Highway economics and finance

Intro
Many countries have modernized their road system

through the involvement of the private sector in funding, designing, constructing, operating and maintenance of highway facility The private entrepreneurs or the government body levy a fee on the road user for using the facility. Roads where the costs are recovered through such user fees are known as Toll Roads.

Advantages
1.

2. 3. 4. 5.

Since the financing of Toll Roads is done by private entrepreneurs, time is the essence of a project. Hence such project gets completed in a short duration Toll financing is an additional source of funding Tolling is an efficient method of charging the actual road user and thus is a equitable form of user taxation Toll roads are designed to high standards and are well maintained Toll road companies provide good way side facilities

Disadvantages
1. 2.

3. 4.
5.

Toll roads are constructed with borrowed capitals, hence their costs tend to be high The cost of toll collection is an additional cost component Delays are often caused at toll plazas When a toll free road is present as an alternative, the full potential of toll roads are not utilized Toll projects are financially viable over long period. This period is known as the concession period and is usually 20-30 years. There are uncertainties and risks involved in such projects. The important one is the accuracy of traffic projection. Others are political which are equally important

Forms of Toll projects

BOT Build, operate and transfer. The entrepreneur builds the facility , operates it and

collects the toll, and transfers it at the end of the concession period back to government. Most highway project in India follows BOT. BOLT- Build, Operate, Lease and Transfer. The operator builds and leases the facility from government, operates it for a certain period and transfers it at the end. The government gives him certain fixed lease charges for building and operating the services. India railways have been using this system.

 BOO- Build, Own, Operate, this is similar to BOT,

but without transfer of ownership to the private entrepreneurs DFBO- Design, Fund, Build and Operate. This system is tried in UK and now is being adopted in India LDO- Lease, Develop, Operate in which the government retains ownership of an existing facility and receives payments as specified in the lease agreement with a private lessee, who in turn finances development and operates the facility

 ROT- Rehabilitation, operate, transfer. This is similar to BOT, but the works involves

rehabilitation of existing facility rather than the new one

 There are some other forms of public-private-

partnership (PPP) in financing roads 1. Annuity concept under this scheme the concessionaire is required to meet the entire upfront cost. the client makes a fixed payment at regular intervals to the concessionaire for an agreed period this enables the concessionaire to recover his initial investment, interest there on and operation & maintenance cost the client can also collect toll and it goes to client only

 Viable Gap Funding It is found that the project isnt fully commercially

attractive on basis of collection of Toll alone the client agrees to give grant to cover the viable gap Where traffic is very high and Toll collections are high, the concessionaire doesnt seek VGF Some other form include ASSET SECURITIZATION- existing highway assets can be leveraged to raise funds, particularly from international funding institutes like WB and Asian Development Bank

Highway user benifit

There are various benefits due to highway

improvement and it can be classified into two categories 1. Quantifiable or tangible benefits 2. Nonquantifiable or intangible benefits

Quantifiable benefits
Saving in vehicle operation cost is due to reduction

in fuel and oil consumption and reduction in wear and tear of tyres and other maintenance cost A road with sharp curves, steep grades require frequent speed changes Presence of intersection requires stopping idling and accelerating Road stretches with high volume or congestion necessitates speed changes stopping and time travel

 Uneven surface condition with ruts, pot holes,

undulations, waves and corrugations increase the vehicle operating costs, increase in fuel consumption, wear of tyres and general maintenance cost Saving of travel time is of direct consequence to commercial vehicles due to possible increase in their trip length and earning per unit time Value may also be assigned for saving in travel time of passengers

 Reduction in accident rate due to improvements in

the highway facilities causes considerable benefits to the road users and others The components of accident loss include cost of damages to vehicles and other properties, injuries and loss of human life, delays to human life and passengers, cost of human life and legal proceedings Benefits other than road user include the enhancement in land value, increase in employment opportunities and related economic uplift

Non-quantifiable benefits
Reduction due to fatigue and discomfort during

travel Increase in comfort and conveniences improvement in general amenities social and educational aspects Development of recreational and medical services Improved mobility of essential services and defense forces Another major intangible benefit is reduction in suffering and pain involved in highway accidents

Highway financing in India

The responsibility of financing different road lies

with the a. Central government b. State government Local bodies like c. Corporations d. Municipalities e. District boards f. panchayats

Highway financing in India

Taxes levied by central government A. Duties and taxes on motor fuel B. Exercise duties on vehicles, spares tyres etc.,

C. Exercise duties on oils, grease

A. B. C. D.

Taxes levied by state government Registration fee for vehicles and road tax Permits for transport vehicles Passenger tax on vehicle parts tyres etc Fees on driving licenses

 Taxes by local bodies are mainly the toll tax Since the introduction central road fund (CRF)

(1929) taxing on motor fuel has been the main source of finance (state government)

Role of economic evaluation

India has a serious shortage of resources needed for

economic development Various sectors of economic activity is decided by planning at the national level Within the allocation of highway sector a number of schemes can be taken up Hence a wise decision should be reached on the most appropriate choice This can be achieved by modern technique of economic evaluation of projects

 Economic evaluation is a rational approach at

quantifying the future benefits and costs of proposed highway improvements Its view is to determine the extent to which the projects will contribute to the goal of improvement of general welfare and living standards It can also be carried out to weigh other alternatives

Some of the specific objectives in carrying out economic evaluation

To decide weather the scheme under construction is worth investing 2. To rank schemes competing for scarce resources in order of priority 3. To compare various alternative schemes and select one of the most economical 4. To assist in phasing the programme depending upon the availability of resources
1.

Some basic principles

Economic evaluation makes it possible to choose the best of the various alternatives 2. In economic evaluation all past actions are irrelevant. The prime importance is the future flow of costs and benefits 3. In highway projects the appraisal is carried out from the view of nation as a whole and are not restricted to any sub-sets 4. Economic analysis should not be misunderstood with financial analysis.
1.

Some basic principles

5. Economic evaluation should take place within a set

of established criteria such as minimum attractive rate of return, interest rate etc. 6. Opportunity cost of capital and resources should be considered wherever they are imported 7. The period of analysis need not be too long in the view of uncertainties associated with the future traffic and benefits (for highway projects it is enough if the analysis covers a period 15-25 years after opening to traffic)

Motor vehicle operation cost

The factors to be considered for evaluating motor

vehicle operating cost would differ depending on the purpose of analysis. The vehicles may be classified into different groups such as passenger cars, buses, light commercial vehicles, single unit trucks, combination vehicles etc., for the purpose of cost analysis

The motor vehicle operation cost depends on several factors such as

Cost dependent on time expressed as cost per year such as interest on capital, depreciation cost, registration fee, insurance cost, garage rent etc 2. Cost depending upon the distance driven expressed as cost per vehicle-kilometer. The items included (fuel, oil, tyres, maintenance and repairs) 3. Cost dependent on speed include cost of fuel, oil and tyre per vehicle/Km travel time value of passenger 4. Cost dependent on tyre of vehicle and condition. Operation cost of larger vehicles maintained in poor conditions are also higher
1.

5. Cost dependent on road condition and geometrics

such as tyre and conditions of pavement surface. The vehicle operating cost increases with the unevenness index of pavement surface. These factors are also affected by topography of a region 6. Cost dependent on traffic factors such as congestion, volume to capacity ratio, flow characteristics, composition of traffic etc 7. Value of occupants time 8. Accident costs.