Chapter - 13 Economic and Financial Evaluation: Modal Shares in Madhya Pradesh, 2007-2008

Consultancy Services for preparation of Detailed Project Report for Detailed Project Report
Reconstruction & Widening of existing MDRs Networks in Rewa-1 & Rewa-2 Economic& Financial Evaluation
divisions of Madhya Pradesh (Package-VII) under ADB Phase-V Kirhai – Ramgarh – Mukundpur Road
CHAPTER -13
13.1 INTRODUCTION
ECONOMIC AND FINANCIAL EVALUATION 1
Economic analysis of the project Kharamseda-Kirhai-Ramgarh (Kirhai-Ramgrah-Mukundpur) road (a
sample road out of 9 roads selected as sample roads under ADB Phase-V) for rehabilitating and upgrading
under the proposed Madhya Pradesh District Connectivity Sector Project was carried out using the
Highway Development Model 4 (HDM-4). The model require input data on traffic, road geometry,
condition, pavement structure and material characteristics of the existing road, maintenance and road
improvement costs, and vehicle operating cost (VOC) parameters. The costs to the road agency and road
users in the with- and without-project cases were estimated and used for deriving the net costs and
benefits with the project and to calculate the economic viability of the sample roads. The project will
contribute to the improved road transport connectivity in the state of Madhya Pradesh by reconstructing
and rehabilitating about 1,600 kilometer (km) of Major District Roads (MDRs) to all weather standards. All-
weather roads will provide all-year access to social services and markets and significantly reduce vehicle-
operating costs. Least cost options have been adopted for technical designs for the MDRs, with due regard
to the fact that the project involves improvements to existing roads, in-situ. The existing bituminous/CC
surface is being up-graded to rigid pavements. Longitudinal and cross drains are also proposed to be in
line with existing systems.
13.2 PROJECT ROAD DETAIL
Madhya Pradesh is surrounded by five states: Chhattisgarh, Gujarat, Maharashtra, Rajasthan, and Uttar
Pradesh. Because of its central location, traffic from these surrounding states passes through its state
largely from road and railway network. Other modes of transport such as civil aviation and coastal
shipping have very limited role in the state’s transport services and would require substantial initial
investment cost. Modal shares in Madhya Pradesh are shown in Table-13.1. The project scope was
considered based on the least cost approach to invest in the road transport. The project road has mostly
single lane configuration except between 21.000 & Km 23.375 and except between 32.550 & Km 34.000.
They pass through rural areas and the land use pattern along the project road is mostly barren land. The
project road corridors will need capacity augmentation to cater to the anticipated increase in traffic. The
project road sections have poor riding surface for the majority of their length, and require rehabilitation
and capacity expansion. Traffic volume was obtained from the classified traffic counts carried out on
project road sections. The traffic composition on the project road sections indicates that passenger traffic
accounts for 89% and goods traffic for 11% of the total traffic. Slow moving traffic accounts for 7% of total
traffic. Two-wheelers comprise 70% and car/jeep/taxis comprise 15% of total fast moving traffic (FMV). 2-
axle & 3-axle truck comprise 6% of total FMV. AADT (PCU) and CVPD in the traffic count year (2014) on the
project road was 333 and 47 respectively. Traffic details for the project roads are in Table 13.2.
Table 13.1: Modal Shares in Madhya Pradesh, 2007–2008
Mode of transport Percentage (%)
Road 63.09
Railway 36.10
Coastal Shipping 0.0
Airways 0.0
Total 100.0
*Source: Government of India. Planning Commission - 2011. Total Transport System Study, Delhi.
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13.3 TRAFFIC VOLUME AND COMPOSITION
The base year traffic estimate for the project road and homogenous sections by composition are the basic
input for the HDM Model application.
1
Table 13.2 (A): Traffic Composition on Project Road
Percentage
Traffic Composition
(%)
Two Wheeler 70
Three Wheeler/ Auto 0
Car/Jeep/Van/ Taxi 15
Mini Bus 0
Bus 3
LCV 4
2-Axle Truck 3
3 -Axle Truck 3
M-Axle Truck 0
Tractor With Trailer 0
Tractor Without Trailer 2
Total First Moving Vehicles(FMV) 100
Cycle 100
Cycle Rickshaw 0
Hand Cart 0
Bullock Cart 0
Horse Cart 0
Total Slow Moving Vehicles(SMV) 100
Table 13.2 (B): Modal Split of Traffic

Modal
Traffic Composition
Split (%)
Passengers Traffic 89
Goods Traffic 11
Total 100
Source: Traffic Analysis of detailed project report.
13.4 TRAFFIC GROWTH FORECAST
Traffic growth on a road facility is generally estimated on the basis of historical trends and the growth
forecast of both the economy and population. In the absence of established time series data on traffic
volume on the road sections, the growth forecast is made based on data available on vehicle growth and
state gross domestic product (GDP) growth.
The state economy of Madhya Pradesh has been demonstrating strong economic growth, well above the
national level growth. Table 13.3 compares the average economic growth rate in Madhya Pradesh and the
Indian average during 2004–2012. Reserve Bank of India has projected the national average economic
growth of 7.1% in real terms for the next 10 years (fiscal year 2013-22) in its latest reports.

Table 13.3: Average Annual Economic Growth Rates, 2004–2012
Item
Madhya Pradesh
Average Annual Economic Growth Rate,
Over 2004–2012 (%)
8.8
1
All of India 6.9
*Source: Govt. of Madhya Pradesh, Department of Economics and Statistics 2013, Madhya Pradesh Economic Survey, 2012-
13, Bhopal
The growth of registered vehicles on the road gives an indication of the traffic growth (Table 13.4). Vehicle
growth for 2004–2012 was 10.0% for Madhya Pradesh. The elasticity of the vehicle growth against GDP
growth is also shown in Table 13.4. To have a better understanding of these annual traffic growth rates
across different vehicle types, the growth of different vehicles during 2007–2009 is shown in Table 13.5 for
Madhya Pradesh.
Table 13.4: Growth of Registered Vehicles, 2004–2012
Compound Annual Growth Rate of Elasticity, calculated against
Item
Registered Vehicles over 2004-12 GDP growth rate over 2004-12
Madhya Pradesh 10.0% 1.14
All of India 10.3% 1.49
*GDP = gross domestic product.
**Source: Govt. of India. Ministry of Road Transport & Highways – Road Transport Year Book (2011-12)
Table 13.5: Growth of Registered Vehicles in Madhya Pradesh, 2007–2009

Two- Standard Mini
Year Car Trucks Tractor Trailer
Wheeler Bus Bus
2007 208,052 3,895,557 7,134 73,797
135,509 394,356 200,719
2008 237,022 4,292,649 7,119 80,311
149,718 411,424 206,640
2009 272,009 4,691,218 6,960 86,611
162,226 432,618 210,903
Growth (%) 14.3% 9.7% -1.2% 8.3%
9.4% 4.7% 2.5%
( ) = negative.
Source: Government of India. Ministry of Road Transport and Highways: 2011—12. Road Transport Year Book, Delhi
The growth of registered vehicle by type shows the clear trend that vehicle composition is rapidly
changing, shifting towards in favor of personalized mode. The long-term vehicle growth rate for Madhya
Pradesh is envisaged to grow at least in line with national growth rate.
In the report of Madhya Pradesh State Road Development Plan (2013-2033), the traffic growth rates from
the period 2012 to beyond 2026 has been considered within the range of 6.8% to 5.6 %. Since the project
roads are MDRs and passing through mostly rural areas and semi urban areas, the traffic growth rate is
likely to be impacted predominant by economic activities of the rural areas. Taking into consideration of
the rapid growth of economic activities in the rural areas of Madhya Pradesh, the traffic growth rate
throughout the project period has been consider as 6.5%.
13.5 COST AND BENEFITS
Costs considered for the analysis include the construction cost, the cost of environmental and social
impact mitigation, utility shifting costs, operation and maintenance costs, and road user costs.
Construction costs were derived from the detailed design bill of quantities and unit cost estimates based
on the current schedule of rates. The economic analysis has used the domestic price numeraire. Indian
rupee is used as the currency unit and project cost as of 2015 is used in the analysis. Customs duty and
value-added tax are included in the project cost estimate, but is excluded in the economic analysis.
Physical contingencies are included as they are part of the value of resources that will be used in the

construction, but price contingencies are excluded as they do not reflect the real changes in the volume of
resources consumed. Financial construction and maintenance costs were converted to economic costs
using a standard conversion factor of 0.85, which is calculated as a proportion of total import and export
values to total import and export values and trade related duties. An analysis period of 30 years of
1
operation after construction completion is used. In the terminal year of the project, residual values of
assets were considered as per their economic life by applying the straight-line depreciation method.
Table 13.6: Project Cost (excluding contingencies & supervision)

Length Cost / Km Economic Unit Cost
Section Particulars
(Km) (INR million) (INR million)
Construction Cost 19.99 16.99
Kirhai –
34.350 Maintenance Cost 0.87 0.74
Ramgarh
Total 20.86 17.73
Source: Detailed Project Report.
13.6 HDM Model Input Data
The following values are considered as input data for the HDM Model.
Analysis period
The analysis period starts from 2018. Analysis period for EIRR estimation is considered as 30 completion of
road construction. A discount rate of 12% is considered.
Project Costs
The project costs include costs of
 Road works of INR 529.94 Million (INR 15.43 Million per Km),
 Bridges & other structures works of INR 134.30 Million (INR 3.91 Million per Km),
 Shifting of Electric poles (LT & HT) of INR 16.51 Million (INR 0.48 Million per Km),
 Miscellaneous works (utility duct, shifting hand pumps, water pipelines etc, Tree plantation etc.)
of INR 5.15 Million (INR 0.15 Million per Km),
 Environment & Forest clearance etc. of INR 0.69 Million (INR 0.02 Million per Km),
 Maintenance cost of INR 29.93 Million (INR 0.87 Million per Km)
Construction cost for economic analysis includes Land Acquisition, Resettlement & Rehabilitation,
environment and utility shifting cost along with civil construction cost. The capital costs (civil costs) of the
project road have been converted into economic cost by using a standard conversion factor of 0.85.
The economic costs of Land Acquisition, Resettlement & Rehabilitation, environment and utility shifting
are considered same as financial cost as they are only transfer price and have no attached opportunity
cost.
Conversion Factor
A standard conversion factor of 0.85 is used for converting financial costs to economic costs as detailed in
section 13.5. The viability is examined for the project as a whole.
Road and Pavement Characteristics

Road and pavement characteristics that are used as model input include road length, carriageway width,
width of paved shoulders, existing pavement composition, sub-grade CBR, roughness of the existing road
(IRI), structural number and cracking, ravelling and other pavement distress parameters.

Construction Cost Phasing

The construction periods is considered to be 2 years starting from the middle of the year 2016. The
phasing of construction cost is presented as follows: 1
First Year : 40%
Second Year : 60%
The values considered while preparing the input data for the application of HDM Model have been
summarised as below.
 Analysis Period (Years) : 30 Years

 Pavement Alternatives : RCC
 Design Life (Years) : 30 Years
 Maintenance Costs : Normal (Routine) Costs
 Construction Period (Years) : 2.0 Years
 Investment Schedule : (1st Year: 40% & 2nd Year: 60%)
 Salvage Value (%) : 15%
 Discount rate : 12%
Maintenance treatments are triggered within the HDM-4 model based on the set maintenance standard for
with- and without-project scenarios and costs calculated based on the unit prices for treatments given as
input to the model. Examination of maintenance of project road sections indicates that the road sections are
not allowed to deteriorate to very bad conditions. Based on this, the analysis assumes that periodic
maintenance needs are met in the without-project case as well as the with-project case, but no pavement
strengthening is considered in the without-project case. Road user costs were estimated within the HDM
model using input provided on VOC parameters 1. The economic price of fuel per liter is taken as INR 41.38
for petrol and INR 33.63 for diesel and INR 297.00 for lubricant oil.
Since the major portion of the road is passing through rural area of Madhya Pradesh, work value time and non
work value time appear to represent the rural condition of Madhya Pradesh. The value of nonworking time is
taken as one-sixth of the value of work time. The values for the state GDP per capita were obtained from the
Government of India’s Economic Survey2. The value of time for freight is calculated as time value of goods in
transit, i.e. the value of the goods carried times the commercial interest rate paid by the owners as an
inventory cost. Considering the predominance of regional trade and main goods carried, a cargo value of Rs
65,000 per ton is assumed and the opportunity cost of cargo delay or value of time for cargo is estimated
considering 75% of cargo to be benefited and an interest rate of 12%. A summary of the calculated values of
time for each type vehicles is presented in Table 13.7.
1
Information required for updating the main VOC parameters—such as vehicle prices, crew and maintenance labor cost, and tire costs—
were obtained from the detailed project reports.
2
The Net State Domestic Product (NSDP) data of Madhya Pradesh (Directorate of Economics and Statistics, State of Madhya Pradesh.
2012) was taken and per capita NSDP was taken as per capita income, then total number of employed person was determined. Taking
into consideration income of person employed was estimated by using household consumption expenditure rate and assuming 2,000
working hour in a year, average work time value Rs 42.57 was determined. It was assumed that two wheelers operators has 13% higher
time value than average value, car passengers has 94% higher time value and bus passengers has 32% higher time value than average
time value. The working passenger time weights are taken based on “Manual of Economic Evaluation of Highway Project in India” by
Indian Roads Congress (2009).

Table 13.7: Adopted Values of Working and Nonworking Time (INR per hour)
State
State GDP
per capita at
current Worki
Bus
Non- Workin
Car
Non-
Two- and Three-
Wheelers
Workin Non-
1
prices (INR) ng Working g Working g Working
MP 38,669 56.19 9.37 82.59 13.77 48.10 8.02
*GDP= Gross Domestic Product
Source: Ministry of Finance, India
13.7 MAINTENANCE COSTS
Routine maintenance cost without project includes patch works, edge break repair works and
miscellaneous works (shoulder repairs etc.). Since the road is being upgraded to rigid pavement which
requires very lower maintenance cost compared to bituminous pavement, no routine maintenance work
considered in “with project” case except maintenance cost for first 5 years which is a part of the cost
estimate. Only periodic maintenance works like overlays etc. has been considered in this case. The work
items cost for routine maintenance has been estimated and given in Table below-
Table 13.8: Work Standards and Cost Details

Type of Maintenance/
Intervention Criteria Work Item Cost (INR)
Improvement
Potholes >= 5 Nos/km Patch works Rs. 600 per sqm.
Routine Maintenance in Edge Break Area >= 5 m2/km Edge Break Repairs Rs. 600 per sqm.
“without project” case Miscellaneous Works Miscellaneous Works Rs. 100000 per Km.
overlaying, crack
Periodic Maintenance in Every 5th Year Rs. 200000 per km
sealing etc.
“with project” case
13.8 BENEFITS OF THE PROJECT
The existing road has single lane carriageway (3.0-5.5m wide) with 0.75-2.0m wide earthen shoulder on
either side. PCU of the existing road is 333 (year 2014) and 47 CVPD (commercial vehicle per day) and at
the end of design period (year-2047, i.e. 30 year after completion of construction) PCU is calculated as
2496 with 354 CVPD. Traffic analysis shows that capacity requirements for the calculated PCU at the end
of design period is of intermediate lane category (capacity up to 6000 PCU as per IRC 64-1990), hence the
road is being upgraded to intermediate lane (5.50m C/W with 2.25m hard shoulder on either side in
general) as per guidelines of MPRDC. The benefits of upgrading the project roads will include higher
vehicle speeds, better riding quality, and safer roads—resulting in reduced travel time and VOCs during
the analysis period. Without the project, the road capacity will be reached in the near future, speeds will
drastically reduce over the years, and road deterioration will be faster with higher traffic. The other
benefits are as below.
 Savings in vehicular operating and maintenance cost:

Vehicle operating costs refer to costs that vary with vehicle usage, including fuel, tires, maintenance,
repairs, and mileage-dependent depreciation costs. Projects that alter vehicle kms travelled, traffic speed
and delay, roadway surfaces, or roadway geometry may affect travellers’ vehicle operating costs, which
are considered in a benefit-cost analysis. The VOC with-project is 51.15% lower than that of the VOC
without project (from 1658.79 INR Million for without-project to 810.34 INR Million for with-project). And

similarly, decrease in travel time with-project is 66.06% lower than that of the VOC without project (from
817.90 INR Million for without-project to 277.56 INR Million for with-project).
 Benefits to trade especially in movement of perishable goods:

1
Construction of the project road will help in quick transportation of agricultural product and perishable
goods to the nearby markets, and hence improving the economy of local people by saving both travel time
and wastage of product.
 Access to new Industrial Areas

Construction of road will provide better connectivity to the surrounding areas and access to new industrial
areas. By permitting time savings, road transport allows the development in the industry. Economy of local
people will be increased by increasing tourism, development of local industry and handicrafts etc.
 Overall enhancement of socio-economic condition of the area along the project corridor:
Construction and operation phases of project road will have beneficial impact on social-economic
conditions. Increase in income of local people is expected as local unskilled, semiskilled and skilled
persons may gain direct or indirect employment during construction phase. After construction of the road,
improvement in social aspects like literacy, health care, cultural aspects and transport facilities are
expected.
13.9 ECONOMIC ASSESSMENT
Economic analysis has been carried out using the HDM-4 model comparing the with- and without-project
scenarios for each of the project road sections.
Based on the pavement condition and capacity analysis, improvement options including pavement
rehabilitation/reconstruction and capacity augmentation (widening to standard two-lane configuration)
were defined; this forms the with-project scenario. The without-project scenario involves basic
maintenance and periodic surface renewals to the existing roads. An analysis period of 30 years after road
construction was used. The project improvement includes capacity augmentation, and the salvage value
for each road section was calculated for road components considering straight-line depreciation approach
and the values included at the end of the analysis period. A discount rate of 12% was used as a desirable
rate of return for calculating the net present value (NPV).
The results of the economic analysis, in terms of the economic internal rate of return (EIRR) and NPV (in
Rs million) for the proposed project improvement option, are presented in Table 13.9 The results indicate
that the proposed improvements of the sample project roads are all economically viable, yielding an EIRR
above 12% and in most cases significantly higher—indicating the high economic rate of return. The result
of the economic analysis for Project Road is given in Table below. Cash flow stream has been provided at
the end of the chapter.
Table 13.9: Economic Analysis Results
NPV
Road No. Road Name EIRR (%)
(INR million)
Kirhai – Ramgarh –
1 20.6% 341.76
Mukundpur Road
EIRR = economic internal rate of return, NPV = net present value.
Source: HDM-4 Analysis

Table 13.10 (A): Road Agency and User Costs Streams (Discounted)
(Cost in INR Million)
Case-I: Do Nothing (Scenario-I)
Road Agency
Total Road Road Agency Costs (RAC)
Case-II: Upgrading (Scenario-I)
1
Road User Costs (RUC)
User Costs Total Total Net
Year Costs
(VOC + Travel Transport Total MT Vehicle MT Travel NMT Travel Total Transport Benefits
(Recurrent Capital Recurrent
Time & Cost RAC Operation Time & Operation RUC Cost
Works)
Operation)
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044

Case-I: Do Nothing (Scenario-I) Case-II: Upgrading (Scenario-I)

Net
2045
Year
Benefits
2046
2047 1
Table 13.10 (B): Road Agency and User Costs Streams (Undiscounted)
(Cost in INR Million)
Case-I: Do Nothing (Scenario-I) Case-II: Upgrading (Scenario-I)
Total Road Road Agency Costs (RAC) Road User Costs (RUC)
Road Agency
User Costs Total Total Net
Year Costs
(VOC + Travel Transport Total MT Vehicle MT Travel NMT Travel Total Transport Benefits
(Recurrent Capital Recurrent
Time & Cost RAC Operation Time & Operation RUC Cost
Works)
Operation)
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038

2039
2040
2041
2042 1
2043
2044
2045
2046
2047

13.10 SENSITIVITY ANALYSIS
Sensitivity analysis was carried out with respect to adverse changes in the costs and benefits: (i) 1
construction cost increased by 10%, (ii) VOC and travel time savings reduced by 10%, (iii) construction cost
increased by 10% and VOC and travel time savings reduced by 10% and (iv) one year delay in project
starting. The cost estimates for the project roads are based on current costs and detailed design, giving
high confidence in the estimates. The results of the sensitivity analysis (Table 13.11) indicate that the
project roads remain economically viable with adverse variations in costs and benefits.
Table 13.11: Sensitivity Analysis Results
Increase in Cost
Base Increase in Cost Reduction in One Year Delay
Particulars and Reduction in
Case by 10% Benefits by 10% in Construction
Benefits by 10%
(EIRR) (%) 26.10% 24.10% 25.90% 24.00% 24.90%
NPV (INR
888.47 834.09 873.45 819.07 832.36
million)
Switching
- 125.20 45.33 103.01 72.80
Value (%)
EIRR = economic internal rate of return, NPV = net present value
13.11 FINANCIAL SUSTAINABILITY
Incremental recurrent costs associated with the project are estimated to be 0.195% of the current
maintenance budget of MPRDC and 0.008% of the overall Madhya Pradesh Public Works Department
budget on an annual basis. Thus, it is reasonable to expect that funds will be available to meet these
costs.

Chapter - 13 Economic and Financial Evaluation: Modal Shares in Madhya Pradesh, 2007-2008

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Chapter - 13 Economic and Financial Evaluation: Modal Shares in Madhya Pradesh, 2007-2008

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Consultancy Services for preparation of Detailed Project Report for Detailed Project Report

13.2 PROJECT ROAD DETAIL

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13.3 TRAFFIC VOLUME AND COMPOSITION

Table 13.2 (B): Modal Split of Traffic

13.4 TRAFFIC GROWTH FORECAST

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Table 13.3: Average Annual Economic Growth Rates, 2004–2012

Table 13.5: Growth of Registered Vehicles in Madhya Pradesh, 2007–2009

13.5 COST AND BENEFITS

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Table 13.6: Project Cost (excluding contingencies & supervision)

Road and Pavement Characteristics

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Construction Cost Phasing

 Analysis Period (Years) : 30 Years

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13.7 MAINTENANCE COSTS

Table 13.8: Work Standards and Cost Details

13.8 BENEFITS OF THE PROJECT

 Savings in vehicular operating and maintenance cost:

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 Benefits to trade especially in movement of perishable goods:

 Access to new Industrial Areas

13.9 ECONOMIC ASSESSMENT

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Case-I: Do Nothing (Scenario-I) Case-II: Upgrading (Scenario-I)

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13.10 SENSITIVITY ANALYSIS

13.11 FINANCIAL SUSTAINABILITY

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