DPR for Chhattisgarh State Road Sector Development Project Package - A [Loan -2, Phase -3 Asian Development Bank] Economic Analysis 10.0 ECONOMIC ANALYSIS 10.1 Introduction This chapter discusses the general principles of cost benefit analysis (CBA) and outlines the major costs and benefits considered for the economic appraisal of the project road. It discusses the adjustments needed to convert the financial costs into economic costs. Economic evaluation of a project attempts to take into account all the costs and benefits to the society irrespective of who pay the costs and who receives the benefits. In the case of a road project, the benefits accrue mainly to the road users (society in general) in the form of vehicle operating cost savings and time savings. The costs are borne by the developer (government/ private operator). 10.2 Economic Costs The cost of implementing a project to society is not necessarily the same as the costs in the market place. In terms of economic costs, such market or financial costs are devoid of any tax components and market imperfections. Thus, in the cost benefit analysis of an economic appraisal, financial costs have to be adjusted to derive the economic costs. In a project of the current nature many items are used in the construction with tax components known for certain items and not for others. It is a general practice to adjust the financial costs of items with unknown tax components by a standard conversion factor (SCF). A SCF of 0.9 is assumed for this study. 10.3 Homogenous Sections The cost of improving the existing roads and development along the project corridor and the resultant benefits in terms of vehicle operating costs differ between various sections of the project road. This variation is primarily due to the condition of the pavement of the particular section and the quantum of heavy vehicles moving on it. Thus, the results of investigation of pavement strength and traffic levels on various sections were combined and the project road has been delineated in to homogenous sections as presented in Table 10.1. Table 10.1: Homogenous Sections for Economic Analysis Scott Wilson 12 - 1 October 2010
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DPR for Chhattisgarh State Road Sector Development Project Package - A [Loan -2, Phase -3 Asian Development Bank] Economic Analysis
10.0 ECONOMIC ANALYSIS
10.1 Introduction
This chapter discusses the general principles of cost benefit analysis (CBA) and outlines the major costs and benefits considered for the economic appraisal of the project road. It discusses the adjustments needed to convert the financial costs into economic costs.
Economic evaluation of a project attempts to take into account all the costs and benefits to the society irrespective of who pay the costs and who receives the benefits. In the case of a road project, the benefits accrue mainly to the road users (society in general) in the form of vehicle operating cost savings and time savings. The costs are borne by the developer (government/ private operator).
10.2 Economic Costs
The cost of implementing a project to society is not necessarily the same as the costs in the market place. In terms of economic costs, such market or financial costs are devoid of any tax components and market imperfections. Thus, in the cost benefit analysis of an economic appraisal, financial costs have to be adjusted to derive the economic costs. In a project of the current nature many items are used in the construction with tax components known for certain items and not for others. It is a general practice to adjust the financial costs of items with unknown tax components by a standard conversion factor (SCF). A SCF of 0.9 is assumed for this study.
10.3 Homogenous Sections
The cost of improving the existing roads and development along the project corridor and the resultant benefits in terms of vehicle operating costs differ between various sections of the project road. This variation is primarily due to the condition of the pavement of the particular section and the quantum of heavy vehicles moving on it. Thus, the results of investigation of pavement strength and traffic levels on various sections were combined and the project road has been delineated in to homogenous sections as presented in Table 10.1.
Table 10.1: Homogenous Sections for Economic Analysis
Sec. No. Section as per Existing Chainage Length (Km)Name Start Chainage
The project costs such as construction; routine, recurrent and periodic maintenance; land acquisition; environmental mitigation and rehabilitation etc. have been discussed in detail in Chapter – 09: Cost Estimates. The SCF stated earlier was applied to these costs during the cost benefit analysis.
The costs in general include the costs of improvement of the existing Intermediate and 2-lane to a 2-Lane with 1.5m earthen shoulder on either side facility.
Scott Wilson 12 - 1 October 2010
DPR for Chhattisgarh State Road Sector Development Project Package - A [Loan -2, Phase -3 Asian Development Bank] Economic Analysis
10.5 Project Sections
Improvement options considered for each of the homogenous sections are as shown in Table 10.2 and Figure 10.1.
Table 10.2: Project Improvement Sections
S.No.
SectionExisting Section
Existing Average
Carriageway Width
Proposed Improvement
Length (Km)
Improvement Proposal
1Raipur-Kharora
HS-01 7.0Overlay and
Rehabilitation29.00
Improvement on the Existing
Alignment
2Kharora-
BalodabazarHS-02 5.5
2-Lane with 1.5 m Earthen shoulder
44.00Improvement
on the Existing Alignment
Figure 10.1: Project Improvement Sections
10.6 Cost-Benefit Analysis Method
This analysis was carried out using the HDM-4 software. This appraisal included sensitivity analysis to assess the impact of increased costs of construction and decreased benefits. The analysis also considered the value of savings in travel time.
Economic benefits of the project were estimated in terms of savings in VOC and savings in travel time for passenger and goods vehicles. The estimates of VOCs and time costs of each vehicle type in with and without project scenario have been made using HDM-4.
Scott Wilson 12 - 2 October 2010
DPR for Chhattisgarh State Road Sector Development Project Package - A [Loan -2, Phase -3 Asian Development Bank] Economic Analysis
The HDM-4 software comprises a set of models for estimating various values which effect the feasibility of road project, such as vehicle operating costs, travel time costs of passengers and commodities in transit, and the effect of maintenance standards and improvement standards on road condition and the resultant impact on VOCs etc. Some salient input parameters, which were considered for this project, are presented hereinafter.
Analysis Period : 20 years (2011-2030)
Construction Period : 24 months
Discount Rate : 12%
Comparable Alternatives : Alt-0 (Base)-Routine Maint. And Overlay Alt-X0 (For HS-01) –Rehabilitation and OverlayAlt-X1 (For HS-02)-Improvement for widening to 7m
The calibration factors for some parameters of HDM-4 software used for this analysis are as indicated by ADB for some of the national highway projects undertaken in the recent past. These are presented hereinafter:
The economic viability of the considered options for improving the traffic facility on the project corridor have been evaluated in terms of Economic Internal Rate of Return (EIRR) and Net Present Value (NPV) of the project benefits and the ratio NPV/Cost. The benefits of the project were estimated in terms of VOC savings and monetary value of savings in travel time. The economic returns of each section with normal scenario and with drop in traffic growth rates by 50% are presented in Table 10.3 and Table 10.4 respectively.
Table 10.3: Economic Returns of each Section and Project for flexible pavement option with normal Scenario
Sensitivity analysis of economic returns of the project was carried out. The sensitivity scenarios considered in this analysis are as presented here in after.
Base Costs and Base BenefitsBase Costs plus 20% and Base BenefitsBase Costs and Base Benefits minus 20%Base Costs plus 20% and Base Benefits minus 20%
The results of this analysis are presented in Table 10.4. The results indicate that the project EIRR values, across sections, in the worst case of simultaneous increase in costs and decrease in benefits varies between 49 and 54 percent considering VOC savings alone and varies between 63and 67 percent including value of travel time savings. The bank (RBI - Reserve Bank of India) rate is varying between 6 and 11 percent in the recent past and is the lower limit for a project to be economically viable. Hence the overall project can be considered to be viable in economic terms as the EIRR values of the project in the worst case is more than 15 percent. The comparative cost streams (output of HDM-4) of the Base Alternative (Alt-0) with that of the proposed improvement options are presented in Annexure 10.1.
Table 10.4: Sensitivity of Economic Returns for flexible pavement option with normal scenario
