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HDM and Roads Economic Decision Model

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					Roads Economic Decision Model
           (RED)

               January 2008

          Rodrigo Archondo-Callao
      Senior Highway Engineer, ETWTR
               The World Bank
                 RED Objectives
• Simplify the economic evaluation of low volume
  roads
• Better capture the economic benefits of a project
• Characterize the wet and dry seasons separately
• Include in the analysis the high level of
  uncertainty related to low volume roads (risk
  analysis)
• Produce proper sensitivity, switching values, user
  impacts, and distribution of benefits analyses
• Perform budget constraint optimization and multi-
  criteria analysis
                RED Development

• RED is being developed by the World Bank for the
  Africa Road Management Initiative (RMI)
• RED version 1.0 was released in 1999, version 3.2
  was released in 2004
• RED is being used at project and network level in
  many countries worldwide (Nicaragua, Turkey,
  Ecuador, Chad, Argentina, Ethiopia, Guatemala, Lao,
  Cambodia, Yemen, South Africa, etc.)
• RED version 3.2, 2004, is available at the website:

http://www.worldbank.org/afr/ssatp/Models/RED_3.2/red
  32_en.htm
   Economic Evaluation of Low Volume Roads
• Low Volume Road Versus High Volume Roads (>
  300? AADT paved roads: HDM-4 evaluation)
• Low Volume Roads Versus Very Low Volume Roads
  (< 50? AADT unpaved roads: social evaluation,
  maximize population served per investment, multi-
  criteria)
• Consumer Surplus Approach Versus Producer
  Surplus Approach (difficult to judge the assumptions
  made, concern of double counting benefits)
• Customized Excel Model Versus HDM Models (HDM-
  III and HDM-4 models have the same unpaved roads
  deterioration models, which are not particularly
  customized for developing countries)
              RED Characteristics
a) Constant average level of service over
   evaluation period
b) Three options to define levels of service
c) Two periods during a year: period with and
   without direct passability (wet and dry seasons)
d) User defined equations relating road user costs
   and speeds to roughness
e) Generated, induced and diverted traffic benefits
f) Risk analysis with triangular distributions
g) Budget constraint optimization
h) Multi-criteria and cost effectiveness analysis
a) Constant average level of service over
           evaluation period
  HDM-III/HDM-4 Roughness Estimates
           for Unpaved Roads
• Valid for engineered unpaved roads with good
  maintenance (good drainage). Therefore:

  – Higher rainfall yields lower roughness
  – Higher percent of trucks yields lower roughness
  – Earth roads (finer soils) have lower roughness than
    gravel roads

• In practice, the condition of an unpaved road can
  be different from what is being predicted by the
  HDM models
        b) Three options to define levels of service
                                                                        b) Speed of a                        c) Roughness
               a) Roughness                                             Reference                            & Speeds of
                                                                        Vehicle                              All Vehicles
a)                                                        | b)                                                       | c)
                      Input Road                          |                      Input Reference                     |
                      Roughness                           |                       Vehicle Speed                      |      Input Road
                                                          |                                                          |      Roughness
                                                          |                                                          |
                                                          |                      Estimated Road                      |
                                                          |                        Roughness                         |
                                                          |                                                          |
                                                          |                                                          |
                                        Light    Heavy    |                                         Light    Heavy   |               Heavy
 Car      Utility   Bus                 Truck    Truck    |   Car      Utility   Bus                Truck    Truck   |   Car         Truck
 VOC      VOC       VOC       .......   VOC      VOC      | VOC        VOC       VOC      .......   VOC      VOC     | VOC …. VOC
                                                          |                                                          |
                                                          |                                                          |
                                         Light   Heavy    |                                          Light   Heavy   |     Input Speeds
 Car      Utility    Bus                Truck    Truck    |   Car      Utility    Bus               Truck    Truck   |    for All Vehicles
Speed     Speed     Speed     .......   Speed    Speed    | Speed      Speed     Speed    .......   Speed    Speed   |         …….
                                                          |                                                          |


Equations for each vehicle type and each terrain-road type:
       a) Vehicle Operating Costs = a0 + a1 * Roughness + a2 * Roughness^2 + a3 * Roughness^3
       b) Speed = b0 + b1 * Roughness + b2 * Roughness^2 + b3 * Roughness^3

Equation for each terrain-road type and for the defined reference vehicle:
       c) Roughness = c0 + c1 * Speed + c2 * Speed^2 + a3 * Speed^3
  Vehicle Operating Costs and Speeds
  Function of Roughness Obtained from
    HDM-III, HDM-4 or Other Models




Results from HDM          Fitted Cubic
(VOC X IRI)               Polynomial
          c) Two periods during a year

Days Per Year             Days Per Year
With Direct Passability   Without Direct Passability




                              - Different Length
                              - Different Roughness
                              - Different Speeds
                              - Different Traffic


                              Higher Transport Costs
       d) User defined equations relating vehicle
       operating costs and speeds to roughness
                                                        Vehicle Operating Costs ($/veh-km)

                                          0.45
                                                         y = -2E-05x3 + 0.0009x2 - 0.0004x + 0.1153
                                          0.40
                      Terrain Type                                       R2 = 0.9997
                                          0.35
                                          0.30
                 A         B          C   0.25
                                          0.20
Road    X                                 0.15
                                          0.10
Type    Y                                 0.05
                                          0.00
        Z        AZ
                                                    0           5            10           15          20   25
                                                                          Roughness (IRI)




       Vehicle        Car                                   Vehicle Speeds (km/hour)
       Type           Utility
                      Light Bus           100
                      Medium Bus          80
                      Heavy Bus           60
                      Light Truck
                                          40
                      Medium Truck                       y = 0.0073x3 - 0.2767x2 + 0.2562x + 86.24
                      Heavy Truck         20                             R2 = 0.998
                      Articulated Truck    0
                                                0              5           10            15           20   25
                                                                          Roughness (IRI)
  e) Generated, induced, and diverted traffic
                   benefits
• Normal traffic. Traffic without any new 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
  from other roads, changing its origin or destination,
  due to increased economic activity in the road’s zone
  of influence brought about by the project
• Diverted traffic. Traffic that diverts to the project road
  from an alternative road with the same origin and
  destination as the project
   Generated Traffic <> Lower Transport Costs
 Induced Traffic <> Local Economic Development
                   Decrease in Transport Costs                                   Special Local Economic Development (Induced Traffic)
Transport Costs                                                         Transport Costs




                                           Consumer                                                                          Consumer
                                            Surplus                                                                           Surplus



COST1                                                                   COST1




COST2                                                                   COST2




                                                                                                                                                d2

                                                             d1                                                                         d1

                          ADT1             ADT2               Traffic                                               ADT2     ADT3               Traffic

              Normal      Generated Traffic                                                                   Generated Traffic
              Traffic    due to Decrease in                                                                  due to Special Local
                          Transport Costs                                                                   Economic Development

User enters:                                                            User enters:
  - Percent of normal traffic or                                          - Amount of generated traffic due to special local economic development
    or
  - Price elasticity of demand =       Percent Increase in Traffic
                                   Percent Decrease in Transport Cost
 f) Risks analysis with                                                                                                                                                       Country
                                                                                                                                                                              Project
                                                                                                                                                                                                                                                                                                  Africa Region
                                                                                                                                                                                                                                                                                                  Road Management Initiative

triangular distributions
                                                                                                                                                                              Road                                                                                                                Road from Point A to Point B
                                                                                                                                                                              Option                                                                                                              2          Upgrade to ST

                                                                                                                                                                                                                               Internal Rate of Return
                                                                                                                                                                                                                     Upgrade Road to Surface Treatment Standard
                                                                    Normal Traffic                                                                                            Minimum                                                                                                                                              4.2%
                                                                                                                                                                              Maximum                                                                                                                                             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
                              g) Budget constraint optimization
                                                                   Program Net Present Value
                                                                                                                                                             5% Margin

                           25.00


                           20.00                                                                                                            A            U
                                                                                                                                  B
  Net Present Value (M$)




                                                                                                                       C                             R
                                                                                                        D
                                                                                               E
                           15.00


                           10.00


                            5.00


                            0.00
                                0.00          1.00   2.00           3.00           4.00          5.00          6.00         7.00        8.00       9.00         10.00
                                                                       PV Economic Agency Costs (M$)


                                                             Net           Internal       Equivalent    Modified           PV         Financial      NPV            NPV
                                                            Present         Rate           Annual      Internal Rate   of Economic    Investment      per           per
                            Program-Alternative             Value      of Return           Benefits     of Return      Agency Costs     Cost       PV Agency     Investment
Code                        Description                      (M$)            (%)            ($/km)          (%)            (%)          (M$)          (#)            (#)
 U                          Unconstrained Budged            20.40           63%            322414           20%            9.01         8.92         2.26           2.29
 A                          Budget Constraint A             20.25           70%            319993           21%            7.97         7.72         2.54           2.62
 B                          Budget Constraint B             19.50           77%            308123           21%            6.92         6.52         2.82           2.99
 C                          Budget Constraint C             18.94           81%            299261           22%            6.27         5.96         3.02           3.18
 D                          Budget Constraint D             17.59           91%            277943           22%            5.22         4.76         3.37           3.70
 E                          Budget Constraint E             16.13          101%            254813           23%            4.51         3.84         3.58           4.20
 R                          Recommended Program             20.40           63%            322414           20%            9.01         8.92         2.26           2.29
   h) Multi-criteria and cost effectiveness analysis
                                                   User Defined                        Financial           Net        NPV        Internal                 Population
                                              Recommended Alternative               Investment         Present          per          Rate Population          per
Road   Road   Road                                                                          Cost         Value Investment of Return Served                Investment
 No.   ID     Name                       Number       Name                                  (M$)          (M$)          (#)           (%) (persons) (person/1000$)
  1    R01    Road R01 with 25 AADT         0         Current Poor Condition              0.000          0.000       0.000      #N/A               750                  0
  2    R02    Road R02 with 50 AADT         1         Bring to Fair Condition             0.120          0.004       0.032        12.9%           1000                  8
  3    R03    Road R03 with 100 AADT        2         Bring to Good Condition             0.400          0.278       0.694        29.4%           1000                  3
  4    R04    Road R04 with 200 AADT        3         Pave with ST                        1.600          1.230       0.768        31.4%           2000                  1
  5    R05    Road R05 with 300 AADT        3         Pave with ST                        1.600          2.626       1.641        50.3%           3500                  2
  6    R06    Road R06 with 400 AADT        3         Pave with ST                        1.600          4.023       2.514        68.0%           3000                  2
  7    R07    Road R07 with 500 AADT        3         Pave with ST                        1.600
                                                                             Multi-Criteria Weights      5.420       3.387        85.3%           4000                  3
  8    R09    Road R08 with 600 AADT        4         Pave with AC 6m                     2.000          6.823       3.412        85.8%           3000                  2
                                         Criteria       Criteria    Criteria   Criteria       Criteria     Criteria   Criteria     Criteria       Sum
                                                1              2           3           4             5            6          7            8 Weights
                                                1              1           1           1             1            1          0            0           6
                                                                                  Multi-Criteria Indicators
                                          Criteria      Criteria    Criteria   Criteria       Criteria     Criteria   Criteria     Criteria    Criteria
          Road                                   1             2           3           4             5            6          7            8     Overall
          Name                         (-10/0/10)    (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10)
          Road R01 with 25 AADT               -10           -10         -10           10             0           10                                  -2
          Road R02 with 50 AADT                  0             0           0           0             0            0                                   0
          Road R03 with 100 AADT                 0           10          10           10          -10             0                                   3
          Road R04 with 200 AADT              -10              0         10          -10             0          -10                                  -3
          Road R05 with 300 AADT                 0             0        -10          -10                        -10
                                                                                                   10Importance Rank                                 -3
                                                                                                                                             Importance Class
          Road R06 with 400 AADT               10           -10            0           0 (1-highest, 2-second, 3-third, etc.)
                                                                                                     0            0                                   0
                                                                                                                                       (-10-low, 0-medium, 10-high)
          Road R07 with 500 AADT                 0             0         10           10 Economic Population
                                                                                                   10             0      Multi-                       5
                                                                                                                                    Economic Population        Multi-
          Road R08 with 600 AADT              -10              0           0           0          -10
                                                                                             Analysis           -10
                                                                                                            Served     Criteria      Analysis        -5
                                                                                                                                                   Served      Criteria
                                                                                               NPV        Population     Multi-        NPV       Population    Multi-
                                                                                               per             per     Criteria         per         per        Criteria
                                                           Road                            Investment Investment         Sum       Investment Investment       Overall
                                                           Name                                 (#)            (#)        (#)       (-10/0/10) (-10/0/10) (-10/0/10)
                                                           Road R01 with 25 AADT                 8              8          5            -10         -10           0
                                                           Road R02 with 50 AADT                 7              1          3            -10          10          10
                                                           Road R03 with 100 AADT                6              2          2            -10          10          10
                                                           Road R04 with 200 AADT                5              7          6             0          -10         -10
                                                           Road R05 with 300 AADT                4              4          6             0            0         -10
                                                           Road R06 with 400 AADT                3              5          3            10            0          10
                                                           Road R07 with 500 AADT                2              2          1            10           10          10
                                                           Road R08 with 600 AADT                1              6          8            10          -10         -10
               RED Excel Software Modules

                                                                    New
  HDM-III Vehicle Operating Costs                  HDM-4 Vehicle Operating Costs
              Module                                      Module
RED - HDM-III VOC (version 3.2).XLS              RED - HDM-4 VOC (version 3.2).XLS




                                   Main Economic
                                  Evaluation Module
                             RED - MAIN (version 3.2).XLS


                                                                     New
          Risk Analysis                                 Program Analysis
             Module                                         Module
   RED - RISK (version 3.2).XLS                  RED - Program (version 3.2).XLS
            What is Next for RED

• Further dissemination within the Bank and other
  Agencies (ongoing)
• Preparation of an Applications Guide presenting
  case studies based on real applications of the
  model (ongoing)
• Deal with cases with no passability
• Deal with social benefits
• Create a Seniors Executives Module

				
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