Appraisal of Basic

Access Interventions
Anand Venkatesh
IRMA
Conventional Cost-Benefit Analysis
• First Round vs Secondary Benefits
• Project and alternative case
• Planning time horizon, discounting and residual values
• Use of economic prices and inflation
• Road investment and maintenance costs
• Estimating Traffic Benefits(Normal, Diverted, and generated)
• Forecasting Traffic
• Estimating Generated Traffic
• Vehicle Operating Costs
• Value of Travel Time
• Accident Rates and Costs
• Economic Decision Criteria
First Round Effects and Secondary
Benefits
• CBA focuses on direct ‘first round’ effects of road investment on traffic
and transport costs
• Avoids Double Counting of benefits
• Sometimes referred to as “Consumers Surplus Approach”
• Secondary Benefits more difficult to estimate particularly beforehand
• E.g if transport cost savings (primary benefit) is added to rise in land values it
is double counting as the latter is a direct consequence of the former
Project and Alternative Case
• Necessary to identify a base or without investment case to compare
with different Project or With Investment cases.
• The Base case should include a level of road maintenance that is
appropriate to expected traffic volumes
• Should avoid pitfall of inflating the value of a project case by assuming
an unrealistically poor base case with little or no maintenance
The Planning Time Horizon and
Discounting
• The Planning Time Horizon is the period over which the economic
analysis is to be carried out
• Should reflect the economic lifetime of major assets in the investment
• Rural Roads are commonly evaluated over a 10-20 period
• Economic discount rate used to make money flows in different period
comparable-Costs and benefits that occur in distant future are valued less
than those occurring in the near future
• Typical discount rate 12%-recommended by world bank
• However, the Bank permits use of a lower discount rate for projects
targeted at the poorest sections of society
The Use of Economic Prices and
Inflation
• All Costs and Benefits need to be expressed in economic price terms or Shadow
Prices
• Subtract Taxes and Add Subsidies
• When there is substantial unemployment, the market price of unskilled labour may
not properly reflect its economic cost, and value should be adjusted downwards
• Similar adjustments should be made if exchange rate is controlled
• Standard conversion factors often provided by the Bank at a country level
• Investment and maintenance costs too to be included using shadow prices
• Costs of environmental disruption and their mitigating measures to be incorporated
• All prices used should be in Constant Price terms and refer to a given date
Estimating Traffic Benefits
• Traffic Separated into the following categories:
• Normal Traffic: The traffic volume that is forecast to travel on the route in both the base and
project cases
• Diverted traffic: Traffic travelling between the same origin and destination that is forecast to
switch routes because of the investment
• Generated Traffic: An increase in traffic volume that is forecast to rise, because of lower
operating costs, directly because of the road investment
• Traffic forecasts are required in both the project case, and the alternative, or do
nothing, case
• For most rural roads, when a change in modal split is not envisaged, a simple
extrapolation of current growth trends (typically between 2 and 8 percent per year)
will be sufficient for forecasting normal traffic
• Vehicle ownership trends need to be factored in while forecasting
• Generated Traffic can be forecast from an estimate of the transport
demand elasticity
• The elasticity is the ratio of the percentage change in demand to the
percentage change in transport costs faced by the users.
• the elasticity relates to the change in costs for the total journey, and
not just for the change in costs for the link in question.
Valuing Traffic Benefits
• Normal (and diverted traffic benefits are valued in terms of the
forecast traffic volume multiplied by the forecast change in transport
costs
• Generated traffic is valued as the forecast traffic volume multiplied by
half the difference in operating costs
• This “rule of half” based on the assumption that whilst some users
would value the improved travel at virtually the full difference in
transport costs for many other users the trip is only just worth making
at the new lower cost.
• The assumption is that half the difference in operating costs
represents a reasonable approximation for all generated traffic.
Vehicle Operating Costs
• Savings in VOC arise through reduction in trip distance, trip time, road
roughness, and a change in road alignment and modal split
• Components
• Capital Costs including depreciation and interest
• Fuel Consumption
• Tyre Consumption
• Maintenance costs including parts and labour charges
• Driver and conductors labour costs
• Oil and lubricants
• Overhead costs including garaging and insurance
Value of Passenger Time
• Valuation of time
• Working time
• Non-working time
• The value of working time is the total income of an individual
expressed per working hour
Economic Decision Criteria
• Net Present Value (NPV)
• A project is economically worthwhile if NPV>0
• Higher the NPV higher the net benefits of the project
• Choice between two alternative projects should be based on the NPV
• Internal Rate of Return
• Is the discount rate at which the base year value of costs and benefits are equal
(NPV=0)
• Acts as a guide to the profitability of the investment-higher the better
• IRR is often used to see how robust a project will be to future uncertainty and
possible changes in assumptions
• Used for initial project screening
• Cannot discriminate between mutually exclusive projects
• Net Present Value over Cost Ratio (NPV/C) and Budget Constraints
• NPV/C=Net Present Value/Construction Cost
• Serves to rank projects where there is a budget constraint
• Higher the ratio the more worthwhile the project
• First Year Rate of Return (FYRR) and Optimal Timing
• For road projects with smoothly increasing forecast traffic growth, FYRR gives
a rough guide to optimal timing
• If FYRR>Discount Rate, then the project should go ahead
• Otherwise, it should be delayed till it meets this criterion
Strengths and Weaknesses of
Transport-Cost Benefit Analysis
• Strength: Ability to discriminate between different transport projects
and engineering designs
• Weaknesses
• Poverty and income inequality issues
• Externalities
• Social and economic issues relating to major changes in accessibility
• Uncertainties with forecasting outcomes
Cost Effectiveness and Ranking
• Used to prioritize low volume rural or feeder road investments
• Often referred to as “ranking” or “screening” procedures
• Often include indicators or measures of social or economic demand, need or
benefit
• Cost Effectiveness indicator of Link (j)=
• (Cost of upgrading link to basic standard)/(Population served by Link)
• Improvements of links that have the lowest ratio given the highest priority
• Drawbacks
• No measure of benefit resulting from change in road condition
• No importance attached to traffic
• Assumes socio-economic situation in rural areas is same across country
An alternative approach
• Designed for roads that are less than 25 km in length and have less than
25 vehicles per day
• For impassable roads
• Cost/head =(Estimated Cost of minimum improvement works)/(population
served by or living in the zone of influence of the improvement)
• For Passable Roads
• Prioritization Index=(Traffic X Access Change)/(Improvement Cost)
• Traffic is the predicted traffic
• Access change calculated on basis of road condition
• Measured on a 0-5 scale where 5 is good.
• Access Change is the rating for the “After” condition minus rating of the “Before condition”
Case Study: CBA and CEA in Andhra
Pradesh
• Areas included three poor districts-Adilabad, Karimnagar and
Warangal with population of 6.8 Mn
• Project proposed to improve the rural road network to be at least
basic, all-weather passable standard
• 60% of prevailing network of 15000 Km tracks and earth roads, 10
percent gravel and 30% Water-bound Macadam roads.
• Role of the economic analysis is to assist the design, prioritization,
and selection of road works for financing under the project
• Given budgetary constraints focus was on improving the core
network.
• Links that do not meet the basic all-weather standard identified for
improvement-economic analysis applied only to these roads
• Basic-accessibility works given top priority
• When traffic volume on an unpaved road crosses threshold volume,
there is economic justification to pave the road than to keep restoring
it to all weather condition.
Motorised and NMV thresholds for
paving
Criteria for Road Selection
Economic Analysis Framework
• CEA framework applied for economic analysis of basic accessibility road works.
• All roads proposed for basic accessibility work are ranked by a simple cost-effectiveness
measure-total population served per $2500 equivalent of expenditure.
• Top ranking least cost works financed
• Based on budget allocation about 1700 km of rural roads selected for financing to basic
access standards, with cost effectiveness ratio ranging from $14 5o $50 outlay per person
served.
• Further total of 1300 km of roads selected for black topping-ERRs range from 12 to 90%.
• 2 Million people expected to benefit from project.
• Data collected through small-scale rural household and village transport survey conducted
for 40 sampled villages
• 10 HH were randomly selected in each sampled village.
Estimation of cost and time
• Value of travel time estimated by using the rural per capita income
data from the project area.
• Annual traffic growth rate predicted based on the area’s population
and per capita income trends.
• VOCs and travel speeds estimated according to road and vehicle type
• Road condition measured by International Roughness Index (IRI)
• VOC-IRI relationships for bullock carts and bicycles estimated using
the NMV basic cost data and empirical relationships developed by
studies in south asia
NMV VOC data