Economic Evaluation of Highway Projects

Economic evaluation of highway projects

Better highway system provides varied benefits to the society. Improvements in highway results in several benefits to the road users such as 1. 2. 3. 4. .

Reduct Reduction ion in vehi vehicle cle oper operatio ation n cost cost Savi Saving ngss in in trav travel el time time Redu Reduct ctio ion n in acci accide dent nt rat rates es Impr Improv oved ed lev level el of of serv servic icee Increas Increased ed comfor comfortt to to passen passenger gerss

Highway user benefits General benefits Several benefits are brought to highway users and others due to the construction of a new highway or by improving a highway. Road user benefits are the advantages! privileges or  savings that accrue to drivers or owners through the use of one highway facility as compared with the use of another. Benefits are measured in terms of the decrease in road user costs and the increas increasee in road road user services. services. Road Road user user service servicess are the advantage advantagess or privil privilege egess accruing to the vehicle driver or owner through features of safety! comfort! convenience etc. in some cases these can be evaluated in rupees per veh"#m. $ reduction in transportation cost as a result of highway improvements would result in the reduction in cost of almost every commodity which is transported from place to place before  being delivered to the consumer. %he impact of transportation cost on the cost of various commodities commodities is conspicuous conspicuous when there is an enhancement enhancement in transportatio transportation n cost due to any reason! such as hi#e in price of petrol and diesel. %he various benefits due to highway improvement may be classified into categories 1. &uantifiable &uantifiable or tangible tangible benefit benefitss in terms terms of of mar#et mar#et values values 2. 'on (uanti (uantifiab fiable le or inta intangi ngible ble bene benefits fits.. Quantifiable benefits )arious benefits which can be (uantified include benefits to road user such as reduction in vehicle operation cost! time cost and accident cost. %he other benefits include enhancement in lan value. %here are briefly e*plained below. 1. Saving Saving in vehicle vehicle operati operation on cost is due to reduction reduction in fuel and oil consum consumpti ption on and reduction in wear and tear of tyres and other maintenance costs. $ road with sharp curves and steep grades re(uire fre(uent speed changes! presence of intersections re(uire stopping idling and accelerating! vehicle operation on road stretches with high traffic volume or congestion necessitates speed changes and stoppings and increased travel time. $ll these factors result in an increase in every component of vehicle operation cost. +neven pavement surface condition with ruts! potholes! undulations! waves and corrugations increase the vehicle operation cost due to increase in fuel consumption! tyre wear and the general maintenance cost of the vehicles. 2. Saving Saving in travel travel time is of direct direct conse(uen conse(uence ce to commercial commercial vehicles vehicles due to possible possible increase in their trip length and earning per unit time. Benefits due to saving in travel time may be assigned in terms of time cost of vehicles.

3. )alue may also be assigned for the saving in travel time of passengers. $ part of the time saved by the passengers or commuters may be used for some useful purpose and a value can be assigned for the saving in travel time 4. %he reduction in accident rate due to improvement in highway facilities causes considerable benefits to the road users and others! the component of accident costs may include cost of damage to vehicle and other properties! in,uries and loss of  human life! delays to vehicles and the passengers! cost for investigations! legal  proceedings etc. . %he benefits to other than road users include the enhancement in land value increase in employment opportunities and related economic uplift. Non-quantifiable benefits %he non (uantifiable benefits due to improvements in highway facilities include reduction in fatigue and discomfort during travel! increase in comfort and conveniences and improvement in general amenities! social and educational aspects! development of recreational and medical services! improved mobility of essential services and defence forces! aesthetic values! etc. yet another important intangible road user benefit is the reduction suffering and pain of those involved in highway accidents Factors affecting vehicle operation cost Vehicle factors 1. $ge 2. -a#e 3. orse"power  4. /oad carried . 0ondition of vehicle . /evel of maintenance input . %ype of fuel used . %ype of tyres oa!way factors 1. Roughness of the surface 2. %ype of surface 3. oriontal curvature 4. )ertical profile . 5avement width . %ype and condition of shoulders . 'umber of ,unctions6#m "raffic factors 1. Speed of travel 2. %raffic volume and composition Environmental factors 1. $ltitude 2. Rainfall 3. %emperature Evaluation techniques %he methods commonly adopeted for economic evaluation are 1. 'et present value

2. Benefit6cost ration method 3. Internal rate of return Net present value %he '5) method is based on the discounted cash flow techni(ue. In this method! the stream of costs and benefits associated with the pro,ect over its time horion is calculated and is discounted at a selected discount rate to give the present value. Benefits are treated as  positive and costs are treated as negative. $ny pro,ect with a positive '5) is treated as acceptable. In comparing more than one pro,ect! a pro,ect with the highest '5) is selected. #enefit cost ratio metho! %here are a number of variations of this method! ut the simple procedure is to discount all costs and benefits to their present worth and calculate the ratio of the benefits to costs.  'egative flows are considered costs! and positive flows as benefits. %hus the savings in the transport costs are considered as benefits. If the b6c ratio is more than one! the pro,ect is worth underta#ing $nternal rate of return metho! %he internal rate of return method is the discount rate which ma#es the discounted future  benefits e(ual to the initial outlay. In other words! it is the discount rate which ma#es the stream of cash flows to ero. %omparison of the various metho!s of Economic Evaluation %he three methods of economic evaluation described above have their own advantages and disadvantages %he B60 ration method is very widely used by the highway engineers. It! however! suffers from the following drawbac#s7 1. It re(uires an assumption of discount rate! which should bear relation to the opportunity cost of capital. It is! however ! rather difficult to #now the opportunity cost of capital accurately 2. %he significance of the B60 ratio is ambiguous! and its relative value is difficult to understand and interpret 3. It is somewhat confusing to decide which items should be termed as costs and placed in the denominator and which as benefits and placed in the numerator. %he IRR method is popular with international lending agencies li#e the 8orld Ban#. It lends itself admirably well for use in a computer aided design model. It avoids the need for  selecting a discount rate of interest! with which economists! financial e*perts and ban#ers are familiar. Its disadvantage is that the computations are tedious and a solution can be obtained only by trial and error %he '5) method suffers from the same disadvantages as that of B60 ratio method in that a rate of discount is to be assumed. E&le 0alculate the annual cost of a stretch of highway from the following particulars7 $tem

"otal cost s' in la(hs

Estimate! life' years

ate of interest )

/and 12.9 199  :arthwor# ;.9 49  Bridges . 9  5avement 14.9 1 19 %he average cost of maintenance of road is Rs 1. la#hs per year. *olution+ 8hen ever the salvage cost is not given the e(uation to calculate the annual cost

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