EDI SERIES IN ECONOMIC DEVELOPMFNT /0/0 7' ECONYOMIC Public Disclosure Authorized APPRAISAL OF TiRASPORT PROJECTS Report No. li007 Public Disclosure Authorized F-ILECopY1 A MANYUIAL WITHCA SE STUDIES Public Disclosure Authorized REVISEDAND EXPANDED EDITION HANS A. ADLER mo Public Disclosure Authorized - ~~~- I- Economic Appraisal of Transport Projects 11WOR&MMANOEDI Series in Economic Development Economic Appraisal of Transport Projects A Manual with Case Studies Revised and Expanded Edition Hans A. Adler Published for The World Bank The Johns Hopkins University Press Baltimore and London © 1987 by the International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W., Washington, D.C. 20433,U.S.A All rights reserved Manufactured in the United States of America The Johns Hopkins University Press Baltimore, Maryland 21211,U.S.A. The findings, interpretations, and conclusions expressed in this study are the results of research supported by the World Bank, but they are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. First printing January 1987 Library of Congress Cataloging-in-Publication Data Adler, Hans A Economic appraisal of transport projects. (EDI series in economic development) "Published for the Economic Development Institute of the World Bank." Bibliography: p. Includes index. 1.Transportation-Cost effectiveness. 2. Transportation-Cost effectiveness-Case studies. 1. Economic Development Institute (Washington, D.C.) II. Title. III. Series. HE15L.A32 1986 380.5'068'1 86-21348 ISBN 0-8018-3411-2 ISBN 0-8018-3429-5(pbk.) Contents Preface ix Part I. Appraisal Methodology I 1. Introduction 3 Aspects of Project Appraisal 3 Definition of Project 4 Role of the Transport Sector Plan 6 Relevance of Transport Prices 8 Adequacy of Statistics 9 Notes 10 2. Economic Costs 11 The Use of Shadow Prices 11 Other Types of Adjustments 15 Notes 18 3. Forecasting Traffic 21 Methods of Forecasting 21 Types of Traffic 25 Notes 26 4. Economic Benefits 27 General Issues 27 The Distribution of Benefits 29 Reduced Operating Expenses 30 Economic Development 33 Time Savings 37 Accident Reduction 41 v vi CONTENTS Secondary Benefits 44 Notes 46 5. Comparing Costs and Benefits 49 Discounting Costs and Benefits 49 Methods of Comparison 50 Risk and Uncertainty 54 Economic versus Financial Appraisal 57 Optimum Timing of Projects 58 The Highway Design Model 61 Notes 62 Part II. Case Studies 65 Introduction 67 Road Projects 69 1. Paving a Gravel Road 69 2. Widening the Pavement of a Road 77 3. Construction of a Major Highway 84 4. Construction of a Development Road 96 5. Construction of a Bridge 106 6. A Highway Maintenance Program 116 Railway Projectsand a Pipeline 123 7. Electrification or Dieselization of a Railway Line 123 8. Modernization of a Marshaling Yard 133 9. Discontinuing Service on a Railway Line 140 10. Construction of an Oil Pipeline 152 Port Projects 163 11. Construction of Additional Berths 163 12. Construction of an Ocean Port 174 13. Cargo-Handling Equipment for a Port 185 14. Construction of a Grain Silo in a Port 190 CONTENTS vii Airport Project 194 15. Construction of an Airport 194 Appendix: Discount Rates 202 References 205 Bibliography 208 Index 231 Preface A TRANSPORT INFRASTRUCTURE is a prerequisite-though by no means a guarantee-of economic development. The intensive efforts of many developing countries to expand agricultural output, for example, re- quire the timely availability of seeds, fertilizers, and other inputs and the reasonable access of farmers to markets. Expanded industrial out- put requires the efficient transport of raw materials, for example, as well as the distribution of finished products. Transport of exports re- quires adequate port facilities and land transport connections to the port. The costs of imports are increased if ships are delayed unduly in the ports. Since in the early stages of economic development it is not unusual for traffic growth to be two to three times as large as the rise in national income, and since the ratio of capital to output is high, investments in the transport sector often account for as much as 15 to 30 percent of public investments. Transport investments in the private sector, pri- marily for motor vehicles, also tend to be sizable. The importance of transport investments is underscored by the fact that a significant part of these investments in developing countries in- volves foreign exchange expenditures. The extent varies, depending primarily on the degree of a country's industrialization and the type of investment, but foreign exchange components ranging from 30 to 60 percent of transport investments are not uncommon. In addition, operating costs often require continuing foreign exchange expenditures for spare parts, maintenance equipment, tires, and fuel. In view of the strategic role of transport in a country's economic development, the large investments required, and the heavy foreign ex- change costs that are frequently involved, a careful economic appraisal of these investments is particularly important. An increasing number of planning agencies, highway departments, railways, port authorities, and other agencies in developing countries are therefore establishing staffs that specialize in project appraisal. Effective transport coordina- tion requires that these agencies apply common investment criteria; Lb x PREFACE otherwise, railway investments, for example, might be undertaken where road transport would serve more economically, or vice versa. The purpose of this manual is to serve as a guide to all agencies respon- sible for the planning of investments in the transport sector. The manual deals with the appraisal of transport projects in develop- ing countries. Although there are many similarities between appraisal in developed and appraisal in developing countries, there are also im- portant differences. First, shadow pricing, which is applied only rarely in industrial countries, is frequently used in developing countries (for reasons explained in chapter 2). Second, while one of the main pur- poses of transport improvements in developing countries is to reduce the operating costs of transport, in industrial countries the emphasis is now on time saving, particularly for individuals, and, to a somewhat lesser extent, on accident reduction. Third, the importance of opening up new lands with rural roads is much greater in developing countries. In most developing countries rural roads account for about 80 percent of the total length of roads, and only a small proportion of them have been improved above the level of basic tracks and trails (Carapetis, Beenhakker, and Howe 1984,p. 3). Fourth, while the external costs of transport, such as noise and pollution, are glaring in industrial coun- tries, the governments of developing countries are giving higher priority to increased production of tangible goods and services, such as food and housing, than to environmental improvements, in part because the environmental effects are uncertain and are frequently felt only in the long term. The emphasis in this manual is on the practical application of economic analysis, and for this reason Part II contains fifteen case studies for the principle modes of transport. Since there are many types of transport investments and the range of their benefits is very wide, not every situation could be covered. But Part I provides background on the methodology of economic appraisal so that it can be applied to the many cases which are not specifically illustrated. In addition, the bibli- ography makes suggestions for those who wish to pursue specific sub- jects in greater depth. The manual is not intended to deal with urban transport improvements since this involves broad and complex issues in urban planning and usually large external costs and benefits. Many of the concepts used in the appraisal of intercity transport, however, such as savings in transport costs or in passenger time, also have ap- plicability to urban transport, and the bibliography suggests some readings on urban transport. Similarly, this manual does not deal with the appraisal of environ- mental factors such as noise, air pollution, visual intrusion, and PREFACE xi severance of communities; it does, however, cover the valuation of acci- dent reduction, and some regard accidents as the most serious of the so- cial costs of transport. The science of appraising environmental factors quantitatively, both the costs and the benefits, is still at an early stage, and their evaluation has to be supplemented by other methods. Moreover, most of the environmental effects of transport arise in urban areas. (Roads in rural areas can also have detrimental environmental effects if, for example, they cause an expansion of agricultural land or the exploitation of timber for firewood and building lumber that leads to deforestation, soil erosion, lowering of water tables, or the elimina- tion of wildlife [Devres 19801.)As suggested above, developing coun- tries are not yet willing to give environmental improvements the same priority as increases in production. This is particularly true of environ- mental improvements, such as noise reduction, which are regarded as contributing to human welfare less than does the production of goods and services. Environmental considerations are becoming increasingly important, however, because economic growth is leading to