Presentationn project 2

8/7/2019 Presentationn project 2

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Slide 1.

QUESTIONS TO BE ANSWERED BY A FEASIBILITY

STUDYGiven the topography and hydrology of the area to be served by the road, is itfeasible to construct the road at the given budget? For example it is required toimprove transportation around Mt. Kenya or Lake Victoria. The shortestpossible route around these of obstacles may require tunneling. Is it feasiblethat the tunneling will be achieved at the available budget? If not thealternative is to construct the road around the lake or the mountain, but thedistances may such that construction of the road is yet again not feasible at

the available budget.

Given the social, economic or travel patterns (present and future) of thepopulation of an area, is it feasible the proposed solution will yield the outputsthat meet their objective?

Given the loading patterns of vehicles expected to use the road, is it feasiblefor the proposed alternative to be constructed to the required loading

standards at the proposed budget?

Is the institution or institutions responsible for the construction, maintenanceand operation of the project prepared adequately in terms of technology,financial and personnel resources to implement the project as planned?


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Slide 2.

FEASIBILITY STUDY OF A ROAD PROJECT

In carrying out a feasibility study of a road project, the following must be addressed as a minimum: The socio-economic environment in the country What are the general indicators of the performance of the economy and society? How are they

performing and how are they supposed to perform in future given the stated goal and objectives ofthe country?What are the effects of the changes socio-economic situation on generation andgrowth on roads in general and the project road in particular?

The transport sector in general: How is it organized?What are the policies of the sector? What are the other modes of transport

that will affect the performance of the road project and how? How do we address the effects of theother transport modes so that the road project can perform as desired?

The road sector in particular How is it organized?What are the policies of the sector? What are its strengths and weaknesses

that will affect the performance of the project? What are the vehicle licensing, insurance andoperating strategies?

The Ministry responsible for roads What are the road-specific objectives and policies of the Ministry?What size of the network is it

responsible for? How is its performance in construction and maintenance of the network? What isthe trend in performance: improving or declining?What is the ministrys technological, financial andpersonnel capacity to oversee the construction, operation and maintenance of roads in general andthe project road in particular?

The road project Where is it located? The population of the area and the trends in growth. What is the zone of

influence and what are land uses and socio-economic activities of the area? How is thetopography, climate and hydrology of the area of influence?What are the traffic levels on the roadnow if it exists and what factors will affect its generation and growth? Where are the material andwater sites? Given all the issues learned from the state of the economy, the transport sector, theroad sector, the ministry and the road area itself, predict the performance characteristics of theroad.


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All project or system costs: capital, operating andmaintenance are derived during that activitycalled preliminary engineering design.

The costs derived at the Preliminary Engineering

Design stage are called financial costs. As wehave seen above, one the conditions under whichproject costs can be expressed in terms of marketprices is that there is full employment in theeconomy. Therefore for us to use financial costsin economic evaluation there must be fullemployment in the economy. One other conditionis that use is being made only of local resources,financial or otherwise. These conditions do notalways hold.

Slide 4.

Shadow pricing of Costs


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Slide5.

In view of the above and other deviations from the explainedconditions, financial costs are transformed into economiccosts using proportions of the various inputs into the costs.For example:

Economic Capital costs = F{(1-0.5x.18) + (0.32 x 0.7)-0.15}

Where:F is financial costsContribution of unskilled labour is 50% of 18% of the total

construction costs (where it is assumed that 50% of theunskilled workforce is unemployed and they contribute 18%of the total wage bill during construction.

Foreign costs contribute 32% of the 70% foreign contribution to

the construction costs.is the proportion of the local to foreign financial contribution.Taxes are 15% of the construction costs.


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Slide 6.

Estimation of Benefits

Benefits of the project also cannot accrue until the project is completed. The concept of a demand curve is central to the derivation of the benefits associated

with expenditures on public projects. A demand curve illustrates the way in which thequantity of good or service consumed varies with unit price of a good or service.UNITPRICE OF GOO

Demand curves are usually assumed to possess a negative slope. That is as

the price increases the less the demand. Demand curves depict the reaction ofconsumers to prices for a particular set of incomes and prices for the other goods andservices available to consumers. Changes in income or the prevailing prices for othergoods and services, may change the demand curve. For many goods and services thedemand curve may be determined empirically.

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Slide 7.

Economic theory attempts to explain the nature of the demand curve in terms of a theory of consumer

behaviour. The utility of an economic good or service may be defined as the subjective benefit which aconsumer receives from the consumption of the good or service. Consumers only need to state which of twogoods is preferred without attempting to report the absolute magnitude of the strengths of thesepreferences.

A consumer is assumed to have a set of preferences and to allocate a limited income in such a way as tomaximize his well being or welfare. A consumer is said to be in equilibrium when a particular allocation of hisincome yields a level of welfare that cannot be exceeded by any other allocation of income.

Consumer behahiour is developed in terms of an indifference curve. Points along the consumer indifferencecurve identify a combination of quantities of goods or services consumed to which the consumer isindifferent.

Example of a consumer indifference curve

Increasing

A D Welfare

c

c

B

0 QUANTITY OF y1CONSUMED

Fig. a.2 A Consumer indifference curve

QUANTITYOF

y2CONSU


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Slide 8.

The Demand Curve

The slope of an indifference curve at anypoint shows the rate at which a consumeris prepared to give up the consumption of

one item to increase the consumption ofanother while retaining a constant level ofwelfare. The absolute magnitude of theslope is called the consumers marginal

rate of substitution of the goods. It maybe regarded as the consumers subjectiverate of exchange between goods.


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Slide 9.

The consumer indifference curve may be used to determine an individualsdemand curve for a particular good. A demand curve conveys a consumersindifference between the utility of a good or service and money. A demandcurve represents the result of two of forces: the desires of consumers andtheir willingness to pay to satisfy these desires. A community demandcurve for a good may be derived by summing up the individualdemand curves. The community demand curve will thereforerepresent the communitys desires and its willingness to pay tosatisfy the desires.

OACD = Total community benefit

OBCD = Market value

BAC = Consumers surplus

Consumers Surplus = Net Community Benefit

B p

MarketValue

QO D

AMOUNT CONSUMED

PR

CEPERIUNI


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Slide 10

For example, it is the desire of the community is toreduce the accidents by 5 accidents per month. Toquantify the 5 accidents in monetary terms onerequires to ask: what does the community wish to payto avoid each accident?

One principle is based on insurance the community iswilling to pay for cars, other property and life lostthrough accidents. The annual benefit will therefore be5x insurance premium (for cars + for other property +life).This will be annualized by multiplying the result by12 months. Arguments have been raised against thewillingness to pay theory: Do peoples value of life

correlate with their willingness to pay? Do they pegtheir life insurance premiums against the willingness orability to pay?


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Slide11

Typical benefits of a road improvement project include:

Vehicle operating costs savings.

Avoided maintenance savings

Time savings

Reduction in accident rates

Reduction in the noise and air pollution.

Estimation of benefits for objectives which can easily beexpressed in monetary values is straightforward. Forexample, should one option be to improve a road fromgravel to bitumen standards, vehicle operating costssavings and avoided maintenance costs savings caneasily be worked out as follows:


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Slide12.

VEHICLE OPERATING COST SAVINGS

Vehicle operating costs includeinsurances, fuel, oils, tyres and

other consumables such as spareparts, labour charges during repair,standing time during repairs etc. Itis the duty of the planner to work

out the various components ofthese costs at various roadroughnesses for each vehicle class.


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Slide 13.

Typical VOC RATESs

One would therefore work out the annual Vehicle operating costs savings for the forecasttraffic for each vehicle class.

One would therefore work out the annual Vehicle operating costs savings

for the forecast traffic for each vehicle class.

VOC for average road surface roughness (Ksh)

10,000

mm/km

2400

mm/km

Saving per

vehicle/day

Saving per

vehicle/year

Cars 1.01 0.58 0.43 156.95

Light Goods

Vehicles

1.93 0.9 1.03 375.95

Medium

Goods

Vehicles

2.25 1.31 .94 343.10

Heavy

GoodsVehicles

3.61 2.20 1.41 514.65

Buses 1.79 1.16 0.63 229.95


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slide 14:

Typical computations of Annual VOC

No Voc

savings

No Voc

savings

No Voc

savings

No Voc

savings

No Voc

savings

97 14 2197.3 69 25940.6

98 14 2197.3 71 26692.5

99 14 2197.3 73

0 15 75

1 16

2 16

3 17

4 18

5 18

6 19

7 20

8 21

9 21

10 22

11 23

12 24

13 25

14 26

15 27

16 28

H.G Buses

Typical computations of Annual VOC

Year Cars L.G M.G


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SLIDE 15: MAINTENANCE COSTS SAVINGS

One would also work out the avoided maintenance cost savings by considering themaintenance costs and cycles of various alternatives. For example, the maintenancecosts of a gravel road is as follows:

Routine Maintenance (or annual maintenance) for gravel roads Traffic per day Annual Routine Maintenance Cost

(Ksh/km/year) 0-30 600

31-100 1000 101-200 1600

201-300 2600 Over 300 3600 Gravelling (or periodic maintenance) = Ksh 160,000/ km carried out at the following

cycle Traffic Cycle (Years) 0-200 5 200-300 4 300-500 3 501-800 2 Over 800 1


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Slide 16

For bitumen roads Routine Maintenance CostsTraffic (vpd) Sh/km/year501-1000 160,0001001-2000 240,000

Over 2000 320,000Periodic Maintenance = Ksh 600,000/ cycle which is asfollows

Traffic (vpd) Cycle (Years)Over 2000 41001-2000 5

501-1000 6Under 500 8The total annual costs are allocated to each year for each

alternative project and the difference between the caseswith or without the project worked out for each year.


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Unlike in the case of for vehicle operating costs savingswhere the savings are in monetary values, valuefunctions have to be worked out for time, accidents etc.As discussed above the value of time and accidentswould be estimated by the principle of willing to pay.Different people value time differently. Moreover in an

economy where most people are unemployed, questionsarise as to what they would with the time saved. One study carried out in 1996 gave the following as the

time savings rate for Kenya. By that time the rate ofunemployment was lower.

Vehicle type CLGMGHGB Savings (K

pounds/hour)3.459.8016.6234.7825.7

Vehicle type C LG MG HG B

Savings (K

pounds/hour

)

3.45 9.80 16.62 34.78 25.7

SLIDE 17:

TIME SAVINGS AND ACCIDENTS


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Slide 18

The Supply Curve and the principles of evaluation

The supply curve shows the amounts of a good thatproducers are willing to supply at various prices. Eachproducer is faced with some combination of fixed and variablecosts which contribute to the total cost of each output. The

variable cost is zero when the output is zero. And it increasesas the output increases. The marginal cost of an increase in production is the

increment in the total cost that comes from each increment inoutput of a producer. In a perfectly competitive market a firmcan sell as much as little as it likes at a fixed price per unit.The marginal revenue of a firm is equal to the extra income itreceives for each extra unit of production it sells.

It is possible to plot a marginal revenue curve and a marginalcost curve. From these it is possible to demonstrate that afirm maximizes its profits if it produces up to a point wherethe marginal revenue equals the marginal cost.


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Slide 19.

This discussion focuses on a firm that producesone commodity. For firms producing two or morecommodities it is necessary to introduce theconcept of transformation function. The

transformation function shows the combination ofoutputs that can be produced for a fixedproduction budget. This is like a country thathas too many products to give to its citizensat a fixed budget. For example, as theproduction of one commodity increases theproduction of the other must be curtailed, and the

transformation function shows the rate ofsubstitution.

For a profit-maximizing firm the marginalrevenue must equal the marginal cost foreach product.


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Slide20

Conditions for General Equilibrium

The distribution of goods among consumers is efficientif every possible reallocation of goods amongconsumers results in the reduction of the satisfactionof at least one consumer. Production is efficient if

every feasible reallocation reallocation of inputs amongproducers decreases the output level of at least onefirm.

Simply put the aim of welfare economics is to assessthe desirability of alternative allocation of resources.The Pareto criterion considers a reallocation ofresources to be an improvement in the welfare if atleast one person is made better of without making

anybody worse off. The decision criteria based on the above principles

include the benefit cost ratio, the net present value andthe Internal Rate of Return.


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Economi

c

costs Costs Benefits Costs Benefits Costs Benefits

94 8935 7979 7443 7436

94 8935 7121 6201 6871

95 8935 6362 5164 6031

96 3282 2087 1582 1943

97 3936 2232 1582 2043

98 4029 2043 1350 1837

99 4214 1905 1176 1686

0 4383 1771 1021 1538

1 4520 1632 877 1397

2 3642 1173 590 983

3 5257 1509 710 1246

4 4935 1268 553 1031

5 5094 1167 412 927

6 5283 1083 412 845

7 5428 993 353 760

8 4667 761 252 574

9 5800 847 261 626

10 6437 837 245 612

11 6197 719 192 514

12 6448 671 168 471

13 6652 619 146 426

14 5891 489 106 330

15 7140 528 107 350

21462 24334 18808 12095 20338 20139

Present Value

Discounted at 14%

Discounted Totals

Benefit/Cos t Ratio 1.134

Year Benefits Present Value

Discounted at 12%

Present Value

Discounted at 20%

Internal Rate of Return 13.87%

Net Present Value 2872 -6713 -199

SLIDE 21:Example of the computation of these parameters


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SLIDE 22:The net present value (NPV) is the difference between the sum of benefits and the sum of costs

discounted at the rate of the opportunity cost of capital in a country which was taken as 12% in the early2000. The project is viable if the NPV is positive.The Benefit/Cost Ratio is the ratio of the sum of benefits and the sum of costs discounted at the sameopportunity cost of capital (12%). A project is viable if the Benefit/Cost Ratio is greater than one.

Internal Rate of Return is the discount rate at which the Net Present Value is zero. It is therefore obtainedby a process of reiteration. However, through experience one can estimate the discount rate at which theNPV will be positive and another at which NPV will be negative. One would therefore use theproportionality of triangles to work out the I.R.R. A project is viable when the I.R.R is greater than theopportunity cost of capital in the country.

2872

2 X 14%

12%

199

1990 NPV

2872 =

X 2-X

2872 (2-X) = 199X

5744 2872X = 199X

5744 = 3071X

X = 1.37 therefore zero NPV is at 12

x

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Presentationn project 2