1
Updated: May 16, 2007
Lecture Notes
ECON 622: ECONOMIC COST-BENEFIT ANALYSIS
Lecture 10
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MEASUREMENT OF COSTS AND BENEFITS OF TRANSPORTATION
INVESTMENTS
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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
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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
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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.
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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