LAO Road Sector Governance and Maintenance Project

ECONOMIC ANALYSIS LINKED DOCUMENT APPENDIX

A. Least Cost Analysis

1. A least cost analysis (LCA) was conducted to obtain a measure of the average
incremental economic cost (AIEC) for each mutually exclusive alternative under comparison.
The same conversion method as used in the benefit-cost analysis was used to express
economic values of costs and outputs. For each alternative, the cost equals the present value
discounting at 12% (PV) of investment and ongoing costs; the valued output equals the present
value of benefits discounting at 12%. The AIEC is the cost per dollar of valued output or benefit.

a. National Roads

2. . For national roads, the two alternatives to the project treatment of the road surface
were asphalt concrete (AC) overlay and double bituminous treatment (DBST) resealing. The
costs for the alternatives were estimated by replacing in the project investment cost the cost of
pavement spot repairs by i) the AC overlay, respectively ii) DBST resealing cost. Given that the
national roads are in good condition, the three alternative road surface treatments are not
expected to have significantly different effects on the benefits. Consequently, the project
approach to pavement rehabilitation has the lowest AIEC for all three national roads. See Table
A1 for details.

Table A1. National Roads Least Cost Analysis of Surface Treatment

($ million)
Alternatives Highlights NR 16 NR 18B NR 20
AC Overlay
Investment (undiscounted) 14.65 23.19 15.37
Cost 9.46 14.04 9.07
Valued output (benefit) 5.00 0.98 0.99
AIEC ($) 1.89 14.35 9.18
DBST Resealing
Investment (undiscounted) 5.19 11.39 6.43
Cost 3.45 7.09 3.90
Valued output (benefit) 5.00 0.98 0.99
AIEC ($) 0.69 7.25 3.95
Project
Investment (undiscounted) 1.01 3.24 2.17
Cost 0.61 1.87 1.24
Valued output (benefit) 5.00 0.98 0.99
AIEC ($) 0.12 1.91 1.26
AC= asphalt concrete; DBST= double bituminous surface treatment; AIEC=average incremental economic cost;;
NR=national road
Source: Loan Fact Finding Mission and PPTA consultant's report

b. Local Roads

3. . . The cost to upgrade a local road to a DBST paved road was estimated using an
average per kilometer cost of DBST road design, construction supervision and construction at
2015 constant prices of $0.3 million1. The DBST upgrade and the project improvement of local

1
The source of unit cost is Grant 0234-LAO: Second Northern GMS Transport Network Improvement Project.
 LAO Road Sector Governance and Maintenance Project

roads were compared based on an equal appraisal period of 15 years, with the DBST road
having a period-end 65 per cent salvage value, against 30-35 per cent for the project. For the
DBST upgrade alternative, the benefits were estimated by comparison with the same without-
project scenario as the project. Comparing HDM4-generated unit road user costs for national
roads in good condition with those for the local roads in the without-project scenario, it can be
assumed that DBST upgrading of the local roads would lead to benefits that are 2-2.5 times the
benefits obtained on local roads under the project. As a result of the lower user costs
associated with the benefits, a larger generated traffic can also be expected. But the
comparative investment and ongoing costs are also substantially higher. The net result by local
road is that the AIEC for DBST upgrading exceeds the project treatment AIEC in varying
degrees from slight to large; that is, the project is a lower cost alternative measured by AEIC
than the DBST upgrading alternative. Details are in Table A2.

Table A2. Local Roads Least Cost Analysis of Surface Treatment

($ million)
Alternatives Highlights LR 9001 LR 6901 LR 7615
Upgrade to DBST pavement
Investment (undiscounted) 17.38 8.25 6.81
Cost 6.74 4.50 3.72
Valued output (benefit) 6.52 7.38 10.55
AIEC ($) 1.03 0.61 0.35
Project
Investment (undiscounted) 5.90 2.02 1.86
Cost 1.06 1.26 1.28
Valued output (benefit) 2.18 3.01 4.24
AIEC ($) 0.49 0.42 0.30
DBST= double bituminous surface treatment; AIEC=average incremental economic cost; LR=local road
Source: Loan Fact Finding Mission and PPTA consultant's report

B. Assumptions in Estimating Time Cost and Saving

4. Key assumptions in estimating time cost saving benefit are shown in Table A2.

Table A3. Value of Time at Economic Prices and Related Unit Time Cost Assumptions
($ per hour)
Item Motor- Car Pickup Med- Large Small Med- Heavy Articu-
cycle ium Bus Truck ium Truck lated
Bus Truck Truck
VOT per person, work time 1.10 1.50 1.50 1.10 1.10 1.50 1.10 - -
VOT per person, non-work 0.33 0.50 0.50 0.33 0.33 0.33 0.30 0.33 0.33
Work-related trips (%) 75 26 30 75 75 50 50 0 0
VOT for cargo per vehicle 0.083 0.083 0.083 0.083 0.083 0.200 0.540 1.000 2.000
a
Occupancy (persons) 2.0 3.0 2.5 17.0 30.0 3.0 2.0 0.0 0.0
VOT=value of time
a
Excluding crew; crew time is accounted for under vehicle operating cost. Motorcycle and car have zero crew.
Source: Loan Fact Finding Mission and PPTA consultant’s report

5. Lao PDR 2014 per capita gross domestic product (GDP) is $1,7072. Assuming a 5 per
cent growth of GDP per capita between 2014 and 2020 (broadly, this is achievable if GDP
2
Sourced on 8 July 2015 from the online databank at www. data.worldbank.org
 LAO Road Sector Governance and Maintenance Project

grows at 7 per cent, as assumed for the traffic forecast, and population growth is an expected 2
per cent per year), it is an easy calculation to show that the VOT per passenger of $1.1 in 2020
is equivalent to the average Lao 2014 GDP per capita. The $1.5 VOT is explainable as applying
to a personal income of some 36 per cent above the Lao 2014 average.

6. The cargo VOT per vehicle represents expected loss owing to perishability of goods in
transit. For a passenger vehicle, the low cargo VOT is applied in consideration of the
occasional small freight parcel carried. The total VOT per vehicle is the sum of the passenger
and cargo VOT per vehicle.

7. Directly calculable from Table A3, the unit time cost by vehicle type per vehicle hour
traveled is converted to a unit time cost per vehicle kilometer traveled upon division by the
HDM4-output average travel speed. Applying the annual vehicle hours or kilometers traveled to
the respective per hour or per kilometer unit time cost, the annual road user time cost for the
vehicle type is obtained.