Slide 1.

QUESTIONS TO BE ANSWERED BY A FEASIBILITY

STUDY
Given the topography and hydrology of the area to be served by the road, is it
feasible to construct the road at the given budget? For example it is required to
improve transportation around Mt. Kenya or Lake Victoria. The shortest
possible route around these of obstacles may require tunneling. Is it feasible
that the tunneling will be achieved at the available budget? If not the
alternative is to construct the road around the lake or the mountain, but the
distances may such that construction of the road is yet again not feasible at the
available budget.

Given the social, economic or travel patterns (present and future) of the
population of an area, is it feasible the proposed solution will yield the outputs
that meet their objective?

Given the loading patterns of vehicles expected to use the road, is it feasible
for the proposed alternative to be constructed to the required loading
standards at the proposed budget?

Is the institution or institutions responsible for the construction, maintenance

and operation of the project prepared adequately in terms of technology,
financial and personnel resources to implement the project as planned?
 Slide 2.
FEASIBILITY STUDY OF A ROAD PROJECT
 In carrying out a feasibility study of a road project, the following must be addressed as a minimum:
 The socio-economic environment in the country
 What are the general indicators of the performance of the economy and society? How are they
performing and how are they supposed to perform in future given the stated goal and objectives of
the country? What are the effects of the changes socio-economic situation on generation and
growth on roads in general and the project road in particular?
 The transport sector in general:
 How is it organized? What are the policies of the sector? What are the other modes of transport
that will affect the performance of the road project and how? How do we address the effects of the
other transport modes so that the road project can perform as desired?
 The road sector in particular
 How is it organized? What are the policies of the sector? What are its strengths and weaknesses
that will affect the performance of the project? What are the vehicle licensing, insurance and
operating strategies?
 The Ministry responsible for roads
 What are the road-specific objectives and policies of the Ministry? What size of the network is it
responsible for? How is its performance in construction and maintenance of the network? What is
the trend in performance: improving or declining? What is the ministry’s technological, financial and
personnel capacity to oversee the construction, operation and maintenance of roads in general and
the project road in particular?
 The road project
 Where is it located? The population of the area and the trends in growth. What is the zone of
influence and what are land uses and socio-economic activities of the area? How is the topography,
climate and hydrology of the area of influence? What are the traffic levels on the road now if it
exists and what factors will affect its generation and growth? Where are the material and water
sites? Given all the issues learned from the state of the economy, the transport sector, the road
sector, the ministry and the road area itself, predict the performance characteristics of the road.
Slide 3.
ECONOMIC EVALUATION

Estimation of Costs

Costs of projects are classified as capital costs, operation

costs and maintenance costs.
Capital costs are incurred early in the project life while
maintenance and operational costs are incurred soon as
construction of a project is completed.
Costs of alternative projects are normally expressed in terms
of the market prices of the resources required for the
construction, operation and maintenance of the facility. The
fundamental assumption underlying this approach is that
competitive conditions in the marketplace will ensure that the
most efficient combination of input factors will be used. This
assumption is only valid if the prices of the resources used
are equal to the marginal cost of using the resources. The
fairly restrictive conditions under which this assumption holds
are described in many planning publications. For example,
one condition is that there is full employment in the
economy.
Slide 4.
Shadow pricing of Costs
 All project or system costs: capital, operating and
maintenance are derived during that activity
called preliminary engineering design.
 The costs derived at the Preliminary Engineering
Design stage are called financial costs. As we
have seen above, one the conditions under which
project costs can be expressed in terms of market
prices is that there is full employment in the
economy. Therefore for us to use financial costs
in economic evaluation there must be full
employment in the economy. One other condition
is that use is being made only of local resources,
financial or otherwise. These conditions do not
always hold.
Slide5.

 In view of the above and other deviations from the explained

conditions, financial costs are transformed into economic
costs using proportions of the various inputs into the costs.
For example:
Economic Capital costs = F{(1-0.5x.18) + (0.32 x 0.7)-0.15}
Where:
F is financial costs
Contribution of unskilled labour is 50% of 18% of the total
construction costs (where it is assumed that 50% of the
unskilled workforce is unemployed and they contribute 18%
of the total wage bill during construction.
Foreign costs contribute 32% of the 70% foreign contribution to
the construction costs.
is the proportion of the local to foreign financial contribution.
Taxes are 15% of the construction costs.
 Slide 6.
Estimation of Benefits
 Benefits of the project also cannot accrue until the project is completed.
 The concept of a demand curve is central to the derivation of the benefits associated
with expenditures on public projects. A demand curve illustrates the way in which the
quantity of good or service consumed varies with unit price of a good or service.UNIT
PRICE OF GOO
 Demand curves are usually assumed to possess a negative slope. That is as the
price increases the less the demand. Demand curves depict the reaction of
consumers to prices for a particular set of incomes and prices for the other goods and
services available to consumers. Changes in income or the prevailing prices for other
goods and services, may change the demand curve. For many goods and services the
demand curve may be determined empirically.
UNI

PRI

GO
OD
CE
OF
T
 Slide 7.
 Economic theory attempts to explain the nature of the demand curve in terms of a theory of consumer
behaviour. The utility of an economic good or service may be defined as the subjective benefit which a
consumer receives from the consumption of the good or service. Consumers only need to state which of two
goods is preferred without attempting to report the absolute magnitude of the strengths of these preferences.
 A consumer is assumed to have a set of preferences and to allocate a limited income in such a way as to
maximize his well being or welfare. A consumer is said to be in equilibrium when a particular allocation of his
income yields a level of welfare that cannot be exceeded by any other allocation of income.
 Consumer behahiour is developed in terms of an indifference curve. Points along the consumer indifference
curve identify a combination of quantities of goods or services consumed to which the consumer is
indifferent.
 Example of a consumer indifference curve
Q U A N T IT Yy2 CO OF N S U M E D

Increasing
A D Welfare

c
c

B
0 QUANTITY OF y1 CONSUMED

Fig. a.2 A Consumer indifference curve

Slide 8.
The Demand Curve

 The slope of an indifference curve at any

point shows the rate at which a consumer
is prepared to give up the consumption of
one item to increase the consumption of
another while retaining a constant level of
welfare. The absolute magnitude of the
slope is called the consumer’s marginal
rate of substitution of the goods. It may
be regarded as the consumer’s subjective
rate of exchange between goods.
Slide 9.

 The consumer indifference curve may be used to determine an individual’s

demand curve for a particular good. A demand curve conveys a consumer’s
indifference between the utility of a good or service and money. A demand
curve represents the result of two of forces: the desires of consumers and
their willingness to pay to satisfy these desires. A community demand
curve for a good may be derived by summing up the individual
demand curves. The community demand curve will therefore
represent the community’s desires and its willingness to pay to
satisfy the desires.

OACD = Total community benefit

OBCD = Market value
BAC = Consumers’ surplus
Consumers’ Surplus = Net Community Benefit
P R ICE P ER IU N IT

B p

Market
Value

Q
O D

AMOUNT CONSUMED
Slide 10
 For example, it is the desire of the community is to
reduce the accidents by 5 accidents per month. To
quantify the 5 accidents in monetary terms one
requires to ask: what does the community wish to pay
to avoid each accident?
 One principle is based on insurance the community is
willing to pay for cars, other property and life lost
through accidents. The annual benefit will therefore be
5x insurance premium (for cars + for other property +
life).This will be annualized by multiplying the result by
12 months. Arguments have been raised against the
willingness to pay theory: Do people’s value of life
correlate with their willingness to pay? Do they peg
their life insurance premiums against the willingness or
ability to pay?
 Slide11

 Typical benefits of a road improvement project include:

 Vehicle operating costs savings.
 Avoided maintenance savings
 Time savings
 Reduction in accident rates
 Reduction in the noise and air pollution.
 Estimation of benefits for objectives which can easily be
expressed in monetary values is straightforward. For
example, should one option be to improve a road from
gravel to bitumen standards, vehicle operating costs
savings and avoided maintenance costs savings can
easily be worked out as follows:
Slide12.
VEHICLE OPERATING COST SAVINGS

 Vehicle operating costs include

insurances, fuel, oils, tyres and
other consumables such as spare
parts, labour charges during repair,
standing time during repairs etc. It
is the duty of the planner to work
out the various components of
these costs at various road
roughnesses for each vehicle class.
 Slide 13.
Typical VOC RATES
sOne would therefore work out the annual Vehicle operating costs savings for the forecast
traffic for each vehicle class.

VOC for average road surface roughness (Ksh)

10,000 2400 Saving per Saving per
mm/km mm/km vehicle/day vehicle/year
Cars 1.01 0.58 0.43 156.95
Light Goods 1.93 0.9 1.03 375.95
Vehicles
Medium 2.25 1.31 .94 343.10
Goods
Vehicles
Heavy 3.61 2.20 1.41 514.65
Goods
Vehicles
Buses 1.79 1.16 0.63 229.95

One would therefore work out the annual Vehicle operating costs savings
for the forecast traffic for each vehicle class.
slide 14:
Typical computations of Annual VOC

Typical computations of Annual VOC

Year Cars L.G M.G H.G Buses

No Voc No Voc No Voc No Voc No Voc
savings savings savings savings savings
97 14 2197.3 69 25940.6
98 14 2197.3 71 26692.5
99 14 2197.3 73
0 15 75
1 16
2 16
3 17
4 18
5 18
6 19
7 20
8 21
9 21
10 22
11 23
12 24
13 25
14 26
15 27
16 28
SLIDE 15: MAINTENANCE COSTS SAVINGS

 One would also work out the avoided maintenance cost savings by considering the
maintenance costs and cycles of various alternatives. For example, the maintenance
costs of a gravel road is as follows:
 Routine Maintenance (or annual maintenance) for gravel roads
 Traffic per day Annual Routine Maintenance Cost
(Ksh/km/year)
 0-30 600
 31-100 1000
 101-200 1600
 201-300 2600
 Over 300 3600
 Gravelling (or periodic maintenance) = Ksh 160,000/ km carried out at the following
cycle
 Traffic Cycle (Years)
 0-200 5
 200-300 4
 300-500 3
 501-800 2
 Over 800 1
 Slide 16

For bitumen roads Routine Maintenance Costs

Traffic (vpd) Sh/km/year
501-1000 160,000
1001-2000 240,000
Over 2000 320,000
Periodic Maintenance = Ksh 600,000/ cycle which is as
follows
Traffic (vpd) Cycle (Years)
Over 2000 4
1001-2000 5
501-1000 6
Under 500 8
The total annual costs are allocated to each year for each
alternative project and the difference between the cases
with or without the project worked out for each year.
 SLIDE 17:
TIME SAVINGS AND ACCIDENTS
 Unlike in the case of for vehicle operating costs savings
where the savings are in monetary values, value
functions have to be worked out for time, accidents etc.
As discussed above the value of time and accidents
would be estimated by the principle of willing to pay.
Different people value time differently. Moreover in an
economy where most people are unemployed, questions
arise as to what they would with the time saved.
 One study carried out in 1996 gave the following as the
time savings rate for Kenya. By that time the rate of
unemployment was lower.
 Vehicle type CLGMGHGB Savings (K
pounds/hour)3.459.8016.6234.7825.7

Vehicle type C LG MG HG B

Savings (K 3.45 9.80 16.62 34.78 25.7

pounds/hour
)
Slide 18
The Supply Curve and the principles of evaluation

 The supply curve shows the amounts of a good that

producers are willing to supply at various prices. Each
producer is faced with some combination of fixed and variable
costs which contribute to the total cost of each output. The
variable cost is zero when the output is zero. And it increases
as the output increases.
 The marginal cost of an increase in production is the
increment in the total cost that comes from each increment in
output of a producer. In a perfectly competitive market a firm
can sell as much as little as it likes at a fixed price per unit.
The marginal revenue of a firm is equal to the extra income it
receives for each extra unit of production it sells.
 It is possible to plot a marginal revenue curve and a marginal
cost curve. From these it is possible to demonstrate that a
firm maximizes its profits if it produces up to a point where
the marginal revenue equals the marginal cost.
Slide 19.

 This discussion focuses on a firm that produces one

commodity. For firms producing two or more
commodities it is necessary to introduce the
concept of transformation function. The
transformation function shows the combination of
outputs that can be produced for a fixed production
budget. This is like a country that has too
many products to give to its citizens at a fixed
budget. For example, as the production of one
commodity increases the production of the other
must be curtailed, and the transformation function
shows the rate of substitution.
 For a profit-maximizing firm the marginal
revenue must equal the marginal cost for
each product.
Slide20
Conditions for General Equilibrium

 The distribution of goods among consumers is efficient

if every possible reallocation of goods among
consumers results in the reduction of the satisfaction
of at least one consumer. Production is efficient if
every feasible reallocation reallocation of inputs among
producers decreases the output level of at least one
firm.
 Simply put the aim of welfare economics is to assess
the desirability of alternative allocation of resources.
The Pareto criterion considers a reallocation of
resources to be an improvement in the welfare if at
least one person is made better of without making
anybody worse off.
 The decision criteria based on the above principles
include the benefit cost ratio, the net present value and
the Internal Rate of Return.
SLIDE 21:
Example of the computation of these parameters
Year Economi Benefits Present Value Present Value Present Value
c Discounted at 12% Discounted at 20% Discounted at 14%
costs Costs Benefits Costs Benefits Costs Benefits
94 8935 7979 7443 7436
94 8935 7121 6201 6871
95 8935 6362 5164 6031
96 3282 2087 1582 1943
97 3936 2232 1582 2043
98 4029 2043 1350 1837
99 4214 1905 1176 1686
0 4383 1771 1021 1538
1 4520 1632 877 1397
2 3642 1173 590 983
3 5257 1509 710 1246
4 4935 1268 553 1031
5 5094 1167 412 927
6 5283 1083 412 845
7 5428 993 353 760
8 4667 761 252 574
9 5800 847 261 626
10 6437 837 245 612
11 6197 719 192 514
12 6448 671 168 471
13 6652 619 146 426
14 5891 489 106 330
15 7140 528 107 350
Discounted Totals 21462 24334 18808 12095 20338 20139
Benefit/Cost Ratio 1.134
Net Present Value 2872 -6713 -199
Internal Rate of Return 13.87%
SLIDE 22:
The net present value (NPV) is the difference between the sum of benefits and the sum of costs
discounted at the rate of the opportunity cost of capital in a country which was taken as 12% in the early
2000. The project is viable if the NPV is positive.
The Benefit/Cost Ratio is the ratio of the sum of benefits and the sum of costs discounted at the same
opportunity cost of capital (12%). A project is viable if the Benefit/Cost Ratio is greater than one.
Internal Rate of Return is the discount rate at which the Net Present Value is zero. It is therefore obtained
by a process of reiteration. However, through experience one can estimate the discount rate at which the
NPV will be positive and another at which NPV will be negative. One would therefore use the
proportionality of triangles to work out the I.R.R. A project is viable when the I.R.R is greater than the
opportunity cost of capital in the country.

2 87 2

x 2 – X 14 %
12%
199
199
0 NP V

2872 =
X 2-X

2872 (2-X) = 199X

5744 – 2872X = 199X

5744 = 3071X

X = 1.37 therefore zero NPV is at 12+1.37=13.37%