the net benefit perceived by those who would not have used the road at unit cost of C1 , but who would have used it a unit cost of C2.

D’4(C2) D’3(C1)

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Volume of traffic on road

Unit Cost of

Travel onroad

M

R N

1v'2v

1D

'1D

G J

O

F

Traffic level on railroad

Fare

3D

4D

Figure 2.

1D'1D - the demand curve for services of the road on the assumption that the railroad is

operating and charging the fare level OF (from Figure 2.)

Figure 1.

D’4(C2)

D’3(C1)

If MCR = F no adjustment is necessary to evaluation of benefits of road improvement

x2 x1

x1 - initial traffic on railroad before road is improved

x2 - level of traffic on railroad after road is improved

MCR - marginal costs of supplying railway service

If MCR = F then at each point from J to G the lost fare is equal to MC i

c1*v1 - the initial levels of unit costs and traffic volume on the road

c2*v’2 - the equilibrium levels after the road has been improved but before railway

abandoned

*2c

*1c

MCR

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Measuring Marginal Cost for Railroads:

• The marginal costs of carrying additional freight on trains which are in any event running are very low – MC1

• The marginal costs of running additional trains where the track and station facilities will in any event be kept in working condition are at an intermediate level – MC2

• The marginal costs of providing rail service on a stretch of track as against the alternative of abandoning that stretch are higher still – MC3

• The Fare charged by the railroad will be set to cover at least average costs.

• The net external effect will therefore almost certainly be negative, and will be measured by:

ii

ii XMCF )(

- is the fare or freight rate for the type of rail traffic

- is the marginal cost associated with carrying that traffic on railroad

- is the change in the volume in railroad, induced by the road improvement

- type of traffic on the railroad

iF

thi

iMC

iX

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G J

O

(Pd) F

Traffic level on railroad

Fare

3D

4D

KL(Ps) MC

Lose of GJKL on railroad must be deducted from Road Benefits

D’4(C2)

D’3(C1)

x2 x1

x2GJx1 -is the value of railway service to users who switched to use the road

x2LKx1 -is the costs saved when users of railroad switched to use the road

LGJK -is the economic loss when railway users switch to road because their valuation of service is F/unit but by resources saved is only MC per unit. is an external loss.This amount has to be deducted from direct benefits of road improvement equation (1).

ii

ii XMCF )(

Volume of traffic on road

Unit Cost of

Travel onroad

M

R

N

1v'2v

1D

'1D

*2c

*1c

Disregarding the impact of the road improvement project on the railway, the benefits of the road improvement is:

…………(1)))((2

1)( 12

*2

*11

*2

*1

*2

*1 vvccvccMNcc

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Volume of traffic on road

Unit Cost of

Travel onroad

M

RN P

1v'2v 2v

*2c

*1c

1D2D

'1D

'2D

'1C

'2C

1C

2C

Traffic level on railroad

Figure 2.

Figure 1.

G J

x2 x1O

(Pd) F

Fare

3D4D

KL

(Ps) MC

D’4(C2)

D’3(C1)

Loss

-the demand curve for the services of the road assuming the railroad has been abandoned

2D '2D

*2c 2v -the equilibrium levels of costs and road traffic after

the road has been improved and the railroad abandoned

NPv2v’2 -represents cost in incurred on the road by traffic that

had been involuntarily generated on road because of

the abandoned of the railroad. This does not cause

net benefits of road improvement change because

D2D’2 for road assumes cost of railway is F. Any other

changes in welfare is measurement in railway

market.

2C'2C - after the improvement

1C'1C -the private average unit costs of travel on the road

before the improvement

Benefits of Road when it causes Railway to be abandoned

1D'1D - the demand curve for services of the road on the

assumption that the railroad is operating and charging the fare level OF

Even in case where F= MC, there is an additional loss in railway market is of loss in consumer surplus, FD4G when railway abounded and people forced to use road. This loss in consumer surplus should be subtracted from net benefits of road.

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Volume of traffic on road

Unit Cost of

Travel onroad

M

RN P

1v'2v 2v

*2c

*1c

1D2D

'1D

'2D

'1C

'2C

1C

2C

Traffic level on railroad

Figure 2.

Figure 1.

SUMMARY

a) The present values of cost savings to the user of the road (represented by area )

*1c MN

*2c

less b) The present value the loss in the private consumer surplus associated with abandonment

of the railroad (represented by FD4G )

less c) The present value of the excess of rail fares over the direct marginal costs of operation (MCFGL)

plus d) The present value of the savings stemming lower equipment, maintenance, station operation costs, and so forth, for the railroad

plus e) The current market value in alternative uses of the properties to be abandoned

Benefits of Road Improvement of Railway Abandoned

G J

x2 x1O

(Pd) F

Fare

3D4D

KL(Ps) MCD’4(C2)

D’3(C1)

Loss

Loss

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A Case of Upgrading

a Gravel Road

37

The three expenditure decisions that need to be made

by a Road Agency:

1. Selecting new roads for construction;

2. Allocating funds between road maintenance and new

road construction;

3. Selecting the roads to be maintained, the type, and

timing of treatment.

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Benefits of Road Improvement • Ideally, five types of benefits should be counted:

(1) reduction in resource costs on maintenance by the Roads

Agency;

(2) reduction in vehicle operating costs for road users due to

improved road surface;

(3) time savings for road users due to increase in the average

speed of vehicles;

(4) possible reduction in the costs of accidents; and

(5) other fiscal externalities.

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Economic Costs

• Convert all financial expenditures into their

corresponding economic costs.

• This implies that all the taxes, subsidies, market

imperfections, impact of foreign exchange premium,

and labor market distortions must be removed from

the financial expenditures to arrive at economic

costs.

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Decision Criterion• If the economic NPV of the project is greater than zero, the project

is potentially worthwhile to implement.

• On the other hand, if the NPV is less than zero, the project should be rejected on the ground that the resources invested could be put to better use if they were left to be allocated by the capital market.

• When selecting among several alternatives, the economic NPV criterion makes it possible to choose the best combination of roads.

• Alternative road projects with the highest NPV’s should be selected first in order to maximize the net economic benefits over time.

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Roads Management System • All existing roads are catalogued in a database that contains a

detailed description of roads, their condition, and user traffic.

• Graphical interface and allows the analyst to examine the

whole network.

• The location of a particular road link is referenced relative to

other roads.

• A total count of annual average daily traffic (AADT) is recorded

and proportion of heavy vehicles traffic.

• Condition of a road link is assessed through a number of

criteria: cracks, poth, patching, rutting.

• Two summary measures of physical condition are stated:

international roughness index (IRI), and visual condition index

(VCI).

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Example of Gravel Road Upgrading • There are a few potential sources of such forecasts: a) a study by

specialized consultants; b) a traffic flow movement software system for the province (no such system exist at the RAL as of now); or c) building own traffic forecast by using all of the available information.

• Traffic count suggests that in 2005 there will be an annual average of 600 vehicles a day (AADT), with 10% being heavy vehicles.

• Suppose that a 20 km existing gravel road is being considered for tarring.

• It is expected that “normal” traffic will grow at a rate of 2.0% per annum and share of heavy traffic will not change over time.

• It is expected that due to lower user costs some “additional” traffic will appear on the road in year 2006 with an AADT of 40 vehicles and 5% of heavy vehicles.

• This new traffic flow consisting from “diverted” and newly “generated” users is assumed to grow at 2.0% per annum.

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Traffic Forecast “With” and “Without” Project (2005-2025) Year “Without” Project “With” Project

Normal Traffic Additional Traffic Total Traffic AADT % Heavy AADT % Heavy AADT % Heavy

2005 600 10.0% 0 0.0% 600 10.0% 2006 612 10.0% 40 5.0% 652 9.7% 2007 624 10.0% 41 5.0% 665 9.7% 2008 637 10.0% 42 5.0% 678 9.7% 2009 649 10.0% 42 5.0% 692 9.7% 2010 662 10.0% 43 5.0% 706 9.7% 2011 676 10.0% 44 5.0% 720 9.7% 2012 689 10.0% 45 5.0% 734 9.7% 2013 703 10.0% 46 5.0% 749 9.7% 2014 717 10.0% 47 5.0% 764 9.7% 2015 731 10.0% 48 5.0% 779 9.7% 2016 746 10.0% 49 5.0% 795 9.7% 2017 761 10.0% 50 5.0% 811 9.7% 2018 776 10.0% 51 5.0% 827 9.7% 2019 792 10.0% 52 5.0% 843 9.7% 2020 808 10.0% 53 5.0% 860 9.7% 2021 824 10.0% 54 5.0% 878 9.7% 2022 840 10.0% 55 5.0% 895 9.7% 2023 857 10.0% 56 5.0% 913 9.7% 2024 874 10.0% 57 5.0% 931 9.7% 2025 892 10.0% 58 5.0% 950 9.7%

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Project Costs Type of Activity Frequency Cost per km (R, million)

2004 2005 Construction - 2.000 2.130

Routine annual 0.035 0.038

Intermediate every 5 years 0.040 0.043 Tar

red

R

oad

Periodic every 10 years 1.113 1.185

Construction - 0.588 0.627

Blading annual 0.043 0.046

Wearing Course every 2 years 0.235 0.251 Gra

vel

Roa

d

Heavy Regravel every 5 years 0.412 0.439

45

Financial Cashflow Profile (R2005, million) Year With Project Without Project Incremental Flow

Construction Routine Intermediate Periodic Total Construction Blading Wearing Course

Heavy Regravel

Total Construction Routine Intermediate Periodic Total

2005 42.60 0 0 0 42.60 0 0.92 0 0 0.92 -42.60 0.92 0.00 0.00 -41.68

2006 0 0.76 0 0 0.76 0 0.92 5.02 0 5.94 0.00 0.16 5.02 0.00 5.18

2007 0 0.76 0 0 0.76 0 0.92 0 0 0.92 0.00 0.16 0.00 0.00 0.16

2008 0 0.76 0 0 0.76 0 0.92 5.02 0 5.94 0.00 0.16 5.02 0.00 5.18

2009 0 0.76 0 0 0.76 0 0.92 0 8.78 9.70 0.00 0.16 0.00 8.78 8.94

2010 0 0.76 0.86 0 1.62 0 0.92 5.02 0 5.94 0.00 0.16 4.16 0.00 4.32

2011 0 0.76 0 0 0.76 0 0.92 0 0 0.92 0.00 0.16 0.00 0.00 0.16

2012 0 0.76 0 0 0.76 0 0.92 5.02 0 5.94 0.00 0.16 5.02 0.00 5.18

2013 0 0.76 0 0 0.76 0 0.92 0 0 0.92 0.00 0.16 0.00 0.00 0.16

2014 0 0.76 0 0 0.76 0 0.92 5.02 8.78 14.72 0.00 0.16 5.02 8.78 13.96

2015 0 0.76 0.86 23.7 25.32 0 0.92 0 0 0.92 0.00 0.16 -0.86 -23.70 -24.40

2016 0 0.76 0 0 0.76 0 0.92 5.02 0 5.94 0.00 0.16 5.02 0.00 5.18

2017 0 0.76 0 0 0.76 0 0.92 0 0 0.92 0.00 0.16 0.00 0.00 0.16

2018 0 0.76 0 0 0.76 0 0.92 5.02 0 5.94 0.00 0.16 5.02 0.00 5.18

2019 0 0.76 0 0 0.76 0 0.92 0 8.78 9.70 0.00 0.16 0.00 8.78 8.94

2020 0 0.76 0.86 0 1.62 0 0.92 5.02 0 5.94 0.00 0.16 4.16 0.00 4.32

2021 0 0.76 0 0 0.76 0 0.92 0 0 0.92 0.00 0.16 0.00 0.00 0.16

2022 0 0.76 0 0 0.76 0 0.92 5.02 0 5.94 0.00 0.16 5.02 0.00 5.18

2023 0 0.76 0 0 0.76 0 0.92 0 0 0.92 0.00 0.16 0.00 0.00 0.16

2024 0 0.76 0 0 0.76 0 0.92 5.02 8.78 14.72 0.00 0.16 5.02 8.78 13.96

2025 0 0.76 0 0 0.76 0 0.92 0 0 0.92 0.00 0.16 0.00 0.00 0.16

SUM -42.60 4.12 47.62 11.42 20.56 Sum of Maintenance Expenditure Savings = 63.2 PV@11% -42.60 2.19 20.04 4.11 -16.3 PV of Maintenance Expenditure Savings = 26.3

46

Financial Expenditures

• The incremental financial PV criterion could

wrongly suggest that it is better to continue with

the existing gravel road than to upgrade it to a

tarred surface.

• A decision based on undiscounted sum of the

budget expenditures over a number of years may

be incorrect, because it does not account for the

time value of money.

47

Project Benefits

• Economic Maintenance Resource Savings. The estimated

present value of economic resource maintenance savings due to

road improvement amounts to R2005 23.1 million.

• Vehicle Operating Costs (VOC) Savings. The present value of

economic VOC resource savings is estimated to be R2005 70.6

million.

• Time Savings. The total PV of time savings to all road users is

estimated as R2005 15.1 million.

48

Economic Resource Flow Statement (R2005, million)

• Incremental Statement (= “With Project” – “Without Project”)

• Financial flows have been converted into economic equivalents by using economic conversion factors.

VOC Economic Savings Time Savings

Year Construction

Costs

Maintenance Resource Savings Light Heavy Light Heavy

Savings (Benefits)

Sub-Total

Net Economic Resource Flow

2005 -37.32 0.81 0.00 0.00 0.00 0.00 0.81 -36.51

2006 0.00 4.54 6.42 1.37 1.48 0.18 13.99 13.99

2007 0.00 0.14 6.54 1.40 1.51 0.19 9.78 9.78

2008 0.00 4.54 6.68 1.42 1.54 0.19 14.37 14.37

2009 0.00 7.83 6.81 1.45 1.58 0.20 17.86 17.86

2010 0.00 3.78 6.95 1.48 1.61 0.20 14.02 14.02

2011 0.00 0.14 7.08 1.51 1.64 0.20 10.58 10.58

2012 0.00 4.54 7.23 1.54 1.67 0.21 15.18 15.18

2013 0.00 0.14 7.37 1.57 1.70 0.21 11.00 11.00

2014 0.00 12.23 7.52 1.60 1.74 0.22 23.31 23.31

2015 0.00 -21.37 7.67 1.64 1.77 0.22 -10.08 -10.08

2016 0.00 4.54 7.82 1.67 1.81 0.23 16.06 16.06

2017 0.00 0.14 7.98 1.70 1.85 0.23 11.89 11.89

2018 0.00 4.54 8.14 1.74 1.88 0.23 16.53 16.53

2019 0.00 7.83 8.30 1.77 1.92 0.24 20.06 20.06

2020 0.00 3.78 8.47 1.81 1.96 0.24 16.26 16.26

2021 0.00 0.14 8.64 1.84 2.00 0.25 12.86 12.86

2022 0.00 4.54 8.81 1.88 2.04 0.25 17.52 17.52

2023 0.00 0.14 8.98 1.92 2.08 0.26 13.38 13.38

2024 0.00 12.23 9.16 1.95 2.12 0.26 25.73 25.73

2025 0.00 0.14 9.35 1.99 2.16 0.27 13.91 13.91

PV: -37.32 23.08 58.15 12.40 13.45 1.67 108.76 NPV@11% = 71.44

Share in Total Benefits: 21.2% 53.5% 11.4% 12.4% 1.5% 100%

PV of Benefits / PV of Costs Ratio = 2.91

49

Economic Assessment• The proposed project appears to be economically

feasible as it generates a positive NPV of R2005 71.4

million.

• In order to compare this particular road upgrading investment to other alternative road improvement alternatives, the Roads Agency must conduct their assessment and estimate what NPV each other project will generate.

• A relative ranking of all projects then could be done by the size of their estimated NPV’s.

50

Distributive Analysis

• The relative distribution of benefits among the three stakeholder

groups is such that the owners of light vehicles stand to benefit the

most from the proposed road improvement.

• The owners of heavy vehicles are the second main beneficiary group.

• For the RAL, the R2005 23.1 million amount of total maintenance

resource costs savings is overwhelmed by the investment costs of

road upgrading, R2005 37.3 million, and the net impact on RAL is net

economic cost with a PV of R2005 14.2 million.

Stakeholder Gross

Benefits Share (%)

Economic Costs

Net Benefits

PV of Road Agency 23.08 21.2% -37.32 -14.24

PV of Owners of Light Vehicles 71.60 65.8% 0.00 71.60

PV of Owners of Heavy Vehicles 14.08 12.9% 0.00 14.08

Total PV 108.76 100% -37.32 71.44

51

Sensitivity Analysis1. Construction Costs Overruns. This test measures the response of the

economic NPV due to unexpected escalation of the tar road construction

costs, keeping all other project parameters constant.

2. Traffic Growth Rate. This test measures the project’s performance under

various traffic volume levels, resulting from the assumption of the future

growth rate.

3. Maintenance Costs Savings Factor. This factor adjusts all the maintenance

resource savings over a range from -50% to 0% in order to assess the

sensitivity of the NPV to the overall value of the maintenance savings.

4. VOC Savings Factor. A range of -50% to 0% for this factor has been tested.

5. Time Savings Factor. This test examines the elasticity of the NPV to

changes in the total value of time savings in a range of -50% to 0%.

52

Case Study Conclusions

• Road upgrading and construction activities should be subject to cost-benefit analysis.

• Cost-benefit analysis should attempt to incorporate not only Roads Agency’s costs and savings but also the costs and benefits accruing to the road users and other stakeholders.

• The relevant project selection criterion is the economic net present value, discounted by the economic opportunity cost of capital for South Africa.

• From the results of the sensitivity analysis it is apparent that the outcome of the project is very dependent on the amount of initial construction costs, reliability of the initial traffic counts and future traffic volume growth.