TRACECA Appraisal Manual

Guidelines for Pre-Feasibility of Transport Projects

with Exercises and Case Studies

A project implemented by TRT Trasporti e Territorio in association with:Alfen Consult, Dornier Consulting, PTV

Project Title : Transport dialogue and interoperability between the EU and its neighbouring countries and Central Asian countries

Short Name : IDEA (Transport Interoperability and Dialogue between the EU, Caucasus and Asian)

Project Number : EuropeAid 2008 / 155-683

Countries : Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Uzbekistan and Ukraine. Bulgaria, Romania and Turkey associated to the project as TRACECA member

Contractor

Name : TRT Trasporti e Territorio SRL

Address : Via Rutilia, 10/8 20141 Milano, Italy

Tel. Number : +39-02-57410380

Fax number : +39-02-55212845

E-mail : maffii@trt.it

Contact person : Dr. Silvia Maffii / Team Leader

Autors of Report : S. Maffii, R. Parolin, M. Brambilla, R. Scatamacchia

This Appraisal Manual is prepared by the TRACECA IDEA (February 2012).

The IDEA project is implemented by TRT Trasporti e Territorio in association with:

Alfen Consult, Dornier Consult, PTV.

Table of contents

I

Table of contents

Table of contents ................................................................................................. I 

List of figures ................................................................................................... IV 

List of tables ....................................................................................................... V 

List of abbreviations ........................................................................................ VII 

1  Introduction ................................................................................................. 1 

1.1  Premise ............................................................................................................. 2 

1.2  Project appraisal ................................................................................................. 2 

1.3  The guidelines .................................................................................................... 3 

2  Project identification .................................................................................... 7 

2.1  Overview ........................................................................................................... 8 

2.2  Project objectives and definition of project solution .................................................. 8 

2.3  Definition of the reference or “do minimum” solution .............................................. 10 

2.4  Analysis of the demand ...................................................................................... 10 

2.4.1  Generalised costs ...................................................................................................... 11 

2.4.2  Demand forecast ...................................................................................................... 13 

2.4.3  Check list for demand analysis ................................................................................... 14 

2.5  Problems ......................................................................................................... 15 

3  Financial analysis ....................................................................................... 17 

3.1  Overview ......................................................................................................... 18 

3.2  Rationale of the financial analysis ........................................................................ 18 

3.3  Investment costs, operating costs and revenues .................................................... 19 

3.4  Financial discount rate ....................................................................................... 21 

3.5  Performance indicators: Financial Return on Investment and Internal Rate of Return .. 22 

3.6  Profitability analysis ........................................................................................... 22 

4  Economic analysis ...................................................................................... 25 

4.1  Overview ......................................................................................................... 26 

4.2  Change in transport user benefits ........................................................................ 27 

4.2.1  Components of the generalised cost ............................................................................ 28 

4.2.2  Consumer surplus and Willingness to Pay (WTP) ........................................................... 28 

4.2.3  Transport user benefits: Consumer surplus and the Rule of Half ..................................... 30 

4.2.4  Diverted and induced demand .................................................................................... 33 

4.2.5  Introduction of completely new modes ........................................................................ 33 

4.2.6  Special treatment of unperceived costs ........................................................................ 34 

4.3  Change in system operating costs and revenues .................................................... 35 

4.3.1  Producer surplus ....................................................................................................... 35 

4.3.2  Taxation and Government revenue effects ................................................................... 36 

4.4  Change in external costs .................................................................................... 37 

4.4.1  Environmental costs .................................................................................................. 38 

4.4.2  Air pollution ............................................................................................................. 40 

Table of contents

II

4.4.3  Noise ....................................................................................................................... 43 

4.4.4  Global warming ........................................................................................................ 43 

4.4.5  Safety ..................................................................................................................... 44 

4.5  Value transfer ................................................................................................... 45 

4.6  Project investment costs .................................................................................... 46 

4.6.1  From financial to economic costs ................................................................................ 48 

4.7  The project appraisal period ................................................................................ 49 

4.8  Constant prices, common currency and base year .................................................. 50 

4.9  Treatment of values over time ............................................................................ 50 

4.10  The problem of evaluation in cross-border projects ................................................ 51 

4.11  Flows of benefits and costs ................................................................................. 52 

4.12  Social discount rate ........................................................................................... 53 

4.13  Decision criteria ................................................................................................ 54 

4.14  Social analysis of costs and benefits ..................................................................... 56 

4.15  Problems ......................................................................................................... 58 

5  Risk assessment ......................................................................................... 69 

5.1  Overview ......................................................................................................... 70 

5.2  Sensitivity analysis ............................................................................................ 71 

5.3  Probability distribution of critical variables ............................................................ 72 

5.4  Calculation of the distribution of the performance indicators and evaluation of acceptable levels of risk ..................................................................................................... 73 

5.5  Risk mitigation .................................................................................................. 75 

5.6  Problems ......................................................................................................... 75 

6  Case studies ............................................................................................... 77 

6.1  Foreword ......................................................................................................... 78 

6.2  Construction of additional berths ......................................................................... 79 

6.2.1  Introduction ............................................................................................................. 79 

6.2.2  Traffic and terminal servicing time .............................................................................. 79 

6.2.3  Project benefit .......................................................................................................... 80 

6.2.4  Optimum timing of the project (with three berths) ........................................................ 84 

6.2.5  Conclusion ............................................................................................................... 85 

6.2.6  Further remarks ....................................................................................................... 86 

6.3  Electrification of a railway line ............................................................................. 87 

6.3.1  Introduction ............................................................................................................. 87 

6.3.2  Traffic ..................................................................................................................... 87 

6.3.3  Costs of diesel fleet renovation (reference solution) ...................................................... 87 

6.3.4  Costs of electrification ............................................................................................... 88 

6.3.5  Results .................................................................................................................... 88 

6.4  Paving gravel road ............................................................................................ 92 

6.4.1  Introduction ............................................................................................................. 92 

6.4.2  Investment and maintenance costs ............................................................................. 92 

6.4.3  Traffic ..................................................................................................................... 92 

Table of contents

III

6.4.4  Benefits from reduced generalised costs ...................................................................... 93 

6.4.5  Other benefits .......................................................................................................... 95 

6.4.6  Project performance .................................................................................................. 96 

6.5  Investment in a railway line and modal shift ......................................................... 97 

6.5.1  Introduction ............................................................................................................. 97 

6.5.2  Traffic analysis ......................................................................................................... 98 

6.5.3  Investment costs ...................................................................................................... 98 

6.5.4  Project benefits ........................................................................................................ 99 

6.6  Social analysis ................................................................................................ 105 

6.6.1  Introduction ........................................................................................................... 105 

6.6.2  Solution ................................................................................................................. 105 

Appendix 1: Glossary ...................................................................................... 107 

Appendix 2: Value of Time (through SP) ........................................................ 111 

Appendix 3: Suggested solutions to problems ................................................ 117 

References ..................................................................................................... 142 

List of figures

IV 

List of figures

Figure 1 - 1: Components of the Guidelines ............................................................. 5

Figure 2 - 1: Structure of the technical solutions analysis ........................................... 8

Figure 3 - 1: Structure of the financial analysis ....................................................... 19

Figure 4 - 1: Structure of the economic analysis ..................................................... 27 

Figure 4 - 2: Transport demand curve ................................................................... 29 

Figure 4 - 3: Consumer surplus without the project ................................................. 30 

Figure 4 - 4: Consumer surplus with the project ..................................................... 31 

Figure 4 - 5: Change in consumer surplus .............................................................. 32 

Figure 4 - 6: Possible demand curves of a new mode............................................... 34 

Figure 4 - 7: Variation in producer surplus ............................................................. 36 

Figure 4 - 8: The additional tax revenues ............................................................... 37

Figure 5 - 1: Example of triangular distribution ....................................................... 73 

Figure 5 - 2: Example of probability distribution for NPV .......................................... 74 

Figure 5 - 3: Example of cumulative probability distribution for NPV .......................... 74

Figure 6 - 1: Port layout in reference solution (left) and project scenario (right) .......... 79 

Figure 6 - 2: Estimated traffic [ships/year] ............................................................ 80 

Figure 6 - 3: Extent of time benefits with three berths at year 11 .............................. 82 

Figure 6 - 4: Graphical depiction of project’s IRR .................................................... 91 

Figure 6 - 5: Road alignment and cross-section in reference solution (above) and project

scenario (below) ................................................................................................ 92 

Figure 6 - 6: Surplus change for trucks ................................................................. 95 

Figure 6 - 7: Project plan in reference solution (above), Option 1 (middle) and Option 2

(below). The road corridor is black and the rail line is red (each line depicts a track). ... 97 

Figure 6 - 8: Rail line typical cross-section in reference solution (left) and project

scenario (right) .................................................................................................. 98 

Figure 6 - 9: Change in user surplus for rail travellers (Option 1 with respect to reference

solution) ......................................................................................................... 100 

Figure 6 - 10: Economic performance of investment options ................................... 102 

  

List of tables

V 

List of tables

Table 1 - 1: Stages of the decision making process ................................................... 4

Table 2 - 1: Costs and benefits with separable projects ............................................ 10 

Table 2 - 2: Values of time (Euro, 2010) ................................................................ 12

Table 3 - 1: Outflows and inflows for the profitability analysis ................................... 23 

Table 3 - 2: Evaluation of financial return on investment in a motorway project (Million of

Euro) ................................................................................................................ 23

Table 4 - 1: Consumer surplus variation for modal shifters ....................................... 33 

Table 4 - 2: Values per tonne of CO2 equivalent emitted (Euro, 2009) ........................ 43 

Table 4 - 3: Estimated cost per fatality (USD, 2009) ............................................... 44 

Table 4 - 4: Example of scheduled investment costs with and without the project ........ 48 

Table 4 - 5: Reference evaluation period for the transport sector .............................. 50 

Table 4 - 6: Example of costs and benefits over years for a rail project (Meuro) .......... 53 

Table 4 - 7: Social discount rate for some countries ................................................ 54 

Table 4 - 8: Matrix for the analysis of the distribution of project impacts .................... 56

Table 5 - 1: Significant factors for risk analysis in transport projects .......................... 71 

Table 5 - 2: Switching values for the Economic Net Present Value of a motorway project

....................................................................................................................... 72 

Table 5 - 3: Example of scenario analysis .............................................................. 72

Table 6 - 1: Investment cost per berth and related timing [Meuro/year] ..................... 79 

Table 6 - 2: Annual ship traffic, berth occupancy, ship waiting times and cost of annual

waiting time ...................................................................................................... 81 

Table 6 - 3: Flow of costs and benefits with three berths [Meuro] .............................. 83 

Table 6 - 4: Flow of costs and benefits with four berths [Meuro] ............................... 84 

Table 6 - 5: Economic performance with a postponement of one year ........................ 85 

Table 6 - 6: Consequence of postponement on the discounted flow of costs and benefits

[Meuro] ............................................................................................................ 85 

Table 6 - 7: Scheduled costs in reference solution [Meuro/year] ............................... 87 

Table 6 - 8: Scheduled costs in project scenario [Meuro/year] .................................. 88 

Table 6 - 9: Economic analysis: electrification vs dieselisation [Meuro/year] ............... 89 

Table 6 - 10: Traffic growth rates per year [%] ...................................................... 93 

Table of tables

VI

Table 6 - 11: Traffic in reference solution and project scenario [vehicles/day] ............. 93 

Table 6 - 12: Generalised cost per type of road and net of taxes [Euro/vehicle·km] ..... 94 

Table 6 - 13: Benefits yielded per type of vehicle [Meuro/year] ................................. 95 

Table 6 - 14: Net benefits and NPV [Meuro] ........................................................... 96 

Table 6 - 15: Passenger travel demand [Mpassengers/year] and freight flows

[Mtons/year] ..................................................................................................... 98 

Table 6 - 16: Economic investment costs [Meuro] ................................................... 99 

Table 6 - 17: Economic maintenance costs [Meuro/year] ......................................... 99 

Table 6 - 18: Generalised cost [Euro/travel] ........................................................... 99 

Table 6 - 19: Change in user surplus [Meuro/year] ............................................... 100 

Table 6 - 20 Producer surplus and Government fuel tax revenues [Meuro/year] ........ 101 

Table 6 - 21: Estimated external costs benefits [Meuro/year] ................................. 101 

Table 6 - 22: Economic analysis of Option 1 [Meuro/year] ...................................... 103 

Table 6 - 23: Economic analysis of Option 2 [Meuro/year] ...................................... 104 

Table 6 - 24: Costs and benefits yielded by the project [Meuro] .............................. 105 

Table 6 - 25: Matrix for the analysis of the distribution of project’s impact ................ 106 

List of abbreviations

VII 

List of abbreviations

CO Carbon monoxides

CO2 Carbon dioxides

CH4 Methane

Δ User surplus variation

ΔΠ Producer surplus variation

FR Fiscal Revenues

GC Generalised Cost

GDP Gross Domestic Product

IRR Internal Rate of Return

NOx Nitrogen oxides

N2O Nitrous oxide

NPV Net Present Value

NMVOC Non-Methane Volatile Organic Compounds

Pb Lead

PM Particulate Matter

ROH Rule of a Half

RV Residual Value

SDR Social Discount Rate

SO2 Sulphur dioxides

VOCs Vehicle Operating Costs

VOT Value of Time

 

 

VIII 

Chapter 1

1 

1 Introduction

 

Chapter 1

2 

1.1 Premise

The purpose of these Guidelines is to provide a practical tool for project promoters to assess the financial and economic pre-feasibility of their projects in the framework of the IDEA “Transport dialogue and interoperability between the EU and its neighbouring countries and Central Asian countries” Technical Assistance project as part of the TRACECA programme.

The methodology to carry out pre-feasibility studies does not differ substantially from the one applied for full feasibility, the main difference being the degree of detail of the analysis. The methodology to be used to carry out the pre-feasibility study can be considered to be a simplified version of the process used to conduct a full feasibility study.

Projects will need to undertake a feasibility study to provide the information necessary to decide whether to proceed or not with a project. However a feasibility study is inevitably time and money consuming as it involves engineering design studies as well as on-site investigations and surveys. A pre-feasibility study is the precursor to a feasibility study, whose main purpose is to ensure there is a solid basis for undertaking a full analysis.

Therefore a pre-feasibility study makes extensive use of existing information, minimising as far as possible ad hoc surveys and field investigations.

The guidelines have been developed as a user-friendly manual to be put at disposal of each project promoter in the TRACECA region. The chosen approach is then to provide operational indications and recommendations and for this reason the guidelines are complemented with exercises and case studies. The Guidelines are not intended to substitute for national approaches but to be rather complementary to the appraisal methodologies established in individual countries. They provide a supporting tool for a common platform for the appraisal of projects belonging to the TRACECA region that need a supranational appraisal, either because they have a regional value that goes beyond national boundaries or because they are cross-border projects.

Finally, the focus of these Guidelines is the economic appraisal. But in both pre- and full feasibility of a transport project, economic analysis is just one component amongst others, which are strictly interconnected. The interactions between the different components, particularly between economic, financial and environmental analysis are extremely important. This is why the text also includes some hints on the financial and environmental analysis.

These Guidelines largely build on the “Guidebook on the methodology of transport project evaluation and appraisal” prepared by TRT Trasporti e Territorio experts within “The Northern Dimension Partnership on Transport and Logistics (NORDIM)” project coordinated by WSP Finland on behalf of DG MOVE (Annex 1 to the Final Report of the study, December 2010, contract no. TREN/B1/297-2009/SI2.539.137).

1.2 Project appraisal

The project appraisal is a comparative tool; it considers the difference between alternative states of the world (“with project” scenarios against a “without project” scenario) and estimates the costs and benefits of a project or policy intervention. Its scope is to support the decision making process with all the necessary information.

In order to do this, project appraisal needs to be based on a sound methodological approach, which will constitute a proper framework for assessing:

the financial implications, especially in terms of the capacity for the project to be financially self-sustainable or not;

the impacts on the society, as a whole and from the perspective of individual agents or social groups, in terms of economic and environmental analysis.

Chapter 1

3 

The appraisal of transport projects relies on inputs that come from the planning and design phases. Therefore, the availability of basic data on demand and supply, the use of appropriate transport models and sound forecasting methods are of crucial importance for a successful analysis. It goes without saying that if the analysis is based on weak inputs and assumptions, then the appraisal itself will be weak.

Carrying out a solid appraisal is not a simple task and requires the adoption of a reasonable level of approximation. There are in fact critical issues that have to be addressed in defining the scope of the assessment. They include:

1. the estimation of all the main impacts (investment, maintenance and operating costs, vehicle operating costs, journey times, user charges and operator revenues);

2. the analysis of all the transport modes affected by the project (for instance a new motorway could attract traffic from rail services), and

3. the appropriate definition of the project: the boundaries of the analysis should be well defined since they strongly influence the assessment of the impacts and therefore the final results. The study area should be large enough to capture the main network effects and if cross-border impacts are expected, then the study area should be defined so as to incorporate both domestic and international travel.

1.3 The guidelines The decision to build a new infrastructure project, to upgrade an existing one or even to introduce new transport policies is always a complex and long term one. Several decision makers at different levels (local, national, supranational) are usually involved in the process and many stakeholders might be affected, either positively or negatively. Within this decision making process, the initial idea of the project is refined, detailed, and modified: it is not uncommon for the project finally approved to look substantially different from the initial one.

At each step of such a process a decision has to be taken on whether to investigate further the project, and consider what technical solution(s) should be taken forward. The aim of these guidelines is to provide a tool which could be applied at the beginning of this process when a decision has to be taken on whether it is worthwhile to move from the preliminary design to a more detailed definition of the project and so to help in selecting the best options amongst the ones available.

It is extremely important to remember that the entire process of appraisal from preliminary identification of projects to full feasibility should be consistent. By applying different approaches at the different stages you might disregard a project in the preliminary screening stage that, with the criteria applied at a later stage in the decision making process, would have been considered for financing.

Consistency across all these stages requires a coherent and consistent approach, but without running through a costly and time consuming appraisal at each stage of the project. These guidelines provide a description of the general approach and provide suggestions on the shortcuts to be considered for using the tool in the preliminary stages of the project.

Chapter 1

4 

Table 1 - 1: Stages of the decision making process

Steps in project appraisal Phases Necessary information and tools Purpose of the appraisal

Preliminary evaluation

Information still preliminary and thus uncertain: first demand estimation, costs, costs for the users No demand models applied

Eliminating those proposals which are clearly too expensive when compared to the potential benefits. Ensuring that proposals which represent partial, or low cost solutions are considered.

Pre-feasibility

Aggregated demand, approximate investment and management costs, better estimation of time savings, operational costs, etc., environmental costs even if no environmental impact assessment has been undertaken Simplified transport modelling approach

Identifying the most promising solutions. Verifying the available technological alternatives: new infrastructure, or better functioning of the existing infrastructure, routes, capacity, etc. Impacts related to pricing policies Support decisions on appropriate financing mechanisms and management structures (PPP for instance), etc.

Full feasibility

Disaggregated transport demand, including other modes and routes, final investment and management costs, final tariffs, and final operational costs, shadow prices, etc. Multi-modal transport modelling approach

Verifying the profitability of the various alternatives

The methodological approach developed by these Guidelines is based on the state of the art of transport projects appraisal.

The text is structured into the following chapters:

Project identification which considers a qualitative assessment of the objectives that a project investment is expected to achieve and a description of the critical factors to be aware of in the upstream flow of information (project alternatives, demand analysis etc.);

Financial analysis, where the attention is focalised on the simplified assessment of the profitability of a project investment;

Economic analysis, where the cost-benefit analysis evaluates the overall impacts generated by the projects on the social and economic well-being;

Risk assessment, where the main steps are identified and briefly described;

Case studies.

A simplified scheme illustrating the timing and connections among the components of the Guidelines is provided in the following figure.

 

Chapter 1

5 

 

Figure 1 - 1: Components of the Guidelines

Project identification and

analysis of alternatives

Environmental analysis

Riskassessment

Financial analysis ECONOMIC ANALYSIS

Social analysis

Time

 

6 

Chapter 2

7 

2 Project identification

Chapter 2

 8

2.1 Overview

The first step in the appraisal is project identification. Firstly it is necessary to identify the problem under consideration, and then set the objectives which the project should achieve. Then, the project technical solutions for meeting the objectives have to be defined: these are combinations of elements such as locations, investment expenditures, operating costs, pricing policies, etc. each with different impacts on the analysed area.

The main impact to consider is on transport demand. Indeed, a detailed demand analysis is possible only after the definition of a project solution, but project promoters should have already in mind the order of magnitude of transport demand effects while thinking about the possible alternatives. Considering the demand analysis and the features of each alternative, it is possible to identify the so-called “with project” scenarios. An important aspect is that such scenarios have to be compared with the “without project” scenario, which is a forecast of what would occur if the project were not realised. Thus, the demand analysis has to be carried out also for this scenario.

The elements described and their interconnections are summarised in the following flow diagram.

 

Figure 2 - 1: Structure of the technical solutions analysis

2.2 Project objectives and definition of project solution

The objectives of transport projects are generally related to the improvement in travel conditions for goods and passengers (accessibility), both inside the study area and to/from the study area, as well as improvements in both the quality of the environment and the well being of the population served.

The first step is to state clearly the main objectives of the transport project as well as those related to the environment (energy savings, emission reductions). Once the objectives have been clarified, the second step is to define the project technical solutions, which should be consistent with the objectives of the investment.

In order to meet the objectives of a transport project, there are usually a range of technical solutions that could be designed for the “do-something” solutions.

Project objectives

Project technicalsolutions

Identify the solutions

Demand analysis

“With project” scenario

“Without project”scenario

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9 

Possible solutions for dealing with transport problems are1:

completion of missing links or poorly linked networks: transport networks have often been created on a national and/or regional basis, which may no longer meet transport demand requirements;

eliminating capacity constraints on a single network link and node, or building new and/or alternative links or routes in order to reduce congestion;

a shift of transport demand to specific transport modes (in order to reduce congestion and/or minimise pollution and moderate environmental impact);

improvements in accessibility for people and economic activities in peripheral areas or regions.

Different technical solutions aimed at achieving the same objective can be identified on the basis of technical, regulatory and managerial constraints, and demand opportunities. The combinations of locations, investment expenditures, operating costs, pricing policies, etc., may amount to a large number of feasible alternatives, but usually only some of them are promising and merit detailed appraisal. It’s worth noting that large projects and the ones at the forefront of technology are not necessarily the best alternatives. A critical risk of distorting the evaluation is to neglect some relevant alternatives, in particular low-cost solutions, such as demand management, pricing and/or infrastructure interventions that are considered as not “decisive” by designers and promoters, etc.

Focus: Example of option analysis of the Waterway Crossing Magdeburg project (Germany)

The Waterway Crossing Magdeburg is part of the German midland canal which crosses the centre of Germany from West to East, namely from the Ruhr area to Berlin. It consists of a 918 m channel bridge above the Elbe river and it is owned and managed by the Federal German Waterway and Navy Agency.

During the ex-ante project appraisal, three different do-something alternatives were considered in the options analysis:

one-way bridge (no parallel usage possible – alternative 1);

two-way bridge (bridge can be used in both directions at the same time – alternative 2);

dam alternative (independence of the water level of the river Elbe – alternative 3).

The alternatives were analysed with CBA methodology. All analysed alternatives achieved very good economic results, but the “one-way bridge” across the river Elbe showed the best benefit/cost ratio and was therefore the option implemented.2

Moreover, it is necessary to take into account two important aspects for the definition3 of a project:

the project should be well defined. Let us take the case of a project consisting of two or more separable project components, where only one has a positive profitability; if they are considered as a single entity, it could happen that the result for the entity is an average positive profitability suggesting the realization of the entire project. This clearly would be misleading, given the presence of project components not worth being realized; in this respect, an example is shown in the next table, where one can observe that, when the projects A and B are appraised jointly, net benefits are

                                                            1 See HEATCO (2006). 2 Source: EVA-TREN (2008). 3 De Rus et al (2006).

Chapter 2

 10

positive (+100), while appraising them as two distinct projects, project A would be worthwhile implementing (+200) and B would not be (-100).

Table 2 - 1: Costs and benefits with separable projects

Project Costs Benefits Net Benefits A -200 400 200 B -150 50 -100 A+B -350 450 100

the project should be “complete”, i.e. it includes all the necessary complementary works for making it fully operational (e.g. the realization of access roads in case of a seaport project), otherwise the “incomplete” project could seem more profitable than it would be in reality.

2.3 Definition of the reference or “do minimum” solution

Once a set of possible project technical solutions (“do-something” solutions) has been identified, it is necessary to define also the option “without project”.

Each technical solution determines different economic consequences (in terms of both costs and benefits), namely yielding different “scenarios”. Amongst them, there exists also the option of not implementing any project.

Intuitively, the issue is that the promoters have two underlying options: to implement or not implement the project. If the project is not realised, there will not be investment costs, but costs for the users (e.g. congestion costs) might occur. If the project is implemented, new investment costs will be borne, but, at the same time, benefits for the users might arise.

Therefore, the choice requires a comparison between the economic effects of these two possible options. Each project technical solution will be evaluated with respect to the option “without project” (namely, the Reference Solution). In fact, a correct evaluation should aim at measuring the incremental costs and benefits of a project with respect to the evolution of the scenario “without project”. Such a scenario is a forecast of what would happen in future if the project was not implemented, a “business as usual” (BAU) forecast. This is the basic approach of any investment appraisal.

The Reference solution is also labelled the “do minimum” solution. In particular it is defined as the solution which involves carrying out the investment and maintenance necessary to keep the system working without excessive deterioration. In fact, since the benefits of a project are determined by comparing them with a reference solution, the worse the reference solution is, the more overestimated the benefits are, thus distorting the evaluation. Therefore, in some circumstances the “do minimum” solution requires certain investment outlays, for example for partial modernisation of an existing piece of infrastructure, beyond the current operational and maintenance costs. In the case of very severe congestion, whether at present or in the future, the reference solution would include those measures (investment, management, maintenance, etc.) which would probably be implemented even in the absence of the project.

The design of a Reference solution and the identification of promising alternatives are two aspects that will influence all the results of the whole evaluation process. Therefore it is strongly recommended that attention is paid to the definition of these critical elements.

2.4 Analysis of the demand

A major requirement for the analysis of a transport project is to appraise both the demand with and without the project, in order to draw the correct comparison between the reference scenario and the project scenario. Ideally the analysis should consider

Chapter 2

11 

different demand segments. The main categories usually considered are passenger and freight, but more specific distinctions may be more relevant according to the situation being considered.

The analysis of the demand is critical for the results of the evaluation, since it affects most of the impacts and overall benefits of a transport project. A prerequisite for a sound appraisal is a careful estimate of existing and future demand based on reasonable and well-defined assumptions.

A critical issue with regard to the methods used to estimate existing and future demand is the use of single or multi-modal transport models. These are recommended in order to simulate the scenarios with and without the project. Where it is difficult and/or too expensive to adopt transport models, it could be useful to adopt statistical methods.4

2.4.1 Generalised costs

The demand for a transport infrastructure or a transport service depends on its generalised cost and on the one of the competing modes or routes (see problem in paragraph 2.5). Generalised cost expresses the overall inconvenience to the transport user of travelling between a particular origin and destination by a particular mode. In practice, generalised cost is usually computed as the sum of true monetary costs (e.g. fares for public transport, perceived operating costs and tolls for private modes) plus the value of travel time, which is calculated in equivalent monetary units. The translation from time to cost is made using estimations of the value of travel time available from current literature or possibly from dedicated field surveys (see Appendix 2).

Whatever the project, its main impact will be perceived by the users through a change in the generalised transport costs on that link. By shortening a route or eliminating congestion, a new or upgraded piece of infrastructure will reduce travel time and/or travel costs. There might of course be also other relevant impacts such as on safety, toxic emissions, the service operator(s), etc., which will not directly affect demand.

Travel times and monetary costs borne by users are the most critical variables affecting demand. In fact they influence users’ travel choices: high fares for a transport mode could lead a user to choose another mode for his trip, whereas low travel times could favour one transport mode over another for freight shipments, etc.. A reliable analysis should be based on either actual or plausible values of these components and should take into account all factors that may induce changes to those values: such as pricing and regulatory policies that might influence fares, congestion and/or capacity constraints that might affect travel times, etc.

Time is valuable for passengers and freight. The monetary value that individuals or companies attribute to savings in travel time is important for two reasons:

Its use in the estimation of actual and future demand;

Its use in the assessment of the project benefits (see paragraph 4.2.2 on surplus changes).

To guarantee consistency, the values of time used in the demand analysis and forecasts must be compatible with the values applied in the evaluation.

In order to better predict the behaviour of different users, the value of travel time is usually estimated separately for three different categories:

business trips, where it is suggested that the hourly average salary is applied, since the output of the employee is lost to the employer while the employee is travelling (please note that journeys from home to work and vice versa are not included);

                                                            4 The description of such methods and transport models goes beyond the scope of this Guidebook. For in-

depth examinations regarding the analysis of demand, see Ortúzar and Willumsen (1990).

Chapter 2

 12

non-working trips (including commuting), for which individuals’ willingness to pay (see paragraph 4.2.2) should be applied. As no market price for that time can be observed, the value of time must be inferred through surveys (see Appendix 2). In case this costly and time consuming approach cannot be followed, a good rule of thumb is to value the non-working time saved at 30% of the value of working trips;

freight, for which the value of time can be either estimated through ad hoc surveys (the recommended approach) or derived from the value of the goods transported. Table 2–2 presents a sample of values of time applied in transport project appraisal. In the absence of available data, Country-specific Value of Travel Time Savings (VTTS) can be calculated according to the value transfer approach (see paragraph 4.5).

Table 2 - 2: Values of time (Euro, 2010)

Country Passengers [pax∙hour]

Freight [ton∙hour] Work Non-work

1 Armenia 1.88 0.62 0.22 2 Azerbaijan 1.69-2.01 - - 3 Bulgaria - - 0.58-1.60 4 Georgia 0.12-2.41 - - 5 Kazakhstan 1.01-2.94 0.30-0.88 - 7 Moldova 1.46 0.48 - 8 Romania 12.03-14.98-20.645 0.93-2.266 9 Turkey 3.81 - -

Source: TRT elaboration on data from: The World bank, Asian Development Bank, Turkish Highway Directorate and European Commission - DG Regional Policy (2008).

Problems may arise when dealing with cross border projects involving two or more countries. In these cases the following criteria can be useful both for passengers and freight:

if the majority of traffic is due to trips within one country, the use of country-specific VTTS for all trips is reasonable;

if the majority of the traffic is made up of trips between countries, the use of the VTTS of the country of origin for the trip may be reasonable.

In the case of monetary costs things are easier. For the majority of modes the users are confronted with a monetary cost represented by tariffs or fares, or a set of them if more than one mode is included. The generalised cost for users is given by the sum of the fares charged or tariffs and the time expressed in monetary terms.

Things are different for private car users, as they are also the vehicle owners and bear the costs associated with their use: thus, for private car transport the monetary cost is given by vehicles operating costs (VOCs).

For the other transport modes, including road freight transport7, these costs are borne by the service providers (e.g. the operating costs of trains, planes, trucks, etc.).

The operating costs that are relevant for estimating travel demand are those “perceived” by users, i.e. the ones that users consider when making their travel choices (the so-called “out of pocket” costs: typically fuel costs, tolls, and parking). It is important to remember that the perceived costs include taxes (e.g. taxes on fuels).

                                                            5 Respectively referring to car/train, bus and air.

6 For rail and road modes.

7 Even if some producers provide their own freight transport, it is assumed that the whole of road freight transport constitutes a service that is provided to the final users at a specific price (as for the rail services).

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13 

Vehicle operating costs are country-specific, and vary according to the type of vehicle. If detailed information on fleet composition is not available, the costs of typically representative vehicles can be considered.

For cross-border projects the approach that can be used for projects involving two or more countries, is the same as that proposed for the value of time. An exercise on generalised cost is presented at the end of this chapter.

2.4.2 Demand forecast

The estimation of future transport demand shows how project induced changes in travel costs and times affect behaviour and this is normally done through the implementation of transport models. For those pre-feasibility studies where models are not available, an approach based on elasticity can be a useful shortcut to preparing a preliminary estimate of future demand. Demand elasticity is the ratio of the percentage variation in the demand to the percentage variation in a specific variable such as fares, travel times or generalised transport costs. Demand elasticity can be estimated making reference to data provided in scientific literature8 or data taken from similar projects. As an example, consider the case of a congested motorway and assume that, as a consequence of the construction of a additional lane, user travel times are reduced. If transport demand and travel times before the construction of the new lane as well as expected time savings due to the project implementation are known, it is possible to estimate the increase in demand by simply multiplying the change in travel times by the elasticity (see example below).

Focus: Example of the use of demand elasticity

Actual demand on the motorway ( without the new lane) t = 100 cars;

Elasticity of the demand with respect to travel time %

% , ;

Total travel time without the project = 10 hours;

Total travel time with the project = 6 hours;

The change in travel time is given by:

% %

It is possible to estimate the demand with the project by multiplying the change in travel time by the elasticity:

∙ % , ∙ , ,

By applying this ratio to the demand without the project it is possible to estimate the demand with the project:

Demand with the project = , ∙ .

It is worth noting, however, that such an approach is a simplification, as future demand also depends on several other factors, and therefore an accurate estimate of future demand in general would require an in-depth analysis and the use of modelling tools.

                                                            8 See Hensher and Button (ed.), 2000.

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 14

2.4.3 Check list for demand analysis

Whatever the approach followed in the estimate of future demand, it is worth mentioning a few key aspects for consideration:

The definition of the project’s area of influence could heavily influence the results of the analysis. The area should be large enough to properly capture the effects of the project. In the case of a project with cross-border impacts, as in the case of a measure aimed at stimulating international trade, it is important that the study area encompasses all the transport network links directly affected by the project no matter in which country the network lies. The study area should therefore not be artificially restricted within the borders of one country.

The same future transport demand may be, at least partially, satisfied by various transport modes which are in competition. Such competition may not only occur between different modes but even within the same transport mode, for example between roads or between nodes, like ports or airports. The reaction of existing modes to the introduction of a new link or service is a critical factor that might substantially influence the expected demand and, wherever possible, it should be properly assessed (e.g. considering possible strategies of the competing modes to counter the new project in terms of fare policies, quality increase, etc.).

Attention should be paid to the project transport demand composition in terms of:

existing traffic which is already using the infrastructure (in the case of a project which is designed to improve or upgrade the existing infrastructure);

diverted traffic, where traffic is redirected from other modes or routes;

generated or induced traffic, i.e. traffic which occurs because of reductions in travel costs brought about by the implementation of the project;

it is appropriate to analyse such different components of demand separately so as to achieve a more precise evaluation. Such a distinction is also helpful in quantifying the economic benefits and, in particular, for calculating the consumer surplus.

Demand trends are normally related to GDP growth or other macroeconomic variables. There is in fact no need to state that the improvement or decline in a country’s general economic situation could strongly influence the choices of each economic agent, including transport operators and the final users of a transport system. However, it would be misleading not to consider the effects of macroeconomic impacts, since they may have an influence on both transport demand and supply. Demand trends are critical in the evaluation process, since they affect the results of the appraisal. Therefore, attention should be devoted to these variables and any deviations from broader observed economic trends in the area should be highlighted. In order to deal with the uncertainties of future forecasts, it is not uncommon to find studies that develop two demand forecasts, one based on more optimistic assumptions and a second one more cautious assumptions (see also paragraph 5.2 on sensitivity analysis).

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15 

Check list for the demand analysis

Clearly identify the area of influence of the project

Appraise the demand both with and without the project over time

Distinguish between the different demand components

Consider the competition framework

Check the reliability of the critical variables (travel times, fares and costs for the users)

If possible, carry out some sensitivity tests

 

Pre-feasibility evaluation

In case of a pre-feasibility evaluation, it is sufficient to distinguish only between passenger and freight flows.

If possible, it is recommended that a simplified transport model is applied, which can be limited to the main routes. 

2.5 Problems9

1 Generalised cost Travelling by car from A to B takes an hour to cover 50km. Private vehicles consume on average 5 litres per 100 kilometres and the undertaking which manages the highway receives a toll of 5 .

Calculate the generalised cost of travel per vehicle between A and B, assuming:

the cost of gasoline is 1 ;

the value of time is equal to 10 ∙;

the average load factor is 2 .

 

 

 

 

   

                                                            9 Solutions can be found in Appendix 3.

 

 16

 

Chapter 3

17

3 Financial analysis

Chapter 3

 18

3.1 Overview

The purpose of the financial analysis is to evaluate the financial profitability of an investment in a project and its sustainability. The profitability assessment provides an analysis of the project’s capacity to generate monetary cash flows: a project is profitable if it generates enough revenues to recover the investment and operating costs. In particular, in the profitability analysis the focus is on the capacity of a project to generate, in comparison with a reference solution, adequate cash flows solely by its operating management (i.e. without considering bank loans/equity capital and the relative costs over the life of the project, such as debt reimbursement, interest, and dividends). The reader should be clear that the profitability analysis provides indications regarding the potential strength or weakness of a project, without considering all the sources of financing involved in the project and the timescale of proceeds and payments. These aspects are evaluated in the framework of the financial sustainability analysis. The financial sustainability analysis aims to assess whether the project has any risk of running out of cash in the future.

At the pre-feasibility stage, however, it will not be possible to have the necessary information to carry out the financial sustainability analysis. This will be required only in the full feasibility phase of the project. At the pre-feasibility stage, the financial analysis can be limited to the profitability analysis and be based on approximate investment and management costs, and traffic revenues, consistent with the demand forecasts.

As stated in the Introduction, the main focus of the Guidelines is the economic analysis: what is discussed in the following paragraphs is a general introduction to the complex task of carrying out a financial analysis of a transport project aimed mainly at highlighting its link with the economic analysis and providing some preliminary figures of the financial performance of a project.

3.2 Rationale of the financial analysis

The financial analysis is made on behalf of a single subject (individual or organization), instead of on behalf of society as a whole, as in the economic analysis (see Chapter 5). Indeed, the type of subject is different according to the characteristics of the project being considered. As most transport projects concern infrastructure investments, the analysis is usually conducted from the viewpoint of the infrastructure manager, which can be a private operator or a public body such as a regional authority or municipality. Nevertheless, in some cases the financial analysis is carried out on the behalf of the transport service providers, or an infrastructure operator which also supplies transport services to the final users. Clearly, the monetary flows to be considered vary according to the subjects involved. As an example, from the point of view of an infrastructure manager, the relevant costs are those related to the construction and management of the infrastructure, while revenues are those derived from access charges applied to the service provider. In the case of a transport service operator, the costs are those related to the operation and management of the service (e.g. for a rail operator, these would be the costs of access to a rail network, the costs of running the trains or purchasing new trains, etc.) while the inflows are represented by tolls or fares revenues coming from the final users.

The financial profitability analysis requires a project cash flow10 calculated on the basis of the differences in the costs and revenues between the scenario with the project (do something alternative) and the scenario without the project (do minimum alternative).

Cash flows occur during different years: in order to compare future and present cash flows it is necessary to discount back future cash flows. It would be misleading to consider equal costs and revenues that occur in different years, since one euro today has a higher value than one euro in the future. Future costs and revenues need to be

                                                            10 They are defined as the difference between the money inflows and outflows produced by a project.

Chapter 3

19

discounted back to the present through the use of a discount factor which decreases with time. The magnitude of such a factor is closely related to the choice of an appropriate financial discount rate (see paragraph 3.4).

The analysis is focussed on the evaluation of the actual monetary flows determined by the project. So only cash inflows and outflows are considered, while all the non-cash elements like depreciation, reserves and other accounting items are disregarded.

The cash inflows and outflows to be considered, as well as the ways to assess the financial profitability and sustainability, are described in detail below. The following figure illustrates the flows of information and inputs in the financial analysis.

 

Figure 3 - 1: Structure of the financial analysis

3.3 Investment costs, operating costs and revenues

The first step in the financial analysis is the assessment of the project costs and revenues that should be considered during the reference period. In the investment costs evaluation, appraisers have to consider the overall sum of the components required to build transport infrastructures, which depends on the type of project considered and its characteristics (for example, construction of new road or rail line, or technical upgrading/enlargement). Financial investment costs are an outcome of the technical analysis, usually disaggregated by the type of works into which the proposed project may be broken down and allocated over the construction period. The investment outlays can be planned for several years at the start of the project, and sometimes non-routine maintenance or replacement costs may be scheduled for later years.

Regarding the operating costs, they encompass all the foreseen expenses for the purchase of goods and the supply of services, which cannot be considered as investment costs since they are incurred within each accounting period.

The majority of the operating costs include:

Financial discount rate

Investment costs

Operating costs

Residual value

Revenues

Taxes

Profitability analysis

Sustainability analysis

Sources of costs and financing

Demand

Prices

Analysis of alternatives

Chapter 3

 20

direct production costs (consumption of materials and services, personnel, ordinary and extraordinary maintenance, and general production costs);

administrative and general expenditures;

sales and distribution expenditures.

For the calculation of the investment and operating costs, all items that do not give rise to an effective monetary expenditure must be excluded, even if they are items normally included in company accounting (Balance Sheet and Net Income Statement). In particular, the following elements should be excluded from the analysis:

any depreciation and amortisation, as they are not actual cash flows but the outcome of accounting criteria;

any reserves for future replacement costs or contingencies. Also in this case, these budget items are created through accounting operations and so therefore do not correspond to real monetary flows.

To complete the analysis of the project outflows, an important issue is the treatment of the costs of debts and taxes. Interest and debt reimbursements have to be considered when assessing the financial sustainability, but not in calculating the profitability of the project (see below). Likewise, income or other direct taxes should be included in the financial sustainability table but are not considered for the calculation of the profitability indicators. Additionally, where VAT is recoverable on costs, it should not be included in the profitability analysis.

With regard to the cash inflows, transport projects may generate their own revenues from the sale of goods and services (for example, charges on railways and tolls on highways). Revenues will be based on the demand forecasts for the services provided and the anticipated prices over the years. For the sake of simplicity, it is not unusual to keep prices fixed over the years, implying in practice that variations in revenues will be due to demand trends only. It is important to remember that generally the demand for and price of a good or service are strictly interrelated (see paragraph 2.5), and normally an increase in prices will result in a decrease in demand and vice versa. Therefore, whenever a new pricing scheme is considered in the financial analysis, it is necessary to go back to the demand forecast and estimate the new expected demand. Failure to consider how price changes affect the level of demand is a common mistake in a project appraisal that significantly distorts the results of the analysis.

Transfers or subsidies from the Government are usually not included in the calculation of future revenues, as they are proceeds which are not strictly generated by the project. Another item which should be excluded is VAT on revenues, because this does not usually constitute an earning but is paid back to the Government.

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21

3.4 Financial discount rate

Focus: The discounting process

Consider the case of a person who deposits X Euros in a bank. Assume that for such a deposit he/she receives interest at a certain rate per year on the amount deposited equal to r. The interest rate represents the remuneration for not having her/his money available at present, but in some future year.

At the end of the first year the available money is:

∙ ∙  

At the end of the second year the money that could be withdrawn is:

∙ ∙ ∙  

The formula can be generalised in the following way:

∙  

The subject could withdraw X1 after a year, or X2 after two years, if he deposits an amount X now. In other words X is the present value of the future proceeds Xt at the year t,

 

Following this simple example, in general terms it is possible to discount future monetary items and calculate their presents value multiplying such items by the discount factor which decreases with time, where t is the time and r is the discount rate applied.

The following table shows the effect of the discount factor over years and how it varies depending on the choice of the discount rate applied (5% in the first case and 10% in the second one):

Years 0 1 2 5 10 20 30

, 1.00 0.95 0.91 0.78 0.61 0.38 0.23

, 1.00 0.91 0.83 0.62 0.39 0.15 0.06  

The key element of the discounting process, which makes it possible to consistently compare future costs and benefits over time, is the choice of an appropriate financial discount rate, reflecting how future costs and revenues are to be valued against present ones. The financial discount rate reflects the opportunity cost of capital. Opportunity cost means that the use of a capital for a particular project prevents the same capital from being invested in another project. The cost incurred when a capital is invested in a project is the loss of income from the best alternative investment.

How to establish appropriate discount rates goes beyond the scope of this Guidebook. Different values may be used on the grounds of the country’s specific macroeconomic conditions, the nature of the investor and the sector concerned.

Ideally, the discount rate value should be correlated with the project features: the more risky the project is, the higher the discount rate should be.

Chapter 3

 22

3.5 Performance indicators: Financial Return on Investment and Internal Rate of Return

Once all costs and revenues have been valued, a decision criterion has to be applied to aid the appraiser’s decisionmaking. The indicators used for evaluating the financial performance of a project are:

the Financial Net Present Value (FNPV), and

the Financial Internal Rate of Return (FIRR).

The Financial Net Present Value is defined as the difference between the discounted value of the expected proceeds and the expected costs of the project:

⋯

where St is equal to the difference between inflows and outflows at time t and at is the financial discount factor. A FNPV higher than zero indicates that the forecasted revenues of the project are sufficient to recover its costs.

The Financial Internal Rate of Return is defined as the discount rate that yields the FNPV equal to zero:

The presence of a FIRR higher than the discount rate is stating that the FNPV is positive.

3.6 Profitability analysis

The FNPV and FRR of the project depend on the type of cash flows being considered. As was said in the overview, in the framework of a profitability analysis attention is focussed on the financial return on investment, measuring the capacity of the revenues to repay the investment and operating costs. More specifically, the Financial Net Present Value on the total investment cost and the Financial Rate of Return measure the performance of the investment independently of the sources or methods of financing.

For this aim, items such as debt reimbursement, interest, and dividends are not included in the calculation of the profitability of the investment. It is again emphasised that the profitability analysis provides indications of the financial performance of a project just with in relation to its operating management.

Therefore, the results of the performance indicators do not constitute a definitive criterion for deciding whether to proceed with the project implementation or not, but they are useful for the next step, i.e. the analysis of the financial sustainability. Negative results indicate that there is the need for additional financial resources (such as Government subsidies, IFI loans, etc.) in order to guarantee the project feasibility, since the outflows are higher than the inflows. On the other hand, a positive FNPV suggests a situation where the financial sustainability is easier to achieve.

It is worth noting that financial profitability is typically negative for most transport projects. In fact, the revenues are generally not sufficient to recover the investment and operating costs, especially in case of large transport infrastructures. In some cases, toll revenues are not even sufficient to cover the operating costs.

The cash inflows and outflows to be included in the profitability analysis are ahown in the following Table 3–1, while in the Table 3–2 an example of calculation of the performance indicators is provided.

Chapter 3

23

Table 3 - 1: Outflows and inflows for the profitability analysis

Profitability Outflow Inflow

Total investment costs Total operating revenues Land Residual value Buildings Equipment Extraordinary maintenance Licences Patents Other pre-production expenses Total operating costs Raw materials Labour Electric power Maintenance Administrative costs Other operating outflows

Excluded items Costs of financing Sources of financing Interest National public contribution Loans reimbursement National private capital Dividends Loans Other resources (e.g. operating subsidies) Taxes

Table 3 - 2: Evaluation of financial return on investment in a motorway project (Million of Euro)

YEARS

1 2 3 4 5 6 7 8 9 10 Total operating revenues 20 30 40 40 50 50 50 Residual value 10 Total inflows 20 30 40 40 50 50 60 Total operating costs -8 -14 -18 -18 -20 -20 -20 Total investment costs -50 -70 -60 Total outflows -50 -70 -60 -8 -14 -18 -18 -20 -20 -20 Net cash flow -50 -70 -60 12 16 22 22 30 30 40 Financial Rate of Return on investment - FRR -0.80% Financial Net Present Value of the investment – FNPV -46.49

A negative financial rate of return on investment indicates that revenues are not sufficient to recover

the investment and operating costs.

A discount rate of 5% has been

applied to calculate this

value.

Finally, it should be remembered that here the issue is not simply whether a project alternative shows a good financial performance (positive FNPV or a FRR higher than the chosen discount rate), but whether it is the best of the available alternatives. It is important, therefore, that all the most viable solutions are explored and compared in terms of their FNPV and FRR.

 

 24

 

Chapter 4

25

4 Economic analysis

Chapter 4

 26

4.1 Overview

The economic analysis assesses the contribution of a project to overall economic welfare. The scope of the analysis is to establish whether society as a whole is better off with or without the project.

The economic analysis differs from the financial one, since its aim is to measure the social value of a project. In assessing the social value of a project, it is important to consider both the advantages and disadvantages for all the parties involved (in particular, the users) and not only those relevant to the promoters or backers of the investment.

The rule of thumb in economic analysis is that an investment should be advantageous to the community, which means that the benefits yielded should be larger than the costs borne and they should include any welfare gain and loss.

The overall basic calculation is summarised below:

The users’ benefits are measured in terms of aggregate individuals’ preferences that, in turn, are represented by the willingness to pay of the users (the monetary values are assumed as universal indicators).

In the next paragraphs, it will be shown that the demand curve can be considered as representing a consumer’s willingness to pay for a certain amount of a good at different prices, and therefore, it represents the utility (or the gross benefit) that a consumer enjoys. The net benefit is the difference between the gross benefit and the real amount of money paid (namely, the real monetary sacrifice borne including non-monetary components such as travel time). This difference represents the consumer surplus and is the underlying measure of user benefit of a project (see paragraph 4.2.2).

More particularly, it is the unique measure of the benefits in the case of a perfectly competitive market, where the producers do not gain any profit and where the government is not an economic agent.

If other agents are involved (producers, government, or non users), the project’s appraisal should also consider their benefits (or costs) as well, and these should be summed (with the proper signs) with the consumer surplus, to determine the final result.

Market prices play an important role in the assessment of costs, even though the economic analysis should take account of both possible market imperfections and situations where a market does not exist at all.

Beyond a project’s investment costs, the benefits for users and producers, and the impact on government, the analysis must also take account of the so-called external effects (see paragraph 4.4). An external cost is a cost borne by the sufferers for which they are not compensated by those who generate them, and external effects are generally referred to as goods without a market.

Overall Economic Impact

=

Change in transport

user benefits

(Consumer surplus)

+

Change in system operating costs and revenues (Producer surplus and impact

on Government)

+

Change in external costs

(Environmental costs,

accidents, etc.)

- Investment costs

Chapter 4

27

 

Figure 4 - 1: Structure of the economic analysis

4.2 Change in transport user benefits

User benefits for transport projects can be defined by the concept of the consumer surplus. This is defined as the benefit which a consumer enjoys in terms of the difference between his/her Willingness To Pay (WTP) and the actual generalised cost (see par. 2.4.1). The Willingness To Pay is the maximum sum of money that the beneficiaries of a favourable effect would be willing to pay to have it.

 

Environmental analysis

Surplus change Performance indicators

Analysis of alternatives Shadow price

Demand

Environmental costs

Social discount

rate

Value transfer

and treatment over time

Investment, operating costs and residual

value

Analysis input Main activity Complementary activity

Generalised costs

Overall Economic Impact

=

Change in transport

user benefits

(Consumer surplus)

+

Change in system operating costs and revenues (Producer surplus and impact

on Government)

+

Change in external costs

(Environmental costs,

accidents, etc.)

- Investment costs

Chapter 4

 28

4.2.1 Components of the generalised cost

The generalised cost is usually calculated as the sum of true monetary costs (e.g. fares for public transport, operating costs and tolls for private modes) plus the travel time expressed in equivalent monetary units (see problem in paragraph 2.5). Travel time savings are defined as the variation in door-to-door journey time. This definition means that travel time is the sum of both in-vehicle and out-vehicle times. If transport models for traffic simulations are adopted, it is very important for the coherence of the appraisal that the values used in the economic analysis are the same as those considered in the models. Otherwise, the appraisal results will not be consistent with the estimation of demand.

Regarding Vehicle Operating Costs, such costs assume relevance for the determination of the generalised cost only for users of private car transport, where the final users are also the vehicle owners and bear the costs associated with their use. For the other transport modes, including road freight transport, these costs are borne by the service providers and should be considered within the producer surplus (e.g. the operating costs of trains, planes, trucks, etc.).

The calculation of Vehicle Operating Costs can be done by using the RUC (Road Use Costs) Module of HDM-4 software; its Version 2.00 is downladable from The World Bank web site11.

It should be noted that only the vehicle costs “perceived” by users should be considered in the calculation of generalised cost. As far as private car transport is concerned, the perceived costs should include taxes (e.g. fuel tax), because users, when making decisions about transport (e.g. how far to go, or what mode to use) take into account the fuel price and not the resource cost. For the other transport modes, including road freight transport, the generalised cost for users is simply represented by the sum of the fares charged and the time taken expressed in monetary terms.

In short, as with the value of time, it is noted that the adopted values of the perceived costs have to be the same both in the economic analysis and in modelling.

4.2.2 Consumer surplus and Willingness to Pay (WTP)

It can be readily understood that, generally speaking, transport demand is inversely correlated with generalised cost: the higher the generalised cost, the lower the demand. This concept can be represented by a demand curve.

 

                                                            11 http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTTRANSPORT/EXTROADSHIGHWAYS

Chapter 4

29

 

Figure 4 - 2: Transport demand curve

If we consider passenger transport, the demand curve summarises the number of individuals who make the trip at a given generalised cost. For instance, the demand corresponding to a generalised cost of 6 Euros is the number of individuals (80) that would make the trip if the generalised cost is 6 Euros.

Amongst these 80 individuals, the first (on the left hand side) would be willing to pay the maximum value to travel (12 Euros), the second a slight lower amount and so on, until the last individual of the 80, who is willing to pay exactly six Euros. Assuming a reduction of the generalised cost to five Euros, the demand increases to 100 trips, as 20 more individuals, who previously either did not travel, or travelled by another mode, now consider the lower cost more acceptable to pay.

Therefore, from another point of view, the demand curve is a way of ranking of individuals according to their willingness to pay (WTP), namely the maximum amount an individual is prepared to pay in order to travel from A to B using a particular mode of transport and within a particular travel time: moving from left to right the willingness to pay decreases, as represented by the downward slope of the demand curve. The same applies to freight transport.

The interpretation of the demand curve as a ranking of WTP is useful to capture the concept of consumer surplus. Consumer surplus is defined as the benefit which a consumer enjoys in terms of the difference between his/her WTP and the actual generalised cost. For instance, if the generalised cost of a trip is 3 Euros, all individuals with a WTP of 5 Euros will enjoy a benefit of 5 – 3 = 2 Euros.

Thus, for a given generalised cost, the consumer surplus is the sum of the benefit enjoyed by all individuals with a larger WTP. Graphically, the consumer surplus is represented as shown in Figure 4–3 below, where V1 is the number of trips, C1 is the corresponding generalised cost and the shaded triangle ABC1 is the consumer surplus.

Gen

eral

ised

cos

t pe

r tr

ip

Volume of trips

Demand curve

5

10080

6

0

12

Chapter 4

 30

 

Figure 4 - 3: Consumer surplus without the project

4.2.3 Transport user benefits: Consumer surplus and the Rule of Half

Changes in the supply of the transport system give rise to changes in the generalised cost of travel from certain points of origin to certain destinations. Assume that a project reduces generalised cost from C1 (depicted in Figure 4–3) to C2 (depicted in Figure 4–4).

 

Volume of trips

C1

V1O

B

A

Gen

eral

ised

cos

t pe

r tr

ipConsumer

surplus without the project

Demand curve

Chapter 4

31

 

Figure 4 - 4: Consumer surplus with the project

This reduction increases the consumer surplus, which is now the triangle ADC2. In the economic analysis of a transport project, the benefits for users are calculated as the difference between the consumer surplus with and without the project, i.e. the area of the trapezium C1BDC2 is calculated as difference between the triangle ADC2 and the triangle ABC1 (see Figure 4–5).

 

Volume of tripsO

A

C2

D

V2

Gen

eral

ised

cos

t pe

r tr

ipConsumer

surplus with the project

Demand curve

Chapter 4

 32

 

Figure 4 - 5: Change in consumer surplus

The change in consumer surplus generated by the project is therefore:

∙ ∙

This formula is the so-called “rule of half”.

The same result can be obtained through the following calculation:

∙ ∙ ∙

The total benefits are the sum of (change in cost ∙ “do minimum” demand) and (change in costs ∙ change in demand)/2.

The formula makes apparent that the additional surplus comes from two components:

existing traffic enjoy the difference between the previous and the actual generalised cost: ∙ ;

additional traffic (modal shifters, or induced users) enjoy the half of the difference between the previous and the actual generalised cost: ∙ ∙ .

√ Input for the consumer surplus is the estimated actual and future demand with and without the project. 

Real case studies are usually more complex, since more modes, more demand segments (e.g. passenger and goods) and several origin-destination pairs are involved (see the case studies in paragraphs 6.1, 6.4 and 6.5), but the formula above can be extended to cover such more complex cases (see problems 1, 2, 5 and 6).

Volume of trips

C1

V1O

B

A

C2

D

V2

Gen

eral

ised

cos

t pe

r tr

ip

Change in consumer surplus

Demand curve

Reduction of generalised

cost

Increase of trips

Chapter 4

33

4.2.4 Diverted and induced demand

It is worth noting that for multi-modal studies the consumer surplus should be calculated for the mode where the benefit occurs, i.e. using the formula above and considering the change in demand and generalised cost for that mode. For instance, in the case of an improvement in a public transport service, the benefits are shown as the difference between the generalised costs without and with the project for that public transport service regardless of the generalised cost of alternative modes (e.g. car) from which the additional demand for the service is diverted.

Consider, for example, a rail service currently used by 300,000 people with a generalised cost of 20 Euros per trip. As a consequence of the project, travel time will be significantly reduced and generalised transport cost will go down to 15 Euros per trip. Thanks to the reduced generalised transport costs, 100,000 former car users will now shift to train travel.

Table 4 - 1: Consumer surplus variation for modal shifters

Volume of trips

Generalised transport costs (Euro/trip)

Change in consumer surplus (Euro) Without the project With the project

Existing users 300,000 20 15 1,500,000 Additional users shifting to the new service 100,000 15 250,000

As illustrated in the table, the correct estimation of the benefits for the additional users is obtained from the “rule of a half” ∙ ∙ multiplying the number of such users (100,000) by the savings in generalised transport costs of the existing users (20-15=5) and dividing by 2. The final result is 250 thousands Euros, which is the total benefit to travellers shifting from road to to rail.

It is important to stress that the amount of the benefit for those travellers shifting to the improved transport mode (rail in the example) does NOT depend on the generalised cost of the mode they used previously (car in the example). The reason is that the demand curve for each transport mode provides the willingness to pay of individuals to use that mode already taking into account the alternatives. Therefore, when one transport mode is improved, the size of the benefit is measured only by the difference between the old and the new generalised cost of that mode. The difference between the generalised cost of the new mode and the generalised cost of the previous mode is already accounted in the decision to change mode.

For sake of simplicity, one can assume that the individual surplus variations are linearly distributed between a maximum (namely, the entire change of generalised cost) and a minimum value (slightly higher that zero). This assumption determines the triangular shape of surplus variation as far the the additional traffic is concerned.

It follows that the area of the triangle bordered between the demand curve, the variation of generalised cost on the new mode and the additional traffic, coincides with the whole benefit (namely, the economic benefits), both for the users that change their mode and for the induced ones (see problem 2 in paragraph 4.15).

4.2.5 Introduction of completely new modes

There is a special case, not addressed in detail in several guides, where the application of the rule of a half formula is less straightforward. This happens when a new mode is introduced in the do something case and the generalised cost and the demand without

Chapter 4

 34

the project do not exist. Making reference to Figure 4 – 6, and are unknown, and only the point defined by and is available.

The consumer benefit is always the difference between the surplus with and without the project, but since demand is zero without the project, consumer benefit is equivalent to the whole consumer surplus with the project.

In order to calculate this surplus the first step is to define the demand curve for the new mode. When the demand for the new mode is estimated, it is possible to know point D in Figure 4–6. However, the consumer surplus can be very different if the demand curve is A1 or A2 or A3. Therefore, the estimation of demand for the new mode should be repeated for other values of generalised cost in order to estimate the demand curve. Then user benefits can be calculated via the method of numerical integration as set out in Nellthorp and Hyman (2001).

 

Figure 4 - 6: Possible demand curves of a new mode

4.2.6 Special treatment of unperceived costs

For private car transport, it should be noted that vehicle operating costs include unperceived costs as well. Due to project implementation, the distances travelled by the vehicles vary, as well as the resources consumed and the costs related. Changes in the perceived costs (e. g. fuel cost) are considered when user surplus variation is calculated. Neverthelss, there exists also variation of costs non perceived and that should be taken into account. Among these, the cost variations of lubricants and tyres can be calculated as proportionally related to the change of vehicle∙km, while those depending on vehicle maintenance and depreciation can be partially assumed (usually at a rate of 50%), as they are not fully dipendent on the distances covered. Finally, insurance and property tax must not be considered as they are fixed costs and do not vary with the distance travelled.

Volume of tripsO

A1

C2

D

V2

A2

A3

Gen

eral

ised

cos

t pe

r tr

ip

Demand curves

Chapter 4

35

4.3 Change in system operating costs and revenues

Cost-benefit analysis is concerned not only with consumer surplus, but with total social surplus. This includes producer surplus as well as consumer surplus. The producers are transport providers, both with respect to infrastructure and services: network managers, train operating companies, freight forwarders, etc. The changes in the producer surplus include operators’ profits or losses. Changes in Government revenues due to changes in the volume of taxes and subsidies have to be assessed as well.

4.3.1 Producer surplus

The producer surplus is the excess of revenues over costs.

∙ ∙  

Where:

and are the unit monetary prices (tolls, fares) respectively with and without the project;

and are the covered kilometres respectively with and without the project;

and are the producer unit management costs respectively without and with the project.

According to the figure above, the change in producer surplus is the difference between the areas of rectangles A and B.

Revenue forecasts depend on traffic forecasts, and both depend on pricing policy. Therefore it is essential in the appraisal that the price policy assumptions, on which the traffic and benefit estimates are based, are consistent with those used for revenue forecasting (see paragraph 3.2 and problems 5 and 6 (part 2) in paragraph 4.15).

Overall Economic Impact

=

Change in transport

user benefits

(Consumer surplus)

+

Change in system operating costs and revenues (Producer surplus impacts on

Government)

+

Change in external costs

(Environmental costs,

accidents, etc.)

- Investment costs

Chapter 4

 36

 

Figure 4 - 7: Variation in producer surplus

√ Traffic forecasts, management costs and prices have to be the same as those considered in the financial analysis.

4.3.2 Taxation and Government revenue effects

A project can lead to change in government surplus by altering tax receipts. It is important to include such a change in tax revenues in the cost-benefit analysis.

Figure 4–8 shows a situation where the price paid by the transport users includes taxes. In such a case the amount paid by each consumer is equal to , where is the price without the taxes (for sake of simplicity, the same price is assumed in both the without and with project scenarios), and is the tax (the difference between and and are due to the time component of the generalised transport cost).

 

Volume of trips

P1

V1O

B

A

P2

V2

Pri

ce/C

ost

per

trip

z1

z2

Producer surplus without

the project

Producer surplus with the project

Chapter 4

37

 

Figure 4 - 8: The additional tax revenues

∙ reflects the increase in tax receipts for the Government due to the increase in the volume of trips.

The changes in tax revenues are important when a project leads to a shift in demand between private and public transport: the implications for Government tax revenue may be significant because private transport is often heavily taxed whereas public transport is often lightly taxed relatively.

Consider, for example, the realisation of a rail project causing a modal shift from the road transport. In this case, the fiscal loss for the government generated by the modal shift cannot be ignored. It is true that - in general - indirect taxes should be ignored in cost-benefit analysis. But this does not hold for specific fuel taxes lost because of modal shift. Thus, it is not correct to state that what is a loss for the government is a gain for former car users. In fact, the benefits for such users are already represented by the consumer surplus (see also problems 5 and 6 (part 2) in paragraph 4.15).

4.4 Change in external costs

An externality is said to exist when the production or consumption of a good in one market affects the welfare of a third party without any payment or compensation being made. The most important externalities arising when transport projects are implemented are related to both environment and safety issues. 

p+t

Volume of trips

C1

V1O

B

A

C2

D

V2

p

Gen

eral

ised

cos

t pe

r tr

ipAdditional

governmentaltax revenues

Overall Economic Impact

=

Change in transport

user benefits

(Consumer surplus)

+

Change in system operating costs and revenues (Producer surplus impact on

Government)

+

Change in external costs

(Environmental costs,

accidents, etc.)

- Investment costs

Chapter 4

 38

The calculation of external costs can be done by using the RUC (Road Use Costs) Module of HDM-4 software; its Version 2.00 is downladable from The World Bank web site12 and it provides outputs for: air pollutants, noise, global warming and safety.

4.4.1 Environmental costs

An underlying part of economic appraisal deals with the impact of the the project on the environment. An Environmental Impact Assessment (EIA), when available, should be considered as the starting point for measuring the social costs resulting, as it provides quantifiable impacts in physical terms.

It is suggested that the appraisers focus on the most relevant categories of environmental effects, namely: air pollution, noise and global warming. Other impacts (vibration, visual intrusion, loss of important sites, resource consumption, impairment of landscape, soil and water pollution) are rarely covered due to the fact that social damage values are extremely difficult to estimate.

Variations in the impacts between scenarios have an influence on individuals’ utility and appraisers ought to include them within the economic cost-benefit analysis, by translating these impacts into monetary values.

The first step in estimating the environmental costs is to quantify changes in pollutant emissions, noise and CO2, due to the implementation of the project.

Box: Environmental analysis

The implementation of a transport infrastructure typically has an impact on the environment. Depending on a project’s nature, size and location, the effects on the environment may be significant and they should be evaluated carefully, since the assessment of the consequences is necessary both at the project design stage (as the results might suggest modification of the original project or consideration of some mitigating measures), and within the economic analysis framework. An increase (or decrease) in the quality or quantity of environmental goods and services will produce some changes, in terms of gain (loss) of social welfare associated with their consumption.

Major environmental impacts of transport projects are related to land use changes and air pollution. For example, the construction of a new road will be expected to reduce the availability of workable rural land, alter landscape, increase the pressure on biodiversity and negatively affect the air quality due to increased traffic flows along the route but at the same time might reduce emissions in other parts of the region from which traffic has been diverted. Impacts can be both negative and positive and they can be local, regional or global.

It is useful to distinguish between impacts which are due to the construction of the infrastructure and impacts that arise when it is operational. While the first ones are usually local, the environmental impacts of transport activities may occur at different scales (both local and global). Impacts due to the construction of a new infrastructure, or the widening or upgrading of an existing one would be normally identified in the design phase of the project, together with the mitigating measures necessary to minimise the adverse impacts. The impacts of changes in transport activities due to new investments are related to traffic volumes which impacts mainly on air pollution, climate change and noise. Damages may be immediate, or occur in the future (up to several hundreds of years later in the case of CO2 emissions). The methods deployed to estimate environmental impacts must address these different scales and further analysis might be necessary for certain types of pollutants and damage.

In preventing environmental damage, it is important for designers to consider a full                                                             12 http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTTRANSPORT/EXTROADSHIGHWAYS

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39

range of possible approaches to mitigate impacts, including measures to reduce/avoid, the consequences with alternative strategies, variations of layout, changes of implementation plans and management practices.

Environmental analysis is becoming of paramount importance and mandatory for transport projects, at least for the large-scale ones and is accomplished either by the carrying out of Environmental Impact Assessments (EIA), or by meeting certain obligatory targets (for noise levels), or thresholds (for airborne pollutants).

EIA is an integral part of the consent process for major projects for most international financial institutions. For references see:

UNECE. 2007. Resource Manual to Support Application of the UNECE Protocol on Strategic Environmental Assessment. http//:www.unece.org/env/sea;

European Commission DG TREN. 2005. The SEA Manual. A Sourcebook on Strategic Environmental Assessment of Transport Infrastructure Plans and Programmes. http://ec.europa.eu/environment/eia/sea-studies-and-reports/beacon_manuel_en.pdf

If an EIA is available, it will provide all the relevant values. Otherwise, project-related emissions should be assessed using suitable country-specific emission factors, taking into consideration the characteristics of the domestic fleet (composition, average age, fuel or electricity consumption etc.)13. For noise and pollutants it is also important to consider the locations where these emissions take place: the damage depends on people’s exposure to noise and pollutants and therefore is higher in densely populated areas and lower in rural areas.

In order to be considered in the economic appraisal, the final impacts estimated in physical terms (damage unit or risk or loss of time per v∙km, p∙km, t∙km travelled according to a specific mode) have to be translated into economic terms. In most cases, the analysis concerns public goods or merit goods that do not have comparable market valuations (for example the goods “clean air”, “human health”, “ecosystem”). In other cases, a market for the concerned goods exists, but the market has so many rigidities that the analysis results tend to be highly complex and controversial. In these cases, particular techniques have to be used to measure the value attached to such “goods” in a consistent way.

In the mainstream approach, the evaluation in economic terms (e.g. the damage generated by a worsening of air quality in a given area) is based on the demand formulated by individuals for the environmental goods (air quality in this example). On this basis, the willingness to pay (WTP) for obtaining an additional unit of the benefit (e.g. for reducing the concentration of a given pollutant or for avoiding an increment of the same concentration), or the willingness to accept (WTA) monetary compensation after having been deprived of a unit of such a benefit (e.g. a reduction of the concentration of the pollutant) is estimated.

In the case of public goods, where a market is not available, WTP or WTA can be estimated only indirectly. These values are usually country specific, as they are strictly related to per capita income, and are sometimes made available to the appraisers from the Government or from evaluation agencies.

When country-specific values are lacking for environmental costs and noise, it is possible to transfer the data from countries where these values are available, through suitable modifications (see paragraph 4.5).

The treatment of values over time should be considered as well. Given that the economic values are related to per capita income, they are most likely going to increase in future years.

                                                            13 In this respect, useful outputs can be obtained using the World Bank RUC Module of HDM-4 software.

Chapter 4

 40

The recommended four-step approach for calculating the environmental costs of air pollution, noise and global warming due to a project implementation are listed below:

1. quantify changes in air pollution and noise emissions due to project implementation (according to EIA);

2. collect the country-specific economic values or apply the GDP transfer rule (see paragraph 4.5);

3. increase values over time (see paragraph 4.9);

4. estimate the economic impact by multiplying air pollution and noise emissions by the country-specific values.

The approach for calculating the economic impact of global warming is somewhat different.

4.4.2 Air pollution

Air pollution, which may be considered as one of the main externalities generated by transport, is dependent upon many factors, from fuel composition to engine characteristics and maintenance, the types and main characteristics of vehicle, infrastructure layout, speed, congestion, and so on.

Moreover, air pollution is measured by the emission and concentration of particular primary pollutants, which include nitrogen oxides (NOx), carbon monoxides (CO2), sulphur dioxides (SO2), lead (Pb) and, lastly, particulate matter (PM10 and PM2,5) such as dust and soot. These primary pollutants can cause damage to materials and buildings, agricultural crops and forests, as well as being harmful to human health when inhaled.

The valuation of air pollution costs takes into account the following dimensions:

population and settlement density, implying the concept of receptor density close to an emission source, which is an indication of the size of population close to a source of air pollution, i.e. the closer to an air pollution source the population is, the more negative effects it will suffer and the higher the marginal costs will be;

sensitivity of the area;

level of emissions (according to the different transport modes).

For some pollutants that have relevant local effects, the values are reported separately for urban areas and non-densely populated areas, as the values are different according to people’s exposure.

The calculation of the environmental costs of air pollution is normally based on standard emissions per vehicle∙km14 (which differ according to fleet composition), multiplied by the kilometre distance run in the with and without project scenarios and by a monetary value.

 

                                                            14 In this respect, useful outputs can be obtained using the World Bank RUC Module of HDM-4 software.

Chapter 4

41

Focus: Example of calculation of air pollution costs

Consider a project for a new motorway. The expected results with the project are:

A slight increase of total travel length (the motorway route is preferred, as it is less time consuming, though longer);

A different distribution between routes: vehicle∙km increase along suburban routes (where the population exposure is lower), while vehicle∙km along either urban or mixed routes reduces.

The results obtained from the simulation model are reported in the following table. They refer to the first year of the new infrastructure (year six) and to another threshold year (namely, year 20).

Variation of vehicles∙km [million]

Year Suburban Mixed Urban Total

6 2,724.8 -2,137.2 -431.6 156.0 20 3,310.3 -2,596.4 -524.3 189.5

Each vehicle produces a measurable amount of pollutants. An example of average emission coefficients per vehicle∙km, assuming a certain composition of the fleet, by age and technology, is shown in the table below.

It is likely that the pollutant emissions will decline in the future, due to both technical advance in vehicles, and the replacement of older vehicles. Nevertheless, in the evaluation process, these variables have been assumed to be constant, due to the difficulties involved in forecasting them precisely.

Emission coefficients per vehicles∙km

Emissions Grams/vehicle∙km

NOX 0.331 VOC 0.124 PM 0.058

The variations in emissions between the solutions with and without the project are as follow.

Variations in pollutant emissions [tons]

Year Emission Suburban Mixed Urban Total

6

CO 5,525.9 -4,334.2 -875.3 316.4 NOX 901.9 -707.4 -142.9 51.6 VOC 337.9 -265.0 -53.5 19.3 PM 158.0 -124.0 -25.0 9.0 Total 6,923.8 -5,430.7 -1,096.7 396.4

20

CO 6,713.3 -5,265.6 -1,063.4 384.3 NOX 1,095.8 -859.5 -173.6 62.7 VOC 410.5 -322.0 -65.0 23.5 PM 192.0 -150.6 -30.4 11.0 Total 8,411.5 -6,597.6 -1,332.4 481.6

In order to calculate the benefits (namely, the variations in pollution costs between the solutions with and without the project), specific monetary values should be assigned to the emission quantities.

Let us assume that the following results are available from a study (see the next table).

Chapter 4

 42

Monetary values assigned to the pollutant emissions [Euro/ton]

Emission Suburban Mixed Urban NOX 5,741.8 11,955.0 18,168.2 VOC 898.3 1.987.7 3.077.2 PM 144,964.5 184,653.4 224,342.2

The monetary values introduced above relate to a date ten years before the opening of the infrastructure investment (year 6) and they are expected to change over time. As the literature in this field suggests, the monetary values depend on per capita income and for this reason, their growth rates correlate with the per capita growth in GDP.

As the data refer to ten years before year 6, the formula below has been introduced to revalue them.

∙  

where:

is the monetary value in the opening year;

is the monetary value available;

is the per capita GDP growth rate assumed.

Using a similar methodology, the values needed can be calculated also at year 20. The results, assuming a per capita GDP growth rate of 1.8% are shown in the table below.

Monetary values of emissions [Euro/ton]

Year Emission Suburban Mixed Urban

6 NOX 6,863.2 14,289.8 21,716.5 VOC 1,073.7 2,376.0 3,678.2 PM 173,276.5 220,716.6 268,156.8

20 NOX 8,810.4 18,344.1 27,877.8 VOC 1,378.3 3,050.1 4,721.8 PM 222,437.7 283,337.4 344,237.1

Finally, in order to determine the project benefits, the values assumed for pollutant emissions must be multiplied by their quantities.

Benefits [Million Euro]

Year Emission Suburban Mixed Urban Total

6

NOX -6.2 10.1 3.1 7.0 VOC -0.4 0.6 0.2 0.5 PM -27.4 27.4 6.7 6.7 Total -33.9 38.1 10.0 14.2

20

NOX -9.7 15.8 4.8 11.0 VOC -0.6 1.0 0.3 0.7 PM -42.7 42.7 10.5 10.4 Total -52.9 59.4 15.6 22.1

Note: negative numbers are costs, while positive numbers are benefits.

The analysis performed shows that, even though the total traffic has increased by both of the two time thresholds considered, the variation between the routes, with either higher or lower population exposure, yields benefits of 14.2Meuro in year six and 22.1Meuro in year 20.

See also problems 3 and 6.2 in paragraph 4.15.

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43

4.4.3 Noise

Noise imposes social costs and has a negative effect on individual well being which could damage physical and psychological health. The impact of noise due to transport activities is highly site-specific and varies considerably depending on the mode of transport, vehicle type and its technical characteristics15. Finally, damage occurs particularly when exposure to noise continues over a long period of time.

Costs are usually specified according to time of day (day or night) and specific sites of noise emissions, (urban, suburban or rural according to settlement density and number of people exposed).

Suburban and rural values are recommended for projects implemented at sites where low densities occur, while the urban ones are suggested for projects entirely within a city (namely, road network modifications, rail stations, public transport networks, etc). See also problem 6.2 in paragraph 4.15.

4.4.4 Global warming

Climate change costs are very complex due to the fact that they are long-term and global and because risk patterns are very difficult to anticipate.

The climate change or global warming impacts on production and consumption activities are mainly caused by emissions of greenhouse gases (carbon dioxide (CO2), nitrous oxide (N2O) and methane (CH4)). The methodology for calculating costs due to the greenhouse gas (GHGs) emissions (usually expressed in CO2 equivalents) consists essentially of multiplying the amount of CO2 equivalents emitted16 by a cost factor.

Theoretically, due to the global scale of the damage caused, there is no difference in how and where the emissions of greenhouse gases take place, nevertheless appraisers should apply the values available taking into account the specific locations where the data have been calculated. In this regard, the following table shows data about the EU25 group of countries.

Recommended values are specified to be aplied in different years. Long-term external costs based on marginal damage costs depend on the assumed scenario describing the development of global greenhouse gas emissions and their increase over time in scenarios with growth in emissions.

Short term costs are based on current or near future avoidance costs. For policies that determine future CO2 emissions, it makes sense to use an external cost factor for CO2 that is related to the costs of future CO2 emissions. This value will be higher than the value for present-day emissions, although the level will depend on the amount of CO2 emission reduction measures that are adopted worldwide.

Table 4 - 2: Values per tonne of CO2 equivalent emitted (Euro, 2009)

Year of emission Lower value Central value Upper value 2010 7.1 25.2 45.4 2020 17.2 40.4 70.7 2030 22.2 55.5 101.0 2040 22.2 70.7 136.3 2050 20.2 85.8 181.8

Source: Elaboration from IMPACT (2008)

The procedure for calculating the global warming costs is:

                                                            15 In this respect, useful outputs can be obtained using the World Bank RUC Module of HDM-4 software.

16 In this respect, useful outputs can be obtained using the World Bank RUC Module of HDM-4 software and in IMPACT (2008).

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 44

Quantify the change in GHG emissions due to the project (measured in tonnes), which is a function of fuel and energy consumption;

Multiply CO2 equivalents by a cost factor for the year of emission.

4.4.5 Safety

Regarding safety concerns, the first step is to forecast the number of accidents (and their severity) which are expected to occur in the scenarios with and without the project. This is a complex task because accidents depend on many factors. Accident prediction models require extensive data to support them. A more practical solution is to estimate the accident rates on the basis of the distances covered (number of accidents per million vehicle kilometres travelled within a year, by transport mode).

Accident rates should be estimated for both the with and without project scenarios, unless there is strong evidence to suggest that the improved transport facility will have a different accident rate (accidents per vehicle kilometre travelled) from that currently recorded.

In order to provide a proper economic valuation of changes in transport accidents, a generally agreed definition of their severity should be shared within the group of countries considered. For assessing the cost of a casualty, country-specific values are recommended. Finally, the following Table 4–3 shows the economic costs per fatality for all the TRACECA countries (The World Bank, 2009). See also problems 3 and 6.2 in paragraph 4.15.

Table 4 - 3: Estimated cost per fatality (USD, 2009)

Country Estimated economic cost per fatality

Armenia 380,590 Azerbaijan 627,060 Bulgaria 866,040 Georgia 350,070 Kazakhstan 809,140 Kyrgyzstan 152,180 Moldova 220,780 Romania 888,860 Tajikistan 138,880 Turkey 941,290 Turkmenistan 403,550 Ukraine 534,380 Uzbekistan 182,420

Source: The World Bank (2008) 

Focus: Example of calculation of accidents costs

Consider a project in Finland, which aims to reduce of the number of road accidents. Having estimated the number of accidents and their severity, the accidents costs are calculated according to the values recommended in the relevant literature.

Type of Casualty

Number per year

Unit cost [Euro]

Total costs [Euro/year]

Without the project Fatality 7 1,930,598 13,514,186 Severe injury 15 256,154 3,842,310 Slight injury 40 19,217 768,680

With the project Fatality 4 1,930,598 7,722,392 Severe injury 8 256,154 2,049,232 Slight injury 16 19,217 307,472

Chapter 4

45

 

The change in accident costs is presented as the difference between total costs with and without the project:

, , , , , , , , , ,, ,  

This results in a reduction in safety costs, therefore the conclusion is that the project generates a benefit of 8Meuro/year.

4.5 Value transfer

It is not uncommon to find that one or more estimates of the economic costs of non-market goods are not available. This might be the case for the environmental, noise, travel time and accident costs. Due to limited time and the availability of financial resources, new non-market valuation studies often cannot be performed. In this case, a possible shortcut for a pre-feasibility study is to apply the value transfer approach. This approach consists of taking a unit value for a non-market good estimated in an original study and using this estimate, after some adjustments, to value a non–market good elsewhere.

Adjustments are usually advisable in order to reflect differences between the original study site and the new project site. In particular, the unknown cost parameters can be calculated on the basis of the ratio between the income per capita of the two countries, the one where the parameter was originally estimated and the one which is the new context of evaluation. The income per capita is, in fact, one of the most important factors influencing individual preferences and willingness to pay. The income to be considered in the Value Transfer procedure is normally per capita net of tax income. If this data is not available, per capita Gross Domestic Product (GDP) can also be applied.

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 46

Focus: Value transfer

When estimates of the economic value of non-market goods (environmental goods, noise, travel time and accidents) are not available, the value transfer approach can be applied.

Since income per capita influences individuals preferences on WTP, the unknown parameter can be calculated through the ratio between the income per capita of the two countries.

∙ 

Where:

is the value to be calculated in a country where the parameter is unknown;

is the value of the parameter in a country where the parameter is known;

are the per capita incomes in the countries where the parameters are respectively known and unknown.

For example:

 

 

Country Per capita

income [Euro/year]

SO2 [Euro/ton]

u 2,284 119 k 4,956 259

When calculating the ranges of costs associated with:

pollution emissions one can refer to the HEATCO17 (2006) study;

noise, a possible source is the IMPACT (2008)18 study.

Even though the value transfer methodology seems powerful, it should be managed with caution and adopted only when other options are not feasible. Finally, once the methodology is applied, it is recommended that a sensitivity analysis on the results is also carried out. See also problem 6.2 in paragraph 4.15.

4.6 Project investment costs

Investment costs are an outcome of the technical analysis, usually disaggregated by the type of works into which the investment may be broken down and allocated over the                                                             17 The HEATCO study is available at http://heatco.ier.uni-stuttgart.de/deliverables.html.

18 The IMPACT study is available at http://www.ce.nl/index.php?go=home.showPublicatie&id=702.

Overall Economic Impact

=

Change in transport

user benefits

(Consumer surplus)

+

Change in system operating costs and revenues (Producer surplus and impact

of Government)

+

Change in external costs

(Environmental costs,

accidents, etc.)

- Investment costs

, ∙ ,   ,,,

∙ ,  

Chapter 4

47

construction period. Nevertheless, at the pre-feasibility stage, it might be that the construction period has already been assumed, but there is no information available on how the works are to be allocated within this phase. In this respect, a possible shortcut consists of allocating the construction costs evenly within the time span of the project.

Conventionally, the investment costs encompass not only the construction costs, but also the non-routine maintenance and replacement costs of the transport infrastructures. They depend on the type of project considered and on its characteristics (for example construction of new road/line, or upgrading/enlargement, technical life, etc.).

Moreover, the investment costs ought to encompass all the mitigation costs required to minimise the negative environmental impacts.

It is worth observing that, if the new infrastructure substitutes the old one, the costs should be assumed as the difference between the ‘with the project’ and ‘without the project’ solutions. Therefore, when the ‘without the project’ solution assumes investment costs, however small, and non-routine maintenance and replacement costs, all of them must be considered as savings and counted with a positive sign, whilst those associated with the ‘with the project’ solution must be represented as negative amounts.

The investment outlays can be planned for the first few years and non-routine maintenance and replacement costs should be scheduled further into the future.

The operating costs both with and without the project (including routine maintenance) are already taken into account when calculating the producer surplus.

It may be possible that the evaluation period is shorter than the economically useful life of the project. Therefore a residual value of the investment has to be taken into account in the analysis for capturing the benefits and costs of the project beyond the chosen appraisal period. In particular, if the residual value is expected to be paid at the end of the last year of the reference period, it has to be included in the investment costs account as a positive amount as it is an inflow.

The minimum approach is to calculate the residual value by using a linear depreciation profile, i.e. by multiplying the total investment costs of the project by the percentage of its residual life at the end of the reference period.

Consider, for example, a transport project with an investment cost equal to 100Meuro, an expected useful life of 40 years and a time horizon after the construction period set at 30 years.

The estimated residual value is equal to: 40 30 40⁄ ∙ 100 1 4⁄ ∙ 10025 . See also problem 6 (part 1) in paragraph 4.15.

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Table 4 - 4: Example of scheduled investment costs with and without the project

Year

Investment costs

With the project Without the project

Total

Con

stru

ctio

n

No

n-r

ou

tin

e m

ain

ten

ance

Rep

lace

men

t

Mit

igat

ion

Con

stru

ctio

n

No

n-r

ou

tin

e m

ain

ten

ance

Rep

lace

men

t

0 -200 0 0 -200

1 -200 0 0 -200

2 -200 0 0 -20 60 -160

3 -200 … … -20 -220

4 0

5 30 30

6 40 40

7 40 40

8-10 0

11 60 60

12 30 30

13 -40 -40

14 0

15 -80 -80

16-32 … … … … … … … 0

33 200 -40 160

4.6.1 From financial to economic costs

The estimation of the investment costs of the project is based on the financial costs provided by the project designers. However, in the cost-benefit analysis, costs are thought of as “opportunity costs”. Without the project the scarce resources (labour, capital, land) would have had alternative uses. The approach “with and without” compares the output value of the project with the output value that the resources allocated to the project could have produced in their best alternative use (their opportunity cost). Therefore the financial project costs cannot always be used as such in the economic analysis since sometimes they do not represent the opportunity cost of the resources.

In an ideal market, the prices exactly reflect the true economic value of the inputs considered. In the real world, this is rarely the case and market prices are not a good indicator of the opportunity cost of the resources, due to market distortions that arise from factors such as: taxes, administered prices, oligopolies, imperfect information, transaction costs and lack of markets.

In order to truly represent the social value of project inputs, appropriate shadow prices should be applied to the financial costs. Their values depend on the specific conditions of the context in which a transport project is realised. Therefore, it is not possible to recommend specific shadow prices for adoption in a particular case.

An important issue to note is the treatment of taxes and subsidies. A common rule used in the practical application of the cost-benefit analysis is to not consider duties, taxes and subsidies. In fact, these elements are monetary transfers amongst the subjects involved and generally they balance each other out without influencing the results of the economic appraisal of the projects. In practice such outflows or inflows do

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not represent a real consumption of resources by society, but just a transfer of resources from one subject to another.

Thus, in the framework of the economic analysis, the costs of all other indirect charges should be net of VAT (according to country-specific tax regulations) 19.

Nevertheless, this practical rule regarding taxes and subsidies does not always have to be applied. In fact, not all the transfers can be ignored. In particular, this concerns direct taxes on labour income.

What is the output value that the labour would have produced in its best alternative use? If the labour is taken away from another productive activity, its value is equal to its marginal product in its best alternative use, which corresponds to the market wage, i.e. the wage before tax. This represents the opportunity cost of the labour that is used in the project. Therefore the price of labour to be considered in the economic appraisal should be gross of direct taxes.

In principle,shadow pricing should be calculated for each investment, maintenance and operating cost item (e.g. land, energy, labour force, raw materials, carriage and freight, etc.). However, as a practical recommendation, shadow pricing can be limited to the resources that are the most relevant for the project and whose market prices are furthest from their respective opportunity costs. The most important candidate for shadow pricing is usually labour.

When there is a certain level of involuntary unemployment for some labour categories (e.g. the unskilled labour) in the country under consideration, a shortcut formula can be used to determine the shadow price:

∙ ∙  

where:

is the shadow wage;

is the market wage;

is the regional unemployment rate;

is the rate of social security payments and relevant taxes.

The formula states that job seekers should be willing to accept a reduction of the wage (considered net of relevant taxes) insofar as the unemployment in the area of interest is severe. This acceptable level of wage represents the opportunity cost of labour20.

4.7 The project appraisal period

Ideally, forecasts regarding the future of the project should be formulated for a period appropriate to its economically useful life and long enough to encompass its likely mid-to-long term impacts. In practice, the evaluation period is often limited to the period in which forecasts can be formulated with reasonable accuracy. If forecasts project very far into the future, the results could be unreliable and unrealistic. This is because the more time goes by, the more the uncertainty level increases. In particular, “in the longer term, the many sources of uncertainty include: potential economic instability; energy prices; shifts in land-use patterns; political risk; and supply side risks over the continued maintenance and operation of the asset itself. Given the vulnerability of projects to these

                                                            19 Consider the price of energy production. A power plant produces a certain amount of energy, which is sold on the market

at a price of 100, that is the sum of 90 (production cost) and 10 due to fiscal burden. In this case, the true economic value is the production cost and the other ten monetary units are a pure transfer from consumers to the Government. Therefore, the correct price of the energy to be used is 90.

20 For a further in-depth examination of the shadow pricing, please see the European Commission (2008).

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risks, it is common practice even in politically- and economically- stable countries to curtail the appraisal period at around 25-40 years, even for a long-lived asset”21.

It is worth noting that values for the reference time horizon by sector of interest are proposed in the relevant literature. In particular, the European Commission Guide to Cost-Benefit Analysis of Investment Projects (2008) recommended the adoption of the values presented in the following table for the years 2007-2013.

Table 4 - 5: Reference evaluation period for the transport sector

Projects by sector Years Railways 30 Roads 25 Ports and airports 25

Source: European Commission – Directorate General Regional Policy (2008)

4.8 Constant prices, common currency and base year

In the evaluation process, a choice must be made between current and constant prices (i.e. prices fixed at a base year). In this Guidebook constant prices are recommended for measuring benefits and costs in a way that is not distorted by the inflation trends.

In cross-border projects, conversion between the currencies of different countries is a necessary step in order to compare costs and benefits across countries. Since, in some cases, the official (nominal) exchange rates do not fully reflect the purchasing power of the country, differences in countries’ currencies should be combined with differences in real purchasing power. This can be done by introducing Purchasing Power Parity exchange rates22 to measure real differences in resources costs, consumers’ willingness to pay, etc., amongst countries.

4.9 Treatment of values over time

There are values that are expected to change over time, such as the value of time, environmental costs and safety costs. In general, this happens for values that depend on per capita income and, for that reason, the factor used to increase them over time is the rate of growth of GDP per capita, or a lower rate (applying an income elasticity 0.7 or 0.5), if the parameter considered in the analysis proves to contribute an important part of the benefits.

The calculation is the following:

is the actual value;

is the value at time ;

is the value of GDP per capita at time ;

is the forecasted value of the GDP per capita at time ;

is the inter-temporal elasticity of the parameter with respect to per capita GDP.

                                                            21 The World Bank, 2005 f. 22 See The World Bank, on www.worldbank.org/data/icp. Purchasing Power Parities are price relatives. In

their simplest form, they show the ratio of prices in national currencies of the same precisely-defined product in different countries. For example, if the price of a kilo of oranges of a specified quality is 45 rupees in country A and 3 dollars in country B, the Purchasing Power Parity for such oranges between the two countries, when B is the base country, is the ratio 45 to 3 or 15 rupees to the dollar. In other words, for every dollar spent on oranges of the specified quality in country B, 15 rupees would have to be spent in country A to obtain the same quantity and quality of oranges. Purchasing Power Parities are calculated for individual products, for basic headings, and for each of the various levels of aggregation up to and including GDP.

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is given by:

∙ ∙  

The treatment of values increasing over time should not encompass any inflation trend.

4.10 The problem of evaluation in cross-border projects

The problem of evaluation in cross-border projects has been stressed by Roy (2000). The solution he identifies is to complement incomplete national evaluations with a second level of evaluation: a supra-national evaluation. This approach is also suggested in this Guidebook: each country involved in a project should be able to evaluate the costs and benefits of the project for its own population, but a project regarding more counties should be evaluated as a whole.

According to Roy (2000) in pages 3-5: “In any cross-border project where each jurisdiction is principally responsible for the funding of its national section, the evaluation of the project will be fragmented into separate national evaluations of the respective sections. And in order to determine the extent to which their section merits public subsidy from the national taxpayer, most national governments will, quite properly, seek to limit their recognition of the section’s economic benefits to the share accruing to their own residents. In short, they will calculate their own national benefit. Each national evaluation is perfectly defensible in its approach to the problem of determining the burden to be placed on the national taxpayer. But there is an asymmetry here: the same national taxpayer is unable to evaluate and thence to secure the benefits accruing to his own fellow-residents in the other sections of the same cross-border project.

The point may be illustrated with the aid of a simple two-country example. Suppose that two geographically contiguous countries, A and B, invest in a new cross-border line which generates a time-saving gain of 1 hour in each of the two national sections: a total of 2 hours. The benefits are expressed in terms of time-savings only: ceteris paribus applies to all the other elements. The required investment cost is 1 billion euros in the case of each section: a total of 2 billion euros. The estimated traffic is two million passengers. And in each section, the estimated passenger split between residents and non-residents is exactly 50/50.

In this example, Country A’s evaluation of its national section will show inter alia a benefit of 1 million hours of time-saving gains measured against an investment cost of 1 billion euros. Country B’s evaluation will show just the same. The implicit sum will thus show a benefit of 2 million hours of time-saving gains measured against an investment cost of 2 billion euros. The truth, however, is that the investment in the project as a whole will enable each of the 2 million passengers to gain 2 hours of time-savings – thus generating a gain of 4 million hours of time-saving measured against an investment cost of 2 billion euros. […]

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Correctly specified national evaluations of the respective national sections will generate an incorrect estimate of the economic profitability of the project as a whole and each of its national sections – and, therewith, an incorrect estimation of the extent of public support which they merit. At the same time, the variability of returns across the various sections can also serve to distort the overall picture.

On the one hand, a national section with a high economic return may be so placed that a very high proportion of its international economic benefits falls to non-residents so that the national measure of economic return falls below the hurdle rate for attracting subsidy from the national taxpayer. The section is thus jeopardised for want of subsidy even though its full economic return is high.

Per contra, another section with a high economic return may be so placed that it clears the hurdle of financial profitability and proceeds without need of subsidy. The project is thus deprived of a stream of subsidy corresponding to that stream of economic benefits even though, as a whole, it may be in need of it.”

Evaluation of national section in

country A

Evaluation of national section in

country B

Implicit sum of A + B

Corrected evaluation of project as a

whole Investment cost: 1 billion Euro

Investment cost: 1 billion Euro

Investment cost: 2 billion Euro

Investment cost: 2 billion Euro

Time saving: 1 hour Time saving: 1 hour Time saving: 2 hour

Resident passengers: 1 million

Resident passengers: 1 million

All network passengers: 2 million

1 million hours of time savings measured against investment cost of 1 billion Euro

1 million hours of time savings measured against investment cost of 1 billion Euro

2 million hours of time savings measured against investment cost of 2 billion Euro

4 million hours of time savings measured against investment cost of 2 billion Euro

4.11 Flows of benefits and costs

The previous paragraphs have provided some guidelines on how to estimate economic costs and benefits of a transport project. This calculation ideally would be repeated for each year of the project life. Normally the analysis is carried out for a discrete number of years: the construction period, the opening year of the infrastructure and one or more years in the future, until the year when the demand can reasonably be forecasted (threshold year). If the project appraisal period goes beyond the threshold year, it is suggested, as a precaution, to keep the benefits constant until the end of the evaluation period.

Between the opening year (the first year where the project is producing benefits) and the threshold year, costs and benefits can be estimated by a mathematical interpolation (linear or more complex); the same approach can be applied to estimate future revenues and costs in the financial analysis because the economic analysis must be consistent with the financial analysis. In the following Table 4–6, an example of distribution of the benefits and costs over years of a rail project is provided.

 

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53

Table 4 - 6: Example of costs and benefits over years for a rail project (Meuro)

Year In

vest

men

t co

sts

Op

erat

ing

co

sts

Co

nsu

mer

su

rplu

s

Pro

du

cer

surp

lus

Go

vern

men

t su

rplu

s

Envi

ron

men

tal

ben

efit

s

Saf

ety

ben

efit

s

Tota

l net

b

enef

its

1 -40.5 0.0 0.0 0.0 0.0 0.0 0.0 -40.5 2 -60.8 0.0 0.0 0.0 0.0 0.0 0.0 -60.8 3 -80.2 0.0 0.0 0.0 0.0 0.0 0.0 -80.2 4 0.0 -1.5 12.0 10.0 4.0 1.0 0.2 25.7 5 0.0 -2.0 14.0 11.0 4.0 1.2 0.2 28.4 6 0.0 -2.0 16.0 14.0 5.0 1.4 0.3 34.7 7 0.0 -2.2 18.0 16.0 5.5 1.5 0.5 39.3 8 0.0 -2.2 21.0 18.0 6.5 1.7 0.6 45.6 9 0.0 -2.5 25.0 21.0 8.0 2.0 0.8 54.3 10 0.0 -3.0 25.0 21.0 8.0 2.0 0.8 53.8 11 0.0 -3.0 25.0 21.0 8.0 2.0 0.8 53.8 12 0.0 -3.2 25.0 21.0 8.0 2.0 0.8 53.6 … … … … … … … … … 29 0.0 -3.2 25.0 21.0 8.0 2.0 0.8 53.6 30 72.6 -3.2 25.0 21.0 8.0 2.0 0.8 126.2

A residual value at the end of the evaluation period has been considered (0.4 ∙ .

Values for the years between year 4 (the opening year) and year 10 have been calculated by linear interpolation.

4.12 Social discount rate

As in the financial analysis, an important issue to be addressed in the economic assessment is the choice of an appropriate Social Discount Rate (SDR), which reflects the societal view on how future costs and benefits have to be valued compared to those in the present.

In general terms, a high SDR means that society assigns a greater weight to costs and benefits that arise in the near future, rather than those that occur further into the future.

Examples of SDR applied in some countries are shown in the next table.

 

 

 

 

 

 

 

 

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Table 4 - 7: Social discount rate for some countries

Country Value (%) Project Source

Austria, Denmark, France, Italy, Germany, Sweden, The Netherlands

3.5 Major projects EU DG Regio Guide, 2008

Czech Republic, Hungary, Poland, Slovakia 5.5 Major Projects EU DG Regio Guide, 2008

Turkey 8.0 Road rehabilitation

Turkish General Directorate of Highways, 2010

Armenia 12.0 Highway improvement

Asian Development Bank, 2010

Azerbaijan 12.0 Highway improvement World Bank, 2010

Georgia 12.0 Highway improvement Padeco Co., 2008

Moldova 12.0 Road extension and rehabilitation Universinj Chisinau, 2010

Kyrgyz Republic 12.0 Road rehabilitation World Bank, 2009

Tajikistan 12.0 Water resources management World Bank, 2005

Uzbekistan 12.0 Logistics Centre World Bank, 2010

4.13 Decision criteria

Similarly to the financial analysis (see paragraph 3.4), the economic project’s performance is measured according the two indicators, namely:

the Economic Net Present Value ( ): the measure of the absolute welfare gain over the entire life of the project (future benefits, net of costs, are summed up along all years of the reference period). The equation to be considered at carrying out the

is:

⋯  

where:

are the benefits (e. g. changes in consumer surplus) at time t; are the economic costs at time ; is the social discount rate ; is the project’s life.

the Economic Internal Rate of Discount ( ) is defined as the discount rate that yields the equal to zero:

⋯  

The acceptance (rejection) criteria are:

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55

Both performance indicators are relevant, and it is recommended that both are calculated, particularly when comparing projects or project alternatives because they provide different information. The project with the highest V is the one that generates the highest amount of benefits, while the project with the higher is the one that provides the highest return on investment. See problems 4, 5 and 6 (part 3) in paragraph 4.15.

It might happen that the ranking of projects according to the two performance indicators is not the same. It is worth noting that the may be misleading in some circumstances, and therefore should be used with caution.

Focus: Reasons why the Internal Rate of Return could be misleading

The Internal Rate of Return should be used with caution for the following reasons:

if the sign of the values changes in the different years of the project lifetime (for example - + - + -) there may be multiple IRRs for a single project. In these cases the IRR decision rule is impossible to use;

the IRR contains no useful information about the overall economic value of a project. If, for example, project A has a higher IRR than that of project B, this does not imply that the NPV of project A is necessarily higher than the NPV of project B. Consider the following figure. Project A (represented by the blue line) has a substantially higher NPV than that of project B (represented by the red line) for a discount rate of 5%. However, it crosses the horizontal axis to the left of project B, and consequently has a lower IRR, i.e. IRR(A) = 12% < IRR(B) = 18%.

 

 

For cross-border projects involving two or more countries, when the countries’ specific Social Discount Rates are similar it is suggested that an average value be applied for the calculation of the ENPV If, on the other hand, the values differ significantly it is suggested that one ENPV for each country specific SDR is applied, and that checks are applied to determine whether the project always has a positive result.

-200

-100

0

100

200

300

400

500

600

0 5 10 15 20 25

NP

V

Discount rate

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Pre-feasibility evaluation

In a pre-feasibility evaluation, the investment and operating costs of the project can be the same of the financial analysis, without applying shadow prices.

Even in a simplified approach, the estimate of the project benefits should be based on the changes in consumer and producer surplus and in government revenues. But they can rely on an approximate estimation of unit time savings and user costs etc..

In the absence of an Environmental Impact Assessment, the estimate of the environmental costs can be a function of the traffic volumes, while the accident costs can be parametric.

4.14 Social analysis of costs and benefits

The scope of the social analysis is to describe how the costs and benefits of a specific transport project are distributed among the different stakeholders, where stakeholders include not only the project promoters and final users, but also all the other actors involved. In practice, the analysis looks at the effects of the project on society as a whole, considering costs and benefits derived from the economic analysis in a disaggregated way.

Usually, when a project is realised the impacts are unevenly spread across a number of affected social groups, and typically there are winners and losers. The economic performance indicators (ENPV and EIRR) provide information at an aggregate level by stating whether society as whole is better off with or without the project irrespective of who is bearing the costs or receiving the benefits. But this might not be sufficient, and is totally insufficient when dealing with cross-border projects where there might be an imbalance between winners and losers in the different countries.

For these reasons, it is always recommended that the distribution of costs and benefits amongst users and other stakeholders is considered in parallel with the performance indicators. A disaggregated description of those groups advantaged or disadvantaged by the project can help in assessing the problems associated with the project and, in some cases, identify possible mitigation measures, such as monetary compensation for those who are excessively disadvantaged.

The most straightforward approach is to produce a matrix (like the one shown in the following table) where costs and benefits (in rows) are disaggregated among: transport producers, government, transport users and non-users (in columns).

Table 4 - 8: Matrix for the analysis of the distribution of project impacts

 

Other stakeholder classifications are obviously possible (for instance splitting them by country) and it is important to identify the most appropriate one according to the

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57

project’s specific characteristics. In particular, for the projects involving two or more countries, i.e. cross-border projects, the analysis should also take into consideration the different geographical areas.

The relevant issue to address for these projects is the distribution of project impacts between countries, since a non-homogeneous allocation of social costs and benefits could be critical. Consider a project that involves two countries where most of the costs are borne by one country while most of the benefits are captured by the other.

The country that bears the majority of the costs without receiving significant benefits would probably strongly oppose the project, even with the presence of positive performance indicators, if nothing is done to mitigate the negative impacts.

In conclusion, the social analysis allows the identification of possible problems for specific groups and may be decisive for the final decision whether to implement a transport project. The level of detail of the analysis depends on the results of the economic appraisal and the possibility of distributing the project’s effects among the different stakeholders. See also the case study in paragraph 6.6.

Pre-feasibility evaluation

For projects involving two or more countries, the analysis can focus only on the distribution of the project costs and benefits between the countries involved.

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4.15 Problems23

1 User surplus

The government of the Alfa region is planning to upgrade a length of road between A and B. The average generalised cost of travel (GC) is 10 ⁄ in the reference solution. After the completion of the investment, the generalised cost will reduce to

5 ⁄ .

Assuming:

travel demand is equal to 1,000 ⁄ in the reference solution and 1,500 ⁄ , when the renovated length of road comes into operation;

the demand function is represented as a straight line:

in the plan (travels, GC) identify the areas that represent the:

user surplus in the reference solution;

user surplus with the project;

user surplus change between scenarios.

Finally, calculate the change in user surplus.

2 User benefits for users making a modal shift

A partial single track railway line links A and B in the region Gamma, while an inter-urban road runs alongside it, but with a longer route.

Due to the expected increase in travel demand between the cities, the Government plans an investment to double track the entire length of railway line (see Figure i). A reasonable expected consequence of the project is a partial modal shift from road to rail.

 

Figure i: Rail line before (above) and after (below) the upgrade 

Table iv and Table v summarise the data available on travel demand and generalised costs, both for the reference solution and the project scenario.

                                                            23 Solutions can be found in Appendix 3.

Road

Rail

Road

Rail

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59

Table iv: Travel demand [passengers/day]

Scenario Rail Road Reference 500 2,500 Project 1,000 2,000

Table v: Generalised costs of travel [Euro/passenger]

Scenario Rail Road Reference 50 55 Project 40 55

Calculate the total change in user benefits due to the expected modal shift.

3 External costs

Consider a road project which has the objectives, firstly, of reducing harmful transport-related emissions and, secondly, of reducing the number of accidents. Using the data provided in relation to the reference solution and the project scenario, calculate the change in total external costs, making use of the unit costs given in Table vi and Table vii.

Table vi: Pollutant emissions and external costs per ton

Pollutant Emissions [tons/year] Unit cost [Euro/ton] Reference solution Project scenario

NOx 10.00 2.00 2,000 NMVOC 4.00 1.00 1,000 PM2,5 (not urban) 0.20 0.10 30,000

Table vii: Number of casualties and external costs per accident

Type of casualty Casualties/year Unit cost [Euro/casualty] Reference solution Project scenario

Fatality 10 5 2,000,000 Severe injury 15 10 200,000 Slight injury 40 20 20,000

4 Performance indicators (Source: Sugden and Williams, 1978)

A railway undertaking (a public agency) is carrying out a programme of modernising level crossings. Unmodernised level crossing which carry railways across minor roads are operated manually by crossing-keepers, who are usually retired railway workers receiving a small income for doing this work.

To install automatic barriers at such crossings costs 20,200Euro (in year zero) and results in subsequent cost savings (from year 1 onwards) of 1,900Euro per year. The useful life of a set of automatic barriers and associated equipment is estimated to be 20 years, after which it must be replaced.

Provide an economic analysis to assess whether the programme of modernisation should be undertaken. The social discount rate is assumed to be 8%. Is the conclusion altered if the social discount rate is 6%?

Finally, determine the Internal Rate of Return.

5 Economic analysis of a railway line with modal shift (simplified complete analysis)

A local Government is planning to improve a length of railway line, as currently it cannot offer a competitive service compared to the private mode (the speed of trains is low and the railway timetable is unreliable).

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Enhancements are expected to benefit the environment and to reduce the need for any further increase in road capacity. When the renovation works are completed, the modal shift of passengers will limit the growth in CO2 emissions, particularly in densely populated areas where exposure of the population is higher.

In order to achieve these goals, the feasibility of several technical options was considered. Condequently, a pre-screening evaluation has reduced the various technical options to a single promising alternative (see Figure ii).

reference solution: the mostly single-track railway continues to lose its share of passenger demand;

project scenario: this is a short-term solution with limited investment (extension of double-track railway line near to the cities), to improve the line’s reliability. This will achieve benefits in terms of partial modal shift and a reduction in environmental costs.

 

Figure ii: Reference solution (above) and project scenario (below)

Preliminary estimates of the economic investment costs have been provided by the project engineers (see Table viii). The renovation works require three years.

Table viii: Economic investment costs [Meuro]

Year Option 1 1 80.00 2 95.00 3 100.00

Total 275.00

The maintenance costs of the line include the costs of all elements necessary for operating it (track, signalling, telecommunication facilities and the catenary system). The estimates reflect the variation in cost between the scenarios for carrying out the maintenance required to ensure a specific level of services; they are equal to 25.00 ⁄ .

Further data are reported in the tables below.

Table ix: Generalised cost of travel [Euro/passenger] 

Reference solution Project scenario 45.00 40.00

Road

Rail

Road

Rail

City A City BCity C

City A City BCity C

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61

Table x: Travel demand [Mpassengers/year]

Travellers Reference solution Project scenario Initial users 6.50 6.50 Modal shifters 0.00 3.50 Total 6.50 10.00

Table xi: Producer’s costs and revenues and Government fuel tax revenues [Meuro/year]

Item Reference solution Project scenario

Producer Operating costs 155.00 210.00 Revenues 105.00 185.00

Government Fuel taxes 340.00 350.00

The total benefits from the reduction in external costs is equal to 15.00 / .

Assuming:

a social discount rate of 10%;

an operating time span of 25 years;

a residual value of 30% of the economic investment cost;

that the parameters mentioned above do not change within the time span of the analysis (namely, growth rates are ignored);

calculate whether this project is economically viable.

6 Economic analysis of highway renovation works

Part 1

Two cities (A and B) of country Beta are linked with an old tolled highway section of 100km in length, which needs the following measures: partial reconstruction, rehabilitation and upgrading works, due bottlenecks and the enhancement of existing intersections at point C.

An alternative route, via a non-tolled road, also links cities A and B, but with a longer distance of 110km (see Figure iii). A local public undertaking is in charge of both the infrastructure management (i.e. toll revenue collection) and maintenance.

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Figure iii: Road network considered in the analysis of the project

The financial investment costs have been estimated by project engineers to be 172.80Meuro, gross of 20% indirect tax. The planned maintenance is periodically implemented (every five years) in order to prevent the infrastructure quality from declining. The planned maintenance costs borne are equal to 19.20Meuro in the reference solution and 14.40Meuro in the project scenario, including 20% of indirect taxes.

Regarding the the completion of all rehabilitation works, project engineers estimate that these will be implemented in four years (conventionally, the initial year of reconstruction is the “year zero” and therefore the opening year is the fourth).

Assuming that:

the total investment costs can be divided equally between years within the construction period;

at the end of the construction period, the planned maintenance is scheduled to continue for 30 years of operation;

Present the flow of economic costs for both the construction and operational phases and provide the net flow of costs, comparing the items between the reference solution and the project scenario.

Part 2

The distances between A, B and C and the related travel times are shown in Table xii, with respect to the tolled highway. Using the data presented in Table xiii, calculate the generalised cost of travel (per vehicle), in the reference solution, with respect to both cars and trucks and for each origin-destination pair.

Old road (tolled)

Non-tolled road

A

B

C

Renovated road (tolled)

Non-tolled road

A

B

C

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63

Table xii: Distances and travel times in the reference solution (tolled highway)

O/D Distance [km]

Travel time [hour] Cars Trucks

A B C A B C A B C A 100 50 1.25 0.63 2.00 1.00 B 100 50 1.25 0.63 2.00 1.00 C 50 50 0.63 0.63 1.00 1.00

Table xiii: Unit cost24

Variable Unit of measurement Private (car) Freight (truck) Fuel cost euro/vehicle·km 0.10 Fuel consumption km/litre 10.00 Insurance euro/year 500.00 Tyres euro/vehicle·km 0.02 Maintenance euro/vehicle·km 0.07 Depreciation euro/vehicle·km 0.09 Toll25 euro/vehicle 5.00 Value of time (passenger) euro/h·passenger 10.00 Value of time (freight) euro/h·ton 1.00 1.00Load (passenger) passenger 2.00 Freight tariff euro/km 1.21Load (freight) ton 0.00 5.00

Distances between A, B and C remain unchanged in the project scenario. On the other hand, highway renovation works are expected to reduce the travel time between nodes, due to a reasonable increase in average travel speed. According to the reduction in vehicles travel times (see Table iii), calculate the generalised costs in the project scenario.

Table xiv: Travel times [hour] in the project scenario (tolled highway)

O/D Cars Trucks

A B C A B C A 1.00 0.50 1.25 0.63 B 1.00 0.50 1.25 0.63 C 0.50 0.50 0.63 0.63

For the purpose of this analysis, travel demand is given in Tables xv and Table xvi. The travel increase between scenarios depends entirely on the demand diverted from the alternative non-tolled (and uncongested) road link26.

                                                            24 Variable costs assume an average distance covered of 20,000km/year.

25 For simplicity, the toll charge is presented as euro/vehicle, though in reality, it should be calculated according to the distance travelled by each vehicle (namely in euro/vehicle·km).

26 Newly generated demand is not considered in this analysis.

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Table xv: Travel demand in the reference solution [trips/day] (tolled highway)

O/D Cars Trucks

A B C A B C A 1,500 2,500 50 75 B 1,000 2,500 100 75 C 2,000 1,500 50 50

Table xvi: Travel demand in the project scenario [trips/day] (tolled highway)

O/D Cars Trucks

A B C A B C A 1,650 2,750 55 85 B 1,100 2,750 120 85 C 2,200 1,650 75 75

The trips per day previously shown can be extended throughout the whole year, multiplying the daily values by 365 ⁄ .

The results obtained, provide the following changes in the opening year:

user surplus;

producer surplus, when the operating costs are 9.00Meuro/year in the reference solution and 8.00Meuro/year in the project scenario;

changes in Government fuel tax revenues,

where:

car types are equally divided between those that use gasoline or diesel;

fuel taxes levied are: 0.30Euro/litre for gasoline and 0.40Euro/litre for diesel;

the change in the non-perceived vehicle operating costs when an indirect tax of 20% is levied.

These costs usually depend on the distance travelled; some are wholly variable, some partially, and others do not vary at all. Tyres belong to the first category, whilst maintenance and depreciation are conventionally assumed in the second class, with a 50% share (therefore, the other half is fixed). Finally, insurance does not increase with distance.

Part 3

The results calculated so far, present the flow of costs and benefits which result over the whole time span considered, including the reductions external costs:

environment pollution is 1.00Meuro/year;

road safety is 0.50Meuro/year.

Finally, calculate the economic performance of the project, introducing:

a residual value equal to 30% of the investment costs;

a social discount rate of 10%.

6.1 Road congestion

In this first extension of exercise 6, we introduce congestion as far as the non-tolled road is concerned.

Calculate the user benefit (per day) arising from congestion reduction, due to traffic diversion from the non-tolled road to the tolled highway with respect to the cars travelling from A to B. Distances, travel demand and travel times are provided in the tables below.

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Table xvii: Matrices of distances and tripss per day in the reference solution (non-tolled road)

O/D Distances [km]

Trips [vehicles/day] Cars Trucks

A B C A B C A B C A 110 55 450 700 30 75 B 110 55 625 550 25 65 C 55 55 575 525 35 70

Table xviii: Travel time [hours] in the reference solution (non-tolled road)

O/D Cars Trucks

A B C A B C A 1.75 0.85 2.25 1.20 B 1.75 0.85 2.25 1.20 C 0.85 0.85 1.20 1.20

Table xix: Travel time [hours] in project scenario (non-tolled road)

O/D Cars Trucks

A B C A B C A 1.35 0.65 2.00 1.00 B 1.35 0.65 2.00 1.00 C 0.65 0.65 1.00 1.00

6.2 External costs

According to data provided and results already calculated, a further stage can be developed by introducing a more detailed evaluation of harmful external costs generated by road traffic.

We are interested in measuring the benefits due to changes in vehicle emissions and noise, as well as from the reduction in accidents resulting from the network enhancement.

Assume that the local Government’s department of transport statistics assists the analysis, providing information about: fleet composition, vehicle pollutant emissions and accidents’ rates.

The analysis of harmful pollutants can be developed focusing on cars and assuming that all these vehicles belong to Class IV (see data in Table xx). Similar calculations for trucks are not required so as to minimise the amount of calculation.

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Table xx: Car emissions by type of pollutant and class of vehicle [grams/vehicle·km]

Pollutant Fuel type Class of emission

PRE Class I Class I Class II Class III Class IV CO2 Gasoline 166.97 203.31 203.31 203.31 101.66 Diesel 167.44 172.13 172.13 172.13 86.07 NOx Gasoline 3.09 0.45 0.19 0.19 0.10 Diesel 2.30 0.39 0.17 0.17 0.08 SO2 Gasoline 0.03 0.03 0.03 0.03 0.03 Diesel 0.05 0.05 0.05 0.05 0.05 PM27 Gasoline 0.00 0.00 0.00 0.00 0.00 Diesel 0.06 0.01 0.01 0.01 0.00 NMVOC28 Gasoline 0.85 0.11 0.04 0.04 0.02 Diesel 0.59 0.08 0.03 0.03 0.02

The values of external costs for pollutants are not available for the country of interest, but appropriate data can be calculated by using the corresponding values for a country X, which already has these inputs available (see Table xxi).

Table xxi: External costs of pollutants for country X [Euro/ton]

CO2 NOx SO2 PM NMVOC 55.54 3,310.85 3,101.45 981.27 63,221.89

The average annual income per capita of the country of interest is 5,250Euro, while in country X it is 5,000Euro.

Calculate the change in external costs of car emissions, when the change in the number of vehicle km is 2.46Mvehicles·km/year and Class IV vehicles are 40% diesel and 60% gasoline powered.

A second category of external cost is vehicle noise throughout the whole road network of interest. Regarding this part of the analysis, a local survey of the distribution of travel has shown that 80% of trips occur during the day, with the rest at night.

Again we are referring only to cars, and according to the variations of vehicles·km provided:

select the most suitable values for measuring the external costs of noise (by location of emission) in Table xxii;

calculate the total change in cost in the opening year.

Table xxii: Marginal cost of noise (by location of emission) for a comparable country [Euro/vehicle·km]

Time Urban Sub-urban Rural Day 0.00767 0.00121 0.00010 Night 0.01404 0.00222 0.00030

Finally, transport planners expect a reduction in the number of accidents due to trip diversion from the non-tolled (more risky) to the tolled highway link (safer) and therefore a reduction in related social costs.

The department of transport provides data on average accident rates in the last five years both for the non-tolled road and the highway (see Table xxiii). According to vehicles’ trips29, calculate:

                                                            27 Particulate Matter (i. e. PM10 when the size of particles is lower than 10micron).

28 Non-Methane Volatile Organic Compounds.

29 Here again we consider only car travel.

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the change in the social costs of accidents’, assuming the rates provided and marginal values per type of casualty avoided. In this case, the values shown are already shown for the country of interest (see Table xxiv).

Table xxiii: Accident rate per Million of vehicle·km

Injury Fatality Non-tolled road 0.650 0.025 Highway 0.350 0.010

Table xxiv: Marginal values per casualty avoided in the country of interest [Euro/accident]

Injury Fatality Marginal value per casualty avoided 50,000 360,000

6.3 Growth rates

Referring to previous data and outcomes for travel and generalised costs (see problem 6), calculate the change in user surplus per day, twenty years after the year of opening, for:

car travel between A and B;

the growth rate of travel is 1.00%/ ;

the value of time increases increases in line with GDP at 1.00%/ .

 

 

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5 Risk assessment

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5.1 Overview

The project appraisal is necessarily based on a forecasting process: assumptions on parameters, rates of growth of GDP and demand, estimations of costs and benefits are all steps that entail a certain degree of uncertainty and risk. No estimation is without problems, due to the impossibility of predicting the future events exactly. In addition to these uncertainties, appraisers suffer from optimism bias, the demonstrated systematic tendency to be over-optimistic by underestimating costs and overestimating benefits30.

Box: Optimism bias

Ex ante evaluations of transport project,s tend to underestimate investment costs and to overpredict the expected demand. Some sample figures are presented in the two tables below. This tendency, which has been termed optimism bias, has led to a number of investments that once realised turned out to be financially and economically unviable. The result was a waste of scarce public funds.

Table i: Inaccuracy of costs estimates

Type of project No. of cases Average cost overrun [%] Standard deviation

Rail 58 44.7 38.4 Fixed links 33 33.8 62.4 Road 167 20.4 29.9

Table ii: Inaccuracy of traffic forecasts

Type of project No. of cases Average inaccuracy [%] Standard deviation

Rail 25 -51.4 28.1 Road 183 9.5 44.3

Figures presented in Table ii suggest significant overestimations of traffic in planning rail projects (ex-post figures were on average 51.4% lower than expected). On the other hand, a low average underestimation (9.5%). Is reported for road infrastructure investments

Over-optimistic behaviour has been identified in the following major reasons:

Technical, due to new (or even) unproved technologies;

Psychological, namely the tendency to behave as such;

Political, because of the power of institutional interests (lobbies);

Economic, due to the construction and industrial sectors promoting their interests.

Source: Premius, Flyvberg and van Wee (2009)

In order to properly address these critical aspects and achieve a reliable appraisal, it is important to assess the uncertainties and risks of the project under examination. The concept of risk is different from that of uncertainty.

Risk can be defined as a situation in which there is a set of possible outcomes for a certain variable, and the probability of each outcome is known. Instead, uncertainty is the situation in which the probability of each possible outcome is unknown. Consequently only risk, and not uncertainty, can be subject to empirical measurement, and analysed and potentially managed.

For a transport project, the sources of risk can be manifold and their importance depends on the project’s specific features and context. Some risks worth noting include demand,                                                             30 HM Treasury (2003).

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which is influenced by economic trends, demographics changes, policies, technological changes, and energy prices.; and construction, operating and maintenance costs, which vary especially with variations in the price such inputs as labour, energy and materials.

Table 5 - 1: Significant factors for risk analysis in transport projects

Categories Examples of variables Price dynamics Rate of inflation, growth rate of energy prices, changes in prices of

goods and services Demand data Population growth rate, GDP growth rates, motorisation, value of time,

volume of through traffic, energy demand, pricing policies

Investment costs Duration of the construction site (delays in realisation), cost of land, cost of other inputs, cost of mitigation of environmental impacts,

Operating costs Prices of the goods and services used, hourly cost of personnel, price of fuels, consumption of energy and other goods and services, number of people employed

Prices of outputs Tariffs, sale prices of products

Quantitative parameters for the revenues

Volume of services provided, productivity, number of users

Accounting prices (costs and benefits)

Coefficients for converting market prices, value of time, cost of deaths avoided, valuation of externalities

The risk assessment aims to identify the risks associated with a project, the estimation of the potential impacts of such risks and the measures that should be undertaken for preventing and mitigating them. It encompasses the following steps:

1. sensitivity analysis;

2. probability distribution for critical variables;

3. calculation of the distribution of the performance indicators and the evaluation of acceptable levels of risk;

4. risk mitigation.

All these aspects are covered in more detail in the following paragraphs.

Risk analysis is an important component of the appraisal process and should be developed with particular attention. At the same time, it may be difficult to perform a complete analysis, due to the fact that it requires specific knowledge, resources and tools. If a complete risk assessment is not possible, it is recommended that at least an appropriate sensitivity analysis is carried out.

5.2 Sensitivity analysis

The sensitivity analysis is focused on the identification of the “critical” variables of a project. The term “critical” refers to the situation where the variations of a variable, positive or negative, have a significant impact on the project’s financial and/or economic performance. The analysis is carried out by varying one element at a time and calculating the effects of such variations on the performance indicators.

The relevant issue here is: how great should the impacts be on the project’s performance for defining a variable “critical”? There is no definitive answer to this question, but the criteria to be adopted for the choice of critical variables vary according to the specific project and must be accurately established on a case-by-case basis. As a general rule of thumb, the recommended approach is to consider those variables or parameters for which an absolute variation of 1% gives rise to a corresponding variation of not less than 1% in the NPV.

The choice of the variable depends on the project characteristics as well. As a general indication, it is recommended that sensitivity tests are undertaken for the money values attributed to the goods which have no market valuation and are therefore more susceptible to estimation errors, i.e. values of time and externalities. Usually, tests are

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also carried out on investment and operating costs and on expected demand, which influence all the transport benefits.

A useful tool is the calculation of the switching values. These are defined as the values of the considered variables for which the NPV is equal to zero or to a minimum acceptability threshold. The following table provides an example of switching values.

Table 5 - 2: Switching values for the Economic Net Present Value of a motorway project

Variable Switching value (%) Yearly Demand -40 Construction cost +20 Maintenance cost +70

The use of switching values provides the appraisers with indications of how vulnerable a transport project is with respect to a specific variable. This allows the identification of variables that must be kept under control and the evaluation of risk-prevention measures to be adopted. However, sensitivity analysis and switching values have a particular weakness: they are not able to assess the simultaneous action of more variables.

In order to overcome this weakness it is necessary to perform a scenario analysis. The scenario analysis evaluates the impact on the project’s performance indicators by combining together changes in the values assumed by a number of critical variables.

This is done by looking at the impacts of a simultaneous variation in the variables of interest, instead of changing them separately and one by one as in the sensitivity analysis. There are no specific rules for building the scenarios to be tested. However, it could be useful to consider a set of “optimistic” and “pessimistic” values of the variables involved in order to have indications of the project’s performance in two extreme situations, i.e. in the worst and best case. An example of scenario analysis is provided in Table 5–3.

The scenario analysis partly encompasses the issue of the combined analysis, since it considers only some values of the critical variables. The further following steps should be adopted to achieve a deeper level of analysis.

Table 5 - 3: Example of scenario analysis

Unit of measurement

Optimistic scenario

Baseline case

Pessimistic scenario

Investment cost Euro 100,000 110,000 115,000 Traffic per year Cars 3,500 3,000 2,000 Tolls Euro/car 4 3 2 FNPV Euro 15,000 -12,000 -40,000 ENPV Euro 40,000 15,000 5,000

5.3 Probability distribution of critical variables

Sensitivity analysis does not take into account the probabilities of occurrence of events. In fact, simply varying the values of the critical variables does not provide any indication about the likely variability of such variables. For taking into account the variability of the critical variables, a probability distribution should be assigned to each of them.

This could be done making reference to different sources, such as experimental data, distributions found in the literature for similar cases, or by consulting experts. A probability distribution describes the likelihood of occurrence of the values that a given variable can assume. According to the circumstances, one distribution can better fit the behaviour of a variable than another. Therefore, the choice of appropriate statistical distributions is an important aspect for a more realistic appraisal.

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The main distinction in literature is between discrete or continuous distributions. In the first case, a variable can assume only a finite number of values. In the second case, a variable can assume any value in a specific range. Besides, within each category there are different distributions that can be adopted. Please refer to statistical manuals for a more detailed description.

Nevertheless, it is worth noting here that the assignment of statistical distributions is usually feasible and it is not as difficult as it seems. For example, a discrete distribution can be adopted for a given variable when the analyst has enough information to reasonably suppose that the variable can assume only some specific values. If there are reasons to believe that all values of a variable in a range can occur with the same probability, a uniform distribution should be used. If, instead, information about the most probable value of a variable in a range is available, a triangular distribution can be used (see Figure 5–1 below). 

 

Figure 5 - 1: Example of triangular distribution

5.4 Calculation of the distribution of the performance indicators and evaluation of acceptable levels of risk

After having established the probability distributions for the critical variables, the next step consists in the calculation of the probability distribution of the project performance indicators. For this the commonly used approach is the Monte Carlo method.

This method is based on random extractions of combinations of values for the critical variables in order to calculate the value of the performance indicators for each extraction.. Considering a very large number of extractions (generally several hundred), it is possible to obtain statistical distributions that are close to the theoretical ones. The simulation requires simple computation software that is available as an add-on to a conventional spreadsheet.

A same simulation outcome regarding the NPV or the IRR can be expressed in terms of probability distribution or a cumulated probability curve. The latter curve is derived from the first and for each value on the x axis indicates with the probability that the variable will be lower than that value on the y axis (see figures below).

Considering the results, it is therefore possible to evaluate a project not only on the basis of the best or baseline estimate, but also based on the risk associated with it. For example, it is possible to assess how probable is that the NPV of a project (financial and/or economic) will be lower than a certain reference value (usually zero).

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The following figures provide an example. In Figure 5–2 the probability that the variable assumes values lower than zero is represented by the area on the left of zero below the probability distribution curve. The same probability is more easily visible on the cumulative probability curve (see Figure 5–3) since it is directly represented on the y axis. In the example, there is a probability of about 30% that the NPV will be negative.

 

Figure 5 - 2: Example of probability distribution for NPV

Figure 5 - 3: Example of cumulative probability distribution for NPV

In general, there are no fixed criteria for evaluating the results of the risk analysis and establishing whether the level of risk of a project is acceptable or not. This depends on the attitude towards risk (neutrality, aversion or propensity) of the project promoters31.

This Guidebook recommends the use of the expected values of the performance indicators rather than the values estimated before the risk analysis. Normally, the NPVs and IRRs reported in project appraisal refer to “best” or “baseline” estimates that do not take into account the underlying probability distributions, while the expected value criterion does, as in the example below.

Consider a project that has a baseline EIRR of 10%, and the probability risk analysis shows that the EIRR has a value between 4 and 10 with a probability of 70% and a value between 10 and 13 with a probability of 30%. The expected value of EIRR for that

                                                            31 See also Annex H of the European Commission Guide to Cost-Benefit Analysis of Investment Projects

(2008).

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

-10 -5 -4 -2 0 2 4 8 12 15 18 20 NPV

Pro

bab

lity

dis

trib

uti

on

0%

20%

40%

60%

80%

100%

120%

-10 -5 -4 -2 0 2 4 8 12 15 18 20NPV

Cu

mu

lati

ve P

rob

abil

ity

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project is 8.35% 4. 10 ∙ 0.7 10. 13 ∙ 0.3 , significantly lower than the baseline EIRR.

5.5 Risk mitigation

Risk analysis should be the basis for risk management, which is the identification of strategies to reduce risks. It should be remembered that risk management is a complex function, requiring a variety of competences and resources, and for that reason can be considered as a role for professionals. Nevertheless, project promoters should be able to identify, even if only at a preliminary level, the relevant risks arising from the implementation of the projects as well as the factors that affect them, for example, cost overruns that could occur if input prices increase or innovative technologies are adopted, or changes in demand growth due to GDP trends being higher or lower than expected, and consequent variation of revenues, etc.).

Once the risks are identified, the next step is to introduce specific measures for prevention, control and transfer of the identified risks, according to international good practice32. A prevention measure could be, for example, the implementation of a well-defined maintenance program in order to keep the operating costs in line with the planned ones.

The adoption of monitoring systems allows the project managers to identify the emerging problems and thus to control them. The assignment of the project risks to the involved parties is part of the contractual stage: a good criterion is to assign each risk to the party which is able to handle it better.

Pre-feasibility evaluation

In a pre-feasibility evaluation the risk analysis can be limited to the sensitivity tests on investments and operating costs, and on the expected demand.

5.6 Problems33

1 Risk analysis

Consider a project concerned with the construction of a tram line connecting the outskirts of a city with the centre. According to the estimations of the project designers, the construction period is expected to last four years. The economic analysis has yielded an NPV equal to 13.30Meuro.

Nevertheless, due to the impossibility of predicting future events, the line’s construction could require a longer time span (for example, due to delivery delays of raw materials). On the other hand, there exists the possibility that particularly favourable conditions might occur and the realisation period could be even shorter (although this situation is usually less probable).

The following Figure iv depicts the estimated probability distribution of NPV regarding the construction period.

                                                            32 For an in depth-examination we suggest: HM Treasury. 2004. The Orange Book: Management of Risk -

Principles and Concepts; The World Bank. 2005. Transport Note No. TRN 7: Risk & Uncertainty Analysis, Washington, USA.), Annex H of the European Commission Guide to Cost-Benefit Analysis of Investment Projects (2008).

33 Solutions can be found in Appendix 3.

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Figure iv: NPV probability distribution of the project’s construction period

The timing for the construction of the line influences the project’s economic performance. Namely, the longer the construction period, the later in time the economic benefits of the project will arise resulting in a lower NPV.

Introducing a social discount rate of 5%, the calculated values of the NPV for the range of construction times are reported in the following Table xxv.

Table xxv: Variations of the construction period, NPV [Meuro] and probability of the event

Construction period [years] NPV Probability 1 35.6 0.00 2 27.8 0.05 3 20.4 0.15 4 13.3 0.30 5 6.5 0.20 6 0.0 0.12 7 -6.1 0.08 8 -12.0 0.05 9 -17.7 0.03 10 -23.0 0.02 11 -28.1 0.00

Total 1.00

For each construction period, determine the probability that the 0, i.e. the probability that the project is not acceptable from a societal point of view.

 

 

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0 1 2 3 4 5 6 7 8 9 10 11 12

Pro

babi

lity

Years of construction

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6 Case studies

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6.1 Foreword

The case studies presented in this handout are illustrative examples of project appraisal methodology, using cost-benefit analysis. The cases considered have been adapted and modified either from examples of the literature in the field, or from actual analyses undertaken for infrastructure projects already planned.

Via the cases presented, the users of this guide are introduced to the analytical method and its practical application. Each case is based on the theoretical framework shown during the training course and is afterwards developed in the exercises, but they present also some issues which are worth discussing and clarifying. In this respect, the cases use as examples: a seaport, a railway line, road infrastructure and a social analysis.

In paragraph 6.2, the analysis considers the addition of berths in a seaport and the main concern is with the determination of a suitable sequence of steps, for analysing the new facilities, that will modify the initial layout. The second part of the case study discusses the optimal timing of the project for the future scheduling of the investment.

Paragraph 6.3 presents an analysis developed from the point of view of a producer. The focus is on a possible change of technology for enhancing the performance of a railway line. On the one hand, the service provider weighs the possibility of maintaining the operation of an existing fleet of diesel locomotives, while on the other hand he considers the possibility of electrification of the line.

The paving of a gravel road is appraised in paragraph 6.4. The discussion about the performance of the proposed project focusses on the main benefits gained by the users of the road (with respect to three road transport modes).

A complete analysis is presented in paragraph 6.5. Here the range of the analysis is extended taking into account the competition between two parallel infrastructure investments, namely a road and a railway line. The benefits arising are discussed in relation to the modal diversion of travellers, who shift from the congested road to the improved railway. Major consequences are discussed with respect to the main categories of stakeholders involved.

Finally, paragraph 6.6 develops the previous case, through a social analysis. In this respect, the aggregate results of a cost-benefit analysis are manipulated in order to obtain a different outcome with respect to any specific stakeholder.

Although the cases could be derived from real cases, the data have been modified and have no necessary relation to these projects. Equally, the data cannot be used directly in analysing other projects.

 

 

 

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6.2 Construction of additional berths

6.2.1 Introduction

The traffic at the container terminal at the port of Alfa has been growing. The port authority is planning a development of the port infrastructure by the construction of one, or more additional berths (see Figure 6–1). At the present time the vessels discharge and load by operating at two berths.

 

Figure 6 - 1: Port layout in reference solution (left) and project scenario (right)

The economic costs per berth are estimated at 53.40Meuro and the construction is expected to take three years. The distribution of the investment costs, as well as the economic costs of periodic replacement are shown in Table 6–1; on the other hand, the economic costs for the annual maintenance of each berth are estimated at 0.60Meuro. The economic life of a berth is 25 years.

Table 6 - 1: Investment cost per berth and related timing [Meuro/year]

Year Item Cost 0

Investment 15.00

1 18.00 2 20.40 10 Replacement 6.00 19 12.00

6.2.2 Traffic and terminal servicing time

The number of ships estimated to call at the port annually is expected to reach 117 units in the first year after the completion of the project. Thereafter, traffic is estimated to grow at a rate of 8% per year for eight years and at 6% till the end of its economic life34.

In the reference solution no increase in traffic is allowed after year 11, since the waiting time would become so long that ships would divert to another port. In the case where 3, or 4 berths exist, traffic is as a precaution not allowed to increase after year 19, because of uncertainty about the growth of demand so far into the future (see Figure 6–2 and Table 6–2).

In the reference solution, the servicing time of a ship requires on average three days. Moreover, the expected increase in cargo handled is assumed to be offset by enhanced mechanisation and other operating efficiencies, so that the average servicing time remains approximately three days.

Depending on the type of ships coming into the port, the economic cost of waiting for a

free berth varies, but is is on average about 0.036 ∙ . 

                                                            34 Assuming v0 the value of a variable at time 0, if it growths with a rate i (per year), then its value at

time is ∙ 1 .

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Figure 6 - 2: Estimated traffic [ships/year]

Question

What are the benefits arising from the construction of a third berth? Develop separate estimates to determine the economic justification for both third and fourth berths.

Does the economic performance indicate whether the investment should be postponed by one year? Discuss the timing of the project.

6.2.3 Project benefit

The benefit of an additional berth is the value of the reduced waiting time of the ships. For calculating such a benefit, information is required about:

the number of ships approaching the port and their arrival times;

the average servicing time at the berth;

the value of time savings for cargo in transit.

Given the previous information, the waiting time of ships outside the port can be estimated on the basis of queuing theory, for any number of berths35. The total annual waiting times are reported for two, three or four berths in Table 6–2. Here, we show that, for example, when 117 ships arrive annually, the total waiting time for a berth is:

105 days with two berths;

14 days with three berths;

2 days with four berths.

                                                            35 The data used in this case study are merely illustrative.

0

50

100

150

200

250

300

350

0 5 10 15 20 25 30

Sh

ips/

year

Years

Two berths Three or more berths

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Therefore, the average waiting time per ship declines from about one day with two berths, to about three hours with three berths and to about 25 minutes with four berths36.

Table 6 - 2: Annual ship traffic, berth occupancy, ship waiting times and cost of annual waiting time

Year

Port traffic [ships/year]

Total annual ship waiting time [days]

Waiting cost per ship [Meuro]

Two berths

Three or more

berths

Two berths

Three berths

Four berths

Two berths

Three berths

Four berths

3 117 117 105 14 2 0.032 0.004 0.001 4 127 127 135 18 3 0.038 0.005 0.001 5 137 137 180 23 4 0.047 0.006 0.001 6 148 148 250 29 5 0.061 0.007 0.001 7 160 160 325 38 6 0.073 0.009 0.001 8 173 173 425 53 7 0.088 0.011 0.001 9 187 187 710 70 10 0.137 0.013 0.002

10 202 202 1.250 90 14 0.223 0.016 0.002 11 202 214 1,250 115 17 0.223 0.019 0.003 12 202 226 1,250 150 22 0.223 0.024 0.003 13 202 239 1,250 190 27 0.223 0.029 0.004 14 202 253 1,250 250 33 0.223 0.036 0.005 15 202 268 1,250 325 40 0.223 0.044 0.005 16 202 284 1,250 475 49 0.223 0.060 0.006 17 202 301 1,250 700 60 0.223 0.084 0.007 18 202 319 1,250 1,300 90 0.223 0.147 0.010 19 202 319 1,250 1,300 90 0.223 0.147 0.010 20 202 319 1,250 1,300 90 0.223 0.147 0.010 21 202 319 1,250 1,300 90 0.223 0.147 0.010 22 202 319 1,250 1,300 90 0.223 0.147 0.010 23 202 319 1,250 1,300 90 0.223 0.147 0.010 24 202 319 1,250 1,300 90 0.223 0.147 0.010 25 202 319 1,250 1,300 90 0.223 0.147 0.010 26 202 319 1,250 1,300 90 0.223 0.147 0.010 27 202 319 1,250 1,300 90 0.223 0.147 0.010

The last columns of Table 6–2 allow to determine the benefits arising from port’s facilities enhancement.

In this respect, appraisers must be careful to evaluate properly the benefits to be considered, as the project with four berths is composed of two separable projects (namely, 2+1 and 3+1 berths) and the viability ought to be calculated using a step-by-step approach. Developing the analysis by introducing two additional berths simultaneously could produce an “average” profitability result, as the benefits of the first additional berth could hide the possible spells of the second one.

                                                            36 The waiting time is the time a ship spends outside the port (namely, the time net of the operations of

discharge and loading within the port). Introducing the data of year 3 in Table 6–2, about the annual ships’ waiting time, we obtain:

105 117 0.897 ⁄ 22.54 ⁄⁄ ;

14 117 0.119 ⁄ 2.87 ⁄⁄ ;

2 117 0.017 ⁄ 24.61 ⁄⁄ .

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The economic performance of the third berth is shown in Table 6–3, where the sum of investment and maintenance costs (on the left hand side of the table) is compared with the time benefits obtained through the rule of a half.

For example, the benefit of year 11 in Table 6–3 is calculated by using the data in Table 6–2, as follows:

∙ . . ∙ .  

Graphically, the benefit yielded coincides with the area ARPB in Figure 6–3.

Figure 6 - 3: Extent of time benefits with three berths at year 11 

 

 

 

 

 

 

 

 

 

 

 

 

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Table 6 - 3: Flow of costs and benefits with three berths [Meuro]

Year Costs per additional berth Benefits Discounted values (12%)

Investment Maintenance Total Third berth Costs Benefits Net flow

0 15.00 0.00 15.00 0.00 15.00 0.00 -15.00 1 18.00 0.00 18.00 0.00 16.07 0.00 -16.07 2 20.40 0.00 20.40 0.00 16.26 0.00 -16.26 3 0.00 0.60 0.60 3.28 0.43 2.33 1.91 4 0.00 0.60 0.60 4.21 0.38 2.68 2.29 5 0.00 0.60 0.60 5.65 0.34 3.21 2.87 6 0.00 0.60 0.60 7.96 0.30 4.03 3.73 7 0.00 0.60 0.60 10.33 0.27 4.67 4.40 8 0.00 0.60 0.60 13.39 0.24 5.41 5.17 9 0.00 0.60 0.60 23.04 0.22 8.31 8.09

10 6.00 0.60 6.60 41.76 2.13 13.45 11.32 11 0.00 0.60 0.60 42.31 0.17 12.16 11.99 12 0.00 0.60 0.60 42.56 0.15 10.92 10.77 13 0.00 0.60 0.60 42.81 0.14 9.81 9.67 14 0.00 0.60 0.60 42.59 0.12 8.71 8.59 15 0.00 0.60 0.60 42.09 0.11 7.69 7.58 16 0.00 0.60 0.60 39.50 0.10 6.44 6.35 17 0.00 0.60 0.60 34.97 0.09 5.09 5.01 18 0.00 0.60 0.60 19.81 0.08 2.58 2.50 19 12.00 0.60 12.60 19.81 1.46 2.30 0.84 20 0.00 0.60 0.60 19.81 0.06 2.05 1.99 21 0.00 0.60 0.60 19.81 0.06 1.83 1.78 22 0.00 0.60 0.60 19.81 0.05 1.64 1.59 23 0.00 0.60 0.60 19.81 0.04 1.46 1.42 24 0.00 0.60 0.60 19.81 0.04 1.31 1.27 25 0.00 0.60 0.60 19.81 0.04 1.17 1.13 26 0.00 0.60 0.60 19.81 0.03 1.04 1.01 27 0.00 0.60 0.60 19.81 0.03 0.93 0.90

Total 54.41 121.23 66.82

The next step consists of the analysis when the fourth berth is introduced into port’s layout. In such a case, the costs required are repeated, as they are identical with respect to the previous additional facility, whilst the benefits are generated comparing the scenario with three berths, with the one with four (the new reference solution is the scenario with three berths). The corresponding flows are reported in Table 6–4.

 

 

 

 

 

 

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Table 6 - 4: Flow of costs and benefits with four berths [Meuro]

Year Costs per additional berth Benefits Discounted values (12%)

Investment Maintenance Total Fourth berth Costs Benefits Net flow

0 15.00 0.00 15.00 0.00 15.00 0.31 -15.00 1 18.00 0.00 18.00 0.00 16.07 0.34 -16.07 2 20.40 0.00 20.40 0.00 16.26 0.39 -16.26 3 0.00 0.60 0.60 0.43 0.43 0.44 -0.12 4 0.00 0.60 0.60 0.54 0.38 0.52 -0.04 5 0.00 0.60 0.60 0.68 0.34 0.67 0.05 6 0.00 0.60 0.60 0.86 0.30 0.78 0.13 7 0.00 0.60 0.60 1.15 0.27 0.88 0.25 8 0.00 0.60 0.60 1.66 0.24 1.01 0.43 9 0.00 0.60 0.60 2.16 0.22 1.18 0.56

10 6.00 0.60 6.60 2.74 2.13 1.34 -1.24 11 0.00 0.60 0.60 3.53 0.17 1.60 0.84 12 0.00 0.60 0.60 4.61 0.15 1.87 1.03 13 0.00 0.60 0.60 5.87 0.14 2.50 1.21 14 0.00 0.60 0.60 7.81 0.12 3.36 1.48 15 0.00 0.60 0.60 10.26 0.11 5.66 1.76 16 0.00 0.60 0.60 15.34 0.10 5.06 2.40 17 0.00 0.60 0.60 23.04 0.09 4.52 3.27 18 0.00 0.60 0.60 43.56 0.08 4.03 5.59 19 12.00 0.60 12.60 43.56 1.46 3.60 3.59 20 0.00 0.60 0.60 43.56 0.06 3.21 4.45 21 0.00 0.60 0.60 43.56 0.06 2.87 3.98 22 0.00 0.60 0.60 43.56 0.05 2.56 3.55 23 0.00 0.60 0.60 43.56 0.04 2.29 3.17 24 0.00 0.60 0.60 43.56 0.04 2.04 2.83 25 0.00 0.60 0.60 43.56 0.04 0.31 2.53 26 0.00 0.60 0.60 43.56 0.03 0.34 2.26 27 0.00 0.60 0.60 43.56 0.03 0.39 2.01

Total 54.41 53.04 - 1.37

Now, the performance is not economically sound because the additional benefits generated from the construction of the fourth berth are not large enough, when compared to the additional costs.

Finally, it is worth mentioning that incorrectly considering the project as a whole would have been misleading, providing a positive net present value of 57.38Meuro.

6.2.4 Optimum timing of the project (with three berths)

Although a third berth appears well justified, an analysis of the optimum timing for its construction shows that it is premature to start the investment at the present time and have it operating at the beginning of the fourth year.

For calculating the optimum timing we have to consider the cost of delay, namely the loss of benefit, compared with the benefits arising from the reduction of total discounted costs.

On the assumption that the project life continues to be twenty-five years and that it will be not replaced thereafter, a postponement of one year37 reduces the discounted costs from 54.41Meuro to 48.58Meuro, or by 5.83Meuro (see the final rows of Table 6–3 and Table 6–5). The delay introduced affects the benefits in two ways. On the one hand, a present benefit of 2.33Meuro in the initial year is lost (see the row for year 3 in the last but one column of Table 6–3), while on the other hand, the project enjoys an incoming present benefit equalling 0.83Meuro (see row of year 28 in the last column of Table 6–5). Therefore, the net loss of benefit is just 1.51Meuro, compared with the reduction in costs of 5.83Meuro and the postponement of one year is well justified.

                                                            37 Postponement means that both investment and replacement costs are moved forward by one year, with

respect to the present time.

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Table 6 - 5: Economic performance with a postponement of one year 

Year Costs

Benefits Discounted flow

Investment Maintenance Total Costs Benefits Net Flow 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1 15.00 0.00 15.00 0.00 13.39 0.00 -13.39 2 18.00 0.00 18.00 0.00 14.35 0.00 -14.35 3 20.40 0.00 20.40 0.00 14.52 0.00 -14.52 4 0.00 0.60 0.60 4.21 0.38 2.68 2.29 5 0.00 0.60 0.60 5.65 0.34 3.21 2.87 6 0.00 0.60 0.60 7.96 0.30 4.03 3.73 7 0.00 0.60 0.60 10.33 0.27 4.67 4.40 8 0.00 0.60 0.60 13.39 0.24 5.41 5.17 9 0.00 0.60 0.60 23.04 0.22 8.31 8.09

10 0.00 0.60 0.60 41.76 0.19 13.45 13.25 11 6.00 0.60 6.60 42.31 1.90 12.16 10.27 12 0.00 0.60 0.60 42.56 0.15 10.92 10.77 13 0.00 0.60 0.60 42.81 0.14 9.81 9.67 14 0.00 0.60 0.60 42.59 0.12 8.71 8.59 15 0.00 0.60 0.60 42.09 0.11 7.69 7.58 16 0.00 0.60 0.60 39.50 0.10 6.44 6.35 17 0.00 0.60 0.60 34.97 0.09 5.09 5.01 18 0.00 0.60 0.60 19.81 0.08 2.58 2.50 19 0.00 0.60 0.60 19.81 0.07 2.30 2.23 20 12.00 0.60 12.60 19.81 1.31 2.05 0.75 21 0.00 0.60 0.60 19.81 0.06 1.83 1.78 22 0.00 0.60 0.60 19.81 0.05 1.64 1.59 23 0.00 0.60 0.60 19.81 0.04 1.46 1.42 24 0.00 0.60 0.60 19.81 0.04 1.31 1.27 25 0.00 0.60 0.60 19.81 0.04 1.17 1.13 26 0.00 0.60 0.60 19.81 0.03 1.04 1.01 27 0.00 0.60 0.60 19.81 0.03 0.93 0.90 28 0.00 0.60 0.60 19.81 0.03 0.83 0.80

Total 48.58 119.73 71.14

Repeating the year-by-year methodology, we obtain the result that the project should be started even as much as four years later (a summary of the results is presented in Table 6–6).

Table 6 - 6: Consequence of postponement on the discounted flow of costs and benefits [Meuro]

Years of postponement from

year 0

Total discounted costs variation

Total discounted benefits variation Net benefits

1 -5.83 -1.51 4.32 2 -11.03 -3.44 7.60 3 -15.68 -5.98 9.70 4 -19.83 -9.43 10.41 5 -23.54 -13.57 9.96

6.2.5 Conclusion

The economic performance of this project could be sensitive to the following factors:

traffic growth, because of the sharp rise in ship waiting time with the growth in traffic;

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the distribution of ship arrivals is a crucial assumption. If a port, for example, is confronted with unusually strong seasonal traffic peaks, the total increases in waiting time would suggest that additional capacity might be required earlier;

the servicing time is particularly important. It can be reduced by better operations and greater mechanisation, and therefore more ships can be handled without increasing the number of berths. Service time can be drastically reduced through cargo containerisation;

this case study assumes that beyond a certain congestion level, traffic will divert to other ports. The analysis is not intended to illustrate the issue of competing ports, but the availability and capacity of neighbouring ports can be crucial for estimating future traffic. Furthermore, it is also relevant whether other ports have excess capacity and can therefore handle the additional traffic without new investment.

the allocation of the benefits yielded ought to be properly taken into account. If congestion occurs and ships diverge to other ports, the benefits due to project implementation can be considered only if the new destinations are in other countries.

6.2.6 Further remarks

The case study illustrates that it is not correct to appraise two new berths jointly. Had this been done, it would have mistakenly appeared that two berths could be justified; the extra benefits of the first berth would have hidden the inadequate benefits of the second.

In this analysis it has been assumed that the port deals only with one type of berth. When a port has separate general cargo, oil, or bulk berths, individual calculations must be made. The appraisal could be even more complicated whether there exists the possibility of interchange among berths, since probability distributions of waiting time should be introduced. On the other hand, the methodology is identical, both for ocean and inland ports.

 

 

 

 

 

 

 

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6.3 Electrification of a railway line

6.3.1 Introduction

A railway line of 300 km joins the cities of Beta and Gamma. It is the main land connection between the port of Beta on the Epsilon river and the port of Gamma on the Lambda Sea.

Most of the section is flat and slopes are rare. The track gauge is standard and the line has recently been strengthened by the renovation of sleeper density, with a thicker ballast cushion and through welded rail joints.

The railway line is currently operated with diesel locomotives. Nevertheless, a large part of the operational fleet has almost completed its technical life and therefore it needs extensive renovation. In recognition of this, the rail undertaking is considering the opportunity to switch to an electrified line.

In this respect, an economic analysis will be developed for evaluating the feasibility of the electrification of the entire line, compared with the renovation of the diesel fleet, according to a scheduled sequence.

Electrification necessitates a new fleet of locomotives, besides costly fixed installations for power supply (substations) and power transmission (via a contact wire system), as well as cabling of telecommunication lines alongside the railway line and reconstruction of some existing buildings. The works required are expected to last four years.

The last year of the analysis will be the thirty-third, being the first year of construction of the electric network in the “year zero”.

6.3.2 Traffic

A traffic forecast has been prepared, again when the electrification is estimated to be completed and for fifteen years thereafter. No growth of traffic has been allowed for after year 20, because any increase is not likely and further investment might be required for enhancing the capacity.

6.3.3 Costs of diesel fleet renovation (reference solution)

Estimated costs for diesel traction includes the entire fleet renovation, as well as its operation and maintenance.

The economic cost of each diesel locomotive is 6.00Meuro and its economic life is estimated at 20 years, hence replacements will be needed after this period. The fleet size, the maintenance costs and the fuel cost for running the diesel fleet are shown in Table 6–7. In addition, a residual value of 17.40Meuro can be assumed. 

Table 6 - 7: Scheduled costs in reference solution [Meuro/year]

Year New locomotives

Capital cost of locomotives

Maintenance cost of locomotives Fuel cost

4 29 174.00 16.40 19.30 8 4 24.00 21.50 22.10 12 2 12.00 24.10 26.40 17 2 12.00 27.60 29.60

The maintenance costs of capital and locomotives can be assumed unchanged till the end, when the last three locomotives will operate.

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6.3.4 Costs of electrification

The cost of electrification includes: the capital cost of the installations, the locomotives, and all the maintenance costs plus the supply of electricity38.

The economic cost of the installations is estimated at 252.00Meuro and the time schedule within the construction period is shown in Table 6–8. The useful economic life of the items varies, but on a weighted basis is estimated to be thirty years. A scrap value of 6.00Meuro can be assumed at the end of the operating phase.

The railway undertaking has planned to renew the fleet with electric locomotives according to the reference scenario, namely introducing an equivalent number of units in the same years that the diesel stock is withdrawn. The size of the electric locomotive fleet increases from twenty-nine units, in the opening year, to thirty-seven (see Table 6–8 for the scheduled plan). The economic cost of a locomotive is 6.90Meuro, with an economic life of thirty-five years; therefore, no replacement would be needed within the time span of the analysis. Finally, their residual value is 24.00Meuro.

Table 6 - 8: Scheduled costs in project scenario [Meuro/year]

Year

Capital cost of fixed

installation

New locomotives

Capital cost of

locomotives

Maintenance cost of fixed installation

Maintenance cost of

locomotives

Cost of electricity

0 30.50 - 0.00 0.00 0.00 0.00 1 85.40 - 0.00 0.00 0.00 0.00 2 80.90 - 0.00 0.00 0.00 0.00 3 55.20 - 0.00 0.00 0.00 0.00 4 0.00 29 200.10 2.40 3.60 22.20 8 0.00 4 27.60 2.70 4.20 24.30 12 0.00 2 13.80 2.70 4.80 26.70 17 0.00 2 13.80 3.00 5.40 29.10

Question

Provide a suitable methodology for determining the economic viability of railway line electrification

6.3.5 Results

As shown in the last row of Table 6–9, the total economic cost of electrification exceeds that of dieselisation, when they are discounted at 12% ( 142.53 ); moreover the last two columns emphasise that the IRR is lower than 6% (since the 29.71 , see also Figure 6–4).

We conclude that the electrification project does not sound to be economically viable. Nevertheless, the performance achieved could be improved taking into account the environmental benefits associated with fleet electrification.

 

 

                                                            38 The wages of electric train crews are the same for electric and diesel trains and therefore they have been

omitted.

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Table 6 - 9: Economic analysis: electrification vs dieselisation [Meuro/year]

Year

Electrification Dieselisation Discounted flow

(12%) Discounted flow

(6%)

Capital cost of fixed

installation

Capital cost of

locomotives

Maintenance cost of

fixed installation

Maintenance cost of

locomotives

Cost of electricity

Total cost

Capital cost of

locomo-tives

Maintenance cost of locomo-

tives

Fuel cost

Total cost

Electric Diesel Electric Diesel

0 30.50 0.00 0.00 0.00 0.00 30.50 0.00 0.00 0.00 0.00 30.50 0.00 30.50 0.00 1 85.40 0.00 0.00 0.00 0.00 85.40 0.00 0.00 0.00 0.00 76.25 0.00 80.57 0.00 2 80.90 0.00 0.00 0.00 0.00 80.90 0.00 0.00 0.00 0.00 64.49 0.00 72.00 0.00 3 55.20 0.00 0.00 0.00 0.00 55.20 0.00 0.00 0.00 0.00 39.29 0.00 46.35 0.00 4 0.00 200.10 2.40 3.60 22.20 228.30 174.00 16.40 19.30 209.70 145.09 133.27 180.83 166.10 5 0.00 0.00 2.40 3.60 22.20 28.20 0.00 16.40 19.30 35.70 16.00 20.26 21.07 26.68 6 0.00 0.00 2.40 3.60 22.20 28.20 0.00 16.40 19.30 35.70 14.29 18.09 19.88 25.17 7 0.00 0.00 2.40 3.60 22.20 28.20 0.00 16.40 19.30 35.70 12.76 16.15 18.75 23.74 8 0.00 27.60 2.70 4.20 24.30 58.80 24.00 21.50 22.10 67.60 23.75 27.30 36.89 42.41 9 0.00 0.00 2.70 4.20 24.30 31.20 0.00 21.50 22.10 43.60 11.25 15.72 18.47 25.81

10 0.00 0.00 2.70 4.20 24.30 31.20 0.00 21.50 22.10 43.60 10.05 14.04 17.42 24.35 11 0.00 0.00 2.70 4.20 24.30 31.20 0.00 21.50 22.10 43.60 8.97 12.53 16.44 22.97 12 0.00 13.80 2.70 4.80 26.70 48.00 12.00 24.10 26.40 62.50 12.32 16.04 23.85 31.06 13 0.00 0.00 2.70 4.80 27.70 35.20 0.00 24.10 26.40 50.50 8.07 11.57 16.50 23.68 14 0.00 0.00 2.70 4.80 26.70 34.20 0.00 24.10 26.40 50.50 7.00 10.33 15.13 22.34 15 0.00 0.00 2.70 4.80 26.70 34.20 0.00 24.10 26.40 50.50 6.25 9.23 14.27 21.07 16 0.00 0.00 2.70 4.80 26.70 34.20 0.00 24.10 26.40 50.50 5.58 8.24 13.46 19.88 17 0.00 13.80 3.00 5.40 29.10 51.30 12.00 27.60 29.60 69.20 7.47 10.08 19.05 25.70 18 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 4.88 7.44 13.14 20.04 19 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 4.35 6.64 12.39 18.91 20 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 3.89 5.93 11.69 17.84 21 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 3.47 5.29 11.03 16.83 22 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 3.10 4.73 10.41 15.87

(continue) 

 

 

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Table 6 - 9: Economic analysis: electrification vs dieselisation [Meuro/year] (continue)

Year

Electrification Dieselisation Discounted flow (12%)

Discounted flow (6%)

Capital cost of fixed

installation

Capital cost of

locomotives

Maintenance cost of

fixed installation

Maintenance cost of

locomotives

Cost of electricity

Total cost

Capital cost of

locomo-tives

Maintenance cost of locomo-

tives

Fuel cost

Total cost Electric Diesel Electric Diesel

23 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 2.77 4.22 9,82 14,97 24 0.00 0.00 3.00 5.40 29.10 37.50 174.00 27.60 29.60 231.20 2.47 15.23 9,26 57,10 25 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 2.21 3.36 8,74 13,33 26 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 1.97 3.00 8,24 12,57 27 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 1.76 2.68 7,78 11,86 28 0.00 0.00 3.00 5.40 29.10 37.50 24.00 27.60 29.60 81.20 1.57 3.40 7,34 15,89 29 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 1.40 2.14 6,92 10,56 30 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 1.25 1.91 6,53 9,96 31 0.00 0.00 3.00 5.40 29.10 37.50 0.00 27.60 29.60 57.20 1.12 1.70 6,16 9,40 32 0.00 0.00 3.00 5.40 29.10 37.50 12.00 27.60 29.60 69.20 1.00 1.84 5,81 10,72 33 -6.00 -24.00 0.00 0.00 0.00 -30.00 -17.40 27.60 29.60 39.80 -0.71 0.95 -4,39 5,82

Total 535.85 393.32 792,31 762,60 NPV -142.53 - 29.71

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91

 

Figure 6 - 4: Graphical depiction of project’s IRR

 

 

 

-200

-100

0

100

200

300

400

500

600

0,00 0,02 0,04 0,06 0,08 0,10 0,12 0,14

NP

V [

Meu

ro]

Social Discount Rate [%]

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6.4 Paving gravel road

6.4.1 Introduction

Two towns are connected by a twenty kilometre gravel road. This infrastructure operates in good conditions, but it was originally designed with several steep grades and sharp curves. The traffic currently averages 350 vehicles/day.

Dust storms in the summer force vehicles to keep a substantial gap apart and overtaking is then difficult. The highway department proposes to: pave the road, to widen the carriageway road section and to make minor improvements in the alignment. As congestion issues are negligible, travel time is not expected to change after the completion of the improvements (see Figure 6–5).

 

Figure 6 - 5: Road alignment and cross-section in reference solution (above) and project scenario (below)   

6.4.2 Investment and maintenance costs

The renovation works are expected to last only one year, with a total investment cost equalling 28.00Meuro. On the other hand, the maintenance costs of the paved road are estimated at 0.30Meuro/year and they are not expected to increase significantly with the traffic. Furthermore, every five years, major repaving is needed and it costs 1.50Meuro.

Without any investment, the costs of maintaining the gravel road are estimated to increase sharply; taking into consideration the effect of climate on the condition of the road, these costs are estimated at 0.21Meuro over the next six years, 0.36Meuro from seventh to eleventh and 0.42Meuro afterwards.

The economic life of the project is estimated at twenty years and the residual value of the investment is not considered to be positive at the end of this time span.

6.4.3 Traffic

The average daily traffic through this section, the year before the construction, amounts to 350 vehicles: 220 trucks, 40 buses and 90 passenger cars. Assuming as year zero the year when the renovation works are implemented, the forecast traffic growth rates are reported in Table 6–10, varying by type of vehicle.

110

100

90 80

80

90

80

90100

110

100

110

100

90 80

80

90

80

90100

110

100

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93

Table 6 - 10: Traffic growth rates per year [%]

Year Trucks Buses Cars 1-4 12 12 15 5-9 10 10 12

10-20 8 8 9

In addition to the growth of normal traffic39, paving the road is expected to generate traffic. This component is likely to be about 10% of normal traffic.

Based on these assumptions, estimates of the average daily traffic are shown in Table 6–11. Until the last year of the analysis, significant congestion is not expected on the renovated and paved road, although new improvements may be justified thereafter.

Table 6 - 11: Traffic in reference solution and project scenario [vehicles/day]

Year Trucks Buses Cars

Reference solution

Project scenario

Reference solution

Project scenario

Reference solution

Project scenario

Preconstruction 220 - 40 - 90 - 1 246 271 45 49 104 114 2 276 304 50 55 119 131 3 309 340 56 62 137 151 4 346 381 63 69 157 173 5 381 419 69 76 176 194 6 419 461 76 84 197 217 7 461 507 84 92 221 243 8 507 558 92 101 248 272 9 558 613 101 112 277 305 10 602 662 109 120 302 333 11 650 715 118 130 330 363 12 702 773 128 140 359 395 13 758 834 138 152 392 431 14 819 901 149 164 427 470 15 885 973 161 177 465 512 16 955 1.051 174 191 507 558 17 1,032 1,135 188 206 553 608 18 1,114 1,226 203 223 603 663 19 1,204 1,324 219 241 657 722 20 1,300 1,430 236 260 716 787

Question

According to the description above, what are the benefits reasonably arising from the investment planned?

6.4.4 Benefits from reduced generalised costs

Benefits from the project planned will arise in terms of:

reduction in the monetised part of the generalised costs (GC), excluding time savings; hence for trucks and buses it coincides with the variation of the fares paid by the users, whilst for cars it identifies the reduction of VOCs (see Table 6–12);

avoidance of gravel road maintenance costs.

                                                            39 Namely, the pre-existing traffic.

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Table 6 - 12: Generalised cost per type of road and net of taxes [Euro/vehicle·km]

Truck Bus Car

Paved Gravel Paved Gravel Paved Gravel Total 1.40 2.21 1.77 2,75 0,78 1,04 Benefit 0.81 0.98 0.26

For example, the benefits yielded for trucks can be calculated according to the steps below. In the calculations we will assume that:

all trucks run over the entire length of the road;

the daily traffic considered is the same for every day of the year.

In this respect, the surplus change (S) is:

∙ . . ∙ . .  

where:

GCs are the unit costs borne in reference solution (gravel) and in project scenario (paved), again excluding the time savings;

. and . are the vehicle·km/year travelled.

Substituting the values in the equation above, we obtain:

∙ . ∙ . . . 

Figure 6–6 depicts graphically the size of the benefit enjoyed ( . .). Analogously, the same methodology previously employed can be extended to apply to both buses and cars (see Table 6–13).

 

 

 

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95

Table 6 - 13: Benefits yielded per type of vehicle [Meuro/year]

Year Truck Bus Car Total 1 1.53 0.34 0.21 2.07 2 1.71 0.38 0.24 2.33 3 1.92 0.42 0.27 2.61 4 2.15 0.47 0.31 2.94 5 2.36 0.52 0.35 3.24 6 2.60 0.57 0.39 3.57 7 2.86 0.63 0.44 3.93 8 3.15 0.69 0.49 4.33 9 3.46 0.76 0.55 4.78 10 3.74 0.82 0.60 5.16 11 4.04 0.89 0.66 5.58 12 4.36 0.96 0.72 6.04 13 4.71 1.04 0.78 6.53 14 5.09 1.12 0.85 7.06 15 5.49 1.21 0.93 7.63 16 5.93 1.30 1.01 8.25 17 6.41 1.41 1.10 8.92 18 6.92 1.52 1.20 9.64 19 7.47 1.64 1.31 10.43 20 8.07 1.78 1.43 11.27

 

 

Figure 6 - 6: Surplus change for trucks

6.4.5 Other benefits

Firstly, we can say that time saving benefits should not be considered, on the assumption that vehicle travel time does not change in the project scenario.

Secondly, paving increases the comfort of the journey by providing a smoother ride, eliminating dust in the dry season, facilitating passing and so forth. Separate studies of accidents indicate that the effect of paving is minor, with a slight reduction in the number of accidents offset by greater damage per accident, because of the higher speeds possible.

0,00

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Finally, further benefits might arise during construction; as sections of the road are paved, those portions can be used. This, however, is more or less offset by the fact that the paving to some extent interferes with the existing traffic.

6.4.6 Project performance

The benefits of the project are higher than the costs, when the flow of net benefits is discounted at 12% (see Table 6–14).

Table 6 - 14: Net benefits and NPV [Meuro]

Year

Costs Benefits Discounted

net benefits

Reference solution Project scenario

Reduced GCs

Total benefits

Maintenance Investment Maintenance Net cost

0 0.00 28.00 0.00 28.00 0.00 -28.00 -28.00 1 0.21 0.00 0.30 0.09 2.07 1.98 1.77 2 0.21 0.00 0.30 0.09 2.33 2.24 1.78 3 0.21 0.00 0.30 0.09 2.61 2.52 1.80 4 0.21 0.00 0.30 0.09 2.94 2.85 1.81 5 0.21 0.00 1.50 1.29 3.24 1.95 1.10 6 0.21 0.00 0.30 0.09 3.57 3.48 1.76 7 0.36 0.00 0.30 -0.06 3.93 3.99 1.81 8 0.36 0.00 0.30 -0.06 4.33 4.39 1.77 9 0.36 0.00 0.30 -0.06 4.78 4.84 1.74

10 0.36 0.00 1.50 1.14 5.16 4.02 1.30 11 0.36 0.00 0.30 -0.06 5.58 5.64 1.62 12 0.42 0.00 0.30 -0.12 6.04 6.16 1.58 13 0.42 0.00 0.30 -0.12 6.53 6.65 1.52 14 0.42 0.00 0.30 -0.12 7.06 7.18 1.47 15 0.42 0.00 1.50 1.08 7.63 6.55 1.20 16 0.42 0.00 0.30 -0.12 8.25 8.37 1.36 17 0.42 0.00 0.30 -0.12 8.92 9.04 1.32 18 0.42 0.00 0.30 -0.12 9.64 9.76 1.27 19 0.42 0.00 0.30 -0.12 10.43 10.55 1.22 20 0.42 0.00 0.30 -0.12 11.27 11.39 1.18

NPV 1.21  

 

 

 

 

 

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6.5 Investment in a railway line and modal shift

6.5.1 Introduction

The Government of a country eligible for Cohesion Fund assistance is planning to improve a length of railway line which runs through a densely populated region. Currently the transport network in that area includes a relatively old single-track railway line and a well constructed, but congested road. Moreover, the railway line has been losing traffic in favour of faster truck haulage and private cars.

Road congestion particularly affects the network near the main cities and the rail line cannot offer competitive services: train speed is low and the services provided are unreliable. The main objective of the project is to develop the rail link both for passengers and freight, by improving the existing line.

Enhancements are expected to benefit the environment and to reduce the need for further increase of road capacity. The modal shift of passengers and goods from road to rail is one of the major tasks listed in Government’s Transport Plan for reducing congestion and limiting CO2 emissions, particularly in densely populated areas where the exposure is higher. The Government is also confident that the improved transport corridor will accelerate regional development.

In order to achieve these goals, the feasibility of several technical options was considered. Henceforth, a pre-screening evaluation has reduced the selection to a choice between two alternatives vis a vis the reference solution (see Figure 6–7 and Figure 6–8).

Reference solution: the mostly single-track railway continues losing shares of passengers and freight traffic. This implies that in the future some road congestion is foreseen, particularly around the main cities due to freight traffic growth in the region. A major issue will be air pollution, due to the dominance of the road mode in freight transport;

Option 1: this is a short-term solution with limited investment (extension of double-track sections in the vicinity of the cities), to secure the line’s reliability. It will achieve benefits in terms of a partial modal shift and reduction of environmental costs;

Option 2: this reflects a more ambitious design for a full modernisation of the operating line, including complete double tracking and partial change of alignment.

Figure 6 - 7: Project plan in reference solution (above), Option 1 (middle) and Option 2 (below). The road corridor is black and the rail line is red (each line depicts a track).

 

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Figure 6 - 8: Rail line typical cross-section in reference solution (left) and project scenario (right)

6.5.2 Traffic analysis

The two selected options have been analysed with respect to the effect they will have on passenger and freight flows, in comparison to the reference solution and along the whole corridor.

Table 6–15 reports the travel demand allocation between initial users and modal shifters at the opening year. Changes in travel demand will be not introduced in the operating phase40.

Table 6 - 15: Passenger travel demand [Mpassengers/year] and freight flows [Mtons/year]

Mode Reference solution Option 1 Option 2

Passengers

Rail Initial users 6.30 6.30 6.30 Modal shifters 0.00 4.50 10.98 Total 6.30 10.80 17.28

Road Users 40.70 36.20 29.70 Freights

Rail Initial users 0.31 0.31 0.31 Modal shifters 0.00 1.30 2.90 Total 0.31 1.61 3.21

Road Users 64.70 63.40 61.80

6.5.3 Investment costs

Preliminary estimates of economic investment costs have been provided by the project engineers. The forecast costs of the two options are reported in Table 6–16. Construction works are expected to last three years in both cases.

                                                            40 For the sake of simplicity growth rates have not been introduced.

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Table 6 - 16: Economic investment costs [Meuro] 

Year Option 1 Option 2 1 40.00 50.00 2 60.00 75.00 3 80.00 100.00

Total 180.00 225.00

The difference in maintenance costs of the railway line includes all items for operational: tracks, signalling, telecommunication and the catenary system. The estimates reflect the costs for carrying out the maintenance works required to ensure a specific level of services (see Table 6-17).

Table 6 - 17: Economic maintenance costs [Meuro/year] 

Option 1 Option 2 Total 4.50 6.50

Question

Identify the benefits for the users (initial and modal shifters) and determine the economic performance of the two options.

6.5.4 Project benefits

A reduction of the generalised cost for the rail mode (see Table 6–18) determines a partial modal shift from road to rail (see Table 6–15).

Table 6 - 18: Generalised cost [Euro/travel]

Mode Reference solution Option 1 Option 2

Passengers

Rail Time cost 28.50 25.00 22.30 Tariffs 16.70 16.70 16.70 Total 45.20 41.70 39.00

Road

Time cost 25.10 24.80 24.20 VOCs (include. taxes) 17.60 17.60 17.60

Total 42.70 42.40 41.80 Freight

Rail 11.60 6.50 6.50 Road 12.90 12.86 12.73

In this respect, user surplus ought to be calculated taking account of the benefits as follows:

Surplus enjoyed by rail travellers (through the rule of a half);

Surplus gained by users still travelling by road oad (congestion reduction).

The total benefit corresponds to the sum of benefits enjoyed by the users still travelling by train (the rectangle MRQN in Figure 6–9), plus the benefit of the diverted passengers (the triangle RPQ, again in Figure 6–9). The road users, still travelling by the parallel road, earn a benefit which coincides with the difference of generalised cost by the number of users in the project scenario.

The benefit to freight transport is the difference in rail tariffs. In this case, the value of time for goods has not been considered, on the assumption of low values and low time savings.

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Producer’s surplus change is the variation in profit between scenarios and this must be calculated as the difference between total revenues (from tariffs) and operating costs.

The change in the Government’s fuel tax revenues depends on vehicle fuel consumption, which is in turn determined by the the change in total distance travelled. See Table 6–20 for a summary of the results.

Table 6 - 19: Change in user surplus [Meuro/year]

Mode Option 1 Option 2 Passengers

Rail 29.93 73.10 Road 10.86 26.73 Total 40.79 99.83

Freights Rail 4.90 8.98 Road 2.56 10.75 Total 7.46 19.73

 

 

Figure 6 - 9: Change in user surplus for rail travellers (Option 1 with respect to reference solution)

 

MN

RP

Initial users’ benefit

Diverted users’ benefit

Q

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101

Table 6 - 20 Producer surplus and Government fuel tax revenues [Meuro/year]

Mode Reference solution Option 1 Option 2 Benefits

Option 1 Benefits Option 2

Passengers

Rail Operating costs -184.70 -283.50 -470.00 -98.80 -253.80

Revenues 105.21 180.36 288.58 75.15 183.37 Total -79.49 -103.14 -181.42 -23.65 -70.43

Government Fuel taxes 366.10 325.60 267.30 -40.50 -98.80

Freights

Rail

Operating costs -0.80 -4.70 -9.40 3.90 8.60

Revenues 3.60 10.47 20.87 6.87 17.27 Total 2.80 5.77 11.47 2.97 8.67

Road Costs -801.10 -785.50 -758.30 15.60 42.80 Revenues 834.63 821.66 786.71 -12.97 -47.92 Total 33.53 63.16 28.41 29.63 -5.12

Government Fuel taxes 327.40 320.00 309.70 -7.40 -17.70

Finally, non-user benefits from the reduction in external costs are shown in Table 6–21.

Table 6 - 21: Estimated external costs benefits [Meuro/year]

Mode Option 1 Option 2 Passengers 15.00 25.00 Freights 3.00 5.00

Assuming a social discount rate of 10% and an operating time span of 27 years, the performance indicators show that Option 1 is economically viable, while Option 2 is not (see Figure 6–10, Table 6–22 and Table 6–23). Therefore, the short-term upgrading of the rail line is more suitable, rather than a more ambitious full modernisation, which would need a higher volume of travellers to justify it.

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Figure 6 - 10: Economic performance of investment options

The robustness of the results obtained should be also tested against pessimistic scenarios, such as investment cost overruns, or travel demand reductions. The latter case can be ignored, in the present analysis, since we have assumed the precautionary hypothesis of unchanged travel demand within the period of operation.

 

-1.600

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Option 1 Option 2

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Table 6 - 22: Economic analysis of Option 1 [Meuro/year]

Year Costs Users surplus Producers' surplus Government revenues Externalities

Net flow Discounted (10%) Investment Maintenance Passengers Freight Passengers Freight Passengers Freight Passengers Freight

0 -40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -40.00 -40.00 1 -60.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -60.00 -54.55 2 -80.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -80.00 -66.12 3 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 17.13 4 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 15.57 5 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 14.16 6 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 12.87 7 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 11.70 8 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 10.64 9 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 9.67

10 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 8.79 11 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 7.99 12 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 7.26 13 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 6.60 14 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 6.00 15 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 5.46 16 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 4.96 17 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 4.51 18 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 4.10 19 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 3.73 20 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 3.39 21 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 3.08 22 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 2.80 23 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 2.55 24 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 2.31 25 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 2.10 26 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 1.91 27 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 1.74 28 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 1.58 29 0.00 -4.50 40.79 7.46 -23.65 32.60 -40.50 -7.40 15.00 3.00 22.80 1.44

NPV 13.40

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Table 6 - 23: Economic analysis of Option 2 [Meuro/year]

Year Costs Users surplus Producers' surplus Government revenues Externalities

Net flow Discounted (10%) Investment Maintenance Passengers Freight Passengers Freight Passengers Freight Passengers Freight

0 -50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -50.00 -50.00 1 -75.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -75.00 -68.18 2 -100.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -100.00 -82.64 3 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -30.29 4 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -27.54 5 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -25.04 6 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -22.76 7 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -20.69 8 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -18.81 9 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -17.10

10 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -15.55 11 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -14.13 12 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -12.85 13 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -11.68 14 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -10.62 15 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -9.65 16 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -8.77 17 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -7.98 18 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -7.25 19 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -6.59 20 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -5.99 21 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -5.45 22 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -4.95 23 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -4.50 24 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -4.09 25 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -3.72 26 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -3.38 27 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -3.08 28 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -2.80 29 0.00 -6.50 99.83 19.73 -70.43 3.55 -98.80 -17.70 25.00 5.00 -40.32 -2.54

NPV -508.63

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105

6.6 Social analysis

6.6.1 Introduction

Costs and benefits arising from the construction of a planned infrastructure are have been assessed as shown in Table 6–24.

Table 6 - 24: Costs and benefits yielded by the project [Meuro]

Inve

stm

ent

co

st

Mai

nte

nan

ce

cost

s

Use

rs

surp

lus

Pro

du

cer

surp

lus

Go

vern

men

t fu

el t

ax

Pol

luti

on

No

ise

Acc

iden

ts

Tota

l

-200 -20 500 100 -5 30 5 15 425 Question

Provide the distribution of project’s impact on the stakeholders listed below:

users;

infrastructure undertaking;

Government;

non-users,

when the project is entirely financed by the Government and the infrastructure is managed by a publicly owned undertaking.

6.6.2 Solution

The purpose of the social analysis is to describe how the costs and benefits of a specific transport project are allocated amongst groups of stakeholders, where they include not only the project promoters and the final users, but also all the other players involved.

In practice, the analysis takes account of the effects of the project on society as a whole, summing both costs and benefits obtained from the economic analysis, in a disaggregated manner.

Usually, when a project is constructed the impacts are unevenly spread between many subjects, who either gain, or lose. The economic performance indicators (NPV and IRR) provide information at an aggregate level by stating whether society is better off with, or without, the project independently of who is bearing the costs and who is receiving the benefits. Nevertheless, it might not be sufficient, when dealing with cross border projects, where an imbalance between winners and losers may occur.

For these reasons, it is always recommended to consider, beside the usual performance indicators, also the distribution of costs and benefits among users and other stakeholders. A disaggregated description of the groups advantaged, or disadvantaged, can help when assessing the problems associated with the project and, in this case, to identify possible mitigation measures (namely, monetary compensation for the excessively harmed groups).

The most straightforward approach to introduce a matrix, wherein the costs and benefits are disaggregated among: users, producers, Government and non-users.

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Other stakeholders classifications are obviously possible. For instance, they can be split by country and their partition should be the most appropriate one according to the project’s characteristics. In particular, cross-border projects should take into account different geographical areas.

A relevant issue worth emphasising is the distribution of a project’s impact between countries, since non-homogenous allocation of social costs and benefits could be critical.

Consider a project which involves two countries, where most of the costs are borne on the shoulders of one of them, while most of the benefits are captured by the other. The country that bears most of the costs without receiving appropriate benefits would strongly oppose the project, even when positive performance indicators occur where nothing is done to mitigate negative impacts.

Finally, the social analysis allows the identification of possible problems for specific groups and may be decisive for the final decision on whether to implement, or not, the project planned.

Regarding the case introduced in Table 6–24:

users enjoy the benefits of the ROH;

the producers (namely, the infrastructure manager) sums up the maintenance costs and the surplus enjoyed;

Government bears the investment costs and the reduction of fuel tax revenues;

non-users gather the sum of reductions in external costs.

Table 6 - 25: Matrix for the analysis of the distribution of project’s impact

Item Stakeholders

Total Users Producer Government Non-users Costs 0 -20 -205 0 -225 Benefits 500 100 0 50 650 Total 500 80 -205 50 425  

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107

Appendix 1: Glossary

Appendix 1

 108

Consumer surplus: the value consumers receive over and above what they actually have to pay.

Cost-benefit analysis: the conceptual framework applied to any systematic, quantitative appraisal of a public or private project to determine whether, or to what extent, that project is worthwhile from a social perspective. Cost Benefit Analysis differs from a straightforward financial appraisal in that it considers all gains (benefits) and losses (costs) to social agents.

Demand curve: the (linear) relation between a price variable (e.g. the generalised cost) and transport demand.

Demand elasticity: this is defined as the ratio of the percentage variation in demand to the percentage variation of a specific variable.

Discount rate: the rate at which future values are discounted to the present. The financial discount rate and economic discount rate may differ, in the same way that market prices may differ from shadow prices.

Discounting process: the process of adjusting the future values of project inflows and outflows to present values using a discount rate, i.e. by multiplying the future value by a coefficient that decreases with time.

Do minimum scenario: the baseline scenario, or “business as usual”, against which the additional benefits and costs of the “with project” scenario can be measured. It is also labelled as the “without project” scenario and includes a necessary realistic level of maintenance costs and a minimum amount of investment costs or necessary improvements, in order to avoid or delay serious deterioration or to comply with safety standards.

Do something scenario(s): the scenario(s) in which investment projects are considered, different from the “do-minimum” scenario.

Economic rate of return (ERR): the internal rate of return (see definition below) calculated using economic values and expressing the socio-economic profitability of a project.

Environmental impact analysis: the statement of the environmental impact of a project that identifies its physical or biological effects on the environment in a broad sense. This would include the forecasting of potential pollution emissions, loss of visual amenity, and so on.

Evaluation period: the number of years for which forecasts regarding a project are provided.

Externality: an externality is said to exist when the production or consumption of a good in one market affects the welfare of a third party without any payment or compensation being made. In project analysis, an externality is an effect of a project not reflected in its financial accounts and consequently not included in the valuation. Externalities may be positive or negative.

Financial analysis: the analysis carried out from the point of view of a single subject, instead of society as a whole as in the economic analysis. It allows one to 1) calculate the indices of financial return on the investment project based on the net time-discounted cash flows, related exclusively to the economic entity that initiates the project, 2) verify and guarantee the cash balance (financial sustainability).

Financial profitability analysis: the analysis the capacity of the project to produce monetary cash flows by its operating management: a project is profitable if it generates enough revenue to recover the investment and operating costs.

Financial rate of return (FRR): the internal rate of return (see definition below) measuring the financial profitability of a project. In some cases it cannot be calculated in a meaningful way and can be misleading.

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109

Financial sustainability analysis: the analysis carried out in order to verify that financial resources are sufficient to cover all financial outflows, year after year, for the whole time horizon of the project. Financial sustainability is verified if the accumulated net cash flow is never negative during all the years considered.

Generalised cost: this expresses the overall inconvenience to the transport user of travelling between a particular origin and destination by a particular mode. In practice, generalised cost is usually computed as the sum of true monetary costs (e.g. fares for public transport, perceived operating costs and tolls for private modes) plus the cost of travel time expressed in equivalent monetary units.

Government surplus: Changes in the government revenues due to changes in the volume of taxes associated with a project.

Internal rate of return: the discount rate at which a stream of costs and benefits has a net present value equal to zero. The internal rate of return is compared with a benchmark in order to evaluate the performance of the proposed project. Financial Rate of Return is calculated using financial values, Economic rate of Return is calculated using economic values.

Net Present Value (NPV): the sum that results when the discounted value of the expected costs of an investment are deducted from the discounted value of the expected benefits. The financial net present value (FNPV) is computed using financial values. The economic net present value (ENPV) is calculated making reference to economic values.

Operating management: it includes both costs and revenues, that are strictly linked to the production and sales activities of a firm.

Opportunity cost: the value of a resource in its best alternative use. For the financial analysis the opportunity cost of a purchased input is always its market price. In the economic analysis the opportunity cost of a purchased input is its marginal social value in its best non-project alternative use for intermediate goods and services, or its value in use (as measured by willingness to pay) if it is a final good or service.

Perceived costs: these are defined as the costs that influence users’ travel choices (such as time and fuel costs).

Producer surplus: the value a producer receives over and above his actual costs of production.

Project analysis: the analytical framework for the evaluation of a project’s feasibility and performance. It includes the analysis of the context, the objectives, the technical aspects, the demand forecasts and the financial and economic analysis.

Risk analysis: an analysis which aims to identify the risks associated with a project, the estimation of the potential impacts of such risks and the measures that should be undertaken for preventing and mitigating them.

Residual value: the net present value of assets at the end of the final year of the period selected for evaluation analysis (project horizon).

Shadow prices: the opportunity cost of goods, sometimes different from actual market prices. They are used in the economic analysis to better reflect the real costs of inputs to society, and the real benefits of the outputs.

Social analysis: The analysis of the distribution among stakeholders of the costs and benefits of a specific transport project.

Social discount rate: to be contrasted with the financial discount rate. It attempts to reflect the societal view of how the future should be valued against the present.

Unperceived costs: these are defined as the costs that fall on the individual making the journey, but do not influence travel decisions (e.g. non-fuel elements of cost for a car user, such as tyres, maintenance and depreciation of the vehicle).

Value of Travel Time Savings (VTTS): the monetary value which individuals or companies attribute to the travel time savings.

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 110

Value transfer: the benefits transfer method can be defined as the use of the value of a good estimated at one site as a proxy for the value of the same good at other sites.

Vehicle operating costs: the costs associated with the use of vehicles. They are borne by both transport users (cars, trucks) and service providers (planes, trains, ships).

Willingness to pay: the amount consumers are prepared to pay for a final good or service. If a consumer’s willingness to pay for a good exceeds its price, the consumer enjoys a rent (consumer surplus).

Appendix 2

111

Appendix 2: Value of Time (through SP)

Appendix 2

 112

Consider a situation where travel behaviour is analysed along a suburban route during rush hour. Transport planners have set up a Stated Preference (SP) survey designed to evaluate the willingness to pay of travellers for travel time savings.

SP data is collected through surveys where samples of individuals are presented with a number of hypothetical alternatives and asked to indicate their preferences.

Alternatives are described in terms of combinations of attributes. For instance, alternatives can be transport modes and their description is given in terms of travel time, travel cost, frequency, comfort and so on.

Several different SP techniques exist. In the transport field and with the specific target of estimating the value of travel time, the so-called ‘multi-attribute valuation techniques’ are especially used and in particular:

Preference-based approaches, which require the individual to rate or rank each alternative within a pre-defined product set;

Choice-based approaches which ask individuals to make one choice one from two or more alternatives.

Choice-based techniques are based on a more realistic task that people perform frequently. This is one of the reasons why choice-based approaches are more preferred.

SP techniques have several advantages compared to the revealed preference method (based on observed behaviour in the real world). One advantage is that the analyst can control the definition of the alternatives: for instance, the relative importance of each attribute can be estimated. In the real world it can be difficult or even impossible to find cases where, for instance, different travel times are compared to the same travel cost. However, this type of situation is very informative for appraising the relative importance of time and cost within individual choices. The use of SP allows alternatives to be presented where this situation applies, thus maximising the information which can be drawn from the data.

Another advantage is that the attention of the individuals can be focussed on the attributes under analysis. If one is particularly interested in studying the role of some variables in mode choice, one can design the alternatives using those variables with a known value or condition. In the real world, choices can be observed but the underlying conditions might be unobservable (e.g. passengers travelling on a certain route by car and by train can be known as well as their travel cost and time, but not the level of comfort on board the trains). SP techniques are also more efficient in economic terms. Robust estimations need large datasets. When real world behaviour is considered, usually only one choice can be observed for each individual. Therefore large surveys are needed to collect enough data. With SP, the same individual can be presented with several hypothetical alternatives. The same number of observations (choices) can be therefore collected with much smaller samples.

Of course, SP methods rely on respondents’ statements of what they would do, which is not the same as observing actual behaviour. Although well-designed surveys can minimise unreliable responses, some uncertainty always remains in relation to forecasts based on hypothetical choices. For this reason, SP is generally regarded as preferable to estimate the relative importance of choice attributes but revealed preference data is often associated with forecasting market behaviour in the future.

The exercise presented below is a simple choice-based one aimed at estimating the value of travel time (VOT). Respondents are asked to make a choice amongst several pairs of alternatives (see Table i), when:

the competing modes are: car (private) and train (public);

the variables that describe the modes are: travel time and monetary costs (i.e. the fuel price for car and the fare paid for the train service).

Table i shows 16 pairs of choices. For each of the 16 pairs, the respondent is asked to fill in the column “choice” with the preferred alternative (e.g. if in comparing the first pair of

Appendix 2

113

alternatives in row 1, car is considered more attractive than train, the respondent should write “car” in the last column “choice”). Since with all pairs one mode is faster but more costly than the alternative, it is expected that the value attached to saving travel time explains much of the choice.

The estimation of the VOT is developed in a simplified way using templates in Table ii and Table iii.

Table i: Pairs of alternatives

N° Code Alternative 1 Alternative 2 Choice 1 JE Mode Train Mode Car Time 45 Minutes Time 30 Minutes Cost 1.00 Euro Cost 2.30 Euro 2 DW Mode Train Mode Car Time 35 Minutes Time 45 Minutes Cost 1.70 Euro Cost 1.00 Euro 3 LC Mode Car Mode Train Time 35 Minutes Time 45 Minutes Cost 2.30 Euro Cost 1.70 Euro 4 AZ Mode Train Mode Car Time 30 Minutes Time 45 Minutes Cost 2.30 Euro Cost 1.70 Euro 5 HG Mode Train Mode Car Time 45 Minutes Time 35 Minutes Cost 1.00 Euro Cost 2.30 Euro 6 EV Mode Car Mode Train Time 45 Minutes Time 30 Minutes Cost 1.00 Euro Cost 2.30 Euro 7 GH Mode Car Mode Train Time 30 Minutes Time 35 Minutes Cost 1.70 Euro Cost 0.80 Euro 8 CX Mode Train Mode Car Time 35 Minutes Time 45 Minutes Cost 2.30 Euro Cost 1.70 Euro 9 MB Mode Train Mode Car Time 45 Minutes Time 30 Minutes Cost 1.00 Euro Cost 1.70 Euro

10 GT Mode Car Mode Train Time 45 Minutes Time 35 Minutes Cost 1.00 Euro Cost 2.30 Euro

11 IF Mode Train Mode Car Time 35 Minutes Time 30 Minutes Cost 1.70 Euro Cost 2.30 Euro

12 HS Mode Train Mode Car Time 30 Minutes Time 35 Minutes Cost 1.70 Euro Cost 0.80 Euro

13 KD Mode Car Mode Train Time 35 Minutes Time 45 Minutes Cost 1.70 Euro Cost 1.00 Euro

14 BY Mode Car Mode Train Time 45 Minutes Time 30 Minutes Cost 1.00 Euro Cost 1.70 Euro

15 NA Mode Car Mode Train Time 30 Minutes Time 45 Minutes Cost 2.30 Euro Cost 1.70 Euro

16 FU Mode Train Mode Car Time 30 Minutes Time 35 Minutes Cost 2.30 Euro Cost 1.70 Euro

Appendix 2

 114

Table ii: Combination 1

Combination 1 NA MB LC KD JE IF HG GH

Choice

Value of time Train Train Train Train Train Train Train Train < 2.4 Euro/hour Car Train Train Train Train Train Train Train 2.4 - 2.8 Euro/hour Car Car Train Train Train Train Train Train 2.8 - 3.6 Euro/hour Car Car Car Train Train Train Train Train 3.6 - 4.2 Euro/hour Car Car Car Car Train Train Train Train 4.2 - 5.2 Euro/hour Car Car Car Car Car Train Train Train 5.2 - 7.2 Euro/hour Car Car Car Car Car Car Train Train 7.2 - 7.8 Euro/hour Car Car Car Car Car Car Car Train 7.8 - 10.8 Euro/hour Car Car Car Car Car Car Car Car > 10.8 Euro/hour

Table iii: Combination 2

Combination 2 AZ BY CX DW EV FU GT HS

Choice

Value of time Car Car Car Car Car Car Car Car < 2.4 Euro/hour Train Car Car Car Car Car Car Car 2.4 - 2.8 Euro/hour Train Train Car Car Car Car Car Car 2.8 - 3.6 Euro/hour Train Train Train Car Car Car Car Car 3.6 - 4.2 Euro/hour Train Train Train Train Car Car Car Car 4.2 - 5.2 Euro/hour Train Train Train Train Train Car Car Car 5.2 - 7.2 Euro/hour Train Train Train Train Train Train Car Car 7.2 - 7.8 Euro/hour Train Train Train Train Train Train Train Car 7.8 - 10.8 Euro/hour Train Train Train Train Train Train Train Train > 10.8 Euro/hour

In all pairs of choices, one mode is faster but more costly than the alternative. In this situation, a (rational) user should make a trade-off between cost and time to select the most convenient mode.

For example, in the first pair of alternatives (code JE in Table i), the car is 15 minutes faster, but it costs 1.30Euro more. If the 15 minutes which would be saved are valued at more than 1.30 Euro, a perfectly rational individual should prefer the faster alternative, whereas if the 15 minutes are valued at less than 1.30Euro the cheaper alternative would be chosen.

The value of time threshold can be simply calculated as the ratio between the differences of cost and time. In the example of the pair JE, the ratio is 1.30/15 0.087 / or 0.087 ∙ 60 5.2 / . In the second row (code DW, in Table i) the value of time is 0.7/10 ∙ 60 4.2 / and so on for all pairs.

Alternatives are built so that each pair corresponds to a different value of time in a range between 2.4Euro/hour and 10.8Euro/hour. In eight out of the 16 pairs, car is faster and more costly than train, while in the other eight pairs the opposite situation occurs. Moreover, the pairs have been mixed randomly, so the respondents cannot immediately identify the pattern of values of time.

The responses of the individuals involved in the exercise are therefore informed about their value of travel time. It can be reasonably argued that a rationale individual who is willing to pay 6 Euro to save 1 hour of travel time, will choose the faster mode in each

Appendix 2

115

pair corresponding to a value of time lower than 6 Euro. Instead he or she will select the cheaper alternative in each pair corresponding to a value of time higher than 6 Euro.

The templates in Table ii and Table iii can be used to reveal the value of time of the individual. The procedure is as follows:

Firstly, the individual fills in his/her choices in Table i writing in the column “choice” the preferred mode from the two alternatives for each of the 16 pairs.

Secondly, the individual reports his/her choices in the third row “choice” of Table ii and Table iii. Each pair is identified by its code. So, for instance, if the individual has chosen train in the first pair of the exercise, he/she should write “train” in the corresponding cell of Table ii.

Tables iv and v provide an example of how the templates might look after the individual has filled them in.

Thirdly, analysis of the choices recorded in the templates allows the identification of the value of travel time of the individual. In the pairs collected in the first template (Table iv) the car is the faster and more expensive alternative. It is expected that a rational individual will choose the car in all pairs where the implicit value of time is lower or equal to individual’s value of time, and will then choose the train for all other pairs. Since in the template the pairs are ordered by value of time, the responses of a rational individual in the row “choice” should look like one of the rows pre-coded in the template. For instance, if the individual response in row “choice” is the same as the fifth pre-coded row (the one highlighted in yellow). This means that car is chosen in the first four pairs and train is preferred afterwards. As reported in the last column of the template this set of choices corresponds to a value of time in the range of 4.20 5.20 / . In Table v, the individual response corresponds to the fourth pre-coded row, whose implicit value of time is in the range 3.6 4.2 / .

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 116

Table iv: A possible selection for Combination 1

Combination 1 NA MB LC KD JE IF HG GH

Choice Car Car Car Car Train Train Train Train

Value of time Train Train Train Train Train Train Train Train < 2.4 Euro/hour Car Train Train Train Train Train Train Train 2.4 - 2.8 Euro/hour Car Car Train Train Train Train Train Train 2.8 - 3.6 Euro/hour Car Car Car Train Train Train Train Train 3.6 - 4.2 Euro/hour Car Car Car Car Train Train Train Train 4.2 - 5.2 Euro/hour Car Car Car Car Car Train Train Train 5.2 - 7.2 Euro/hour Car Car Car Car Car Car Train Train 7.2 - 7.8 Euro/hour Car Car Car Car Car Car Car Train 7.8 - 10.8 Euro/hour Car Car Car Car Car Car Car Car > 10.8 Euro/hour

Table v: A possible selection for Combination 2

Combination 2 AZ BY CX DW EV FU GT HS

Choice Train Train Train Car Car Car Car Car

Value of time Car Car Car Car Car Car Car Car < 2.4 Euro/hour Train Car Car Car Car Car Car Car 2.4 - 2.8 Euro/hour Train Train Car Car Car Car Car Car 2.8 - 3.6 Euro/hour Train Train Train Car Car Car Car Car 3.6 - 4.2 Euro/hour Train Train Train Train Car Car Car Car 4.2 - 5.2 Euro/hour Train Train Train Train Train Car Car Car 5.2 - 7.2 Euro/hour Train Train Train Train Train Train Car Car 7.2 - 7.8 Euro/hour Train Train Train Train Train Train Train Car 7.8 - 10.8 Euro/hour Train Train Train Train Train Train Train Train > 10.8 Euro/hour

These three steps allow the researcher to identify in which range the value of time of the individual falls. There are two other observations about the exercise, however.

Firstly, as in the example reported in Tables iv and v, the estimated value of time can fall in different ranges when the faster alternative is car and when it is train. When this happens, the most likely reason is that elements other than time and cost drive individual choice. For instance, in Table iv, where the faster alternative is car, the individual’s choices reveal a value of time larger than in Table v, where the faster alternative is train. This means that the individual is willing to pay more for saving time when travelling by car than by train. Most likely, he/she prefers using the car, e.g. for reasons of comfort or flexibility. Thus, the exercise can also reveal that the individual has a prior preference for one alternative.

Secondly, the individual may not always provide wholly consistent responses. For instance, he/she might choose the faster mode for the combinations where the value of time is lower, then shift to the cheaper mode for two other pairs and then switch back to the faster mode. In this case, the exercise is inconclusive (i.e. the value of time of the individual cannot be derived from a simple inspection of the results collected in the templates). A more sophisticated analysis would be therefore required to arrive at an estimation.

Appendix 3

117

Appendix 3: Suggested solutions to problems

Appendix 3

 118

Chapter 2

1 Generalised cost

In order to calculate the generalised cost of a vehicle which travels the length of the highway, it is necessary to add together three different components:

the cost of the gasoline consumed;

the toll paid to the undertaking;

the value of passengers’ travel time.

Step by step, the calculations are listed below.

car consumption (g) is estimated at 5litres per 100km; then for a 50km section a car consumes 2.50litres. Since the cost per litre (f) is equal to 1Euro, the cost of consumption is:

∙ . ∙ . ∙  

according to the data provided the toll is . ;

the vehicle’s travel time (Ctot) ought to take into account the car’s load factor (l):

∙ ∙∙

∙ ∙ .

Hence, the sum of the three values above yields the generalised cost of travel per vehicle:

. . . .

Chapter 5

1 User surplus

In Figures I and II, the consumer surplus is depicted in reference solution (area NAC1) and in the project scenario (area NBC2), while the change in surplus between the scenarios coincides with the area C1ABC2 of the trapezium in Figure III .

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119

Figure I: User surplus in the reference solution

Figure II: User surplus in project scenario

travels1.000O

A

NGC

10C1

travelsO

B

GCN

5C2

1.500

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 120

Figure III: User surplus variation among scenarios

According to the figures above the user surplus is equal to:

, ∙ ∙ , , ∙ ,  

Otherwise, via the “rule of a half”, we obtain again:

∙ , , ∙ ,

2 Modal shift users’ benefit

The reduction of the generalised cost of travel for train users determines a modal shift of 500 passengers from road to rail. The total benefit generated corresponds to the sum of the benefit enjoyed by users already travelling by train (the rectangle MNRQ), plus the benefit of the diverted passengers (the triangle RPQ). According to the so-called rule of a half, the total amount is:

∙ ∙ , ,  

Figure IV below depicts the area calculated.

 

travelsO

A

B

GCN

10C1

5C2

1.5001.000

X

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121

Figure IV: Users’ surplus variation

3 External costs

The tables below show that the project gives rise to a social benefit, due to reductions of both emissions and accidents. For example, consider the reduction of nitrogen oxides (NOx), according to Table vi; in such a case we have:

. . ∙ , ,  

Repeating the calculations for each external cost, we obtain the results in Tables III and IV.

Table III: Benefits from emission reductions

Pollutant Reduction in emissions [tons/year] Total benefit [Euro/year] NOx 8.00 16,000 NMVOC 3.00 3,000 PM2,5 (not urban) 0.10 3,000

Total 22,000

Table IV: Benefits from accidents reduction

Type of casualty Reduction in casualties [number/year] Total benefit [Euro/year]

Fatality 5 10,000,000 Severe injury 5 1,000,000 Slight injury 20 400,000

Total 11,400,000

Finally, the total benefit determined by this project is:

Diverted users’ benefitM

N

RP

Q

Appendix 3

 122

, , ,

, ,

4 Performance indicators

The economic performance of the investment planned must be calculated according to the equation below:

 

where:

is time ( 1 is year 1, etc) and ∈ 0; ;

is the time span of the analysis, that is, the sum of the time required to complete the investment and of the time assumed as its operating phase;

is the benefit generated at time ;

is the cost borne at time ;

is the social discount rate.

According to the data provided the NPV equation can be rewritten as follows:

, ,⋯

, 

Table V shows the complete flow of costs and benefits.

Appendix 3

123

Table V: Flow of Costs and Benefits, both undiscounted (left hand side) and discounted (right hand side)

Year Undiscounted Flow Discounted Flow Costs Benefits 8,00% 6,00%

0 20,200.00 0,00 -20,200.00 -20,200.00 1 0.00 1,900.00 1,759.26 1,792.45 2 0.00 1,900.00 1,628.94 1,690.99 3 0.00 1,900.00 1,508.28 1,595.28 4 0.00 1,900.00 1,396.56 1,504.98 5 0.00 1,900.00 1,293.11 1,419.79 6 0.00 1,900.00 1,197.32 1,339.43 7 0.00 1,900.00 1,108.63 1,263.61 8 0.00 1,900.00 1,026.51 1,192.08 9 0.00 1,900.00 950.47 1,124.61 10 0.00 1,900.00 880.07 1,060.95 11 0.00 1,900.00 814.88 1,000.90 12 0.00 1,900.00 754.52 944.24 13 0.00 1,900.00 698.63 890.79 14 0.00 1,900.00 646.88 840.37 15 0.00 1,900.00 598.96 792.80 16 0.00 1,900.00 554.59 747.93 17 0.00 1,900.00 513.51 705.59 18 0.00 1,900.00 475.47 665.65 19 0.00 1,900.00 440.25 627.97 20 0.00 1,900.00 407.64 592.43

NPV -1,545.52 1,592.85

By introducing a discount rate of 8%, the result is an NPV of –1,545.52Meuro, and therefore the programme of modernisation should not be developed.

On the other hand, using a 6% discount rate, we obtain an NPV of 1,592.85Meuro and the result is that the NPV of the investment becomes positive.

In this respect, due to the change of sign from negative to positive, we can say that in the interval between 6% and 8%, there is a value of the social discount rate such that the 0, and this would be the Internal Rate of Return (IRR).

By definition, the IRR is determined equalling to zero the NPV equation, namely:

, ,⋯

,

 

Nevertheless, without any electronic aid (i.e. a spreadsheet), it is hard to solve an equation of the 20th degree, where the IRR is the unknown. Tedios calculation could be avoided by solving graphically this problem; in Figure VI, where the NPV is depicted as depending on the social discount rates provided and the red line joins these two points. The intersection point of the segment with the horizontal axis roughly identifies the IRR (about 7%).

Appendix 3

 124

Figure VI: Net Present Value function of the Social Discount Rate

5 Economic analysis of a railway line and modal shift (a simplified complete analysis)

In determining the economic performance of the project, the first step of the evaluation process requires the calculation of costs and benefits for all the stakeholders who might be affected by the implementation of the project. In this case, they are the:

users;

producer;

Government;

non-users.

The users are the travellers of the renovated railway line who enjoy a reduction in the generalised cost of travel (GC henceforth). The total benefit must be calculated as the sum of the benefits (from the change in consumer surplus) generated with respect to:

the pre-existing travellers who have already been travelling in the reference solution and who still travel in the project scenario;

the new travellers who decide to move to the renovated infrastructure, but who did not use it in the reference solution. This group of passenger coincides with the modal shifters (see Table x).

-2.000

-1.500

-1.000

-500

0

500

1.000

1.500

2.000

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%NP

V

SDR

Appendix 3

125

Figure VII – Change of users’ surplus

In Figure VII, the benefit of the pre-existing travellers corresponds to the area GCref.AXGCproj., while the travellers who shifted enjoy a surplus measured by the area of the triangle AXB. The total change in user surplus can be expressed as the follows:

. .  

. . ∙ . ∙ . . ∙ . .

. . .

In the analysis we are dealing with, the producer is the railway undertaking, that both manages the infrastructure and operates the service. The change in producer surplus is the change in the difference between total revenues and total operating cost between the reference scenario and the project scenario.

. . . . . .

where:

Π is the producer surplus;

TR are the total revenues earned;

TC are the total operating costs borne.

According to the data in Table xi, we obtain the result that:

. . . . .

The calculation above shows that the producer gets a benefit, even though in both scenarios he suffers losses; these occur because the total operating costs are always higher that the total revenues earned. The reason for the benefit generated lies in the reduction in losses, which fall from55.00 ⁄ to25.00 ⁄ .

The third party to be considered when appraising the project is the Government. In such a case, the revenues gained from taxes levied on fuel consumed by private vehicles fall,

passengersO

A

B

GC ref.

qref.

qproj.

GCN

45

GC proj.40X

[€/pass.]

Appendix 3

 126

as a consequence of some of the travellers shifting away from the road to the enhanced rail service. Let us assume that the change in Government revenues are as follows:

. .

where FR is the total amount of fiscal revenues from taxes levied on fuel. Substituting into the above equation the data from Table xi, we have the result:

. . .

Finally, the project’s non-users enjoy a benefit of15.00 ⁄ , which arises as the modal shift from road to rail brings about a reduction in external cost. All in all, they coincide with the reduction in private vehicle emissions, as well as the expected reduction in casualties on the more dangerous road corridor.

The next step consists of the appropriate allocation of costs and benefits within the economic life of the project, which is the sum of three years for the renovation works and 25 years for the period of operation. The calculation should be completed by introducing the residual value of the investment in the last year of the analysis,

∙

where:

is the economic residual value;

is the share of the economic investment cost .

Substituting the values in the equation above we have 0.30 ∙ 275.00 82.50 . Table VI summarises the flow of costs and benefits.

Appendix 3

127

Table VI: Flow of costs and benefits [Meuro/year]

Year I

nve

stm

ent

cost

Mai

nte

nan

ce c

osts

Users surplus

Pro

du

cer

surp

lus

Go

vern

men

t re

ven

ues

Ext

ern

al c

ost

s

Net

flo

w

Dis

cou

nte

d f

low

Pre

-exi

stin

g

Tra

velle

rs

shif

ted

0 -80.00 0.00 0.00 0.00 0.00 0.00 0.00 -80.00 -80.00 1 -95.00 0.00 0.00 0.00 0.00 0.00 0.00 -95.00 -86.36 2 -100.00 0.00 0.00 0.00 0.00 0.00 0.00 -100.00 -82.64 3 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 34.75 4 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 31.59 5 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 28.72 6 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 26.11 7 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 23.73 8 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 21.58 9 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 19.61

10 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 17.83 11 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 16.21 12 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 14.74 13 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 13.40 14 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 12.18 15 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 11.07 16 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 10.07 17 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 9.15 18 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 8.32 19 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 7.56 20 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 6.87 21 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 6.25 22 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 5.68 23 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 5.17 24 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 4.70 25 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 4.27 26 0.00 -25.00 32.50 8.75 25.00 -10.00 15.00 46.25 3.88 27 82.50 -25.00 32.50 8.75 25.00 -10.00 15.00 128.75 9.82

NPV 104.24

The economic performance of the project is the sum of the present values and is calculated as the sum of the figures in the last column in Table VI. The following formula applies:

⋯

 

where:

t is refers to year t counter and ∈ 0; 27 ;

is the net flow of benefits and costs at time t;

is the social discount rate.

By introducing a social discount rate of 10%, the performance indicator is positive and therefore the project is economically viable.

Appendix 3

 128

..

..

.

...

⋯..

.  

6 Economic analysis of highway renovation works (complete analysis)

Part 1

The net flow of the costs depends on both investment and planned maintenance. Since these values are given in financial terms, the first step consists of reduce them to economic values, by removing the indirect taxes.

The equation below indicates the formula for transforming the financial values economic values:

∙ →

where:

is the financial value;

is the economic value;

is the tax levied.

For example, to move from the financial investment cost to economic costs, the formula applied is:

,.

..

Table VII indicates all the data to be added to the flow shown in Table VIII. The indirect tax is the difference between the financial and economic data.

Table VII: Investment cost and planned maintenance: conversion to economic values [Meuro]

Item Investment Planned maintenance

Reference solution Project scenario Financial value 172.80 19.20 14.40 Indirect tax 28.80 3.20 2.40 Economic value 144.00 16.00 12.00

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129

Table VIII: Flow of net costs [Meuro]

Year Investment Planned maintenance

Net costs Project Project Reference

0 -36.00 0.00 0.00 -36.00 1 -36.00 0.00 0.00 -36.00 2 -36.00 0.00 0.00 -36.00 3 -36.00 0.00 -16.00 -20.00 4 0.00 0.00 0.00 0.00 5 0.00 0.00 0.00 0.00 6 0.00 0.00 0.00 0.00 7 0.00 0.00 0.00 0.00 8 0.00 -12.00 -16.00 4.00 9 0.00 0.00 0.00 0.00 10 0.00 0.00 0.00 0.00 11 0.00 0.00 0.00 0.00 12 0.00 0.00 0.00 0.00 13 0.00 -12.00 -16.00 4.00 14 0.00 0.00 0.00 0.00 15 0.00 0.00 0.00 0.00 16 0.00 0.00 0.00 0.00 17 0.00 0.00 0.00 0.00 18 0.00 -12.00 -16.00 4.00 19 0.00 0.00 0.00 0.00 20 0.00 0.00 0.00 0.00 21 0.00 0.00 0.00 0.00 22 0.00 0.00 0.00 0.00 23 0.00 -12.00 -16.00 4.00 24 0.00 0.00 0.00 0.00 25 0.00 0.00 0.00 0.00 26 0.00 0.00 0.00 0.00 27 0.00 0.00 0.00 0.00 28 0.00 -12.00 -16.00 4.00 29 0.00 0.00 0.00 0.00 30 0.00 0.00 0.00 0.00 31 0.00 0.00 0.00 0.00 32 0.00 0.00 0.00 0.00 33 0.00 -12.00 -16.00 4.00

Part 2

The generalised cost of travel (GC henceforth) is the sum of all the monetary and time costs perceived by users travelling by a specific transport mode. Applying these variables to the vehicles in the present analysis, we have to consider:

passengers, truck drivers and freight travel times;

vehicle fuel consumption;

highway tolls.

We do not have to introduce other vehicle costs listed in Table xiii: although they are perceived by users, they do not influence their travel decisions. Items such as insurance, tyres, maintenance and depreciation belong to this category and they require a special treatment, which will be considered when calculating other surplus changes.

The next two equations show how to calculate the GCs reported in Tables IX and X, both for the reference solution and the project scenario.

Appendix 3

 130

∙ ∙ ∙  

∙ ∙ ∙

where:

is the load factor;

is the value of time;

is the travel time between origin and destination;

is vehicle fuel consumption;

is the distance travelled between origin and destination;

is the toll paid to the highway undertaking;

is the freight tariff.

Table IX: Generalised cost of transport in reference solution [Euro/vehicle]

O/D Cars Trucks

A B C A B C A 40.0 22.5 121.0 65.5 B 40.0 22.5 121.0 65.5 C 22.5 22.5 65.5 65.5

Table X: Generalised cost of transport in project scenario [Euro/vehicle]

O/D Cars Trucks

A B C A B C A 35.0 20.0 86.6 48.3 B 35.0 20.0 86.6 48.3 C 20.0 20.0 48.3 48.3

The user surplus calculation needs to take account of all possible links of the road network in the present analysis.

For example, let us consider the trips between B and A; on the one hand, the GC of transport here reduces by 5 ⁄ (from 40.0 to 35.0) and on the other hand, cars increase by 100 units (from 1,000 to 1,100).

Therefore, according to the rule of a half, the total change in users’ welfare (S) is equal to: 7,875 ⁄ , namely 2.87 ⁄ .

∙ . . ∙ , , ,

The next figure (Figure VIII) depicts graphically the result achieved, where the area GCref.RPGCproj. is the result obtained.

 

 

 

 

 

Appendix 3

131

Figure VIII: Example of users’ surplus change (travels from A to B)

The values for all the other links are in Tables XI and XII.

Table XI: Users’ surplus changes for cars

O/D Euro/day Meuro/year

A B C A B C A 7,875 6,563 2.87 2.40 B 5,250 6,563 1.92 2.40 C 5,250 3,938 1.92 1.44

Table XII: Users’ surplus changes for trucks

O/D Euro/day Meuro/year

A B C A B C A 1,809 1,378 0.66 0.50 B 3,790 1,378 1.38 0.50 C 1,077 1,077 0.39 0.39

All in all, car users enjoy a benefit of 12.93 / , while for trucks the benefit is 3.84 / . Therefore, the total amount is 16.77 / .

The change in producer surplus includes the profits and losses of the highway undertaking, namely the excess of revenues over operating costs (if any).

. . ∙ , . . ∙ , . .  

where:

∙ are the annual toll revenues earned either from either cars or trucks;

are the operating costs per year.

0

10

20

30

40

50

60

70

80

90

100

110

120

0 250 500 750 1.000 1.250 1.500 1.750 2.000 2.250 2.500

Gen

eral

ised

cos

t [€

/veh

icle

]

Cars/day

PGCref.

GCproj.

R

Appendix 3

 132

Table XIII: Revenues in reference solution [Meuro/year]

O/D Cars Trucks

A B C A B C A 2.74 4.56 0.18 0.27 B 1.83 4.56 0.37 0.27 C 3.65 2.74 0.18 0.18

Table XIV: Revenues in project scenario [Meuro/year]

O/D Cars Trucks

A B C A B C A 3.01 5.02 0.20 0.31 B 2.01 5.02 0.44 0.31 C 4.02 3.01 0.27 0.27

According to the results in Tables XIII and XIV, we have:

. . . . .

Changes in Government fuel tax revenue have to be assessed as well. In such cases, the changes depend on the changes in journey lengths between the scenarios. Vehicle diversion from the non-tolled road to the highway reduce the distance travelled, and therefore generates fuel savings.

Table XV: Savings due to vehicles diversion per distances [km] and consumption [litres/vehicle]

O/D Distances saved [km]

Fuel consumption saved [litres/vehicle] Cars Trucks

A B C A B C A B C A 10 5 1.00 0.50 5.00 2.50 B 10 5 1.00 0.50 5.00 2.50 C 5 5 0.50 0.50 2.50 2.50

Table XVI indicates the volume of diverted traffic, depending on vehicle and fuel type.

Table XVI: Diverted traffic per type of fuel [vehicles/day]

O/D Gasoline (cars)

Diesel Cars Trucks

A B C A B C A B C

A 75 125 75 125 5 10 B 50 125 50 125 20 10 C 100 75 100 75 25 25

By calculating the total savings per type of fuel and introducing the taxes levied per litre, we arrive at the change in Government revenues (see Table XVII).

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133

Table XVII: Changes of Government fuels tax revenues [Meuro/year]

O/D Gasoline (cars)

Diesel Cars Trucks

A B C A B C A B C A 0.008 0.007 0.011 0.009 0.004 0.004 B 0.005 0.007 0.007 0.009 0.015 0.004 C 0.005 0.004 0.007 0.005 0.009 0.009

The overall change (namely, a loss in this case) of Government revenues is equal to 0.13Meuro/year.

Finally, we complete the calculation by considering the change in the non-perceived VOCs, that we have already mentioned in the conclusion of Part 2.

Table XVIII: Non-perceived VOCs [Euro/vehicle·km]

Item Financial values Economic values

Private (car)

Indirect tax Share Private

(car) Insurance 500.00 20% 0% 0.00 Tyres 0.02 20% 100% 0.01 Maintenance 0.07 20% 50% 0.03 Depreciation 0.09 20% 50% 0.04 Total 0.18 0.08

Benefits arising from this component should be calculated by again introducing the travel distance saved diverted traffic (see Table XVI). By multiplying the reduction in vehicle·km (see Table XIX) by the economic values of the non-perceived VOCs, we arrive at the result sought.

Table XIX: Variations of Mvehicles·km/year

O/D Cars

A B C A 0.55 0.46 B 0.37 0.46 C 0.37 0.27

The costs fall by 0.20 / for cars.

Part 3

Compiling the results already obtained and including the data presented about savings in external costs, Table XX shows the flow of costs and benefits. Finally, the NPV performance indicator is calculated by introducing a social discount rate of 10%.

Figure IX depicts the relative share of the items considered in the analysis. About three-quarters of the benefits arise from the reduction of GC enjoyed by the users. The remaining quarter is made up of all the other items.

Appendix 3

 134

Table XX: Flow of net benefits and NPV [Meuro] with 10% social discount rate

Year Net costs Users Producer Govern.

Non perceived

VOC

External benefits Total

benefits Net

benefits

Present Net

Benefit Environ -

ment Accidents

0 -36.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -36.00 -36.00 1 -36.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -36.00 -32.73 2 -36.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -36.00 -29.75 3 -20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -20.00 -15.03 4 0.00 16.77 3.35 -0.10 0.20 1.00 0.50 21.72 21,72 14,83 5 0.00 16.77 3.35 -0.10 0.20 1.00 0.50 21.72 21,72 13,48 6 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 12,26 7 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 11,14 8 4.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 25,72 12,00 9 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 9,21

10 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 8,37 11 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 7,61 12 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 6,92 13 4.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 25,72 7,45 14 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 5,72 15 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 5,20 16 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 4,73 17 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 4,30 18 4.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 25,72 4,63 19 0.00 16.77  3.35 -0.13 0.20 1.00 0.50 21.72 21,72 3,55 20 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 3,23 21 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 2,93 22 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 2,67 23 4.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 25,72 2,87 24 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 2,20 25 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 2,00 26 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 1,82 27 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 1,66 28 4.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 25,72 1,78 29 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 1,37 30 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 1,24 31 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 1,13 32 0.00 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 21,72 1,03 33 47.20 16.77  3.35 -0.10 0.20 1.00 0.50 21.72 68,92 2,97

NPV 46.81

   

Appendix 3

135

 

Figure IX: Variations per item at the opening year

A final comment worth noting is consideration of the effect of changes in the SDR and its consequences for the economic performance of the project. Clearly, Figure X indicates that the IRR is close to the assumed SDR, and therefore the performance could reasonably be sensitive to variations in some of the critical variables.

For example, an increase in the investment costs may move downwards the red function drawn, switching the sign of the result. Similarly, a reduction in the amount of travel diverted from the alternative non-tolled road might lead to a similar result..

The IRR obtained graphically can be obtained also by an analytical process, by setting equal to zero the NPV formula. In this case, we deal with a 33rd degree equation, as follow41:

. . . .

. . 

In order to avoid tedious calculations, the IRR is determined using the functional procedure usually available in a spreadsheet. The final result is 13.70%.

 

 

                                                            41 The data are from Table XX.

-2

0

2

4

6

8

10

12

14

16

18

Users Producer Government Non perceived VOC

Environment Accidents

Ch

ange

s [M

euro

/yea

r]

Appendix 3

 136

 

Figure X: NPV as function of the SDR

6.1 Road congestion

The traffic diverted from toll-free to tolled road reduces the number of vehicles travelling along the pre-existing route, hence reducing the level of congestion.

In the reference solution, there are 450 cars travelling from A to B on the toll-free road (see Table xvii). However, from Tables xv and xvi we see that, in these scenarios, the number of cars drops by 150 units, whereas on the tolled link they increase from 1.500 to 1.650. Therefore, the number of vehicles still travelling along the toll-free section remains at 300 per day.

As a result, the users still travelling on that road will enjoy a reduction in travel time and the benefit is calculatedby monetising its value42. Generally, in the case of cars, we can apply the following formula:

∙ ∙  

 

Table XXI: Vehicles data (see Table xiii)

Variable Unit of measurement Private (car) Value of time passenger euro/h·passenger 10.00 Passenger load passenger 2.00

According to the data in Tables xvii and XXI the GCs for the link AB are equal to:

                                                            42 The calculation only refer to travel time, as fuel consumption does not change between scenarios.

-100

0

100

200

300

400

500

600

0 5 10 15 20 25

NP

V [

Meu

ro]

Social Discount Rate [%]

Appendix 3

137

. ∙ .∙

∙ . .  

. ∙ .∙

∙ . .

Therefore, the total time benefit enjoyed by the passengers in the 300 vehicles still travelling on the tolle-free road is:

. . ∙ 

6.2 External costs

In this section, we make the assumption that the vehicle fleet is entirely of Class IV for pollutant emissions. As the total distance travelled is 2.46 / ,the share of travel by fuel type is: 1.48 / for gasoline and 0.96 / for diesel.

Table xx provides the unit of emission by class of vehicle and, by multiplying these values by the total distance travelled as calculated above, we obtain the total amount of emissions per year.

Table XXII: Total emissions per year

Pollutant Class IV unit emissions

[grams/vehicle·km] Total emissions [tons/year]

Gasoline Diesel Gasoline Diesel Total CO2 101.66 86.07 150.27 127.23 277.50 NOx 0.10 0.08 0.14 0.13 0.27 SO2 0.03 0.05 0.05 0.07 0.12 PM 0.00 0.00 0.03 0.02 0.05 NMVOC 0.02 0.02 0.00 0.01 0.01

Since suitable values for the country of interest are not available, the analysis requires an intermediate step to calculate a value transfer, via the data available about country X. The value transfer is the ratio of the per capita incomes of these countries, as shown in the following equation.

 

where the s are the per the capita incomes. In this case 1.05 and the adjusted external costs, as well as their total amounts, are listed in Table XXIII.

Table XXIII: External costs of pollutants [Euro/year]

Pollutant Unit cost [Euro/ton] Total cost

[Euro/year] Country X Country of interest CO2 55.54 58.32 16,183 NOx 3,310,85 3,476.39 933 SO2 3,101.45 3,256.52 392 PM 63,221.89 66,382.98 56 NMVOC 981.27 1.030.34 370

Total 17,934

A preliminary step in the evaluation of the external costs of noise requires the choice of suitable values from those shown in Table xxii, which are a function of the location of the emission. Since the road link runs mainly outside urban or suburban areas, we can reasonably refer to the rural areas here.

Appendix 3

 138

Again, for the proper evaluation of the benefits, an intermediate step is required for calculating the values relevant to the country of interest. By the application of the value transfer already mentioned, we obtain the information needed. Finally, we have to calculate the share of traffic volume by day and by night. Table XXIV summarises the results.

Table XXIV: Noise external costs [Euro/year]

Time Unit external cost (rural) [Euro/veh·km] Share Travels

[Mvehicles·km/year] External costs [Euro/year]

Day 0.00011 80% 1.97 208,98 Night 0.00032 20% 0.49 156,73

Total 100% 2.46 365.71

The final external costs to consider in the analysis are changes in road accident rates between the scenarios.

The data in Table xxiii indicate the accident rates by type of infrastructure and per Million vehicle·km. Therefore, the first step is to calculate the changes in vehicle km by scenario and for each piece of infrastructure. Distances for tolled highway and toll-free road are in Tables xii and xvii respectively.

As far as the volume of travel is concerned, data for the tolled highway is in Tables xv and xvi. Data for the toll-free road in th reference solution is in Table xvii; as traffic diversion has occurred, the traffic volumes on the toll-free road in the project scenario can be calculated by subtracting from the latter table the traffic diverted onto the tolled highway. The results are shown below in Tables XXV and XXVI.

Table XXV: Tolled highway [Mvehicle·km/year] (reference solution on the left and project scenario on the right)

O/D A B C Total O/D A B C Total

A 54.750 45.625 A 60.225 50.188

B 36.500 45.625 B 40.150 50.188

C 36.500 27.375 246.375 C 40.150 30.113 271.013

Table XXVI – Toll-free road [Mvehiclekm/year] (reference solution on the left and project scenario on the right)

O/D A B C Total O/D A B C Total A 18.068 14.053 A 12.045 9.034

B 25.094 11.041 B 21.079 6.023

C 11.543 10.539 90.338 C 7.528 7.528 63.236

Once the volume of traffic (here measured in Mvehicle·km/year) is calculated, the results should be multiplied by the corresponding fatality rates shown in Table xxiii. The result of this calculation gives the level of casualties to be expected by type of infrastructure (see Table XXVII).

Table XXVII: Expected casualties in reference solution and project scenario

Reference Project

Fatality Injury Fatality Injury

Road 2.258 58.719 1.581 41.104 Highway 2.464 86.231 2.710 94.854 Total 4.722 144.951 4.291 135.958

Appendix 3

139

Finally, the change in the number of casualties between scenarios using the values reported in Table xxiv provides the social benefit arising from road safety improvements (namely, 604,851 / ).

Table XXVIII: Social benefit from road safety enhancement [Euro/year]

Fatality Injury Variation 0.431 8.993 Unit value 360,000 50,000 Total 155,216 449,634

6.3 Growth rates

Introducing growth rates simultaneously for travel demand and VOT means that the values of these variables change as time goes by. The baseline values in the opening year are summarised in Table XXIX.

Table XXIX: Parameters in the opening year43

Link Travels/day Generalised cost [Euro/vehicle]

Reference solution Project scenario Reference

solution Project scenario

A → B 1,500 1,650 40.00 35.00

The volume of travel 20 years after the opening of the infrastructure should be calculated by introducing the growth rate assigned, according to the volume of travels in both scenarios and with respect to the following equation:

∙

where:

is the travel demand in the opening year;

is the travel demand after years;

is the travel demand growth rate.

By introducing a growth of 1.00% per year, we obtain 1,830 and 2,013 trips per day in the reference solution and the project scenario, respectively.

At the same time, the forecast increase in GDP influences the VOT, which in turn modifies the GC as shown in the equation below:

∙ ∙ ∙ ∙  

where:

is the GDP growth rate;

all the other variables have the meaning introduced in the complete analysis. The GCs calculated in the opening year now change to 45.50 and 39.40 Euro/vehicle, in line with the assigned rate.

Finally, the users’ surplus variation is:

∙ . . ∙ , , , 

                                                            43 See tables xv, xvi, IX and X.

Appendix 3

 140

Chapter 7

1 Risk analysis

The purpose of a risk analysis is to generate a cumulative probability distribution function for a project’s NPV, such that the total probability of 0 is explicitly identified.

According to the distribution of the outcomes in Table xxv, the NPV remains negative (including zero) when the construction period lasts at least six years. Summing the corresponding probabilities, we obtain a cumulative value of 30% (see Figure XI).

Figure XI: Cumulative distribution of probabilities with respect to NPV

 

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

1,00

-40,00 -20,00 0,00 20,00 40,00

Cu

mu

lati

ve p

roba

bilit

y

NPV

References

141

 

References

 142

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