Name: Jowell Leshner C.

Navarro Date: November 11, 2021

Instructor: Larry Esprela Salarza Section: I15.1

Highway Economic Analysis

Introduction

The highway/road is a paved way or a route or a thoroughfare which drives you

to reach your destination through vehicles (Krishna, 2020).

Highways have been very important in the development and sustainability of our
societies. Highways dominate the transportation system as they provide critical access for
the movement of goods and people. Logistics for goods, natural resources, production,
retail, marketing and the movement of people in their daily activities. Highways have
played important role in the economic growth. In many countries like our country the
Philippines, huge investments on highway transportation infrastructure have been
happening. If you have heard of the build build build program under this current
administration it has been progressing and a lot has been done and is ongoing.
Construction, operation, and maintenance of these infrastructures, improvements in the
operational efficiency, various traffic congestion relief measures, energy conservation,
improves safety, and environmental mitigation all entails cost and engineering and traffic
analysis.
 Highway economic analysis, also known as highway project appraisal, involves
quantification of the costs of and benefits from a scheme over a selected time horizon and
evaluation by a common yardstick. The technique is also known as benefit-cost analysis
(Mugdha, 2017).

According to Michael S. Bronzini (2004), the field of transportation economics is

fairly wide. It entails using economic principles to address pricing, cost analysis, and
regulatory challenges. The impact of transportation on land usage, economic
development, and the environment is also examined. The study of the costs and benefits
of transportation improvement and original construction projects is included in the
discipline of transportation economics. This chapter focuses on the latter component of
transportation economics, which is of particular relevance to transportation engineers.

Objectives of Proposed Investment

Any economic analysis must begin with a list of the goals that the projects or
programs are intended to achieve. There could be a single goal or a number of them. What
matters is that the goals are enumerated clearly and comprehensively. There isn't any
room for doubt. It is impossible to specify the objective function incorrectly. The
significance of the objective function is discussed in more detail later in this chapter. For
the time being, it should serve to state that the objective function does not need to be
mathematically stated. It can be explained verbally, numerically, or both. What is
important is that it is easy to understand.

Alternatives

All alternative systems or programs that, in the analyst's opinion, could be able to
achieve the specified goals should be identified precisely and in great detail. All of the
options aren't always evident. To compile a list of all options, the analyst must investigate
all possibilities. Another essential component of the alternative specification is that if the
analyst examines all of the initially mentioned alternatives and none of them satisfactorily
fulfills the intended objectives, the analyst may be forced to construct new alternatives.
One of the most important benefits of benefit-cost analysis is that it forces the evaluation
and exploration of new routes where alternatives may exist.
Costs

A thorough enumeration of all relevant costs of each alternative project is required

for a proper benefit-cost analysis. Even if all of the costs are known and quantifiable, this
is a difficult task. The project's internal costs must be broken down into categories.
Breaking them down into three categories, fixed or sunk costs, investment or capital, and
maintenance expenses, is one method. Money that has already been spent on plant and
equipment, as well as resources, is referred to as sunk costs. These are costs that have
been made in the past. Economic analysis maintains that because these costs were
expended in the past, they have no relevance to future systems. In other words, they
should not be counted as a cost of the various systems that the analyst is examining. Only
the difference among alternatives is what is relevant in their comparison. In as much as
sunk costs are the same for all alternatives, there is no need to consider it in an analysis
(Pagano, 2004).

The costs of outlays on plant and equipment for any alternative system are referred
to as investment or capital costs. Maintenance costs are those that accumulate over time
and are spent to keep various facilities performing at a satisfactory level. Of course, these
three categories can be further split down into subgroups to enumerate the expenses more
fully and completely.

One approach is to calculate the net average annual cost of a transportation

improvement project. This is the amount by which the annual cost of the improvement
exceeds the cost if no improvements were made. An application to highway
improvements would result in the following cost categories:

1. Right-of-way

2. Grading, drainage, and minor structures

3. Major structures

4. Pavement and appurtenances

Determining the planning or analysis phase is the most difficult component of cost
estimating. The length of a project, often known as planning time, is typically highly
subjective. It's based on personal judgments of the project's physical longevity as well as
the likelihood of any modifications that could make it obsolete. Because of the various
physical lengths of life for each component of the upgrade and the great uncertainty
associated in estimating traffic growth in the future, estimating the planning period
becomes even more difficult in the study of transportation improvement projects. The
estimation of traffic growth is an important part of an analysis of transportation
improvements because the amount of benefit accruing from a given improvement is
directly related to this factor. If the planning period is too long, the analyst may not be
able to estimate this critical factor accurately. This can result in the wrong alternative
being considered ‘‘best’’ or an unacceptable project being accepted.

There is not much agreement in transportation as to what constitutes the maximum

length of time to use as the planning period. Periods of from 10 to 100 years have been
mentioned by various authors as the maximum planning period. Some authors maintain,
though, that the planning period should be either the physical length of life of the project
or the useful life of the project, whichever is shorter. Another problem in cost estimation
is the estimation of the salvage value of the facility at the end of the analysis period. The
salvage value can be positive in the case where the structures can be sold as scrap or
negative in the case where there is a removal cost. Thus, the salvage value can either
reduce or increase the cost of a given alternative and should be taken into account.

Criteria For Choice Among Alternatives

The next step in the analysis involves choosing a criterion or criteria on which to
base a decision as to which alternative system or project is ‘‘best.’’ This is one of the
more difficult steps in an analysis.

Some authors are always on the lookout for the best option that provides the most
value for the least amount of money. There is no other option. Other authors warn against
the "sole criterion fallacy," which assumes that a single criterion may be used to assess
all of the options. The actual world is never so straightforward. It's pointless to try to
analyze all of the options using only one criterion. This occurs due to the intricacies of
each system and the fact that the systems may differ in numerous ways.

In most benefit-cost studies, the costs and benefits accrue over time. The prices of
both the costs and benefits can change over time. The question that arises is: Should the
analyst take these changes in price into account when evaluating the various alternatives?
Most economists feel that the analyst should take into account changes in the relative
prices of costs and benefits, but not changes in the general price level. All prices should
be in constant dollars, which for convenience is usually the initial year of the analysis.

Road User Benefits

Since road user benefits accrue to both beneficiaries of road improvements and
transit projects, it would be helpful to look at these in a little more depth. Much work has
been done in attempting to quantify these benefits. The major work in this area is the
AASHTO ‘‘Red Book’’ of 1977. This work is currently being updated by NCHRP Project
02-23, which should be released some time in 2003. An important category of road user
benefits is decreases in motor vehicle operating costs. These costs can be reduced by
transportation improvements through a decrease in the consumption of fuel and oil, a
reduction in tire wear, a decrease in maintenance and repairs, and a reduction in
ownership costs. These operating costs differ for different types and conditions of
roadway. Some of the more relevant factors that the analyst should take into consideration
when measuring these operating costs are the number and arrangements of lanes, the type
of roadway surface, the amount of grade along a road, the average running speed, the
traffic volume, the alignment of the roadway, and whether the roadway is located in a
rural or an urban area.

Conclusion

Highway economic analysis using benefit-cost analysis is a powerful tool for

systematically prioritizing transportation enhancement projects. It attempts to substitute
quantitative evaluations for the decisions based on intuition, judgment, and political
considerations. However, such analysis cannot take all factors into account. Many
intangibles and unquantifiable are difficult to incorporate into a financial analysis. As a
result, benefit-cost analysis cannot be used to determine which initiatives should be
implemented. The intuition and judgment of the decision-maker is still an important
element in highway economic analysis. Benefit-cost analysis, on the other hand, can
reveal important costs and advantages that can be defined and valued. As a result, it is an
important decision-making tool. It will never be able to take the place of the decision-
maker. Its application in transportation project appraisal aids in ensuring that such
decisions are made in a businesslike manner whenever possible.
References

Cady, P. (1983, September 1). Inflation and Highway Economic Analysis. Journal of
Transportation Engineering. Retrieved November 11, 2021, from
https://ascelibrary.org/doi/abs/10.1061/(ASCE)0733-947X(1983)109:5(631)

Krishna (2020, June 9). Types of Roads or Classification of Roads. Civil Read. Retrieved
November 11, 2021, from https://civilread.com/road-types/

Kutz M. (2011). Handbook of Transportation Engineering, Volume I: Systems and

Operations, Second Edition. McGraw-Hill

Mugdha P. (2017). Highway Economic Analysis or Highway Project Appraisal.

Engineering Notes. Retrieved November 11, 2021, from
https://www.engineeringenotes.com/transportation-engineering/highway/
highway-economic-analysis-or-highway-project-appraisal/48890

Winfrey R. (1970, March 9). Economic Analysis for Highways. Transportation Research
Board. Retrieved November 11, 2021, from https://trid.trb.org/view/91195