Typical methodology for Cost Benefit Analysis - Road projects

Introduction

The objective of the economic evaluation is to provide a methodology for prioritising

road projects in terms of economics, in line with the recommendations made in the
previous chapters.

A simplified economic evaluation model has been set up using EXCEL spreadsheet.
This evaluation is however based on a number of assumptions that need to be refined
and verified for each individual case.

The GTMP is producing a national traffic model of Romania as well as national

matrices of transport demand. Such traffic model enables to assess, in a relatively
broad way, the following effects:

• evaluation of the effects of increasing traffic and consequent reduction in

travel speeds as the capacity of a particular road is approached
• prediction of the diversion of traffic to alternative routes because of
congestion
• evaluation in detail of the amount of traffic likely to switch from existing
roads to new motorways, bypasses and other roads
• impact of implementing possible road tolls

The detailed analysis by major project, thus the traffic study/assessment in the
framework of the feasibility study, shall take into account and make use of the
databases and infrastructure networks developed in the GTMP project, and further
detail on the specific route/corridor of the project to be analysed, in order to ensure
compatibility between the detailed assessment of various projects.

Methodology

A schematic representation of the approach is shown in Figure 1.1.

For a road project, three main categories of benefits are considered:

- Time savings,
- Savings in Vehicle Operating Costs and
- Savings in accident costs.

The effects related to climate change and air pollution should be considered when
these are likely to be sizeable, that is, for example, in the following cases:
- when diversions from other modes are being considered,
- when substantial generated traffic is being estimated,
- when traffic is diverted from congested routes to new/rehabilitated roads,
- when traffic is being diverted out of a urban environment.

In this last case, typically represented by the construction of bypasses, different air
pollution values should be taken into account against the environment of emissions
(urban, semi-urban, rural). Whether or not the construction of bypasses have an actual
effect in decongestion of urban centres remains however to be assessed.
1. Reference framework

The first aspect is to clearly define the scenarios being assessed as well as the area of
influence of the project.

In the proposed spreadsheet, the reference scenario is defined by an existing road

section, maintained in such a way that it keeps its original parameters over the study
period. The with project scenario is defined by:
- the rehabilitation of that road section,
- the construction of a parallel motorway, or
- the construction of a bypass.

The study period is 25 years of operation.

As part of the GTMP, macro-economic scenarios have been developed. These

scenarios include evolution of the GDP, but also of the population and of the main
sectors of the economy.

2. Traffic growth

The evolution of traffic on a particular section is a result of the traffic model made for
study of that section. The GTMP national model provides the general framework, but
should be refined when studying particular sections since it is focusing on the
interzonal traffic for 192 zones in Romania.

As a simplified basis, the spreadsheet considers a traffic growth for all categories of
vehicles with an elasticity of one against the GDP growth, taken for the medium
scenario.
Similarly, the amount of traffic switching from the existing road section to the project
section is assumed to be the following:
- 100% for a road rehabilitation, in an obvious way,
- 80% for a new motorway, in the absence of tolling,
- 50% for a bypass.

3. Time savings for passengers

Typically, a traffic model would normally provide, for each category of vehicle, the
number of vehicle-hours in both the “with” and “without” project situations, by
categories of vehicles, at regular time horizons.
These values should then be transformed into monetary values, depending on three
factors:
- average number of passengers by categories of vehicles,
- trip purposes,
- value of time by trip purposes.

Using the proposed standard GTMP values, the results are the following:
Occupancy Trip purpose value of time 2007 (Euro) value per
rate vehicle hour
(euro)
 work/business non work work/business non work
passenger car 2.1 51.50% 48.50% 4.16 1.25 5.77
minibus 9.1 41.70% 58.30% 1.95 0.59 10.53
bus 27.4 41.70% 58.30% 1.95 0.59 31.71

Furthermore, it is recommended to increase the value of time over time with an

elasticity of one against the GDP growth.

In case vehicle-hours are not estimated as a result of a traffic model, they shall be
calculated on the basis of the traffic by type of roads on the study network, taking into
consideration speed-flow relationships.

Based on the “Norms for assessing traffic capacity of public roads” (code PD 189-
2000) published by the National Administration of Roads in December 2000, the
Consultant has identified the following simplified framework for calculation of
passenger car units:

passenger car units equivalent type of relief

flat hilly mountain
bicycles, motorcycles 0.5 0.5 0.5
cars, minibuses, vans 1 1 1
trucks with 2 axles 2.5 5 12
trucks with 3 or 4 axles 2.5 5 12
articulated trucks 3.5 5 12
buses 2.5 3.9 6.5
tractors 2 5 12
trailers for trucks or tractors 1.5 1.5 1.5

and the following speed flow relationships, by pcus and categories of roads:
For urban traffic, speed is considered as being the same for all categories of vehicles,
as follows. The traffic (expressed in pcu) shown here is only related to the transit
traffic. For major cities however, transit traffic is likely to represent a small part only
of the actual urban traffic and the speed could be therefore considered as independent
from the level of transit traffic.
4. Time savings for freight

While the value of time of bus and truck drivers is included as part of the Vehicle
Operation Costs, the value of the time of the freight can be calculated. The Consultant
has developed detailed values by type of freight, based on the value of the capital
invested in the freight. Furthermore, an average value has been calculated.

On the basis of vehicles-hour provided by the traffic model or by the above described
procedure, the results are the following:

tons of value of ton value of freight per

freight (euro) vehicle (euro)
light truck 1 0.015 0.015
medium truck 5 0.015 0.075
heavy truck 13.4 0.015 0.201
articulated truck 13.6 0.015 0.204

By opposition to the value of time for passengers, it is considered that the time value
of freight is fixed over the study period.

5. Vehicles Operating Costs

The VOCs are calculated for each category of vehicles, based on the quality of the
road condition. VOCs are a function of the vehicles – km and of the condition of the
road, year by year.

The preferred method to assess VOCs is the use of HDM, that enables modelling of
the evolution of the condition of the studied road network. As part of the GTMP,
VOC input values have been defined for each category of vehicles (see Annex).
The results, expressed in Euro / veh-km and depending on the road condition, can be
summarised as follows:

Annual Average Vehicle Operating Cost (Euros) per veh-km

Articula-
Heavy Light Medium Heavy
Car Minibus ted
Bus Truck Truck Truck
Description Truck
Plain Terrain - Very
Good Condition 0.21 0.27 0.62 0.30 0.39 0.77 0.96
Plain Terrain -
Good Condition 0.21 0.27 0.65 0.31 0.40 0.81 1.01
Plain Terrain -
Medium Condition 0.21 0.28 0.69 0.32 0.42 0.85 1.04
Plain Terrain - Bad
Condition 0.21 0.30 0.77 0.35 0.44 0.91 1.10
Hilly Terrain - Very
Good Condition 0.20 0.27 0.64 0.30 0.39 0.79 0.96
Hilly Terrain -
Good Condition 0.20 0.28 0.67 0.31 0.40 0.84 1.01
Hilly Terrain -
Medium Condition 0.20 0.29 0.71 0.32 0.42 0.88 1.06
Hilly Terrain - Bad
Condition 0.21 0.31 0.80 0.36 0.46 0.95 1.16
Mountainous
Terrain - Very
Good Condition 0.20 0.28 0.71 0.31 0.41 0.86 1.07
Mountainous
Terrain - Good
Condition 0.20 0.29 0.74 0.32 0.42 0.91 1.12
Mountainous
Terrain - Medium
Condition 0.21 0.30 0.77 0.34 0.44 0.95 1.17
Mountainous
Terrain - Bad
Condition 0.22 0.33 0.86 0.37 0.48 1.02 1.26

Within the simplified approach of the spreadsheet, the road condition is supposed to
be fixed over the operation period. The underlying assumption is that maintenance is
made, both on the reference section and on the project section, to a level such that
those sections do not deteriorate.

Unit VOCs are considered as fixed over the study period.

6. Accidents costs

Accident costs are calculated out of two main factors:

- the risk of accidents incidence, by type of accident and type of road
infrastructure, typically reported to the traffic level by 100 million vehicle –
km,
 - the cost by type of accident.

The GTMP has assessed the incidence of accidents based on Road Police records, for
two types of network: national roads and A1 motorway (the only Romanian motorway
section for which accident and traffic records were available for several years). While
it is recommended to perform a detailed assessment on the study network, the
proposed values can be taken as references.

Furthermore, the GTMP has assessed costs of accidents. These values are considered
as having an elasticity of one against the GDP growth.

7. Investment cost

The investment cost is composed of:

- construction cost, but also
- preparation costs (design and land acquisition), and
- supervision costs.

Those two categories are estimated as percentages of the construction itself. It is

assumed that preparation costs are incurred within the two years preceding the start of
construction. Construction and supervision costs are supposed to be equally split over
the construction period.

A factor of 1.15 is used for conversion of financial prices into economic costs. This
rate appears to be around the average of the conversion factors used in the EU. It
reflects the relatively low fiscal pressure and low unemployment rate of Romania,
compensated however by a relatively limited and still perfectible market.

The residual value is also calculated depending based on a 25 years lifetime of project
in case of rehabilitation and 30 years in case of new construction, with a linear
depreciation.

8. Maintenance costs

The costs of maintenance shall be carefully evaluated. In the spreadsheet, it is

composed of two elements:
- routine maintenance, for each year of operation, and
- periodic maintenance, every 10 years.

The related costs are:

Routine maintenance Periodic maintenance costs
costs of project road of project road (Euro / km)
(Euro / km) every 10 years
national road (2x1) 15,000 150,000
national road (2x2) 30,000 300,000
motorway (2x2) 40,000 375,000
It shall be noted that further work should be undertaken for a better approach towards
maintenance:
- maintenance cost is included in the spreadsheet only in case of new
construction. It is considered that maintenance costs in case of rehabilitation
would be the same in the with and without project situations,
- maintenance cost is defined as a sum per km, regardless of actual traffic
levels,
- in particular, the impact on maintenance of the EU related commitment of
Romania to open its entire road network to trucks of up to 11.5 tons/axle by
the end of 2013, regardless of the actual status of reinforcement of the roads,
should be integrated.

9. Analysis

The cash flow sheet provides a table of all costs and benefits by year, during both the
construction phase of the project and during the specific (by default 25 years)
evaluation period following the year of opening of a particular project. Summary
statistics are produced in the form of total and proportionate costs and benefits from
different sources (construction costs, maintenance costs, VOCs, VOTs and accidents).

Furthermore, the total costs are subtracted from the total benefits for each year during
the period of evaluation, to produce the net benefits. These are then discounted back
to the base year (by default 2008), using a discount rate of 5.5 percent, to produce the
NPV. The EIRR and PV/C are also calculated on this sheet.

The final analysis sheet calculates the results of a series of sensitivity tests. These
follow the same format as the calculation made on the stream of benefits sheet.
Sensitivity tests are carried out to assess the impact of various elements of the analysis
on the results. These include:
• increasing and decreasing time benefits
• increasing and decreasing VOC savings
• increasing and decreasing construction costs
• increasing and decreasing maintenance costs
• increasing accident savings.

In case the value of time has been grossly overestimated or underestimated, sensitivity
tests were run that varied the value of time savings by +/- 50 percent.

VOC savings were tested +/- 50 percent.

Possible errors in the calculation of the project costs (including land acquisition) have
been incorporated in the sensitivity analysis +/- 20 percent.

Maintenance costs have only a marginal effect on the economics but have
nevertheless been included in the sensitivity analysis +/- 30 percent.

A sensitivity test on accidents savings was introduced that sets the benefits of
increased safety twice higher.