\ Structure \ 4.1 Introduction Objectives 4.2 Transport Demand and Supply 4.3 Cost of Producing Transport Services 4.4 Pricing of Transport Services 4.5 Principles of Economic Evaluation of Transport Projects 4.6 Time Value of Money \ 4.7 Methods of Economic Analysis 4.8 Costs and Benefits 4.9 Transport in Developing Countries 4.10 Transportation in India Today 4.10.1 Historical Perspective 4.13.2 Principal Modes and their Role 4.10.3 Growth Trends 4.10.4 Plan Outlays 4.10.5 Administration 4.10.6 Coordination 4.10.7 Key Transport Statistics in India 4.1 1 Illustrative Problems 4.12 Summary 4.13 Key Words 1 4.14 Answers to SAQs
4.1 INTRODUCTION earlier units, we studied the role of transport in a country's economy, the various systems and their choice and the process of transport planning. In this unit, briefly the subject of Transport Economics. ect of Economics deals with the production, distribution and consumption of and services. Transport is an important sectorof society's welfare and hence a of production and utilisation of transport facilities becomes important. Since s are limited, both within the transport sector and outside it, it becomes necessary er costs and returns and economise the investments. The subject of Transport cs covers the following: a) Study of demand for and supply of transport services. \ b) Study of cost of producing transport services. \c) Study of pricing of transport services ) Study of allocation of society's resources for transport among alternative 1 uses.
After budying this unit, you should be able to: understand how transport demand and supply are related to transport price, Prindples or o know how transport demand is elastic with respect to country's economy, Trohpportation Engineering evaluate the cost of producing transport services, design the mechanism for pricing transport services, e understand the principles of economic evaluation of transport projects, describe the importance of transport in developing countries, and I discuss the current status &transportation in India today.
4.2 TRANSPORT DEMAND AND SUPPLY The satisfaction a household receives from consuming commodities is called utility. In other words, the utility of an object is the maxlmum sacrifice whtch each consumer would be willing to make in order to acquire the object. Considering a household, the total utility is the total satisfaction gained from all trips made by it and the marginal utility is the change in satisfaction resulting from performing a little more or less of travel. In Economics, there is a well-known hypothesis, known as the law of dirninish~ngmarginal utility. According to thls, the utility that any household derives from successive units of a particular commodity will d~minishas the total consumption of that commodity increases. Demand for transport is the amount of it which people are willing to buy at a given price. A well-known law in Economics is the Law of Demand, which states that the amount of a commodity demanded will increase with every fall in the price of that commodity. An example is how travel by car decreases as the price of petrol increases. The rate at which demand changes when any of its determinants changes is known as its elasticity. Price elasticity of demand is the rate of change of demand when transport price changes. It has been observed that in the past, transport demand has the following elasticities with respect to GNP in India : Elasticity badTransport Passenger Movement 2.59 Road Transport Freight Movement 2.34 Rail Transport Passenger Movement 1.2 1 Rail Transport Freight Movement 1.14 In developed countries, the elasticity is much 1ower.Supply of a commodity is the total quantity of it the seller is offering to sell at different prices Supply also has elasticity with respect to price. Under competitive conditions there will be an equilibrium price at which the quantity demanded will equal the quantity supplied.
4.3 COST OF PRODUCING TRANSPORT SERVICES The average total cost is the cost of producing any given output divided by the number of unit; produced. The marginal cost, sometimes known as incremental cost, is the increase in the total cost resulting from raising the rate of production by one unit. Opportunity cost is the economist's term for expressing costs in terms of foregone alternatives. Financial cost is the money cost involved in producing goods. It includes taxes and subsidies. If these are eliminated, one gets the economic cost. Resource cost is the cost to the society or economy in terms of actual resources expended in its production. 50 total cost of producing a transport service consists of fixed costs and variable costs. d costs are those that do not vary with output. Variable costs are those that vary with butput. As ati illustration, the components of fixed and variable costs of a bus pany are sumrnksed below : !d Costs 1) Interest on capital 2) Office expenses 3) Taxes and insurance
4) ' Fines and tolls 5) Licensing fees 6) Registration fees 7) Salary of drew 8) Garaging charges iable Costs '1 Fuel 2) Lubricants 3) spare parts 4) Tyres 5) Depreciation 6) Maintenance labour t cost occurs when the output of one service necessarily entails the output of another. sod example is the operation of iron-ore special trains from mines to Vishakapatnam . The wagons are loaded when moving towards the port, but return empty. Thus, in king out the coqt of transport of ore, empty returns have to be kept in view and a joint worked out. nmon costs are those which cannot be isolated and assigned to any kind of service. Railways operate both passenger and freight services on their lines, and there is no sibility of apportioning fixed cosg separately to passengers and separately to freight. total transport cost consists of the following components: 1) Transport facility user cost 2) Cost of construction of the facility 3) Cost of maktenance of the facility 4) Cost borne by thesociety (such as pollution)
I PRICING OF TRANSPORT SERVICES :ing transport services is an effective way of guiding the allocation of resources within transport sector itself and between major sectors of the economy. For example, by :ing the private car relatively high, the government can achieve a shift of ti-avel by car ~ublictransport. Another example is the fieight equalisation policy pursued by the ways under which certain commodities (coal, salt etc.) reach every consumer at the Le price throughout the country. This way, the pricing policy affects location of ustries, controls migration of rural labour to the cities and develops backward regions. Y Plinciples of In urban transport, the government invariably has to subsidise the prices from Transportation Engineering coqsiderations of equity and viability of transport operations. Various principles are adopted in transport pricing. The "cost of service" principle determines the price on the basis of covering at least the "out of pocket" expenses and some part of the fixed costs. The highest mark-up of a price is based on the "value of service" principle. If the price is more than that determined by this principle, traf£ic will not be attracted to that mode. A third principle of transport pricing is to fix it at least what "traffic will bear".-
a) What is price elasticity of demand for transport? Give an example. b) What are the present values of elasticity of transport demand with respect to GNP in India? c) Give the demand-supply curves of transport with respect to price. d) Give the components of the cost incurred by a bus company. e) What are "economic" and "financial" costs? f) What is "common cost'? Give an example. g) What is "joint cost'? Give an example. h) How are transport services priced?
4.5 PRINCIPLES OF ECONOMIC~VALUATIONOF TRANSPORT PROJECTS When resources are scarce, it becomes necessary to study various engineering alternatives from the point of view of their economic attractiveness, rank them in order of their merit and select the one, which is the most worthwhile. This task is known as Economic Analysis or Evaluation. There are certain basic principles behind Economic Analysis. These are : 1) Money has value over a period of time. Hence future costs and benefits must be discounted to a common reference year. 2) The discount rate selected should reflect the opportunity cost of capital in the country (in India, a rate of 12 per cent per annurn is currently being adopted). 3) Economic evaluation is a choice between alternativeq. One of the alternatives is the "do nothing" alternative. All possible solutions must be compared against this. - -
Transport Economics
4) Incremental costs and incremental benefits fiom one alternative to another gives an idea of whether incremental investments are worthwhile. 5) All past actions are irrelevant. What is important is the hture flow of costs and benefits. 6) In transport projects, the analysis is carried out from the view-point of the nation as a whole and not from the narrow view-point of any sub-set like the government, the transport operator or any beneficiary. 7) Economic analysis is different from financial analysis; all taxes and subsidies must be eliminated fiom the cost and benefit streams. 8) Shadow pricing should be done on elements of costs and benefits to reflect opportunity cost of capital. . . 9) Economic analysis should take place within a set of established criteria such as discount rate. 10) The analysis period generally selected is 20 years.
416 TIME VALUE OF MONEY oney appreciates in time. The following formulae are used in economic analysis to ect how money appreciates over time. 1) The amount S to which Re 1 will appreciate in n years with a compound interest rate of r S= (l+r)n
1 ' 2J The present worth A of Re 1 n years hence :
'3) Compound amount A at the end of n years to which an annuity of Re. 1 per I year will accumulate :
4) . The amount P per annum for n years at interest rate r to accumulate Re. 1 at . the end of n years (Sinking Fund Factor) :
5) The amount P per annum for n yearsat interest rate r needed for recovery of capital Re. 1 (Capital Recovery Factor) :
P= r(l+r)" (l+r)"-1
6) Present worth A for uniform payments of Re. 1 per year (Present Worth Factor) Principles of Transportation Engineering 4.7 METHODS OF ECONONIIC ANALYSIS There are many methods of comparing the benefits from a project to its costs. The BenefitICost Ratio method is perhaps the simplest. In its simplest form, all benefits and costs are discounted to a common year (generally the first year in the analysis) and the ratio of benefits to costs is found. If the ratio is greater than one, the project is worth taking up. The Net Present Worth (NPV) is the discounted sum total of benefits and costs. Thus,
where, NPVo = NPV in the ye& 0 Bo, B 1,B2 ,Bn = Benefits in years 0,1,2, .. ., n. Co, Ci, C2 , Cn = Cost in year 0,1,2, .. ., n. r = discount rate, The project is viable ifNPV is positive. The Internal Rate of Return (IRR) is that rate of discount which makes the discounted benefits equal to the discounted costs. If the IRR is greater than the interest obtainable by investing the capital in the market, the project is considered worth investing.
4.8 COSTS AND BENEFITS Costs of a transport project comprise of the construction cost and maintenance cost. Benefits from a transport project comprise of: 1) Reduction in the user costs 2) Savings in pollution costs User costs for a road project have the following components : 1) Time costs i) Of passengers ii) Of vehicles iii) Of commodities 2) Vehicle operating costs i) Fuel ii) Lubricants iii) Spare parts iv) Maintenance labour v) Depreciation I' vi) Crew costs vii) Fixed costs The Road User Cost Study has quantified the road user cost savings under Indian wnditions. The Indian Roads Congress have published tables for ready use.
SAQ 2 ' a) What is meant by the term '%conomic Evaluation" ? b) What are the principles behind 'Zconomic Analysis"? 'h-ansportEconomics c) Give the formulae for : * Future value for money invested at a given rate of interest * Present worth of a future amount * Compound amount of an annuity at the end of a period * Sinking Fund Factor * Capital Recovery Factor * Present Worth of uniform payments d) What are the common methods of Economic Analysis ? e) How are costs and benefits considered in Economic Analysis ?
adequate transportation system is a pre-requisite for achieving a quick pace of elopment in developing countries. In the early stages of development, these countries e to invest very heavily on the transport infrastructure. For example, India invested 22 nt of its total plan outlay in the First Year Plan. This percentage has now come progressively over the various Five Year Plans. In the Eighth Plan, it was 12.6 per e importance given to transport is necessq in the case of all developing s because of the following reasons : 1) The economy of most of the developing countries is based on agriculture and exploitation of certain natural resources (coal, minerals, oil etc.). A good transport system can ensure that the inaccessible parts where these natural resources are located are tapped, and are brought to the industrial centres for processing and then to the ports for export. 2) The settlement pattern in most of the developing countries is that the rural population is predominant. In India, for example, nearly 75 per cent of the population lives in its villages, which number 600,000. For giving access to these villages, and give them the advantages of modem living, a good road system is necessary. I is seen that the rate of growth of transport in the developing countries is very high. For eLam ple, in India, road transport has been growing at rates above 10 per cent in the past. qeeconomy has been growing at rates in the range of 3-6 per cent.
4.10 TRANSPORTATION IN INDIA TODAY 10.1 Historical Perspective upto the dawn of the nineteenth century, men were not travelling at speeds faster what horses would carry. It had remained that way for milleniums. Weight bulkier a tonne rarely got moved. Less than a two hundred years thereafter, people can travel at supersonic speeds, and on ground do three hundred kilometres an hour (French . Coal trains, sometimes one kilometre long, hurtle through wildernesses. eler mammoth trucks hurtle through modem highways with loads as high as 40 nnes. Driving to work 50 kilometres or more is taken in its stride. since early civilisation, bat mostly as cart tracts and pebbled paths. Canal became popular till the onset of the railways. The advantages of railways in speed were so manifest and overwhelming, the network multiplied all investments and amazing vigour. In India, the first rail line was laid t - Principles of between Bori Bunder and Thane in 1853 ;by 1900 bulk of the present network stood I Transportation Engineering executed. In U.S.A, in one year alone (1887), 20,600 km of track was laid. Canal I1 transport languished and long-distance road travel almost ceased. The age-old horse ! carriages and their roadside inns were out of business. The era of rail had arrived. Underground tubes got built in prominent cities of the world. 1 Though the internal combustion engine was invented around 1850, its primary product, the motor car, made its appearance towards the close of the 19th century. America was the first to exploit the invention in a big way and took an early lead. t
Henry Ford mass produced his Model 7 cars. Advantages of mechanised road 1 transport were soon realised. Boosted by the availability of cheap oil, motorised road i travel boomed. More and more roads got built. The years immediately before and after the Second World War saw the construction of Autobahns (Germany was the pioneer), Expressways, Turnpikes, Freeways and Motorways -4enames by which superfast highways came to be known. These highways and the heavy trucks thereon changed the face of countries. Daily deliveries became routine. The automobile era ended the
isolation of rural living. Old cities expanded and new ones got built. Perhaps no other * invention has had such an impact on modem living as the motor car. Another mode, the faster one of aviation, came into increasing prominence after the Second World War. Here technological leaps were dramatic and rapid. Piston engined planes gave way to turbos and turbos to jets. And jets have grown bigger and faster and safer too. India's transpoft system evolution is on similar lines. Its rail network got built in the latter half of the last century. Motor cars made their appearance early in this century. But roads and road transport were not developed. India does not have a modem Expressway system. The vehicles on its roads (except the new Japanese technology ones) are of old technology. Except for a small stretch of underground tube in Calcutta, urban transport is dependent on surface suburban trains and buses running in ! crowded and narrow streets. Its air transport is growing fast. The ports are old and badly in need of modemisation. Transport by pipe-lines is making a beginning now. 4.10.2 Principal Modes and their Role The modes of transport in India are : I) Railways 2) Roadtransport 3) Water transport 4) Airtransport
6) Ropeways Railways in India transport low-rated bulk goods over long distances. The following eight commodities account for 84 per cent of the tonnage moved : coal (39%), foodgrains (9%), cement (7%), fertilisers (5%), iron and steel (3%), petroleum products (7%), raw materials for steel plants (9%) and iron ore for export (5%). The average lead is 800 krn. Thus the Railways are the "beasts of burden" and will remain so in the future too. In the passenger traffic movement, they are the main mode for long distance travel. They also play a major role in suburban passenger travel in some of the jumbo cities. Road transport is fast emerging as the principle mode, wresting greater and great share hmthe rai1ways:Table 4.1 shows the trend. This is in conformity with trends in other countries. In the matter of freight transport, roads transport most of the finished goods and conswnables, irrespective of the lead. Road transport is also carrying a growing share ities like coal, cement, steel and foodgrain, but for short and medium ~msportEcononics 1. In passenger movement, it is the preferred mode for short and medium distances. It an important role to play in urban transpdrt, both for individual vehicle travel and a
transport meets the special needs of long-distance travellers within the country and travel. It also carries specidised cargo for export and within the country. ater transport comprises of overseas shipping, coastal shipping and inland water sport. Bulk of the country's imports and exports are handled by shipping. Coastal has potentialities, but is not fully exploited. Inland water transport in the country limited potentialities because the rivers are not perennial. It is popular in canals and kwaters. Table 4.1 Share on Road and Rail in Transport Passenger Kilometers Frieght in Tonne-Km Year Share of Roads 1 Share of Rail I Share of Roads I Share of Rail
are a new entrant. With the indigenous production of oil and gas, many of pipelines are being laid. peways are used in the hilly areas and for conveying materials for selected industrial
4110.3 Growth Trends &T port has been growing at a much higher rate than the economy in the recent past in transport has been growing at a rate of around 10 per cent per annum.Railway port has been growing at a lesser rate, in the range of 4-6 per cent per annum.Air sport has been growing at 8-12 per cent per mum. Cargo handled at ports grew at a of around 8 per cent per mum.
4410.4I Pen Outlays c investments in transport sector form an important component of planned trnents. The share of transport has shrunk 12.6 per cent in the Eighth Plan from 22.1 ent in the First Plan. This shows that there has been an under-investment in the or. Essential transport services are therefore operating under considerable strain. 5 Administration lways are owned and operated by the Central Government. The Ministry of Railways Board) is looking after the matter. The Railway have their own budget. The are required to pay dividend (6.5 per cent) on the capital, the whole of which een provided by the Government. ~rincip~esof Roads and road transport are looked after by various agencies. The Central Transportation Engineering Government is responsible for the development and maintenance of the National Highways. The Ministry of Surface Transport (Roads Wing) is in charge. The National Highways Authority of India is the executive agency of the Ministry of Surface Transport. Roads other than National Highways are the responsibility of the States. The Ministry of Rural Development looks &r roads funded under special rural development programmes. The Ministry of Urban Development looks after urban transport. State roads are looked after by the Public Works Departments and Rural Engineering Organisations. Road transport is a State subject. However, a Centd legislation, known as the-~otor Vehicles Act, gives the framework for uniform practices by the States. State Transport Departments regulate road transport they issue drivers licences, register the vehicles, check their fitness and issue permits for their operation. The trucking industry is in private hands, but nearly 40 per cent of the buses are owned by the government. Major ports are administered by their respective Port Trusts. But the Central Government helps them with funds for development. Minor ports are looked after by the State Governments. Matters regarding aviation are controlled by the Central Government. The Director General (Civil Aviation) looks after the affairs. The three level air-lines (Air-India - International traffic ;Indian Airlines - Domestic trunk route traffic; Vayudoot - Domestic feeder service) are Government owned. National waterways are the responsibility of the Central Government. Matters regarding shipping are controlled by the Ministry of Surface Transport. 4.10.6 Coordination Since each transport mode has its own role to play and all the modes complement each other, there is a need to coordinate their development. In the past, a severe competition Table 4.2: Profile of India's Transport Sector Transport Economics S . NO. Item 1950-51 1960-61 1970-71 1980-81 199691 1991-92 1995-96
3) Road Transport a)No of id000 82 168 343 554 1356 1514 1785 Goods Vehicles b) No, of id000 34 57 94 162 331 358 450 Passengers Buses
4) Majorports a) No. of Nos 5 9 10 10 11 11 11 Major Ports b) Trafic MT 19.38 33.12 55.68 80.27 151.67 156.64 215.34 Handled
5) Minor Ports 1
i)Available Millions N. A 113 208 663 927 1090 1046 Tonne Kms ii) Revenue 83 161 420 699 761 723 Tonne Kms b) No. of N. A N. A 84 117 117 120 Airports and Civil Enclaves 7) Inland Water Transport a) Length of lans 14544 14544 14544 14544 14544 14544 14544 Navigational Waterways 8) PipeUnes Length lans N.A N.A N.A N.A 9945 10260 12367 ( existed between the railways and road transport. The former, owned by the govemment, was protected and this often happened at the cost of road transport. Such a competition existed in most of the countries abroad too, but the development has been allowed to take place on the basis of economic performance, viability, competitiveness and market preference. In India, however, road transport has been subjected to restrictive regulations. There are signs of liberalisation and deregulation now. 4.10.7 Key Transport Statistics in India I The profileaofIndia's transport sector is given in Table 4.2. bAQ 3 a) Why is a high importance given to transportation in a country's development ? b) What is the role of railways in moving goods in India ? c) What is the trend in rail-road share in freight and passenger movement in Principles of India over the past ? Transportation Engineering d) How are various transport modes administered in India ? e) How is transport coordination achieved in India ?
4.11 ILLUSTRATIVE PROBLEMS Problem 1 . An Expressway is to be constructed by a private financier who raises a capital of Rs.100 crores in the open market. The interest rate is 15 per cent. What should be the yearly collection of toll of equal amount so that he is able to wipe off the loan at the end of 10 years ? Solution Equation for capital recovery factor is to be used.
Toll collection needed to wipe off the loan of Rs.100 crores = Rs.100 crores x 0.199 = Rs. 19.9 crores annually Problem 2 There are two projects as under :
Initial Cost of Annual Maintenance Const~ction Cost Project A Rs. 10 crores Rs.10 Lakhs I Project B 1 Rs. 12 crores Rs.2 Lakhs J What is more alternative over a period of 20 years, the interest rate being 12 per cent ? Solution ?he present worth of both the projects will be calculated. Present worth (Rs in crores) Project A Transport Economics
Project B
Project A is more attractive. blem 3 A road improvement projects costs Rs. 60 crores. The annual savings in vehicle operating costs as a result of road improvements is Rs. 10 crores. Is the project worthwhile at 12 per cent interest rate ? Use the BenefiVCost Ratio method and an analysis period of 20 years. ution Present worth of annual savings of Rs.10 crores
(1 + 0.12)~~- 1 = Rs. 10 crores x 0.12 (1 +0.12)~O
8.65 = Rs. 10 crores x 0.12 x 9.65
= Rs. 10 x 7.47 cmres
= 74.7 crores
= 1.25 > 1.0 The project is worthwhile.
2 SUMMARY nsport Economics covers a study of demand and supply for transport services, cost of jucing those services, pricing of transport services, and economic evaluation of sport projects, the quantification of costs and benefits assumes importance. A good i base on costs and benefits is of prime importance. The time value of money forms basis for comparing a stream of costs and benefits which occur at different points of :. There are various methods available for economic analysis, such as the Benefit - it Ratio, Net Present Value and the Internal Rate of Return. nsport is important for developing countries to enable the exploitation of natural Iurces, export the surplus produce and give adequate accessibility to the nual alation. ia has a diversified transport system consisting of roads, railways, air transport, water lsport and pipe-lines. The administration of these is being handled by different ' anisations. Coordination of transport modes becomes very important for ensuring a lth competition and growth of each mode according to its suitability. Transport has -- -.--- -"-" -.---.- Principles of grown in India at a high rate in the past, ranging from 5-12 per cent in several modes. Transportation Engineering
4.13 KEY WORDS Law of demand The increase in the amount of a commodity demanded with a fall in the price of that commodity Price elasticity of The rate of change of demand when the price changes. demand Law of diminishing The utility derived from successive units of a marginal utility particular commodity diminishes as the total consumption of that commodity increases. Fixed cost The cost that does not vary with output. Variable cost The cost that vary with output. Net Present Worth The discounted sum total of benefits and costs. Internal Rate of Return The rate of discount that makes the discounted benefits equal to the discounted costs.
-- 4.14 ANSWERS TO SAQs SAQ 1 a) Refer section 4.2. b) Refer to table in section 4.2 c) Refer to Figure 4.1. d) Refer to section 4.3. e) Refer section 4.3. f) Refer section 4.3. g) Refer section 4.3. h) Refer section 4.4. SAQ 2 a) Refer section 4.5. b) Refer section 4.5. c) Refer section 4.6. d) Refer section 4.7. e) Refer section 4.8. SAQ 3 a) Refer section 4.9. b) Refer sub-section 4.10.2. c) Refer section 4.1. d) Refer sub-section 4.10.5. e) Refer sub-section 4.10.6. ~RTHERREADING Transport Economics
1) Bruton, M.J., Introduction to Transport Planning, UCL press, London (1992). 2) Lipsey, R. G., An Introduction to Positive Economics, English Language Book Society, 1980. 3) Manual on Economic Evaluation of Highway Projects in India, Indian Roads Congress, New Delhi, 1993. 4) Kadiyali, L. R. , Traflc Engineering and Transport Planning, Khanna Publishers, Delhi, 1997. 5) Winfrey, Economic Analysis for Highways, International Text Book Company, Scranton, 1969. 6) Heggie, I. A , Transport Engineering Economics, Mc Graw Hill Book Company, London, 1972. 7) Bruton, M.. J., Introduction to Transport Planning, UCL Press, 1992. 8) Dickey, J. W., Metropolitan Transport Planning, Tata Mc Graw - Hill Publishing Company, New Delhi, 1975. 9) Transportation Planning Handbook, Institute of Transportation Engineers, Prentice Hall, Englewood Cliffs, 1992. 10) Wright, P.H. and N. J. Ashford, Transportation Engineering, John Wiley & Sons, 1989. . 11) India Infrasstructure Report (Rakesh Mohan Committee's Report), 1996. 12) Report of the National Transport Policy Committee, Planning Commission, New Delhi, 1980. 13) Report of the Luthra Committee on Transport Planning, Planning Commission, New Delhi, 1986. NOTE