DFID NEW ECONOMISTS GUIDE

Economic Appraisal of Roads - Sundry Issues Author: Paul Ladd - DFID

CONTENTS
1. Introduction
! 1.1 - structure and content of the chapter ! 1.2 - the role of the DFID economist

2. Existing Guidance
! 2.1 - Planning Development Projects ! 2.2 - Overseas Road Note 5 - A Guide to Road Project Appraisal ! 2.3 - Appraisal of Projects in Developing Countries - A Guide for Economists ! 2.4 - Economic Assessment of Road Schemes - COBA DesignManual for Roads and Bridges ! 2.5 - NESA User Manual

3. Synthesis of Road Evaluations and Experience

! 3.1 - treatment of economic issues in past roads projects ! 3.2 - identification and preparation ! 3.3 - appraisal

4. Two Specific Roads Projects Issues

! 4.1 - valuation of small time savings ! 4.2 - optimal timing of roads investments

5. Road Investment Models 6. Accident Avoidance and Cost Reduction 7. Resources

! 7.1 - In DFID ! 7.2 - UK consultants ! 7.3 - In other donor agencies ! 7.4 - Other resources

Bibliography Prepared for the DFID Economist Guide - July 1999

1. INTRODUCTION. 1.1 Structure and content of chapter The aims of this chapter are threefold. First, to point economists in the direction of relevant guidance that already exists for projects and programmes in this sector - this is covered in section 2. Second, to reflect the recommendations from the ODA Synthesis of Road Evaluations and Experience (Evaluation Report EV587, 1996) - section 3. Third, to provide additional guidance on two specific roads projects issues: (i) the valuation of small time savings; and (ii) the optimal timing of roads investments - section 4. Section 5 and section 6 provide background information on Road Investment Models, and engineering measures to avoid road accidents. 1.2 The role of the DFID economist Where design, appraisal or evaluation of roads projects is undertaken, DFID economists are more likely to provide an input as managers of transport economists contracted from specialist consultancy firms (also see Useful Contacts). For this to be successful we need to be intelligent customers. DFID economists need to know about the issues that could arise, and how to manage consultants so as to achieve outputs that meet DFID objectives. 2. EXISTING GUIDANCE 2.1 Planning Development Projects: A Practical Guide to the Choice and Appraisal of Public Sector Investments, ODA, 2nd Impression 1991 Extremely readable, durable, and non-technical overview of roads appraisal issues - the first stop. 2.2 Overseas Road Note 5: A Guide to Road Project Appraisal, TRL, 1988 A longer yet still accessible overview of road appraisal issues. The Note is aimed at economists, transport planners, engineers and administrators and is focused on rural road projects. It includes sections on assessing traffic demand, estimating costs and benefits (including vehicle operating costs and time savings), economic development benefits, cost-benefit analysis and risk and uncertainty. It also addresses wider socio-economic, institutional and environmental issues. The approach described in Overseas Road Note 5 is consistent with: 2.3 Appraisal of Projects in Developing Countries: A Guide for Economists, ODA, 3rd Impression 1997 This is the standard ODA project appraisal guide, containing many useful generalities, but little road specifics. You may wish to refer to: para. 3.34 on page 26 (briefly describes how roads projects are usually appraised); Box 3.4 on page 27 (discusses the benefits of roads projects); para. 5.9 on page 63 (talks about how difficult it is to assess the distribution of benefits); Case Studies 3 - pp. 172-175 (road improvement as part of a 'rural integrated development project'); Case Study 5 - pp. 179-180 (new development road for agricultural districts); and Case Study 6 - pp. 181-183 (road improvement project). 2.4 Economic Assessment of Road Schemes: COBA Manual; Design Manual for Roads and Bridges, Vol. 13, Section 1, HMSO, 1996 This is technical and dry, and deals primarily with the assessment of inter-urban road schemes in England and Wales. However, some useful insights can be gleaned from the brief sections on The Valuation of Time Savings; The Valuation of Vehicle Operating Costs, and The Valuation of Accidents. This is listed as the main Department of Transport reference in the HMT 'Green Book'. 2.5 NESA User Manual: Scottish Development Department, 1995 This explains the economic principles and practice of the appraisal of trunk road schemes.

3. SYNTHESIS OF ROAD EVALUATIONS AND EXPERIENCE 3.1 Treatment of economic issues in past roads projects At the general level, the synthesis found that many roads projects succeed in achieving immediate engineering objectives of constructing or maintaining improved roads, whilst the identification and assessment of economic, social and environmental impacts has been more variable. This section therefore attempts to highlight areas where the coverage of economic issues needs strengthening. It is presented in the form of checklists covering two stages of the project cycle: (1) identification and preparation, and (2) appraisal. Health Warning - These should not be seen as comprehensive checklists that replace existing road project guidance. 3.2 Project identification and preparation A wide approach initially . Projects should be part of the recipient's consistent sector strategy and economic policy. As a result: Think about roads projects in the context of sector-wide constraints to improving road networks. These include natural factors such as climate and topography, the lack of sustainable maintenance capacity, and inadequate management systems rather than specific problems limited to particular routes. Projects addressing institutional constraints such as maintenance capacity, human resource constraints and inadequate sector financing usually have the best chance of improving roads sector performance. In fact, the first priorities for most aid recipients is increased maintenance capacity, funding and effectiveness. Increased road user charges and earmarked road funds can contribute significantly to increasing sustainable maintenance capacity. . paying attention to the whole system, and likely beneficiaries . Improvement of the condition of existing roads (particularly through better road maintenance) generally yields higher economic returns than increasing road capacity. Question the appropriateness of design standards, particularly in the case of low volume roads. New links that provide large distance savings can also give substantial economic benefits, although the environmental implications need to be considered carefully. Sufficient attention should be paid to questions of complementarity and competition between modes of transport, particularly with regard to intermodal links in transport corridor projects. The main beneficiaries of roads projects are usually road users who make savings in transport time and costs (often freight and passenger transport). Traffic levels are the key to economic benefits. In terms of the effect of the provision of roads on agricultural production: roads are a necessary but not sufficient condition to produce a strong agricultural response. . and then weed out weak options. Prospective interventions (particularly those that are unnecessarily expensive) should be rigorously screened at the pre-appraisal level, i.e. projects likely to have a poor economic justification should be killed off quickly. But this is not to say that several options shouldn't eventually be appraised. Low cost solutions to preserve basic access often have higher returns than costlier designs on secondary roads with insufficient traffic.

Think about the split of responsibilities between the private and public sectors Think about how to increase private sector participation, as this has been shown to be effective in past projects. Where the private sector is undeveloped, or unwilling to undertake tasks traditionally the responsibility of the private sector, a direct labour approach has often been successful. There is scope for wider use of labour based methods, including in private sector projects Institutional strengthening requires capacity building in both public and private sectors Plan ahead Think about the requirements for baseline data and studies: this is particularly important for evaluation 3.3 Project appraisal What and how are we appraising? It is important that the appraisal should cover a range of suitable alternatives. The 'Minimum Do Something Approach' will invariably provide one of the best economic options The basis for appraisal is an accurate specification of the 'with' and 'without' project scenarios Decisions should not only be based on a 'yes/no' approach. With high traffic growth rates many road projects will provide a positive Net Present Value but this does not mean that their designs are optimal or that they are timely investments. Consider whether 'when?' or 'ranking' approaches might provide more insights. (See section 4.2 on Optimal Timing) Never forget that the core of economic justification are the benefits to road users some of the nitty-gritty things to watch out for in the appraisal General points to watch Pay attention to the macroeconomic climate, especially import regimes and market distortions Check, if appropriate, which road investment model the consultants plan to use (See section 5. on Road Investment Models) Look at the integrity and coherence of the road section under analysis - many studies in the past have used inadequate or inappropriate sub-divisions of roads Assess feasibility by using the Net Present Value (NPV) rather than through the Expected Internal Rate of Return (EIRR) Don't use excessive residual values at the end of a project's life on costs and benefits Be careful not to underestimate total project costs The weakest component of many rural road projects has been the prediction and valuation of agricultural output response. Pay as much attention to agricultural production implications in the 'without' project scenario, as you do in the 'with' project scenario Be careful not to overestimate benefits by double-counting consumer/producer surplus (this applies especially to projects that have implications for agricultural production) Again in relation to agriculture, be careful not to overestimate the supply-response of farmers. If the

project is sensitive to changes in agricultural production it would be useful to estimate the likely response of farm gate prices from the predicted changes in transport costs. Try not to rely on high and arbitrary estimates of generated traffic - wherever possible have reliable and solid baseline data Time savings are often an area of contention (also see separate section (D1) on the Valuation of Small Time Savings). It is wrong to omit time savings altogether, but be cautious about justifying projects solely on large time savings Wherever possible, try to value non-user benefits such as access to health and other services - this is difficult and most projects usually rely on attempting to prove that user benefits (in the form of vehicle operating cost savings, and time savings) are sufficient to produce a positive NPV 4. TWO SPECIFIC ROADS PROJECTS ISSUES 4.1 Valuation of Time Savings First we look at how time savings have conventionally been valued; and then we turn to a specific appraisal issue of whether these techniques are still valid when valuing very small time savings. For a useful 2 side introduction, refer to pp.59-60 - 'Time Savings' - in Overseas Road Note 5. This gives more of the background arguments in support of the conventions for valuing time savings, but a short summary is as follows: Time savings are accorded different treatment depending on whether they accrue to the vehicles themselves, their passengers, or the freight that they carry. Taking vehicles first, we can split these into two groups: 'fleet' vehicles (lorries, buses and taxis) and privately owned vehicles. For fleet vehicles, time savings may translate directly into reductions in fleet operating costs, such that crew wages or other capital costs may be lower. Or they may allow for increased productive use of the capital in that additional journeys can be undertaken (although this often depend on the route and how long it takes to complete an additional circuit). When considering the benefits accruing to vehicle fleets or privately owned cars, it is important therefore to (1) specify likely routes, and the 'with' and 'without' project scenarios attached to them, (2) try to get hold of, or commission, as detailed traffic survey data as possible, i.e. splitting types of vehicles. When considering passengers, time savings can either accrue in working or non-working time. When time savings occur in working time, these can be used for productive purposes to increase GNP. Production gains will vary between different units of labour, but can essentially be valued at the wage rate of that factor plus the associated costs of employment borne by the employer (such as pensions, insurance). The relevant values may be shadow wages, to correct for imperfections in the labour market. The average wage rate is usually used. Non-working time savings may not increase national production, but evidence suggests that people are prepared to pay for them. As such, these savings are valued as they increase welfare. A number of studies on non-working time have been carried out using a range of techniques. The earlier studies (prior to mid 1980s) estimated passenger time savings of between 25 to 45 per cent of earnings. There is now some doubt about the apparent consistency of the earlier results. More recent research, using Stated Preference Techniques has revealed a wider range of values, depending on the journey circumstances and characteristics of age, sex and national culture. It is not usually so easy to distinguish between working and non-working time. Many trips are multipurpose. Moreover, 'marginal values of time may vary for the same individual, depending on the activities for which the time saved is used. The value of time is also normally a function of factors other than a trade-off between time and cost, such as comfort and convenience. In the UK for example, walking and waiting times are valued more highly than travelling times'. In developing countries, however, it will be very rare for available data sets to allow an analysis of this depth.

Although time values are related to income there is now substantial evidence (both from developed and developing countries) that values of non-working time do not increase pro rata with income. Studies indicate that poor people value non-working time more highly, as a proportion of their income, than richer people do. Similarly, studies show that in Europe, as incomes have risen, time values have not risen proportionately to the same extent. In most countries a single value of non-working time is used to value time savings for equity reasons. However different values are used when route or mode choice needs to be modelled as, for example, in the evaluation of a toll road. It is advised that this approach is adopted for developing country appraisals. In the UK for example, a flat rate of 43 per cent of average hourly earnings (adults working full time) is used. In infrastructure projects designed to alleviate poverty, it will be difficult to justify valuing time savings accruing to higher income groups at a higher rate. But it is also equally inappropriate to weight time savings accruing to the poor at an artificially high level. It seems sensible therefore, and certainly the least controversial, to adopt developed country practice and value each equally. For most road investments using a value non-working time of about one third the wage rate will probably be acceptable. However where passenger time savings are a large and critical component of the benefits (as for example when a bridge is to replace a ferry) it is recommended that a separate study is undertaken. Valuing both working time at non-working times as percentages (100%; 0-45%) of the average wage in the monetised economy omits consideration of wage levels in the informal or non-monetised economy. To some extent this is cancelled out by the argument that in many developing countries, many of the poorest people, who often work in the informal sector as part of their livelihood strategy, can afford to travel less frequently - even by bus, and certainly by car. Again, the analysis will be constrained by available data on wages in the informal sector, and on the number of vehicles and passengers involved in the informal sector. The costs of delays in moving freight consist mainly of::
! costs due to interest on the capital which the goods represent - normally very small compared to the other

elements of vehicle operating costs

! costs due to spoilage or damage of perishable goods - these may be significant, but care must be taken to

ensure that a reduction in spoilage or damage is due primarily to reductions in journey time rather than the provision of a smoother road. If it is the latter, then cost savings should still be credited to the project but, strictly, not as a time saving.
! ancillary costs - e.g. where a piece of equipment is immobilised while waiting for a spare part. Evidence

suggests that these may be considerable. In an uncertain world the costs of meeting all eventualities are very high. So, in order to meet unpredicted fluctuations in demand and reduce the costs of holding unnecessary inventories, transporters of non-perishable goods are often willing to pay far more than the interest cost on the goods to reduce travel time, or to reduce uncertainty in the time of delivery. The trend towards "just-in-time" and "lean inventory management" are now world wide.

Can very small time savings be attributed a pro rata value of larger time savings? Two recent DFID projects in Asia have highlighted the above issue.

Bangladesh Bridge Replacement Project upgrading small bridges on main roads bridges are narrow and in poor condition replace one-lane bridges with two lanes mostly short bridges; 25-30m, hence small time savings (but also includes the delays to waiting traffic is the bridge is full) upgrade 47 bridges at cost of 7.5m

Arterial Roads Project Philippines upgrading small bridges on main roads bridges will fail if not replaced

short bridges; small time savings (5-30 seconds) upgrade 250 bridges at cost of 25m (one third aid funded)

The rates of return on sample bridges in both projects are acceptable because of relatively large numbers of vehicles accruing small time savings. Evidence from Stated Preference studies in developed countries indicate that people tend to value small time savings at a lesser value pro rata than larger time savings. However, to counter this there is also evidence to suggest that small time savings of commercial vehicles will, perhaps after an elapse of time, be translated into productive trips. But this leads us to a dilemma. If we do not attribute pro rata time savings to small benefits then project selection criteria are biased in favour of large projects and the whole rationale for road project planning can become very inconsistent. This may preclude us from upgrading a route through a number of small investments which may be more cost effective than undertaking a large investment. In general, economists and planners have taken the view that small time savings should be valued at the same rate pro rata as large time savings. This approach is recommended. 4.2 Optimal Timing of Roads Investments adapted from p.70 of Overseas Road Note 5, TRL Cost-benefit analysis should be used to assist in determining the best time that a project should start. Even if the analysis shows that the project is worthwhile, there may still be a case for delaying the start whilst traffic continues to grow to increase the rate of return to a more appropriate level. The best way of determining the optimum project start-date is to analyse alternative sequences of project cycles, with different start-dates, over an extended period and to see which sequence produces the highest NPV.

First Year Rate of Return (FYRR) The FYRR is a decision rule for determining the best time to undertake a project. The benefits in the first year of the project's life are expressed as a percentage of the project cost (both undiscounted). Strictly, the correct components of the expression are (1) the benefits in the first year of trafficking after project completion, and (2) the present value of the capital cost. As costs and benefits may accrue in different years, it may be necessary therefore to use the discount rate to bring the capital costs to the same base year as the benefits expressed in (1).

j-1 FYRR = (100*bj) / i=0 where: b = c = j = r = benefits costs first year of benefits; with j = 0 in the base year the planning discount rate expressed as a percentage ci{1 + (r / 100)}
j-I

If the FYRR is greater than the planning discount rate, then the project is timely and should go ahead. If the FYRR is less than the discount rate, but the NPV is positive, the start of the project should be delayed and further rates of return should be calculated to define the optimum starting date. 5. ROAD INVESTMENT MODELS The World Bank's Highway Design and Maintenance Standards model (HDM) and the Transport Research Laboratory's Road Transport Investment model (RTIM) are the two principal models used to appraise roads and highways in developing countries. The models have been mainly designed for rural and inter-urban roads with little traffic congestion. They are not particularly suitable for the appraisal of urban roads or rural access and feeder roads. Both models can deal with earth, gravel and paved roads and with maintenance treatments such grading, regravelling, road sealing, pot hole patching, and overlays. The relationships used in the models were developed from full scale research trials. RTIM was principally derived from research conducted in Kenya and the Caribbean whilst HDM was mainly derived from research conducted in Brazil. The models comprise the following main components:
! A set of road deterioration and road maintenance effects relationships ! A set of vehicle operating cost (VOC) relationships ! A forecasting framework to predict road condition and vehicle operating costs, year by year, over the life of a

road investment
! An appraisal framework to calculate the economic viability of an investment or maintenance treatment from

changes in VOCs and maintenance costs. A given road investment or maintenance activity is predicted to change VOCs by affecting road roughness, trip length, travel speed, or road gradient and curvature. Road surface quality (principally measured by road roughness) is forecast to decline over time with the effects of traffic and climate. Different forms of both models have been developed. RTIM3 is in a spreadsheet format and is relatively simple to use. The data input for HDM III is more demanding but the model is also more comprehensive in the range and combination of maintenance treatments allowed. HDM4 (to be released in 1999) has a number of key modifications. It is designed to deal with interurban traffic congestion, concrete road surfaces and a much wider range of vehicle types including non motorised traffic. For given set of conditions the predictions of fuel consumption and vehicle maintenance costs are lower than for HDMIII.

It is important to calibrate the models to local conditions. This is particularly true for the key relationship between vehicle maintenance costs and road roughness. A very wide range of sensitivities has been found in different countries for this relationship and there is now general agreement that the models have tended to over-predict vehicle maintenance costs and hence it is not recommended to rely on the default values. 6. ACCIDENT AVOIDANCE AND COST REDUCTION A wide range of engineering measures can be taken to minimise the risk and severity of road accidents. Most principles of safety conscious a design are an integral part of good engineering practise that are also implicit in the accepted standards of highway design and construction. Careful thought on the engineering design and attention to detail is very important. Where an accident prevention measure is likely to add appreciably to the cost of construction then it is very useful to take advice and collect and analyse accident and traffic volume data to help assess priorities and the costs and benefits of risk reduction. A very useful source of information on the topic is: "Towards Safer Roads in Developing Countries: A Guide for Planners and Engineers" Prepared by the Transport Research Laboratory for ODA ,1991(reprinted 1994). Some key aspects are identified here. Pedestrians. Where pedestrians flows are high measures should be taken to ensure that, as far as possible, they are segregated from motorised traffic. Footpaths can be constructed away from roads or at the foot of side slopes. Where this is impractical clearly demarcated road shoulders of at least 1.5 m can be built. Road side slopes, drainage ditches and use of gabions. To minimise the dangers associated with vehicles leaving the highway as far as possible side slopes should no less than 1 in 4, or in severe terrain no less than 1 in 3. Where this is impractical consideration should be given to the use of low cost linked gabions to act as crash barriers. As far as possible keep drainage ditches well away from the road. Roads passing through towns and villages. Thought should be given to measures to help reduce vehicle speeds when approaching and passing through towns and villages. Speed limit signs, and traffic calming measures such as gateways, pinch points and possibly roundabouts may be used. Bus bays and lay bys should be provided to keep stopped vehicles, pedestrians, market stalls and sellers away from through traffic. Sharp bends and bridges. Many accidents are caused by sharp unexpected bends, often at the site of a bridge, and particularly after long straight sections. As far as possible unexpected sharp bends should be avoided. If this is not possible then warning signs, chevrons and yellow bar patterns should be employed. On bridges thought should be given to pedestrian access; outriggers for pedestrians may be constructed. The use of road construction diversion roads. Sometimes these roads can be usefully employed, after road construction for the use of slow moving traffic, such as animal carts, tractors, bicycles etc. Other issues. Ensure the vertical and horizontal curvature meet accepted standards. Employ signs and other measures to reduce traffic speeds at junctions. In the choice of surfacing materials ensure that the skid resistance properties are adequate. 7. RESOURCES 7.1 In DFID

Sheila Ahmed Peter Dearden Paul Ackroyd Paul Mullard Shan Mitra

020 7917 0412 020 7917 0076 020 7917 0351 020 7917 0499 c/o DFID Bangladesh

S.Ahmed@dfid.gov.uk } P.Dearden@dfid.gov.uk } P.Ackroyd@dfid.gov.uk } P.Mullard@dfid.gov.uk } S.Mitra@dfid.gov.uk }

Ghana feeder roads

Philippines Bangladesh

7.2 UK consultants

Transport Research Laboratory (John Hine) WS Atkins Halcrow Arup Transportation Transportation Research Group (University of Southampton) Institute for Transport Studies (Prof. C.A. Nash) ISOHDM Project Secretariat, School of Engineering, University of Birmingham (Dr H. Kerali) HDM-4 Project Coordinator, PIARC, France.
7.3 In other donor agencies

http://www.trl.co.uk/ http://www.wsatkins.co.uk/ http://www.halcrow.com/ http://www.arup.com/ http://www.soton.ac.uk/~trgwww/ http://www.its.leeds.ac.uk

http://www.piarc.lcpc.fr

World Bank
7.4 Other resources

http://worldbank.org/html/fpd/transport/

IFRTD

http://www.gn.apc.org/ifrtd/

"The conventional approach to rural transport has been to invest in roads and motorised transport systems. Many villages in the South are not part of road networks. Even where there are links, villagers often cannot afford motorised transport. Therefore goods and persons are mainly transported on foot. These transport constraints can hamper agricultural production and restrict rural development. IFRTD promotes an alternative approach towards rural transport." BIBLIOGRAPHY General Planning Advice: Appraisal of Projects in Developing Countries (1997): A Guide for Economists, ODA, 3rd Impression Economic Assessment of Road Schemes (1996): COBA Manual; Design Manual for Roads and Bridges, Vol. 13, Section 1, HMSO Hine, J. L. (1982). Road planning for Rural Development in Developing Countries: A review of Current Practise. TRRL Laboratory Report 1046. Crowthorne: Transport Research Laboratory NESA User Manual: Scottish Development Department, 1995 A Guide to Road Project Appraisal (1988). Overseas Road Note 5. Crowthorne: Transport Research Laboratory Planning Development Projects (1991): A Practical Guide to the Choice and Appraisal of Public Sector Investments. ODA, 2nd Impression Synthesis of Road Evaluations and Experience (1996). Evaluation Report EV 587, ODA Value of Time: Hine, J. L. (1991). Pakistan road freight industry: The productivity and time use of commercial vehicles. Transport and Road Research Laboratory, Research Report 333 Wardman, M. and Mackie, P. (1997). A Review of the Value of Time: Evidence from British Experience. Proceedings of Seminar E, PTRC European Transport Forum Summer Annual Meeting. Brunel University Sept 1997

Proceedings of the International Conference on the Value of Time. Wokingham, Berkshire, October, 1996. PTRC Education and Research Services Ltd, London Road Investment Models: Chesher, A. and Harrison, R. (1987). Vehicle Operating costs: Evidence from Developing Countries. World Bank, Washington 1987. Cundill, M. A. (1993). RTIM3 User's Manual. Crowthorne: TRL Cundill, M. A., Hine, J.L.. and Greening, P. A. K. (1997). The Costs of Maintaining and Repairing Vehicles in Developing Countries. TRL Report No. 256. Crowthrone: Transport Research Laboratory Highway Development and Management Series: - Eight Reports on HDM-4 to be published 1999/2000. The World Road Association (PIARC) on behalf of the ISOHDM Sponsors, Paris, France. Parsley, L. and Robinson, R. (1982). The TRRL Road Investment Model for Developing Countries (RTIM2). TRRL Laboratory Report No. 1057. Crowthorne: Transport Research Laboratory Watanatada, T et al (1987). The Highway Design and Maintenance Standards Model Vol 1 Description of the HDMIII Model. and Vol 2, User Manual for the HDM III. World Bank, Washington Road Safety: Towards Safer Roads in Developing Countries: A guide for Planners and Engineers, TRL, ODA, 1991