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Economic Evaluation

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					Economic Analysis Concepts
         Questions & Decisions (1)

• Is the project justified ?- Are benefits
  greater than costs?
• Which is the best investment if we have a
  set of mutually exclusive alternatives?
• If funds are limited, how should different
  schemes be ranked?
• When should the road be built or
  upgraded?
                      2
        Questions & Decisions (2)

• What standard of construction should
 be used?
• What standard and frequency of road
 maintenance is optimal?
• Should staged construction be used?
• Are complementary investments
 required?

                    3
      Appraisal Framework

• All appraisals need a framework   or
 model for:

  a) Forecasting changes
  b) Evaluating those changes




               4
     Components of Economic Analysis (1)

• Costs and benefits are measured in
 money terms
• Road construction and maintenance
 costs are compared with estimates of the
 direct primary benefits going to road
 users and road agency
• Secondary benefits are usually ignored
• Economic prices are used in constant
 terms
                     5
     Components of Economic Analysis (2)


• Costs and Benefits are forecast over the
 planning time horizon (usually between 10
 and 20 years)
• Future Benefits are valued less as time
 progresses using the planning discount
 rate
• Costs and Benefits are compared using
 decision criteria such as NPV, IRR, etc.

                      6
     Economic and Financial Prices

The cost to the economy of road
rehabilitation and maintenance may differ
from the financial cost because of :
     • taxes and duties
     • shortage of foreign exchange
     • under-employment

The Government will usually be concerned with
ECONOMIC costs.
Contractors will usually be concerned with
FINANCIAL costs.
                        7
             Use of Economic Prices

  In an Economic Appraisal we use ECONOMIC
  (or SHADOW) prices NOT FINANCIAL prices
Adjust financial prices as follows:
• Exclude all taxes and duties and subsidies
• Use the planning discount rate not financial market rate
• If overvalued exchange rate then value imports and
  exports more highly
• Use the opportunity cost of labor
• Standard Conversion Factors are now widely used for
  road construction costs

                             8
      Benefits from Road Investment


Changes in transport costs occur because of
  :
• Lower road roughness
• Shorter trip distance
• Faster speeds
• Reduced chance of impassability
• Reduced traffickability problems
• Change in mode
                     9
           Project Costs


• Management (including design and
 supervision)
• Labor
• Equipment
• Materials
• Land, Resettlement, Environment

                10
                Primary Effects (1)

• Reduced vehicle operating costs (VOC)
    • fuel and lubricants
    • vehicle maintenance
    • depreciation and interest
    • Tire wear
    • Crew time
    • overheads
•   Reduced journey time
    • drivers, passengers and goods

                       11
           Primary Effects (2)

• Changes in road maintenance costs
• Changes in accident rates
• Increased travel
• Environmental effects
• Change in value of goods moved



                   12
           Secondary Effects

• Changes in agricultural output
• Changes in services
• Changes in industrial output
• Changes in consumers behavior
• Changes in land values
• Changes in income


                   13
       Consumers’ Surplus Approach

• Captures primary benefits
• Advantages: Simple, cost based, traffic
    approach dependent on predicting
    changes in traffic
•   Disadvantages: May not address critical
    factors promoting either rural
    development or social access



                      14
       Normal and Generated Traffic Benefits


                                        Transport cost savings to
         Total Benefits   =             Normal traffic and growth

Cost                                                +
 C1                                       Additional benefits to
                                           Generated traffic


 C2
                                          Demand Curve
                                          (Price Elasticity of Demand)

                T1                 T2     Traffic

       Normal         Generated
                              15
        Generated Traffic Benefits

Traffic induced by the road investment are
  traditionally valued at:

Half the difference in transport costs

Hence total generated transport cost benefits
 = Generated Traffic Volume x Change in
 Transport Costs per km x Distance x 1/2


                     16
           Producers’ Surplus Approach
•   Captures secondary benefits
•   Advantages: Draws attention to changes in
    agricultural output (key economic activity in rural
    areas)
•   Disadvantages: No reliable way of predicting
    response
    - impact studies give widely different answers
     - it could be based on agricultural supply price
       elasticities but this is almost never done; it
    requires very careful examination to use.
•   For most projects benefits are just invented !
                             17
                   Producers’ Surplus

     Price & Costs per Unit
     of Output                                    Increased
                                                  Farmgate Price
P2

P1


                                   Lower Input Costs




               Output              O1        O2
                              18
        Coverage and Double Counting

• Any economic analysis should be designed
    to give maximum coverage of benefits
•   But we must avoid double counting. Do not
    add primary and secondary benefits (e.g.
    changes in land values added to changes in
    transport costs)
•   In a competitive economy the consumers’
    surplus approach (used in HDM) should be
    adequate

                       19
               Economic Comparisons
• Economic analysis involves a comparison of
  “With” and “Without” project cases
• Forecasts are made of traffic, road condition,
  VOC and road maintenance effects for BOTH
  scenarios
• An unrealistic “Without” case (i.e. with little
  maintenance) can give a false result
• A range of “With investment” cases should be
  analyzed to find the best solution
                           20
                    Traffic Categories
•   Normal traffic: Existing traffic and growth that would
    occur on road, with and without the investment
•   Diverted traffic: Traffic diverted from another road
    with same origin and destination to as the project
    road as a result of the investment
•   Generated traffic: Traffic associated with existing
    users of the road driving more frequently or driving
    further than before
•   Induced traffic: Traffic attracted to the project road
    due to increased economic activity in the road’s
    zone of influence brought about by the project
                             21
        Benefits from Road Investment

Transport cost savings for existing (or normal)
traffic = Normal Traffic Volume x Change in
Transport Costs per km x Distance

Main changes in cost from:
    a) change in transport MODE
    b) reduced journey TIME
    c) reduced VOCs

                       22
        Benefits of Upgrading to a
            Motorable Track

              Headloading

  C1


                       Track
Costs
                                Improved
                                     road


  C2
  C3
        T1       Traffic       T2   T3
                  23
                                    Cost Effectiveness Against
                                         Standard of Road


                            95% of year, access established
Marginal productivity




                                       99% of year, access established

                                               Maintenance for roughness reduction




                        0            Maintenance expenditure $/km


                                                     24
          Development Benefits

Development benefits arise from a
combination of increased traffic and
reduced transport costs.

Benefits may also include :
• Increased agricultural production
• Increased service provision
• Increased industrial activity


                    25
                  Estimating Benefits
Normal traffic benefits:   tripsN * d1 * (VOC1- VOC2)

Diverted traffic benefits: tripsD * ((d1 * VOC1)-(d2*VOC2))

Generated and Induced traffic benefits: tripsG * d2 *
(VOC1- VOC2)/2

d1    = existing road length d2 new road length
VOC1 = vehicle operating costs per km “without”
investment
VOC2 = vehicle operating costs per km “with” investment

VOC data relates to each road section and its condition at
the time                      26
            Economic Decision Criteria (1)

•   Net Present Value
    NPV = (B1- C1)/(1 + r) + (B2- C2)/ (1 + r)2 + …+ (Bn- Cn)/(1 + r )n


•   Internal Rate of Return
     To calculate IRR, solve for r, such that NPV = 0

    B1, B2…Bn = Benefits in years 1, 2 … n
    C1, C2…Cn = Costs in years 1, 2 …. n
        r     = Planning discount rate
        n     = Planning time horizon



                                      27
          Economic Decision Criteria (2)

•   Net Present Value/ Investment Cost
     NPV/ C = NPV/Ci

•   First Year Rate of Return
     FYRR = (B1- C1) / Ci
     B1 , C1 = Benefits and Costs in year 1 after
                construction
          Ci = Road investment costs

•   Payback Period
                           28
            Economic Decision Criteria (3)

                                     NPV         IRR3        NPV/C FYRR
Project economic validity            V.Good      V.Good      V.Good      Poor
Mutually exclusive projects          V.Good      Poor        Good        Poor
Project timing                       Fair        Poor        Poor        Good
Project screening 1                  Poor        V.Good      Good        Poor
Under budget constraint 2            Fair        Poor        V.Good      Poor

Notes:
1. check for robustness to changes in key variables (sensitivity analysis)
2. with incremental analysis
3. IRR may be indeterminate with NONE or MANY solutions.



                                         29
       Present Value Calculation

Period Flow
  0            A0           PV(A0) = A0
  1
  2
  3
  4
  5            A5           PV(A5) = A5 / (1 + i ) ^ 5
  6
  7

              PV(Aj) = Aj / (1+ i ) ^ j
              PV(Aj) = Present Value of Aj
              Aj = Amount at year j
              i = Discount rate
              j = Year
                       30
   Present Value at 12.0% Discount Rate

1.00   in    Year 1 =         1.00 in Year 1
             Year 2           0.89
             Year 3           0.80
             Year 4           0.71
1.00   in    Year 5 =         0.64 in Year 1
             Year 6           0.57
             Year 7           0.51
             Year 8           0.45
             Year 9           0.40
1.00   in   Year 1 0 =        0.36 in Year 1


1.00   in   Year 15 =         0.20 in Year 1

1.00   in   Year 20 =         0.12 in Year 1

                         31
                    Discount Rate

•   The discount rate is opportunity cost of
    capital in the public sector, ie the rate of
    return on marginal public sector investments
•   The discount rate to be used will be given by
    the planning authority responsible for the
    project
•   The World Bank traditionally has not
    calculated a discount rate for each project
    but has used 10 to 15 percent as a notional
    opportunity cost of capital in developing
    countries
                          32
        Discount Rate Versus Interest Rate




US discount rate around 4%   33
                NPV and IRR

• The Net Present Value (NPV) of a
 project alternative relative to the without
 project alternative is the sum of the
 discounted annual net benefits.

• The Internal Rate of Return (IRR) is the
 discount rate at which the NPV is zero.




                     34
           NPV Decision Rule

1. If the NPV is positive, for the
   chosen discount rate, then the
   alternative is acceptable.
2. If the NPV is negative, for the
   chosen discount rate, then the
   alternative is unacceptable.
3. If the NPV is zero, for the chosen
   discount rate, then the alternative
   is indifferent to the without project
   alternative.
                    35
                  NPV and IRR Calculation (1)

                                       Discount                              Net
                                       Rate (i)                 Discount   Present
                                        12.0%                   Rate (i)   Present

      Investments  Profits                Present                  0.0%        7500
               or       or        Net        Value   Present       3.0%        6326
 Year       Costs Benefits   Benefits       Factor     Value       6.0%        5281
    a           b        c   d = c-b e = 1/(1+i)^a    f = d*e      9.0%        4347
                                                                  12.0%        3508
   0      10000        0     -10000       1.0000     -10000       15.0%        2752
   1          0     6500       6500       0.8929       5804       18.0%        2068
   2          0     3000       3000       0.7972       2392       21.0%        1447
   3          0     3000       3000       0.7118       2135       24.0%         881
   4          0     5000       5000       0.6355       3178       27.0%         365
                                                                  30.0%        -109
                                                                  33.0%        -544
Total     10000    17500       7500                   3508        36.0%        -944
                                                                  39.0%       -1315
                                      NPV =           3508        42.0%       -1657
                                                                  45.0%       -1975
                                      IRR =           29.3%       48.0%       -2271




                                              36
                                   NPV and IRR Calculation (2)
                         8000



                         6000                  NPV at 12%
                                               Discount Rate
Net Present Value (M$)




                         4000



                         2000
                                                                            Internal Rate
                                                                            of Return
                            0
                            0.0%     10.0%   20.0%           30.0%       40.0%   50.0%      60.0%

                         -2000



                         -4000
                                                     Discount Rate (%)


                                                        37
                                               NPV Versus IRR
                            10000


                             8000
                                                  NPV at 12%
                                                  Discount Rate
                             6000
   Net Present Value (M$)




                             4000
                                                                               Internal Rate
                             2000
                                                                               of Return

                                0
                                0.0%   10.0%    20.0%        30.0%          40.0%   50.0%      60.0%

                            -2000


                            -4000
                                                        Discount Rate (%)
- The IRR and NPV will not necessarily rank the alternatives by the same order
- Always use NPV to compare project alternatives
                                       38
                   Multiples Rates of Return
               Net
   Year      Benefits                                          Multiple Rates of Return
     0        -500
     1        1150
     2        -660                                2.00
NPV at 12%    0.64
IRR #1        10%
IRR #2        20%                                 0.00
                                                          0%   5%   10%     15%     20%       25%   30%   35%
 Discount
                                                  -2.00
   Rate       NPV
                        Net Present Value (M$)

    0%          -10.0
    2%           -6.9
                                                  -4.00
    4%           -4.4
    6%           -2.5
    8%           -1.0                             -6.00
   10%           -0.0
   12%            0.6
   14%            0.9                             -8.00
   16%            0.9
   18%            0.6
   20%            0.0                            -10.00
   22%           -0.8
   24%           -1.8
   26%           -3.0                            -12.00
   28%           -4.4                                                     Discount Rate (%)
   30%           -5.9                                          39
                                  No Rate of Return
               Net
   Year      Benefits                                             No Rate of Return
    0          200
    1          300
    2          350                               900
NPV at 12%     747
IRR          #NUM!                               800

                                                 700
 Discount               Net Present Value (M$)
   Rate       NPV                                600
    0%          850.0
    2%          830.5                            500
    4%          812.1
    6%          794.5                            400
    8%          777.8
   10%          762.0
                                                 300
   12%          746.9
   14%          732.5
                                                 200
   16%          718.7
   18%          705.6
   20%          693.1                            100
   22%          681.1
   24%          669.6                              0
   26%          658.6                                  0%   5%    10%    15%      20%       25%   30%   35%
   28%          648.0                                                   Discount Rate (%)
   30%          637.9                                        40
                               Same Rate of Return

              Net Benefits
          Project    Project
  Year        1          2                                                       Same Rate of Return
    0      -1000       1000
    1       1250      -1250                              300
NPV at 12% 116         -116
IRR (%)     25%        25%
                                                         200
Discount   Project   Project    Net Present Value (M$)
  Rate         1         2
   1%       238       -238                               100
   3%       214       -214
   5%       190       -190
                                                           0
   7%       168       -168                                      0%   5%        10%     15%         20%           25%   30%   35%
   9%       147       -147
  11%       126       -126                               -100
  13%       106       -106
  15%         87       -87
  17%         68       -68                               -200
  19%         50       -50
  21%         33       -33
                                                         -300
  23%         16       -16
  25%          0         0                                                           Discount Rate (%)
  27%        -16        16
                                                                                       Project 1         Project 2
  29%        -31        31
  31%        -46        46


                                                                          41
        Incremental Rate of Return
Alternative A - Base
       Investments   Profits                   Present
                  or      or           Net       Value   Present
 Year         Costs Benefits       Benefits     Factor     Value
                                                                NPV =     6.3
    0             8          0         -8        1.00      -8.0 IRR = 100.0%
    1             0         16         16        0.89      14.3 MIRR = 100.0%
                                                                B/C =     1.79

Alternative B - Base
       Investments   Profits                   Present
                  or      or           Net       Value   Present
 Year         Costs Benefits       Benefits     Factor     Value
                                                                NPV =      7.1
    0           100         0        -100      1.0000    -100.0 IRR =     20%
    1             0       120         120      0.8929     107.1 MIRR =    20%
                                                                B/C =     1.07

Alternative B - Alternative A
       Investments       Profits               Present
                   or         or       Net       Value   Present
 Year         Costs Benefits       Benefits     Factor     Value
                                                                NPV =    0.86
    0            92         0         -92      1.0000       -92 IRR =    13%
    1             0       104         104      0.8929        93 MIRR =   13%
                                                                B/C =     1.01
                                          42
        IRR Reinvestment Assumption
IRR IMPLICIT ASSUMPTION:
ALL CASH FLOW VALUES WILL EARN THE IRR INTEREST RATE

                         Discount
                         Rate (i)
                           12.0%
                                                     Future Value in Year 4
     Investments Profits               If You                 If You Receive
              or       or     Net    Invest at                  and Invest at
Year       Costs Benefits Benefits     29.3%                       29.3%
   a           b        c d = c-b     Interest                    Interest

   0     10000         0 -10000      10000
   1         0      6500   6500      12929            6500
   2         0      3000   3000      16715       =    8404      3000
   3         0      3000   3000      21611           10865     3879      3000
   4         0      5000   5000      27940           14047     5015     3879    5000

                 NPV=       3508
                                                                Total 27940
                 IRR=      29.3%
                                     43
 Modified Internal Rate of Return
         Modified Internal Rate of Return Calculation

                                 Financing              Reinvestment
                                  Rate (i)                 Rate (i)
                                  12.0%                    12.0%

                                    Present                    Future   Modified
                  Net                  Value                    Value     Cash
  Year      Benefits               of Costs               of Benefits      Flow
     a     d = c-b       Costs     at Year 0 Benefits       at Year 4

    0       -10000      10000       10000         0               0      -10000
    1         6500          0           0      6500            9132           0
    2         3000          0           0      3000            3763           0
    3         3000          0           0      3000            3360           0
    4         5000          0           0      5000            5000       21255

TOTAL         7500                  10000                    21255

NPV =          3508                                                       3508
IRR =         29.3%                                                      20.7%

MIRR =        20.7%
                                      44
                                     Benefits X Cost

           120



           100

                                                       Alternative B
           80
Benefits




           60


           40



           20
                     Alternative A

            0
                 0    20             40    60     80       100         120
                                          Costs
                                          45
                             Net Benefits X Costs (Efficiency Frontier)


                     8

                     7
                                                                 Alternative B
                     6
Net Benefits (NPV)




                     5
                               Alternative A

                     4

                     3

                     2

                     1

                     0
                         0        20           40    60     80        100        120
                                                    Costs
                                                     46
          Comparison of Alternatives
• When comparing project-alternatives,
    the Net Present Value (NPV) is used
    to select the optimal project-alternative
    (alternative with highest NPV)
•   The Internal Rate of Return (IRR) or
    the B/C ratio are not recommended to
    compare alternatives of a given
    project Alternatives NPV
Project           0.0
                              Optimal
                  3.7
                              Alternative:
                  6.7
                              Highest NPV
                  5.5
                        47
                    Ranking Projects
    • When comparing the economic priority
       of different projects, a recommended
       economic indicator is the NPV per
       Investment ratio
           Selected Alternative   NPV/Investment
                                                   P
Projects         Overlay               8.4         R
                                                   I
                                                   O
                 Reseal                5.2         R
                                                   I
                                                   T
                 Overlay               2.1         Y
                             48
             Budget Constraints Simple Methodology
                Selected    NPV             Investment     NPV per
  Projects      Alternative                              Investment

                   Overlay   16.8              2.0          8.4
                                                                      P
                                                                      R
                                                                      I
                   Reseal    15.6              3.0          5.2
                                                                      O
                                                                      R
                                                                      I
                   Overlay   20.0              5.0          4.0
Available Budget                                                      T
                                                                      Y
                   Reseal    3.0               2.0          1.5
                                        Budget Constraint Cut Off
                   Overlay   5.0   49          10.0         0.5
         Budget Constraints Optimization
Projects Alternatives   NPV
                                   Evaluates all possible
                        0.0
                                   combinations of project-
                        3.7
                                   alternatives to find the
                        6.7
                                   combination that maximizes
                        5.5
                                   the NPV of the overall
                                   network for the given budget
                        0.0
                                   constraint.
                        2.0
                        1.0        P = Number of projects
                        3.5        A = Number of alternatives
                                   C = Number of possible
                        0.0        combinations
 Available Budget       5.4        C=A^P
                        2.1
                        3.2
                              50
    HDM-4 Optimization Example (1)

 Section 1
         Option         Cost       NPV
             A               2       4
             B               5       7
             C               7       8
 Section 2
         Option         Cost       NPV
             A           1           3
             B           3           6
             C           5           8

What is the recommended program for a budget of 5?
                        51
HDM-4 Optimization Example (2)




                  dNPV/dCost




            52
           HDM-4 Optimization Example (3)




Combination of project alternatives
that maximizes the NPV of the
network                          53
         Appraisals & Post Evaluations (1)

• An Appraisal is carried out before an
    investment is made. Everything is
    uncertain.
•   A Post evaluation may be made say 5 years
    after the investment. The investment is
    known and 5yrs of with case are known.
    The without case is unknown as is the
    remainder of the with case.



                       54
       Appraisals & Post Evaluations (2)


• In Both Cases forecasting and
    evaluation models are required to come
    to an answer.
•   Hence we can never be certain about
    the viability of an investment !




                      55
               Sensitivity Analysis
• Consequences of changes on inputs
• Investment Costs (e.g. +15%)
• Traffic Growth Rate (e.g. = zero)
• Generate Traffic (e.g. = zero)
• Value of Time (e.g. = zero)
• A = Investment Costs Increase (e.g. +15%)
• B = Road User Benefits Decrease (e.g. -
    15%)
•   C = A and B together
                       56
        Switching Values Analysis

• Inputs that yield a NPV equal to zero
• Investments Costs
• Normal Traffic
• Traffic Growth Rate
• Generate Traffic

• Investment Cost
• Road User Benefits
                     57
                                                                                                                                                  Risk Analysis
•Inputs vary at the same time                                                                                                                                                             Country
                                                                                                                                                                                          Project
                                                                                                                                                                                                                                                                                                              Africa Region
                                                                                                                                                                                                                                                                                                              Road Management Initiative
                                                                                                                                                                                          Road                                                                                                                Road from Point A to Point B

following some defined                                                                                                                                                                    Option

                                                                                                                                                                                                                                           Internal Rate of Return
                                                                                                                                                                                                                                                                                                              2          Upgrade to ST



distributions                                                              Normal Traffic                                                                                                 Minimum
                                                                                                                                                                                          Maximum
                                                                                                                                                                                                                                 Upgrade Road to Surface Treatment Standard
                                                                                                                                                                                                                                                                                                                                               4.2%
                                                                                                                                                                                                                                                                                                                                              22.7%
                                  35%
                                                                                                                                                                                          Average                                                                                                                                             11.9%
                                  30%                                                                                                                                                     Standard Deviation                                                                                                                                   3.5%
                                                                                                                                                                                          Median                                                                                                                                              11.7%
         Frequency Distribution




                                  25%
                                                                                                                                                                                          Percentile                                                                                                                  25%                      9.4%
                                  20%                                                                                                                                                     Percentile                                                                                                                  50%                     11.7%
                                  15%                                                                                                                                                     Percentile                                                                                                                  75%                     14.1%
                                  10%
                                                                                                                                                                                          Probability that IRR is less than                                                                                           12%                      50%
                                  5%                                                                                                                                                      Probability that IRR is greater than                                                                                        12%                      50%
                                  0%
                                        0.50
                                               0.58
                                                      0.65
                                                             0.73
                                                                    0.81
                                                                           0.88
                                                                                  0.96
                                                                                         1.04
                                                                                                 1.12
                                                                                                        1.19
                                                                                                               1.27
                                                                                                                      1.35
                                                                                                                             1.42
                                                                                                                                    1.50
                                                                                                                                           1.58
                                                                                                                                                  1.65
                                                                                                                                                         1.73
                                                                                                                                                                1.81
                                                                                                                                                                       1.88
                                                                                                                                                                              1.96
                                                                                                Multiplier Factor                                                                                                                         Upgrade Road to Surface Treatment Standard

                                                                                                                                                                                                                     8%

                                                                                                                                                                                                                     7%

                                                        Project Investment Costs

                                                                                                                                                                                            Frequency Distribution
                                                                                                                                                                                                                     6%

                                  14%                                                                                                                                                                                5%

                                  12%
                                                                                                                                                                                                                     4%
         Frequency Distribution




                                  10%
                                                                                                                                                                                                                     3%
                                  8%

                                                                                                                                                                                                                     2%
                                  6%


                                  4%                                                                                                                                                                                 1%

                                  2%                                                                                                                                                                                 0%
                                                                                                                                                                                                                          5.0%
                                                                                                                                                                                                                                 6.0%
                                                                                                                                                                                                                                        7.1%
                                                                                                                                                                                                                                               8.1%
                                                                                                                                                                                                                                                      9.1%
                                                                                                                                                                                                                                                             10.1%
                                                                                                                                                                                                                                                                     11.2%
                                                                                                                                                                                                                                                                              12.2%
                                                                                                                                                                                                                                                                                      13.2%
                                                                                                                                                                                                                                                                                              14.2%
                                                                                                                                                                                                                                                                                                      15.3%
                                                                                                                                                                                                                                                                                                              16.3%
                                                                                                                                                                                                                                                                                                                      17.3%
                                                                                                                                                                                                                                                                                                                              18.3%
                                                                                                                                                                                                                                                                                                                                      19.4%
                                                                                                                                                                                                                                                                                                                                              20.4%
                                                                                                                                                                                                                                                                                                                                                      21.4%
                                                                                                                                                                                                                                                                                                                                                              22.4%
                                                                                                                                                                                                                                                                                                                                                                      23.5%
                                                                                                                                                                                                                                                                                                                                                                              24.5%
                                  0%
                                        0.50
                                               0.58
                                                      0.65
                                                             0.73
                                                                    0.81
                                                                           0.88
                                                                                  0.96
                                                                                         1.04
                                                                                                 1.12
                                                                                                        1.19
                                                                                                               1.27
                                                                                                                      1.35
                                                                                                                             1.42
                                                                                                                                    1.50
                                                                                                                                           1.58
                                                                                                                                                  1.65
                                                                                                                                                         1.73
                                                                                                                                                                1.81
                                                                                                                                                                       1.88
                                                                                                                                                                              1.96




                                                                                                Multiplier Factor                                                                                                                                                            Internal Rate of Return
                                                                                                                                                                                     58
                             Rural Transport Infrastructure

                        Farm             Household/          Village         Market Center         District               Regional           Capital/
                                         Sub-village                                             Headquarters           Headquarters          Port
Typical Transport
Infrastructure                   Path           Path/Track       Track/ Earth Road   Earth Road/ Gravel   1-2 lane Gravel / ST   2 lane AC**
                                                                                            Road                 Road                Road

Typical Traffic                Porterage          NMT                    NMT               NMT                 >100VPD           >1500VPD
                                                 0-5VPD                5-50VPD          20-200VPD
                                1-5Tkm           1-10 km               5-20 km           10-50 km             20-100 km          50-200 km
Share of Asset Value                                                                                                                            40%
                                                                                                                                                20%
                                                                                                                                                 0%
Share of Network Length
                    40%
                       20%
                       0%

                                   O           Community
                                                       Local Government
Responsability
                                                                                                           Provincial/Central Government

Type of Network
                                        Rural Transport Infrastructure                                    Trunk or Provincial Road



                               “Tracks”                                     “Roads”                                  “Highways”
                                                                           59
                          Rural Transport Infrastructure
                                     Rural Transport Infrastructure            Primary, Secondary and Municipal Roads
Road Network                                    Tertiary                          Secondary                Primary
Functional Classification                                   Access                 Collector               Arterial
Responsibility                    Community            Local Government           Regional &               National
                                                                                  Municipal
% of Road Network                    N.A.                    +- 70%                  +- 10%                  +- 10%
                                                     1 to 2 earth or gravel 1.5 to 2 gravel or paved
Physical Characteristics            tracks                    lanes                   lanes          2 or more paved lanes
                             Normally sections with Normally sections with Normally sections with Normally sections with
                                 1 to 5 kms               5 to 20 kms            20 to 100 kms           50 to 200 kms
Traffic Characteristics          Mostly NMT           < 50 AADT + NMT            50-500 AADT              > 500 AADT
Economic Evaluation                   No                        No                   Yes                     Yes
Social Evaluation                     Yes                       Yes             Complimentary                No
Financial Evaluation                  No                        No                    No                    Tolls
Technical Evaluation                  No                        Yes                  Yes                    Yes
Environmental Evaluation              No                        Yes                  Yes                     Yes
Safety Evaluation                     No                        Yes                  Yes                     Yes




   Focus on social evaluation (cost effectiveness
   indices, community priorities and multi-criteria
   analysis)                                               60
             Social Benefits: Why the Concern ?

•   There is unease with conventional appraisal based primarily on
    transport cost savings to traffic
•   There is a strong desire at community and national levels for
    better access and mobility which is frequently not matched by
    standard measured economic benefits
•   The ‘rich’ world governments subsidise rural transport. Should
    the same happen for developing countries ?
•   Isolation is a recognised characteristic of poverty
•   There is a feeling that a minimum degree of access and
    mobility is a ‘basic human right’
•   Development has moved away from a narrow definition of
    economic development towards concern with ‘livelihoods’ and
    meeting ‘Millennium Development Goals’
•   The issue is particularly important when roads are impassable
    to motor traffic

                                 61
            Economic & Social Benefits
•   Consumers and producers surplus approaches are very
    economic in orientation. Yet roads provide ‘social
    benefits’ – including improved access to health and
    education facilities and improved social mobility that
    cannot be easily translated into conventional economic
    benefits. – Although they may have important long term
    ‘economic’ consequences. Improved health and
    education and more secure social networks increase
    long term earning capabilities but so far the economic
    forecasting framework does not include this.

•   When roads are impassable to motorized traffic we know
    that the quality of health care and schooling falls. Drug
    supply and supervision drops. Likewise no NGO,
    government agency or commercial enterprise will
    establish or support a service which cannot guarantee
    all year round access.
                               62
                  Indices and Ranking
•   Widely used for feeder road planning; there are
    many different approaches
      e.g. i) cost of improvement / population
            ii) estimated trips / cost

Advantages: Speed , simplicity, transparency, many
  factors can be incorporated
Disadvantages: How do we value widely different
  factors ? (adding up apples and pears);
  weightings are not stable ; cannot easily address
  questions of road standards, timing etc, ; possible
  double counting
                            63
                   Example of Two Indices

i) Andhra Pradesh (India)
     cost effectiveness = cost of upgrading/ population served

But – no measure of condition change and no importance to traffic

ii) Airey & Taylor
       1st for impassable roads
          rank      = cost per head of establishing basic access

     2nd when access is there:

                               estimated trips x access change
     prioritization index   = --------------------------------------------
                                  rehabilitation cost per km



                                       64
                 Community Priorities

•   Community priorities now often form an important
    part of feeder road appraisal. It is possible just to
    ask communities to rank the investments they
    prefer- both within the road sector or between roads
    and other investments.
•   Advantages: Community acceptability, use of
    community knowledge
•   Disadvantages: Sectional interest groups may
    dominate voting, community knowledge of area or
    road impact may be poor

                            65
        Cost Effectiveness Analysis (CEA)

•   Compares the cost of interventions with its
    predicted impacts and it is used where the
    benefits cannot be measured in monetary
    terms, or where the measurement is difficult
•   It includes provisions that (a) the objectives of
    the intervention are indicated and are clearly
    part of a ampler program of objectives (such as
    reduction of the poverty); and (b) the
    intervention represents the smaller cost
    alternative of obtaining the indicated objectives
•   It produces effectiveness indicators, such as
    Total Beneficiary Population per Investment or
    Investment per Beneficiary Population

                          66
       CEA Comparison of Alternatives


•   To compare project-alternatives, the investment
    cost is used to select the optimal alternative
•   The selected alternative is the one with the
    lowest investment cost that will achieve the
    objective of the program

              Alternatives Investment
    Project              2.0
                                      Optimal Alternative:
                         3.7
                                      Lower Investment
                         1.7
                         5.5

                            67
              Projects Eligibility with CEA

   •   To assess if a project is eligible, an acceptable
       effectiveness indicator threshold is defined
                     Investment per
                        Population         Effectiveness
                       (U$/person)         Indicator
                                           Threshold
Projects
                          50               Example


                          150               Eligible


                                            Not Eligible
                          500
                                68
                                  Effectiveness Indicator Threshold

                        40                                  ?
                                            Reasonable                    Non Reasonable
                        35
                                                                      ?
                        30                                                      Evaluate Universe
Frequency of Projects




                        25
                                                                                of Projects and
                                                                                Available Budget
                        20

                        15

                        10

                         5

                         0
                             50
                              0


                                   0
                                        0
                                             0
                                                  0
                                                       0
                                                            0
                                                                 0
                                                                      0
                                                                            0
                                                                                 0
                                                                                      0
                                                                                           0
                                                                                                0
                                                                                                     0
                                                                                                          0
                                                                                                               0
                                                                                                                    0
                                                                                                                         0
                                  10
                                       15
                                            20
                                                 25
                                                      30
                                                           35
                                                                40
                                                                     45
                                                                           50
                                                                                55
                                                                                     60
                                                                                          65
                                                                                               70
                                                                                                    75
                                                                                                         80
                                                                                                              85
                                                                                                                   90
                                                                                                                        95
                                                      Investment per Population (US$/person)
                                                                     69
           Possible CEA Indicators

•   Investment Cost per Total Beneficiary
    Population
       100 US$ per person
•   Total Beneficiary Population per
    Investment Cost
       0.01 persons per US$
•   Total Beneficiary Population per
    Investment Cost in thousands of dollars
       10 persons per 1,000 US$
•   Etc.

                     70
    Options for Beneficiary Population

•   Rural beneficiary population
       o Effectiveness = (rural beneficiary population) /
           Investment
•   Poor beneficiary population
       o Effectiveness = (poor beneficiary population) /
           Investment
•   Mixed beneficiary population
       o Effectiveness = (poor persons + 0.3 non poor
           persons) / Investment
•   Etc.

                        71
           Total Beneficiary Population (1)

Total Beneficiary Population = Directly Benefited
  Population + Indirectly Benefited Population

•   The Directly Benefited Population is the one that
    lives next on the road, defined for example to 2.0
    km at each side of the road, and the population in
    the ends of the road, depending on its
    characteristics and the use of the road
•   The Indirectly Benefited Population is the population
    that lives in other roads near the road in
    consideration, who use the project road to arrive at
    the main population center of the region or at a
    main road
                             72
               Total Beneficiary Population (2)

                                                       Main
                              D                      Population
                                                      Center



           B                  C            E             F




           A


               Village




For example, for the road section B-C:
Directly Benefited Population = Population along section B-C plus on
towns B and C
Indirectly Benefited Population = Population along section A-B plus on
town A                             73
          Multi Criteria Analysis (MCA) (1)

•   It adopts criteria such as traffic, proximity to
    educative, health, and economic centers, etc.
•   To each section, a number of the points is assigned
    to each criteria that correspond to the fulfillment of
    the criteria
•   The added number of the points that each section
    receives is computed simply adding the points
    assigned for each criteria, or with the use of a more
    complex formula, for example, weighting the criteria
    by their perceived importance

                              74
               Multi Criteria Analysis (2)

•   It produces a priority indicator
•   The indicators used in a MCA reflect implicit
    economic and subjective evaluations
•   If the weights and the points are decided and
    assigned on a participative way, the MCA has the
    potential to be a good participative method for
    planning based on implicit a socioeconomic
    estimates
•   Nevertheless, it tends to be applied by planning
    consultants or in isolation without the consultation
    with the users and communities affected by the
    project                  75
         Multi Criteria Analysis (3)


•   The result of the MCA, is often,
    unfortunately, not transparent, specially if
    many factors are considered and a
    complicated formula is also applied
•   Therefore, if it is adopted, this method
    must be used very carefully and to be
    maintained simple, transparent, and
    participative




                       76
            Multi Criteria Analysis Example (1)

•   Level of poverty of the influence area (Low, Medium,
    High)
•   Potential for economic development of the influence
    area (Low, Medium, High)
•   Importance of the road given by local consultation
    process (Low, Medium, High)
•   Provision of access of social services of the road
    (Low, Medium, High)
•   Problems of transitability of the road (Low, Medium,
    High)
•   Functional classification level of the road (Low,
    Medium, High)
•   Existence of public transport (Low, Medium, High)
                             77
                         Multi Criteria Analysis Example (2)
                                                                                                                          Priority Index
                                                                                                            Functional        Location on Basic
            Population              Poverty            Agricultural Area                Traffic            Classification            Network       H

     Beneficiary                                      Percent                      Daily
                                Poverty                                                                  A=4 B=3               Yes = 1
     Population     Factor                Factor     of Area of    Factor         Traffic    Factor                 Factor               Factor
                                Percent                                                                  C=2 D=1               No = 0
       per km                                        Influence                   (AADT)


        9,889            1.00    99%          1.00       0%            -           20             0.25      1          0.33      1          1.00
         520             0.05    99%          1.00       0%            -           20             0.25      2          0.67      1          1.00
        1,237            0.13    99%          1.00       0%            -           15             0.19      2          0.67      1          1.00
         564             0.06    97%          0.98      14%           0.25         80             1.00      3          1.00      1          1.00
         344             0.03    97%          0.98      36%           0.64         15             0.19      3          1.00      1          1.00
         503             0.05    97%          0.98      18%           0.32         35             0.44      3          1.00      1          1.00
ity Index
                                                                                                  Environment
                     Health Centers               Schools          Public Transport                Feasibility


                    Yes = 1               Yes = 1                  Yes = 1                   Yes = 1                Priority
                                Factor                 Factor                    Factor                   Factor
                    No = 0                No = 0                   No = 0                    No = 0                  Index



                         0          -         0              -       1               1.00         1          1.00     5.6
                         0          -         0              -       1               1.00         1          1.00     5.0
                         0          -         0              -       1               1.00         1          1.00     5.0
                         0          -         1             1.00     1               1.00         1          1.00     7.3
                         0          -         1             1.00     1               1.00         1          1.00     6.8
                         0          -         1             1.00     1               1.00         1          1.00     6.8


 Factor = Value / Maximum Value                                             78

				
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