Economic management of road

transport
Lecture 1

Economic Management of Road Transport (11 hours)

Introduction. Importance of Road Transport. Scope. Economic Function.
Government involvement. Future development in Transport Classification of
hydropower and end uses
Demand on Road Transport: Factors affecting demand: Land use pattern,
Quality of service, Price, Time value, Demand Analysis, Introduction of
Hydropower plant in Nepal
Costing of Road Transport: Concept of Fixed and Variable costs, Direct and
Indirect Costs, Joint and Common Costs. Excapability and opportunity
costs. Policy of Nepal Government
Pricing of Road Transport: Cost-Plus Pricing, Pricing policy in imperfect
market condition, Marginal Cost Pricing, Subsidy in Transport
Investment Appraisal: Introduction. Conventional investment appraisal,
Average rate of return, Payback Period, Discounted Cash Flow, Net Present
Valve, Benefit-Cost Ratio, Internal Rate of Return
Cost Benefit Analysis: Social cost benefit analysis, hidden Cost, Benefit in
transport
Valuation of Cost and Benefits: Shadow Pricing of Market items, Valuation
of Time, accidents, environmental costs
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Contents
Introduction. Importance of Road Transport. Scope.
Economic Function. Government involvement. Future
development in Transport

Introduction
Today, a world without roads, cars, motorcycles and bicycles is almost
unimaginable. The entire road infrastructure with its diversity of transport
concepts now has a prominent almost dominant position in our
society.
Development is related at improving the welfare of a society through
appropriate social, political and economic conditions.
The transport sector is an important component of the economy and a
common tool used for development.
When transport systems are efficient, they provide economic and social
opportunities and benefits that result in positive multipliers effects such
as better accessibility to markets, employment and additional
investments.
When transport systems are deficient in terms of capacity or reliability,
they can have an economic cost such as reduced or missed
opportunities and lower quality of life.
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What is economics?
Definition:
How individuals, firms, governments and other organizations within
our society make choices, and how those choices determine the way
the resources of society are used. Choices are unavoidable because
desired goods, services and resources are inevitably scarce.
Choices have to be made by the economy as a whole as well as
by each individual.
How do all the choices interact to determine the use of scares
resources available to society?
OR
Due to scarcity we have to make choices, weighing the benefits
and costs of each choice. This is economics. So Mick Jagger was
quite the economist when he sang, "You can't always get what you
want. (http://www.oswego.edu/~edunne/200ch1.html )
Source: www.bonissen.de/ib/summaries/Economics%20(1-3).PDF

Four basic questions how economics functions

1.
2.
3.
4.

What is produced and in what quantities?

How are these goods produced?
For whom are these goods produced?
Who makes economic decisions, and by what
process?

Source: www.bonissen.de/ib/summaries/Economics%20(1-3).PDF
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Buyers and sellers in the marketplace answer these questions

For example, consider the decision to produce a Lexus.
What to produce? Toyota designs a luxury car that it believes buyers will want.
Toyota decides how many it is willing to make given the price and their own costs,
and U.S. buyers decide how many they will buy, based on the price, their
preferences for the luxury car, among other factors.
How to produce? Toyota designs a factory and machines and hires workers to
make the Lexus at a low cost, but high quality. The government (of Japan and the
United States) restricts Toyota's production techniques: there are pollution and
safety regulations that Toyota must follow. There are minimum wage and overtime
laws that Toyota must follow in compensating workers.
Who gets a Lexus? If you've got $50,000 and your willing to give it to Toyota, then
you get a Lexus. If not, too bad. In other words, in the marketplace, the PRICE of
the Lexus rations out the car. If everyone could just go pick one up for free, we
would very quickly run out of Lexuses, and Toyota would not be able to make them
fast enough. The price determines who will get scarce resources.
Who decided 1-3? For the most part, Toyota and potential car buyers determine the
design, quantity and price of the Lexus. However the government also had a say in
how a Lexus is produced through certain regulations.
Source: http://www.oswego.edu/~edunne/200ch1.html

What is transportation economics?

Transport Economics is the study of the
movement of people and goods over space and
time. It is a branch of economics that deals with the
allocation of resources within the transport sector.
Topics traditionally associated with Transport
Economics include Privatization, Nationalization,
Regulation, Pricing, Economic Stimulus, Financing,
Funding, Expenditures, Demand, Production, and
Externalities.
Source: www.tcd.ie/.../Lecture%201%20-%20Transport%.

Importance of road transport

The roads in a big way facilitate advancement in the economy of a country and
they simultaneously facilitate communication.
Road transport is one of the most promising and potent means for rapid
industrialization and agricultural advancement. It plays an important role in the
economy of the country and is particularly suitable for short and medium
distance.
It provides the basic infrastructure for bringing the majority of the people who are
living in far off villages into the mainstream of life by connecting them with the
rest of the country.
With the spread of green revolution in the country and industrial growth and
opening up of new areas, the road transport has assumed greater importance as
the growing demands for supply of inputs like fertilizers, seeds etc. as well as
the transport of agricultural produce to markets have to be met largely by road
transport.
Source: http://www.managementparadise.com/forums/elements-logistics/201669importance-road-transport.html

Benefits of transport systems

Transport systems help overcome the effects of distance. They
also provide the following benefits
Increased size of the market by enabling domestic goods to
be sold globally
Enhanced opportunities for international trade and the
benefits or economic integration
Enabling of Just in Time (JIT) production techniques.
Components are delivered when needed reducing a firms
stock levels hence unit costs
Improved mobility of labour: workers can live many miles
from work and commute
Improved UK competitiveness: efficient transport systems
minimise travel times and so lower domestic unit costs
Source: http://tutor2u.net/economics/content/topics/transport/introduction.htm

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Scope and economic function of road transport

Scope:
To provide the service to people to reach their destination in time at
affordable cost safely.
Economic function:
Effective and efficient transportation provide economic benefits that result
in multiplier effects such as better accessibility to markets, employment and
additional investments. Consequently citizens who are deprived of
transportation infrastructure miss out on several economic opportunities.
Directly or indirectly, transport infrastructure may affect:
Production processes
Industrial location
Housing/labour markets
Price setting

Interregional/international trade
Distribution systems
Land prices

Examples: apples from Mustang, vegetables from Tarai, tea from Ilam etc.
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Scope and economic function of road transport

Mobility is one of the most fundamental and important
characteristics of economic activity as it satisfies the
basic need of going from one location to the other, a
need shared by passengers, freight and information.
Economies that possess greater mobility are often
those with better opportunities to develop than those
with scarce mobility. Reduced mobility impedes
development while greater mobility is a catalyst for
development.
Mobility is thus a reliable indicator of development.
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Automobile dependency
Automobile dependency is defined as high levels of per capita
automobile travel, automobile oriented land use patterns and reduced
transport alternatives. The opposite of automobile dependency is a
balanced transportation system with more mixed travel patterns.
Automobile dependency is a matter of degree. In its extreme, nearly all
local trips are made by personal automobile because alternatives are so
inferior.
Some people suggest that automobile dependency always increases as
consumers become wealthier, but this is not necessarily true. Many
wealthier regions have balanced transportation systems while some
poorer regions are quite automobile dependent. The differences result
from public policies that affect transport choices and land use patterns
Source: Victoria Transport Policy Institute, Website: www.vtpi.org
Institute for Science and Technology Policy Murdoch University, Website: www.istp.murdoch.edu.au
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Economic Development Impacts of Automobile Dependency

Increased Mobility And Convenience For Motorists
Increased Vehicle And Fuel Expenditures
Increased Road And Parking Expenditures
Increased Traffic Congestion, Crash Damages And Environmental
Impacts
Automobile-Oriented Land Use
Reduced Travel Choices
In summary, automobile dependency has both positive and negative
economic development impacts. Benefits are associated with more
efficient local travel that affects productivity and some retail efficiencies.
Offsetting these are various inefficiencies and increased costs that are
borne throughout the economy.

Source: Victoria Transport Policy Institute, Website: www.vtpi.org

Institute for Science and Technology Policy Murdoch University, Website: www.istp.murdoch.edu.au

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Economic impacts of transportation

Direct impacts. The outcome of improved capacity and efficiency where
transport provides employment, added value, larger markets as well as time
and costs improvements. The overall demand of an economy is increasing.
Indirect impacts. The outcome of improved accessibility and economies of
scale. Indirect value-added and jobs are the result of local purchases by
companies directly dependent upon transport activity. Transport activities
are responsible for a wide range of indirect value-added and employment
effects, through the linkages of transport with other economic sectors (e.g.
office supply firms, equipment and parts suppliers, maintenance and repair
services, insurance companies, consulting and other business services).
Induced impacts. The outcome of the economic multiplier effects where
the price of commodities, goods or services drops and/or their variety
increases. For instance, the steel industry requires cost efficient import of
iron ore and coal for the blast furnaces and export activities for finished
products such as steel booms and coils. Manufacturers and retail outlets
and distribution centers handling imported containerized cargo rely on
efficient transport and seaport operations.
Chapter 7 from the book The geography of transport system
http://people.hofstra.edu/geotrans/eng/ch7en/conc7en/ch7c1en.html

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Government involvement
Nepal government is building roads of different
category; e.g. highways, feeder roads, hilly roads etc.
(Economic Survey).
Government is also involved in determining the
transport fare for passengers and goods (DoTM).
Road tax is collected from each vehicle for the
maintenance purpose.
Vehicle registration and renewal of vehicle registration
(DoTM).
Imports and sells petroleum products (NOC).
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Motorable road
Fiscal year

Black
topped

Graveled

Earthen

2010/11

9,902 km

5,670 km

7,637 km 23,209 km

2011/12

10,192

5,787 km

8,410 km 24,389 km

2012/13

10,659 km 5,940 km

8,666 km 25,265 km

2013/14
10,810 km 5,925 km
(mid-March)

8,864 km 25,599 km

Total

Source: Economic Survey, 2013/14

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Local self-governance and community

development program
Fiscal year

Black
topped

Gravel

Road
Total
graveled

2011/12

3,754 km

287 km

676 km

4,717 km

2012/13

3,075 km

178 km

731 km

3,984 km

2013/14
2,050 km
(mid-March)

120 km

487 km

2,657 km

Source: Economic Survey, 2013/14

(data provided Ministry of federal affair and land development)
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Future development in transport

Rail transport
East west mid hill highway
North-south highway
Etc.

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Impact of generic development of road transportation

Shortage of clean environment: including air pollution from cars
Shortage of energy: the natural oil resources are scraping the
bottom of the barrels
Shortage of space: for housing, working, living, recreation and
transport,
But also:
Increased demand for mobility: amongst others resulting from
increase in leisure activities and increasing of single households,
Increased individual demands: everybody enjoys driving a car,
but nobody wants to see a road, hear the traffic or smell exhaust
fumes.
Source: nr2c_final_report.pdf

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Expected concepts of future road construction

Reliable Infrastructure, standing for optimising the
availability of infrastructure,
Green (environmentally-friendly) Infrastructure,
standing for reducing the environmental impact of traffic
and infrastructure on the sustainable society,
Safe and Smart Infrastructure, standing for optimising
flows of traffic of all categories of road users and safe
road construction working,
Human (-friendly) Infrastructure, standing for
harmonising infrastructure with the human dimensions.
Source: nr2c_final_report.pdf

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From vision to direction for solutions

Source: nr2c_final_report.pdf
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Review questions
What are the benefits of road transport in Nepal?
What are the impacts of road transport in economy
of Nepal?
What kind of transport is essential for growing
urbanization?

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