Assessing Public Investment in the Transport Sector

ASSESSING PUBLIC INVESTMENT IN THE TRANSPORT SECTOR

Department of National Planning

Ministry of Finance & Planning

Colombo, Sri Lanka.

December, 2000

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Authors

Amal S. Kumarage

T.L. Gunaruwan

U.E. Storm

Sanath Ranawana

Disna Mudannayake

Prepared by

Transportation Engineering Division

University of Moratuwa

Published by

Department of National Planning

Ministry of Finance & Planning Colombo, Sri Lanka.

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Department of National Planning, Sri Lanka Assessing Public Investment in Transport Sector, 2000 174p.

ISBN 955-8514-00-4

PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com PREFACE

As the transport sector has become increasingly significant in the public investment programme, it has become necessary to develop a methodology for accurately assessing costs and benefits in order to correctly prioritise projects and decide on where to invest. The Department of Civil Engineering of the University of Moratuwa was contracted to review the criteria currently used in formulation, appraisal and decision-making on these projects and to develop appropriate methodologies for use at provincial and central levels. A Steering Committee, comprising senior officers of the Transport Sector, guided the study team. At a number of workshops held at different levels of government, the issues were discussed and the methodology developed validated through discussions and training sessions with transport engineers and planners.

This manual has been developed to elaborate the agreed methodology and to provide the necessary supporting information and examples, including four case studies, for those who will be appraising transport sector projects at different levels of government. It has made a particularly significant contribution in terms of how benefits can be quantified and the derivation of particular values, which can be used immediately.

I wish to thank all those involved in this work, particularly the team of consultants consisting of Dr. Amal S. Kumarage, Dr. T. L. Gunaruwan, Mr. U.E. Storm, Mr. S. Ranawana and Ms. D. Mudannayake, for their assistance and cooperation.

Dr. P. Alailima Director General Department of National Planning

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FOREWORD

It is with deep satisfaction that I write the Foreword to this book intended as a Manual for assessing transport sector investments in Sri Lanka. This book arises from the Report titled ‘Assessment of Public Investments in the Transport Sector’ submitted by the University of Moratuwa to the Department of National Planning in December 1999. The Credit for this initiative should be given to Dr. Pat Alailima, Director-General of the Department of National Planning who decided that a study of this nature was needed in order to apply proper methods of appraisal for evaluating investments in the transport sector.

The book has been edited from the report with the intention that it would be used as a manual at different levels of government in the transport sector. It is hoped that similar works would be developed for other sectors as well.

The book researches the most modern techniques of project appraisal from around the world and attempts to provide as much information as possible on techniques and methods available for handling the different issues in evaluating transport sector projects. It is rich in examples and applications that are common place in Sri Lanka, which may indeed be similar to many countries in the third world. It also provides interesting Case Studies that the reader could use in understanding the intricacies in applying knowledge to practice.

It is hoped fervently that this book would provide a significant step ahead in improving the process of investment appraisal in the transport sector.

I also wish to acknowledge the efforts of Mr. M. Vamadevan, Additional Director General of the NPD for his administrative guidance in the project, the assistance given by our Reviewers, Professor Malik Ranasinghe and Mr. KGDD Dheerasinghe, and also the many comments and suggestions that were received from numerous officials from many agencies. The assistance of Ms. MDRP Jayaratne in the project as well as in the formatting of the manuscript is also noted with appreciation.

Amal S. Kumarage

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1. INTRODUCTION ______1

1.1. Project Feasibility Analysis ______2

1.2. Evaluation of Benefits______2

1.3. Advantages of Benefit-Cost Analysis ______3

1.4. Project Evaluation & Appraisal ______3

1.5. Tools of Best Practice ______4

1.6. Guidelines for a Method of Assessment ______5

2. PROCESS OF TRANSPORT SECTOR PROJECT APPRAISAL ______6

2.1. Project Idea ______8

2.2. Project Proponent______8

2.3. Classification of Projects ______8 2.3.1. Classification of Goals & Objectives ______8 2.3.2. Classification by Investment Type ______9 2.3.3. Classification by Size of Investment ______13

2.4. Project Proposal ______14

2.5. Project Concept Paper ______15

2.6. Project Appraiser ______16

2.7. Short Method of Appraisal ______16

2.8. Long Method of Appraisal ______17 2.8.1. Initialisation of Pre-feasibility Study ______18 2.8.2. Initialisation of Feasibility Study ______19

2.9. Project Authorisation & Selection ______19

2.10. Project Pipeline ______20

2.11. Monitoring the Implementation ______20

2.12. Post Implementation Monitoring & Feedback ______21

PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com 3. METHODS OF PROJECT PREPARATION AND APPRAISAL ______22

3.1. Defining a Project and Selecting Alternatives ______22 3.1.1. Objectives ______22 3.1.2. Project Impact Area ______24 3.1.3. Definition of Base Case ______25 3.1.4. Specification of Alternatives ______27 3.1.5. Data Requirements ______28 3.1.6. Use of Assumptions ______28

3.2. Assessing and Quantifying Benefits and Costs ______29 3.2.1. Economic Definitions ______29 3.2.2. Methods of Assessing Benefits and Costs ______34 3.2.3. Benefits of Transport Projects ______38 3.2.4. Cost Components in Transport Projects ______48 3.2.5. Transfers ______55 3.2.6. Inflation and Price Escalation ______55

3.3. Benefit Cost Analysis ______56 3.3.1. What is Benefit Cost Analysis? ______56 3.3.2. Efficiency versus Equity ______59 3.3.3. Economic Life ______60 3.3.4. Double-Counting ______61 3.3.5. Determining the Appropriate Discount Rate ______62 3.3.6. Inefficient Pricing ______64

3.4. Comparing Benefits and Costs ______65 3.4.1. Net Present Value (NPV) ______65 3.4.2. Economic Internal Rate of Return (EIRR) ______65 3.4.3. Benefit/Cost Ratio ______65 3.4.4. Payback Period ______66 3.4.5. Least Cost Method ______66

3.5. Sensitivity Analysis ______66 3.5.1. Risk and Uncertainty ______66 3.5.2. Crossover Analysis ______67

4. ESTIMATION OF BENEFITS ______69

4.1. Value of Travel Time ______69 4.1.1. Passengers ______69 4.1.2. Freight Consignees ______75 4.1.3. Transport Operators ______77

4.2. Vehicle Operating Costs ______77 4.2.1. How VOC are Determined ______78

PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com 4.2.2. How to Use VOC ______81 4.2.3. Updating VOC in the Short Term ______82 4.2.4. Updating VOC in the Long Term ______82

4.3. Accident Costs ______82 4.3.1. Methods to Estimate Accident Costs ______83 4.3.2. Relevant Studies ______84 4.3.3. Estimation of Values ______85

4.4. Vehicular Emissions ______87 4.4.1. Air Pollution ______87 4.4.2. Valuing Air Pollution ______88 4.4.3. Other Pollutants ______89 4.4.4. Costs from Emissions by Vehicle Type ______90 4.4.5. How to Use Cost from Emissions ______93 4.4.6. How to Update Costs from Emissions ______93

4.5. Improved Accessibility ______94 4.5.1. Review of Practice ______94 4.5.2. Travel Time ______95

5. CRITERIA FOR SELECTION ______100

5.1. Fundamentals ______100

5.2. Other Bases of Selection ______101 5.2.1. Matching Investment Ceilings ______101 5.2.2. Total NPV or Weighted Rate of Return ______103 5.2.3. Least Capital Cost ______105 5.2.4. Least Cost Approach ______106 5.2.5. Meeting Legislative Imperatives ______107 5.2.6. Other criteria ______107

6. CASE STUDIES ______108

6.1. The Appraisal of the Southern Highway (A Review of Previous Studies) ______108 6.1.1. Introduction ______108 6.1.2. Stages in a Highway Feasibility Study ______108 6.1.3. Identification of Project Objectives ______110 6.1.4. Identification of Project Impact Area ______111 6.1.5. Identification of Alternatives & Justification of Selection ______111 6.1.6. Consideration of Government Policy ______113 6.1.7. Collection & Analysis of Historical & Present Data ______114 6.1.8. Formulation of Future Project Scenarios ______115 6.1.9. Estimation of Demand for Project Alternatives and Testing Scenarios. ______117 6.1.10. Estimation of Benefits for Each Project Alternative and Testing Scenario ______119

PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com 6.1.11. Project Cost ______123 6.1.12. Analysis of Cost of Each Project and Testing Scenario ______123 6.1.13. Benefit Cost Analysis ______124 6.1.14. Proposed Project Concept Paper ______124 6.1.15. Selection Criterion ______127 6.1.16. Conclusions ______127

6.2. Procurement of 500 New Buses (D Type) ______128 6.2.1. Project Objectives and Economic Rationale ______128 6.2.2. Forecasting the demand ______128 6.2.3. Project alternatives - choosing the least-cost alternative ______128 6.2.4. Justification for proposed project over alternatives ______129 6.2.5. Benefit Cost Analysis ______130 6.2.6. Estimation of Costs ______130 6.2.7. Estimation of Benefits ______131

6.3. Power Coach Shed Upgrading ______134 6.3.1. Introduction ______134 6.3.2. Review of Concepts ______135 6.3.3. Identification of Project Objectives ______136 6.3.4. Identification of Project Impact Area ______136 6.3.5. Definition of Base Case ______136 6.3.6. Identification of Alternatives ______136 6.3.7. Data Requirements ______137 6.3.8. Estimation of Benefits ______139 6.3.9. Benefits from Shift of Traffic from Road to Rail______140 6.3.10. Benefit-Cost Analysis ______141 6.3.11. Sensitivity Analysis ______141

6.4. A Provincial Road Project ______141 6.4.1. Introduction ______141 6.4.2. Project Impact Area ______142 6.4.3. Valuation of Benefits ______142 6.4.4. Regional Development Benefits ______145 6.4.5. Benefit–Cost Analysis ______146 6.4.6. Project Concept Paper ______148

APPENDIX I ______151

APPENDIX II ______153

APPENDIX III ______157

INDEX ______161

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List of Figures

Figure 2.1: Flow Chart for Proposed Transport Sector Project Appraisal ______7 Figure 3.1 : Demand Curve, Price, Quantity, and Consumers' Surplus ______30 Figure 3.2: Costs and Project Life Span with and without Rehabilitation ______61 Figure 6.1: Project Impact Area ______143

List of Tables

Table 2.1: Two-Dimensional Project Classification by Investment Type ______14 Table 2.2: Proposed 3-level Classification by Size of Investment ______14 Table 3.1: Most Recent Shadow Price Factors ______34 Table 3.2 : Valuation Techniques ______36 Table 3.3: VOT for Transport User Groups (in 1999 Rs/Hour) ______39 Table 3.4 : Distribution and Value of Commodities in Road Transport ______40 Table 3.5 : Vehicle Operating Cost at Road Roughness IRR=6 ______40 Table 3.6 : Accident Costs in 1999 Rupees ______41 Table 3.7 : 1998 Accident Cost per Vehicle/Passenger Km (@ 1999 Values) ______41 Table 4.1: Calculation of Mean Income by Users of Transport Modes (1996) ______72 Table 4.2: Percentage of Work Trips by Sector of Travel ______73 Table 4.3: VOT for Transport User Groups (in 1999 Rs/Hour) ______74 Table 4.4: Vehicle Occupancy (without crew) and Crew (in parenthesis) Rates ______74 Table 4.5: Distribution and Value of Commodities in Road Transport ______76 Table 4.6: Distribution of Freight Vehicles ______76 Table 4.7: Cost of Refrigeration of Trucks ______76 Table 4.8: VOC Savings by Investment Type ______78 Table 4.9: Assumptions to Estimate VOC for M/C & 3/W ______81 Table 4.10: Accident Costs in 1999 Rupees ______85 Table 4.11: 1998 Accident Cost per Vehicle/Passenger Km (@ 1999 Values) ______86 Table 4.12: Pollutant Damage Costs ______88 Table 4.13: Summary of Grams of pollutant per litre of Fuel for various Types of Vehicle 91 Table 4.14 : Estimated Costs from Emissions for Rail ______93 Table 4.15: Calculation of Households in Project Impact Area ______96 Table 4.16: Calculation of Passenger Travel Time Saving ______97 Table 4.17: Calculation of Cost of Freight Transport ______98 Table 4.18: Estimation of Regional Development Index ______99

PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com Table 5.1: Economic Parameters of Projects & Alternatives in Portfolio ______102 Table 5.2: Capital Requirements for Alternatives in Project Portfolio ______103 Table 5.3: NPV of Alternatives ______103 Table 5.4: EIRR of Alternatives ______104 Table 5.5 : Example of NPV & EIRR ______105 Table 6.1: Selection of Alternatives ______112 Table 6.2: Historical & Present Data Used in Studies ______114 Table 6.3: Data & Assumptions Used for Future Estimates ______116 Table 6.4: Value of Travel Time Used in Studies (Rs/hr) ______120 Table 6.5: Vehicle Operating Cost used in Studies (Rs/km) ______120 Table 6.6: Total Project Benefits Estimated in Studies ______121 Table 6.7: Comparison of Data Sources for Cost Estimates ______122 Table 6.8:Concept Paper for Southern Highway ______125 Table 6.9: Average Vehicle Utilization (AVU) of state and private sector buses ______130 Table 6.10: Shadow Price Factors ______131 Table 6.11: Cost components and breakdown (per bus) ______131 Table 6.12: Benefits from operating a bus ______132 Table 6.13: Estimation of value of time savings ______133 Table 6.14. Sensitivity Analysis ______133 Table 6.15 : Concept Paper for PCS Upgrading Project ______135 Table 6.16: Change in Speed due to Modal Shift (Kph) Without & With Project ______139 Table 6.17: Sensitivity Analysis ______141 Table 6.18: Calculation of Households in Project Impact Area ______142 Table 6.19: Calculation of Passenger Travel Time Saving ______144 Table 6.20 : Calculation of Saving in Cost of Freight Transport ______145 Table 6.21: Computation of Regional Benefits ______146 Table 6.22: Computation of BCA (Rs mn) ______147 Table 6.23: Concept Paper ______149

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AAGR : Average Annual Growth Rate AC : Asphalt Concrete AVU : Average Vehicle Utilisation BC : Benefit Cost BCA : Benefit Cost Analysis CCPI : Colombo Consumer Price Index CFSS : Consumer Finance and Socioeconomic Surveys CMR : Colombo Metropolitan Region CMRSP : Colombo Metropolitan Regional Structure Plan CP : Concept Paper CUTS 1 : Colombo Urban Transport Study (Stage 1) CUTS 2 : Colombo Urban Transport Study (Stage 2) DBST : Double Bituminous Surface Treatment DMU : Diesel Multiple Unit DSD : Divisional Secretariat Divisions EIRR : Economic Internal Rate of Return GDP : Gross Domestic Product HHs : Households IRR : Internal Rate of Return MoT : Ministry of Transport NPD : Department of National Planning NPV : Net Present Value O&M : Operation and Maintenance PIA : Project Impact Area PCS : Power Coach Shed RDA : Road Development Authority RUCS : Road User Charges Study SBST : Single Bituminous Surface Treatment SL : Sri Lanka SLCTB : Sri Lanka Central Transport Board SLR : Sri Lanka Railways SOR : Schedule of Rates TOR : Terms of Reference UDA : Urban Development Authority UoM : University of Moratuwa VOC : Vehicle Operating Cost VOT : Value of Time VOR : Vehicle Occupancy Rate WP : Western Province

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CHAPTER ONE

1. INTRODUCTION

When demand for public infrastructure is high but public resources are limited, it is important to ensure that scarce resources are used efficiently and effectively to maximise social benefits. If this is considered true even for developed countries, as illustrated by the quotation below, then it must be more true for countries that are still developing, such as Sri Lanka:

“A well-functioning infrastructure is vital to sustained economic growth, to the quality of life in our communities, and to the protection of our environment and natural resources. Our Nation will achieve the greatest benefits from its infrastructure facilities if it invests wisely and continually improves the quality and performance of its infrastructure programs.”1

The need to "invest wisely" in infrastructure facilities is recognised by the Ministry of Finance and Planning in Sri Lanka, which requires State departments and agencies to submit feasibility studies for investment projects. As described in more detail in the following sections, Benefit Cost Analysis, although still not widely used in Sri Lanka, is an objective and valuable tool to evaluate the feasibility of transport sector projects.

Each department or agency may submit a portfolio of projects to the Ministry of Finance and Planning to obtain funding. Projects in such portfolios may be included for a variety of reasons spanning institutional needs, social needs, development needs and, in certain instances, even personal or political ends. In the absence of a process of assessment, public investment is highly vulnerable to poor investments, and the returns are inadequate to justify its use.

The process of assessment of public investment has a number of steps and intermediaries. There is the project proponent, who would generally be a government department agency entrusted with the provision of providing certain goods or services to the public. On its part, the project proponent may have strong reasons for implementing a certain project that it considers will achieve the desired results. The job of the project appraiser is to evaluate these projects to determine if the

1 W.J. Clinton, President of the USA, Executive Order 12893 - Principles for Federal Infrastructure Investments, (http://nodis.hq.nasa.gov/library/directives/nasa-wide/nasaeoas/eo12893.html), 26 January 1994.

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projects are adequately prepared to achieve the desired benefits and indeed, if the investment requested is justified on the basis of the anticipated benefits.

1.1. Project Feasibility Analysis

The dictionary definition of feasibility study is "a study of the practicability of a proposed project"2. Indeed, this definition generally describes the types of feasibility studies that are at present undertaken by transport agencies, which focus mainly on the physical or technological practicability of undertaking a project – and which estimate only the corresponding input requirements and financial costs. Such a definition, however, is not complete, because it ignores a fundamental question: are the economic benefits of a project greater than its economic costs? The answer to this question must be "yes" before an investment can be said to be "wise".

For the purposes of this Book, therefore, the above definition has been expanded to include the following - all of which must be true, before a project can be said to be feasible:

· Is the project economically justified – in other words, are its economic benefits greater than its economic costs? · Is the proposed project alternative, location, strategy, or design the best - from economic, environmental, and/or social perspectives? · Are the construction/procurement, operation, and maintenance of the project sustainable over its economic life?

Feasibility studies can therefore, show that certain projects or alternatives are not economically justifiable – that economic costs would be greater than economic benefits and that implementation of those projects, therefore, would result in a net reduction of the social wellbeing of the country instead of an improvement.

As described in more detail in the following sections, Benefit Cost Analysis, although still not widely used in Sri Lanka, is an objective and valuable tool to evaluate the feasibility of transport sector projects.

1.2. Evaluation of Benefits

Except for mega scale projects, where cost-benefit analysis is expected, the ‘Least Cost approach’ appears to be what is most commonly adopted. Since this approach requires the minimum of skills and effort, it would be equally appropriate to call it the ‘least effort approach’. This is precisely the

2 The Concise Oxford Dictionary, Oxford University Press, 1993.

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reason for its immense popularity among departments and agencies, especially those that do not have the trained staff to undertake a proper and systematic assessment of projects.

This approach has the major drawback that it makes the fundamental assumption that all benefits between alternatives are similar. Comparing between different investment opportunities is well nigh impossible, since benefits are usually qualitatively and quantitatively dissimilar in transport sector projects.

The intricacies in valuing benefits are seen as the reason for not applying benefit-cost analysis in project appraisal. However, techniques are available for this purpose, and can be further developed and applied in Sri Lanka through this study.

1.3. Advantages of Benefit-Cost Analysis

Well-organised feasibility studies, that include economic appraisal such as benefit cost analysis, can give the following advantages:

· There is better understanding of the impacts of a project. For example, the need to identify the different recipients of benefits, the nature of benefits that would be generated, and of estimating their values, will help confirm that benefits actually do exist. Too often, projects make sweeping and vague generalisations such as "improved services" to indicate benefits. Even if benefits exist for the project proponent agency, it is sometimes unclear whether society as a whole receives a net benefit or not. · Project approval is thorough and quicker: Proposals can be more easily and completely evaluated, if expected benefits and costs, and the assumptions on which they are based are fully described. Often the project approval path becomes circuitous and delayed due to lack of a comprehensive proposal. · It facilitates post-evaluation: The need to quantify benefits facilitates a process of post- evaluation, as assumed targets are available against which actual performance can be measured. Knowledge that it is possible to check assumptions in this way, even at a future date might also discourage exaggeration of expected benefits at the proposal stage. · Alternatives become clearer: It becomes easier to identify between alternatives to a proposed project and the relative advantages and disadvantages between them. · Decision-making becomes more well informed and transparent: When the potential advantages and disadvantages and the economic consequences of a project are fully and clearly laid out, decisions can be made to make resource allocation more efficient.

1.4. Project Evaluation & Appraisal

It was earlier argued that the purpose of a feasibility study is to determine whether a project is

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economically justifiable or not, to find the most efficient alternative, if it can be sustained, or to decide priority in project selection and implementation. Projects with high economic feasibility, on paper, do not always generate high economic benefits in practice. This can be due to various factors – for example, benefits might be exaggerated, costs might be under-estimated, and assumptions might be incorrect (deliberately or innocently). One of the objectives of project appraisal would be to test the reasonableness of estimations and assumptions. Furthermore, projects might fail to achieve their expected benefits if they are poorly implemented or managed, if the socioeconomic environment changes, if new technology makes the project obsolete before the end of its expected life, and so on. Risks and uncertainty associated with the completion of a project and in the realization of the anticipated benefits are also important. Project appraisal must also consider these factors when deciding which projects to recommend.

Evaluation and appraisal should not end with project implementation. Post-evaluation studies are an essential step to complete the planning process that starts with the feasibility study. Post- evaluation will determine if anticipated benefits and costs have actually been achieved, which is necessary to determine if existing projects and services need revision, to test if strategies and designs are appropriate, and to improve future estimates of benefits and costs. Only such a system of feed back will make the process of project appraisal accurate and trustworthy.

It is also recognized that feasibility studies and their constituent cost-benefit analysis are part of a larger decision-making process that includes non-economic and political factors, especially for public investments. Feasibility studies, however, can play a very important role by showing fairly, the economic effects of decisions and by giving a transparent framework within which decisions can be taken.

1.5. Tools of Best Practice

Tools of ‘best practices’ are techniques and methods that can be developed to undertake the preparation and the appraisal of feasibility studies. The authors have, in this book, developed these tools for transport sector projects in Sri Lanka, after extensive research, discussion and debate on the most appropriate method or tool.

The use of these tools is intended to improve the process of benefit cost analysis by providing a scientific approach to the assessment of benefits. The appraiser who uses these tools in the appropriate manner would avoid the pitfalls of potential generalisation and subjective evaluation. These tools can be a powerful instrument to provide a more objective and transparent application in benefit cost analysis and the process of overall project appraisal.

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Tools include valuation techniques and present day estimates obtained from such techniques. It must be emphasised here that valuation techniques should be employed only where original data is either unavailable or cannot be collected within the available period. It is however, the duty of the project proponent to devote adequate time and resources in the project preparation stage so that original data can be collected in order that the reliance on making estimates is reduced. These tools are primarily intended for obtaining approximate values. It should also be pointed out, that both the methods as well as values need to be reviewed and updated from time to time.

The analytical tools of benefit-cost analysis should not be a substitute for the judgments of the appraiser. They should actually complement the technical skills of planners, and appraisers. These tools would be most useful for appraisers with an understanding of transport economics, transport demand estimation and transport costing. Skills in engineering, environmental and operational aspects of transport projects would be an added advantage in transport sector project appraisal.

1.6. Guidelines for a Method of Assessment

The project appraisal mechanism that would ensure that it can be practically implemented and can be instrumental in the efficient allocation of scarce capital resources should have;

· simplicity, · clear and short procedures to deal with small scale projects, · longer and more detailed procedures to appraise medium and large scale projects, · identification of appraisal and approval authorities, · preliminary intervention by the appraiser at the earliest possible stage for medium/large scale projects and · explicit environmental integration, particularly for medium/large scale projects.

It appears appropriate, therefore, to use a “short and quick” method, to appraise smaller scale projects submitted by the project proponent who in the Sri Lankan context, may mostly be provincial agencies. Such a short cut is not appropriate, however, for medium- to mega-scale projects that may be more common at the national and inter-provincial levels. Hence, the project proponent should adopt a more detailed (or longer) methodology to appraise projects of such magnitude.

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CHAPTER TWO

2. PROCESS OF TRANSPORT SECTOR PROJECT APPRAISAL

This Chapter will propose, and discuss thereafter, a framework within which an appropriate form of project appraisal can take place, for the transport sector. The proposed process of project appraisal is outlined in Figure 2.1. This process has several distinct steps and intermediaries, which are identified as follows:

· Project Idea · Project Proponent · Classification of Projects · Concept Paper · Project Appraiser · Short Method of Appraisal · Long Method of Appraisal § Initialisation of Pre-feasibility Study § Initialisation of Feasibility Study · Project Authorisation · Project Pipeline/List · Project Selection · Monitoring Implementation · Post Implementation Monitoring & Feedback

Each of these steps and intermediaries will be discussed in detail in the following sections.

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Figure 2.1: Flow Chart for Proposed Transport Sector Project Appraisal

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2.1. Project Idea

A project idea can be defined as the first expression of need or requirement for a project. It can emanate from many different sources such as a discussion at a planning committee (or council) meeting, a request made by a political representative, a suggestion made by a member of the public, a recommendation made in a development study, and so on. These ideas by themselves do not constitute projects. An idea becomes a project only after a project proposal is made based on the idea. The project proposal should take into consideration the wider issues arising from implementing the idea and the associated benefits and costs.

2.2. Project Proponent

The agency that is responsible for executing or implementing a project idea, should be the project proponent. The project proponent should ensure that appropriate technical skills and tools are available to convert project ideas to project proposals.

2.3. Classification of Projects

Project ideas, in order to be converted into projects, need to be classified according to their critical attributes. This section will attempt to classify projects to assist the process of project formulation. Projects can be classified on the following basis:

· By Goals & Objectives

· By Type of Investment

· By Size of the Investment

2.3.1. Classification of Goals & Objectives

The results of any project or program could be assessed at two levels. On the one hand, projects can be evaluated on the basis of asset or service procurement and implementation; for example, number of buses procured, kilometers of road widened, kilometers of railway signals installed. This is a very superficial level of assessment.

Asset or service procurement and implementation, moreover, do not necessarily guarantee that benefits will be generated. A more meaningful and rational assessment would be based on the ultimate outcome of the project, of which there could be more than one attributed to a single

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project. Since transport is generally not a service desired for its own sake, its outcome is measured by the other benefits to which it can contribute. For example, higher speed on a road is not an objective in itself, but is a means to achieve saving in travel time and thereby increase resource productivity. The following multiple goals are typical for transport sector projects:

· Economic

· Social

· Environmental

Transport projects should be evaluated based on how much they contribute towards achieving these wider goals. A single project may have one or more of these goals.

Example: A new rail line may satisfy economic goals by reducing travel time, satisfy social goals by providing access to services such as schools and hospitals for hitherto inaccessible remote communities, and satisfy environmental goals by diverting road traffic to rail and thereby reducing air pollution.

2.3.2. Classification by Investment Type

Investments can also be classified by (a) their functional nature and (b) their contribution to the national asset base, in a two-dimensional format as shown in Table 2.1. The classification is useful to determine the level of investment in each category. The amount for investment in each category should be consistent with the value of the asset base and its life period.

New Assets: These are investments that provide new and hither-to non-existing facilities to meet new demand, to keep up with increases in demand that cannot be satisfied with improvements, and to meet demand for increased quality of service. Generally, new assets generate new societal benefits—such as time saving, vehicle operating cost saving, development, comfort—but they increase recurrent costs because they add to the annual costs of operation and maintenance.

Example: If rail passenger demand is increasing by 5% per year, and if rolling stock is already being used efficiently, it can be argued that the rolling stock fleet should be also be increased by 5% per year. Operation of the additional fleet might encourage traffic to shift from road to rail and thereby reduce road congestion, but the Railway will incur additional expenditure to operate and maintain the trains over their economic life.

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Improvements: These are investments that develop or "make better" the condition of existing assets. They can involve any combination of the following (a) additions to existing assets, (b) replacement of existing assets with assets of increased capacity, and (c) replacement of existing assets with assets that have qualitative improvements. Generally, investments in improvements will generate only incremental societal benefits; analysts and appraisers should take care to ensure that such benefits are not over-stated. Recurrent Agency costs may increase or decrease, depending on the nature of the improvement.

Example: Replacement of wooden sleepers and 88 pound rail with concrete sleepers and 90A rail would be an improvement, as the new rail can accommodate heavier trains and higher speeds. Benefits might be lower operating costs due to heavier trains and time saving due to high speeds. As concrete sleepers have slightly lower life-cycle costs than wooden sleepers, Railway recurrent expenditures would also reduce.

Example: Widening a 2-lane road to a 4-lane road would be an improvement, as the extra capacity can accommodate greater numbers of vehicles. Benefits might be reduced congestion costs (until induced traffic fills the additional capacity). As 4-lane roads have higher maintenance requirements than 2-lane roads, other things being equal, Agency recurrent expenditures would increase.

Example: Modifying a bus (or a railway carriage) to add air- conditioning would be an improvement, as a higher quality of service can be provided. This would increase operating costs, but its benefits would be the value of the higher comfort provided by air-conditioning.

Under present highway terminology, certain types of projects that are called "rehabilitation" should more appropriately be called "improvement" if the new roads have a higher or improved standard than the old roads.

Example: Putting an asphalt concrete (AC) overlay on an existing double bituminous surface treatment (DBST) road would be an improvement, as the AC overlay would give longer life and smoother surface. Benefits might be time saving from higher speed, reduced vehicle operating cost (VOC) from lower roughness.

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It is the combined investment in "new assets" and in "improvements" that increases overall transport capacity.

Example: A network of 10,000 kilometres of national roads having 4-6% annual traffic growth, might require at least 4-6% capacity expansion per year to maintain the same level of service. Assuming a cost of Rs 10 million per kilometre to construct or improve roads, this suggests an annual investment of Rs 4-6 billion. If the present level of service is inadequate, and this too should be improved, then road capacity should be expanded more than the increase in demand and investment should be even higher.

Replacement/Rehabilitation: Replacement refers to investments that replace existing assets with identical assets in terms of capacity and/or quality at the end of their economic design life. Rehabilitation refers to investments that replace many or most major components of existing assets to extend their economic design life.

Example: Replacement is relaying an AC overlay on a road, putting up a new bridge with the same capacity and standards as the old bridge, buying a new shunting locomotive with the same operating and maintenance characteristics as the old locomotive. Rehabilitation is sand sealing a Single Bituminous Surface Treatment (SBST) road, replacing a decayed bridge deck but keeping the same foundations, replacing the engine, exhaust, and cooling system of a shunting locomotive but keeping the same body platform and bogies.

Replaced or rehabilitated assets do not generate new societal benefits, but restore and maintain existing benefits. Analysts and appraisers, however, must still determine the quanta of benefits that would be maintained, which is done in a similar process as for new benefits.

Example: Replacing an AC overlay will restore the original benefits—such as time and VOC saving—of higher speed and lower roughness. Net benefits, therefore, will be based on the difference in speed and roughness over the life of the new AC overlay, with and without replacement.

Generally, replacement/rehabilitation reduce agency recurrent costs because the replaced or rehabilitated assets have lower operating and maintenance costs than the old assets. Rehabilitation usually requires lower investment than replacement, but this is offset by shorter life, fewer benefits

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(as rehabilitated assets usually cannot maintain the same service standards as newly replaced assets) and by higher operating and maintenance costs.

Example: Rehabilitating a locomotive instead of replacing it might reduce investment by 40-50%, but the rehabilitated locomotive will have a shorter life (e.g., 10-15 years instead of 25), lower reliability, and higher maintenance costs, as much of the locomotive is still old.

Even without growth in traffic volume, assets need to be replaced or rehabilitated at the end of their economic life to maintain the asset base at its design level.

Example: A network of 10,000 kilometres of national roads with, say, an average 20-year life, require an average of 5% to be replaced/rehabilitated each year to maintain the asset base. Assuming an approximate cost of Rs 10 million per kilometre for replacement/rehabilitation, the annual investment requirement would be Rs 5 billion. If replacement/rehabilitation has been deferred in the past, a greater investment might be needed to "catch up".

Maintenance: This refers to the normal recurrent expenditures—annual and periodic—required over the expected life of an asset, so it can perform with reasonable efficiency. Information on "normal" maintenance is not well developed for Sri Lanka, but most studies assume values between 1-2% of the replacement value of an asset for transport infrastructure maintenance and 4-6% for transport rolling stock.

Example: Annual maintenance includes routine work such as patching potholes, cleaning drains, and correcting edges on roads, tightening bolts, clips, and spikes, and replacing damaged sleepers on track, replacing brake shoes, hoses, filters, etc., on rolling stock, and so on. Periodic maintenance includes repairs to the entire asset, such as sand sealing of DBST and AC roads or performing scheduled repairs to rolling stock. Emergency or accident repairs—such as failure of a component such as a bus engine—also count as maintenance.

Maintenance is not an investment, although Transport Sector Agencies at present include some components of maintenance under capital expenditure.

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Example: Sri Lanka Railway (SLR) accounts earlier counted all unscheduled and scheduled repairs undertaken by the Mechanical Sub-department as capital. From 1998, labour expenditure was included under recurrent, but, inconsistently, spares were still included under capital, even for items such as brakes and filters. A more correct classification would be to include all labour and spares for maintenance under recurrent, except those relating to rehabilitation of rolling stock.

When investments are initially appraised, the analyses should include reasonable forecasts of annual and periodic operating and maintenance costs during the asset’s economic life. Maintenance costs are thus appraised at the time of acquisition of the asset and need not be re- appraised annually. Annual expenditure needs to be reviewed only if it is much lower or much higher than forecast. Low amounts might indicate under-spending, which could reduce economic life, performance, and benefits. High amounts might indicate assets that have exceeded their economic life and should be replaced.

Technology and Human Resources Development: This refers to investments in research and development, in training (e.g., both in managerial and in technical skills), and in studies/surveys to develop transport-related information systems and databases, all of which are greatly under- represented in the Transport Sector in Sri Lanka. Technology research and development can yield lower cost designs, more efficient maintenance, increased economic life of assets, etc. Training can improve realisation of transport benefits (e.g., improved productivity and reduced Agency costs, more effective project implementation, etc.). Studies/surveys can collect information to improve economic analyses and to better match services with demand.

Example: It might be argued that investment in technology & in human resources development should not be less than 1% of total capital investment.

2.3.3. Classification by Size of Investment

The investment can be used to determine (a) if the "short method" or the "long method" of appraisal should be used and (b) the level of precision in analysis. This is more fully defined in the following sections.

However, given the large variation in investments in the transport sector e.g. —from under one million rupees to several billion rupees—and the requirements of environmental laws, which specify three types of evaluation, it is recommended that a three level classification be adopted as shown in Table 2.2. It should be noted, however, that requirements for environmental analysis are

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prescribed in the Environmental Act of Sri Lanka and may not necessary correspond only to the size of the investment.

Table 2.1: Two-Dimensional Project Classification by Investment Type

t n t t . e

& n s o n n c t i e e e e e y t n s g a R a m s m m t o e i n l e p n l A e v i c

o o a t o l a b n w n l r e m a i h e p v p a u h c e e N e e

m H

R M D

I T R

Infrastructure Asset Rolling Stock Supporting Asset § Infrastructure refers to roads, bridges, rail tracks, signals & communication systems, etc. § Rolling Stock refers to vehicles used for transport services, such as buses, locomotives, carriages, and wagons. § Supporting Assets refer to facilities that support the core transport function, such as (a) technical (workshops, plant & machinery), (b) administration & management (offices), (c) operations, (d) marketing, (e) public relations, and (f) planning & monitoring.

Table 2.2: Proposed 3-level Classification by Size of Investment

Size of Value (Rs Method of Extent of Investment Million)3 Appraisal Appraisal

Small Short method - Medium Long Method Pre-Feasibility Large Long Method Feasibility

The short method of appraisal might be used for projects such as improvement or replacement of rural roads of less than 5 kilometres length, construction of provincial bus terminals, or construction of train halts. Medium size projects requiring investment might be appraised using the long method to a pre-feasibility level of detail. Larger projects (referred to as Mega Projects in the Development Planning Guidelines of Sri Lanka) might be appraised using the long method and a full feasibility level of detail. The environmental requirements of IEE and EIA reports may also correspond to size.

2.4. Project Proposal

A project idea should be developed as a potential project by considering first, the technical feasibility. If the project can be executed, then a proposal should be made considering the facts

3 The Department of National Planning, in accordance with Government Policy, should determine project values for the above classification. These values should be regularly updated in keeping with price escalation and project appraisal policy.

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surrounding the project. A proposal may be a pre-requisite for obtaining funds. Even otherwise, it acts as an instrument of appraising the viability and the returns on investment of such a project.

2.5. Project Concept Paper

Every project proposal, irrespective of the size of the investment, should be first submitted as a Concept Paper. It should form the first step in the process of project appraisal.

A Concept Paper for Transport Sector Projects (CP) that includes the relevant information considered essential for appraisal at the first stage, is given in Appendix I. This is a two page format, which is short enough to be a format for first submission, but is detailed enough to enable even an approximate benefit cost analysis. Its arrangement in a two-page format gives it more credibility as a ‘paper’ since it can be submitted on a single sheet of paper. As illustrated in Appendix I, the Concept Paper lays out the project objectives and alternatives, describes related issues, suggests some preliminary screening, and estimates the benefits and costs of each alternative considered.

For small-scale projects, this Concept Paper should be considered as being adequate submission for appraisal, provided costs and benefits are properly identified and even approximately valued. This would enable some benefit-cost analysis to be performed in the appraisal, which would otherwise be based only on qualitative information. For small-scale projects, the appraisal process would then constitute a single stage only.

For the medium scale process, it is recommended that once the Concept Paper is appraised and approved, a pre-feasibility study be undertaken. This should be appraised as a second stage. It is intended as the only basis of appraisal for small projects, but for large projects it will provide the first set of information required for the first stage of appraisal.

Guidelines to filling the Concept Paper are given at Appendix II. The methods of estimating the costs and benefits in the proposed format are discussed in detail in Chapter 3.

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2.6. Project Appraiser

Each project proposal should be submitted for appraisal using the Concept Paper. It should be appraised by an institution other than the one proposing the project. In other words, no agency should appraise its own projects. Typically, an agency would submit its Concept Papers for appraisal to the Line Ministry, in which case the latter would become the appraiser. For larger projects, the NPD would become the final appraiser and the Line Ministry would assume co- ownership of the project along with the agency that is the project proponent.

Example: The RDA might submit a proposal for a Rs 500 million bridge project. The Ministry of Highways would undertake the first appraisal. As this is a large project, which requires further appraisal, the Ministry would forward the proposal to the NPD for final appraisal.

Example: A Provincial Agency might require approval for a rural road project of Rs 5 million. It would forward the proposal to the Provincial Ministry, which would appraise and, if viable, approve the project.

2.7. Short Method of Appraisal

The Short Method of appraisal is so called due to its intended shorter process. It is to be applied only in small scale projects. It requires only the Concept Paper for appraisal. In the appraisal of these relatively small projects, where the Short Method is to be used, it is not envisaged that detailed pre-feasibility or feasibility studies will be carried out. However, even for small projects, it is important to carry out some systematic BCA so that projects can be economically justified and ranked in order of priority.

It is proposed that the Short Method would be done as a single step, using information provided in the Concept Paper.

Costs can generally be calculated, without extensive effort, using engineers’ estimates, and some unit costs are given in Chapter 4. Benefits are more difficult to estimate. However, some unit values and methods of computing benefits are given in Chapters 3 and 4.

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This book proposes to use a composite measurement for the Short Method, comprising direct transport user benefits and regional/other benefits. This is based on a review of methods used to evaluate rural road projects in various developing countries4. These methods calculate an index of benefit, which, although useful for comparing the relative benefits of projects, do not reveal if they are economically beneficial, as the benefits are not stated in monetary terms.

Benefits could be estimated in monetary terms by objectively valuing direct transport user benefits and by multiplying such monetary values by an index for regional development and other benefits. The method for "Valuation of Improved Accessibility" is introduced in Chapter 3 and described in detail in Chapter 4.5.

The Short Method should not ignore the features described in the Concept Paper—such as definition of objectives, alternatives, life cycle, etc.—and a BCA based on the composite method should be carried out for all reasonable alternatives.

2.8. Long Method of Appraisal

The Long Method of Appraisal is required for any project that does not qualify for the short method of analysis. These projects are those large enough to require either a pre-feasibility or a feasibility study to be carried out in the process of appraisal.

The Long Method should begin only on receipt of a pre-feasibility study. However, no pre- feasibility study should have commenced without the conclusion of the successful appraisal of the Concept Paper in the first stage of appraisal (common even to the Short Method). The appraisal of a pre-feasibility study becomes the second final stage of approval for a medium scale project, while the process should be repeated with a feasibility report as a third stage of appraisal for large-scale projects.

The Long Method begins by checking the submission of the pre-feasibility report for the proposed project for adherence to the originally stated goals and objectives in the Concept Paper. Benefits and costs should be more accurately quantified by accepted methods and valued appropriately for the proposed project as well as for the alternatives identified in the Concept Paper. Tools summarised in Chapter 3 and described in more detail in Chapter 4 can be used for this purpose.

Example: A pre-feasibility study for the purchase of 500 buses would need to document information about the nature of the routes on which the buses would operate, loading patterns for

4 Rural Roads and Poverty Alleviation, Edited by John Howe and Peter Richards, Intermediate Technology Publications, UK, 1984.

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passengers and freight, travel times, vehicle utilization, and potential revenue and operating costs.

Environmental requirements may also be incorporated into the pre-feasibility and feasibility stages. If the project is prescribed under Gazette No 722/22 of 1993, then it would be a sound practice to include at least an Initial Environmental Evaluation as part of the pre-feasibility study. A more comprehensive Environmental Impact Assessment could then be included as part of the feasibility study. However, since law requires environmental studies and approval, such procedures should be given due care and importance in the feasibility studies.

2.8.1. Initialisation of Pre-feasibility Study

Pre-feasibility studies should be undertaken for both medium and large projects. Such projects should have been approved at the first stage of appraisal after submission of the Concept Paper. Pre-feasibility will prepare a project proposal at a higher degree of accuracy than a Concept Paper. The proposal together with the pre-feasibility study, can then be re-submitted along the same lines as the original Concept Paper, using the same (or similar) format given in Appendix I.

Pre-feasibility studies should be undertaken only after observations and recommendations relating to the Concept Paper have been received during a Consultative Process with relevant experts and Agencies, and should incorporate any proposed refinements. The appraisal agency, whether NPD or Line Ministry, should have access to expert views at short notice. If such expertise is not available in-house, it is advisable to have access to a pool of independent experts who can be called on as necessary.

Example: The pre-feasibility study for an expressway should also incorporate expert views on non-highway alternatives (e.g. railway or coastal shipping), urban and regional development, social and environmental issues, equity issues such as poverty and unemployment, and other matters such as industrial location and highway network planning.

Pre-feasibility studies, whether done by local Agencies or by consultants, should relate to the accepted goals and objectives and proposed project impact area. Such studies should also consider the alternatives proposed to achieve the given objectives, but may consider additional alternatives, too. All relevant benefits and costs should be quantified and valued. When models are used to estimate benefits – the inputs and outputs of the models should be dis-aggregated by type of benefit and justified. The level of accuracy or detail should also be clearly specified. The level of environmental study required should also be specified.

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Feasibility Studies, whether by local or foreign consultants, should be based on well-formulated Terms of Reference (TOR) that give detailed guidelines how to undertake the study. It is recommended that the Line Ministry, the NPD, and other Ministries that the NPD considers relevant should review and approve such TOR.

Example: The TOR to conduct a pre-feasibility study for a railway extension to a proposed industrial area should be approved by the Ministry of Transport, the NPD, and the Ministry of Industries.

2.8.2. Initialisation of Feasibility Study

A feasibility study would be required only for very large projects, where detailed project preparation of an extremely technical nature would be necessary. Such a process should only be carried out when a pre-feasibility study has been appraised, the project has been judged viable, and it is intended to proceed towards project implementation. In this case, also, the project should be re-submitted in the same format as the Concept Paper and the pre-feasibility stage, except that the level of analysis and assessment of benefits and costs should be much more extensive and elaborate.

Example: If the pre-feasibility study of a project to improve access to Uva Province indicated that a new highway trace is the most feasible, a feasibility study could be commissioned to identify the most suitable trace through a detailed assessment of the benefits and costs of each alternative trace.

Like for a pre-feasibility study, a consultative process with related agencies and experts would also be useful in a feasibility study. The TOR for the feasibility study should be approved in a manner similar to that recommended for the pre-feasibility. The status of environmental clearance required before approval of the feasibility should also be clearly specified.

2.9. Project Authorisation & Selection

The appraisal process should have recognized and accepted processes of project selection and authorisation. These should be clearly set out by the NPD through its circulars and guidelines. Decision-makers should also be made aware of what choices they have in selecting projects and authorising investment. The benefits, costs, and associated issues should be clearly outlined to ensure that rational and scientific evidence is available to guide the process of selection and authorisation.

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2.10. Project Pipeline

A Project Pipeline can be defined as a list of proposed projects that have been appraised and are ready for implementation, showing order of priority for selection. A Project Pipeline should be formulated by each Agency well before the required date of implementation.

Such a portfolio of projects would be an important aid to decision making. Each Agency should be encouraged to have an on-going Pipeline that can be updated every year with new project ideas and approved Concept Papers. Projects can be selected for funding from the Pipeline. This would be an effective strategy to pre-empt political and other pressures that appear to be put on Agencies to implement projects that have not been appraised.

Example: A Provincial Council with a progressive Planning Unit might conduct a survey to determine which "C" class roads are in need of replacement and undertake an appraisal of each road identified. If a Provincial Minister wants to expedite implementation of road projects in his constituency, the Project Pipeline could be used to show which roads have the highest viability and how they compare with the rest of the road network for which he is also responsible.

2.11. Monitoring the Implementation

Implementation is generally not considered a part of project appraisal. It is important, however, when deciding whether funding for a project should be continued. If a project is not being implemented properly or promptly, if expected benefits are not being achieved, or if the investment is not contributing to national development, continuity in funding may have to be re-considered. Monitoring project execution should also be considered a part of project implementation.

It is important to ensure that projects are not delayed beyond the planned time frames, as delays may substantially reduce benefits and increase costs, causing the economic viability of the project to decrease or become negative. A process of monitoring the implementation should be set out in operation at the time of project selection.

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2.12. Post Implementation Monitoring & Feedback

Post-evaluation of project implementation and operation is vital for the planning and appraisal process. It is a vital link to update the appraisers' knowledge about Agency performance in project implementation, to verify appropriateness of assumptions for future studies, and to identify flaws in project design and implementation for correction in future planning.

Example: A feasibility study for purchase of diesel multiple units might assume that fuel consumption is 2.5 litres per kilometre. A survey conducted after trains have started operating, however, might reveal that this rate is achieved only when average speeds are 50-60 kph. On the other hand, in typical suburban operations fuel consumption might be 4 litres per kilometre. This information can be used in the appraisal of the next proposal to purchase DMUs or in a track rehabilitation project.

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CHAPTER THREE

3. METHODS OF PROJECT PREPARATION AND APPRAISAL

3.1. Defining a Project and Selecting Alternatives

The following sections describe some of the steps that are recommended for inclusion in feasibility studies and why they are important. As a start, however, care should be taken to divide investments into appropriate projects (or sections) for purpose of analysis; otherwise, large benefits from one section of a project might hide low or negative benefits from another section and result in a sub- optimal decision overall.

Example: A project to build a new highway between A - B - C might have an acceptable overall rate of return. Most of the benefits, however, might come from A - B, concealing the fact that B - C is not viable as proposed. By appraising the investment in sections, which can reasonably stand alone, it might be possible to come up with better proposals, such as constructing B - C to a lower and less costly standard, or deferring construction of B - C for a few years until traffic volumes increase.

3.1.1. Objectives

The starting point of a feasibility study is to define the project objectives. In very general terms, the over-riding objective should be to generate a net socioeconomic improvement for the country by producing the greatest return of such benefits to costs. In the transport sector, this might be as follows:

· To improve the quality and performance of the transport system over what it would have been without the project - by reducing travel time (which also reflects reduced congestion), reducing operating and maintenance costs ( a benefit for implementing agencies and for users), improving safety, reducing emissions, and so on.

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· To efficiently implement (e.g., construct or procure), operate, and maintain the project infrastructure, rolling stock, and/or supporting assets - by incorporating cost- effective design features, using efficient techniques for construction, implementing efficient operating and maintenance practices, and so on.

As noted above, objectives do not relate only to project implementation or post-implementation operation and maintenance. Transport is a service that should, above all, be provided for the social and economic benefit of its users and of society as a whole, not only for the benefit of the implementing agencies. Service quality and performance—from the points of view of individual users and of society—are therefore very important factors that must be included in the objectives.

Objectives should, moreover, be defined in ways that can be directly related to benefits and costs, that can be quantified, and that can be monitored in post-evaluation. Individual user, societal, and agency benefits – all should be covered. Some examples are listed below, but there may be many others:

Examples of Objectives User Objectives: - To have better personal access and mobility. - To have lower travel time. - To have lower vehicle operating costs (for vehicle owners). - To have greater personal safety. - To have more comfortable public transport. Societal Objectives: - To provide a socially acceptable level of access and mobility. - To use resources efficiently. - To reduce social costs of accidents. - To reduce costs of emissions Agency Objectives: - To have suitable design and construction standards. - To complete implementation within a certain time. - To develop knowledge and expertise. - To provide certain operational capacity (e.g., vehicles/trains per hour). - To achieve operational targets (e.g., speeds, safety). - To keep certain maintenance standards (e.g., roughness, speed, cautions). - To minimise lifecycle capital, operating, and maintenance costs.

Objectives should not be defined too narrowly, as this might exclude consideration of efficient alternatives. The first idea that comes to mind might be the best, but this will never be certain unless all reasonable alternatives are also studied. Some examples are as follows:

Example: An objective to "build a highway" would preclude consideration of a railway option. A more suitable objective might be to "develop an improved transport link" as it would allow both road and rail options to be considered.

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Example: An objective to "upgrade a road to 4-lanes" would preclude consideration of other widths. A more suitable objective might be to "upgrade as appropriate to meet projected traffic demand" as it would also allow consideration of, say, a 2- lane road with widening to 4-lanes only in busy sections. Similarly, an objective to "widen roads to reduce congestion" would preclude improvements to traffic management or introduction of Intelligent Transport Systems.

Example: An objective to "improve suburban rail service by electrifying" would preclude consideration of other non- electrification options. A more suitable objective might be "improve service parameters of suburban rail service" as it would allow improved diesel services also to be considered.

Example: An objective to "increase rail speeds to 100 kph" would preclude consideration of other options to reduce travel time. A more suitable objective might be "reduce average journey time", as it would allow consideration of alternatives to reduce (i) access times to/from stations at origin/destination, (ii) waiting time at stations, or even (iii) distance between homes, shops, and work.

Objectives should be quantified as much as possible. Thus, if an objective is to increase capacity, the present and target capacity (e.g., number of trains/vehicles per hour) should be specified. If an objective is to improve safety, the present and target number of accidents per billion vehicle kilometres (or passenger kilometres) should be specified. If an objective is to reduce costs, the present and target costs should be specified. This makes it easier both to estimate the economic benefits of the objectives and to monitor if they have been achieved.

Occasionally, projects might be implemented in response to public policy imperatives, such as legislative or regulatory requirements. If so, these policies should be clearly stated. The need for feasibility study (including benefit-cost analysis) would not change, as there would still be a need to identify the most efficient and effective way to meet the policy requirements.

3.1.2. Project Impact Area

This covers the areas that would be affected by implementation of the project, including for example, geographic area, potential users and beneficiaries, environmental aspects, and so on.

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The purpose of explicitly defining the project impact area is to make project managers and appraisers more aware of what and who will be affected by the project. It defines, to some extent, the scope of the project, facilitates quantification and estimation of benefits and costs, and facilitates appraisal and comparison of projects and project alternatives.

Example: A project to upgrade rail infrastructure between Kosgama and Avissawella would affect the adjacent area, people who use or who are likely to use rail, and users of parallel roads if congestion is reduced. It is unlikely, however, that people travelling between Homagama and Colombo, or between Ratnapura and Avissawella, or by car, would benefit.

3.1.3. Definition of Base Case

Evaluation can be simplified by comparing each project to a "reference" or "base case". This allows alternatives to be evaluated by looking only at the changes—the incremental effects— relative to the base case instead of looking at the total costs and benefits of each option.

Example: A study into widening a road should consider the cost of acquiring new land for extra lanes, but should ignore the value of the land already used by the existing road, as this is a "sunk" cost.

Example: A study into replacing 20-seat buses with 40-seat buses should consider, among other things, the extra fuel consumed by the larger bus and the higher costs of tyres and maintenance. If maintenance staff remains the same, then only parts costs would need to be considered. Crew costs can also be ignored if the same crews are used for both types of buses.

The "base case" is sometimes represented in project appraisal as the "do nothing" scenario, which assumes that the status quo will continue unchanged into the future, or the "before project" scenario, which assumes that conditions prevailing before the project will continue even without the project. Such representations should be made only with great caution, however, because in most real-world situations some changes will occur. A "do nothing" scenario tends to overstate the benefits of improving transport facilities, as it ignores the small initiatives that would normally be taken to offset deterioration in service and increases in costs. The base case should, most appropriately, be a "without project" scenario that includes changes that might reasonably be expected to occur.

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Example: A road study might take present traffic levels and growth rates and project them forward, unchanged, until traffic is assumed to come to a complete stop without road widening. In fact, as congestion increases, people would make fewer trips, or travel at different times, or find alternate routes, or take a train, or shop in different locations, or even look for different places to live and work. In such a case, use of the status quo would overstate traffic growth and congestion under the base case and thereby overstate the benefits of alternatives. A more correct approach might be to reduce growth rates as congestion increases and even set a maximum level of congestion.

Example: A bus (or train) replacement study might assume that current fleet deterioration will continue, unchanged, until the fleet and the service benefits reduce to zero. In fact, it is more likely that reliability will reduce as the fleet deteriorates, but that part of the fleet will somehow be kept in operation and that some service benefits will continue, although at the cost of higher maintenance.

Example: Data shows that accident rates are declining at about 4% per year. A study that claims accident reductions, but that fails to include this natural decline in the base case, will overstate the benefits of accident savings due to the project.

The "second-best" alternative should not be used as a proxy for the base case. Appraisers should be aware that this is sometimes done, inappropriately, to make the favoured alternative look better. The previous paragraph defined the base case as the "without project" scenario. It is acceptable to include reasonable and minor changes in the base case, as mentioned. Major changes that involve high capital expenditure, however, are not the "base case"; they are separate projects or alternatives that should be evaluated separately.

Example: A new road project might use the existing old road as the base case. It would be correct to adjust old road data to account for reductions in traffic growth rates due to congestion, introduction of traffic management policies (e.g., restrictions on parking or on operation of heavy lorries during peak hours), implementation of government policies (e.g., bus use policy), and so on. Upgrading the old road, however, would be a separate project to be studied as an alternative to building a new road.

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3.1.4. Specification of Alternatives

Perhaps the most important single step in project appraisal is to ensure that alternatives are adequately specified and analysed. Feasibility Studies should consider, and clearly specify, a wide range of alternatives to provide the transport service, including new and innovative proposals. Some examples are given below. Each alternative should be well thought out and should be fully capable of meeting the objectives, so that the best one can be selected and the others rejected. Proposing and evaluating alternatives that cannot meet project objectives serves no purpose.

All alternatives should be reasonable and should be designed to maximise benefits and to minimise costs. Appraisers should be aware that it is possible, but incorrect, to make a favoured alternative look better by comparing it only with inefficient options. This could bias the decision and result in an unwise investment (i.e., one that does not maximise net economic benefits for society).

Example: A project to reduce congestion might consider only different options to widen the road, whereas reducing encroachment on pavements and restricting on-street parking at peak hours might achieve the same benefits at much lower cost.

Examples of Alternatives § Different routes. § Different modes (e.g., road or rail, private or public transport). § Different vehicles (low or high occupancy, locomotive or power set). § Different designs (e.g., # of lanes/tracks, lane widths, geometry, axle loads, construction materials, # of seats, horsepower). § Rehabilitation or replacement. § Capacity increases. § Traffic demand management (e.g., user charges, traffic signals, parking restrictions).

Unsolicited proposals, even if they include unbiased economic appraisals (very rare), generally do not consider efficient alternatives. Therefore, even if the unsolicited proposal shows a net economic benefit, there is no assurance that it is the wisest option, as an economic appraisal of alternatives is generally not done.

Agencies generally will be able to specify and appraise alternatives only for their own areas. This makes it difficult, for example, to compare road and rail projects. Agencies can, however, be requested to submit independent studies based on common objectives. Terms of Reference for studies done by consultants can specify that all modal options should be considered. This would allow the Department of National Planning to find out which modal alternative is most beneficial to the country.

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3.1.5. Data Requirements

Data is critical for undertaking accurate feasibility studies. Construction and procurement cost data are readily available, but operating and maintenance costs are less well understood. Traffic data is generally available only in very aggregated formats. Economic data is also difficult to obtain. As a result, studies often need to collect data specially, at high cost, or make assumptions that might or might not be valid.

Agencies should implement procedures to capture data in greater detail and in a systematic way, including by location and by time. This would then be available for studies as required. Some examples of data are shown below.

Examples of Data Requirements § Infrastructure maintenance costs depending on type of road/track, volume of traffic, geographic/environmental condition. § Vehicle operation and maintenance costs depending on type of vehicle and operating condition. § Traffic data (e.g., numbers of vehicles/users, journey times, income levels, traffic growth) by mode, route, time of day, trip purpose, etc. § Economic data such as GDP growth.

3.1.6. Use of Assumptions

Assumptions used to estimate benefits and costs should be clearly explained and justified, including by referring to historic and current data. Analysts should also describe the strengths and weaknesses of the assumptions, particularly those that have the greatest effect on study results. Analysts and appraisers should be especially careful, in traffic growth projections, with modal shift from road to rail or from low occupancy vehicles (such as cars) to high occupancy vehicles (such as buses), and with the economic values of external benefits, which frequently tend to be overstated.

Example: Rail improvement studies generally assume some shift of traffic from road to rail. However, people will not easily shift, especially from private vehicles, unless total costs are reduced (including cost of time). This is affected by factors such as distance between stations and trip origins/destination, ease of station access (road and bus connections), frequency and speed of trains relative to buses, and so on.

Appraisers should carefully evaluate the reasonableness of the assumptions. The most basic evaluation criteria might be: "does it make sense?" Appraisers might also compare assumptions with those used in other similar analyses to see if they are consistent.

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Benefits and costs are greatly affected by projected traffic volumes. One simple way of estimating traffic is by projecting past growth trends. Models may also be used, but appraisers should insist that they are calibrated for conditions in Sri Lanka, that results are not aggregated into hard-to-understand totals, and that results can be replicated outside the model. Even then, appraisers should be cautious in accepting model results and question if they make sense.

3.2. Assessing and Quantifying Benefits and Costs

The goals of transport projects are, or at least should be, to generate economic benefits that more than offset the project’s economic costs of implementation. The main categories of benefits are well enough recognised (e.g., service improvements and operating & maintenance cost reductions), as are the main categories of costs (e.g., construction and procurement costs). Valuing economic benefits, however, has been problematic. Local agencies often do not attempt to do so, perhaps due to lack of information. Feasibility studies done by "want to be" suppliers and by consultants, on the other hand, often do attempt to value economic benefits, but sometimes do so incorrectly due to use of inappropriate assumptions or methods. Valuing economic costs, although better understood for categories such as construction and procurement, can also have problems – for example, externalities such as congestion during road improvements, are often excluded.

The following sections describe methods to assess and quantify economic benefits and costs. The first section defines relevant economic terms, the second section describes techniques to assess values, and the third section quantifies a number of important benefits and costs – relevant to the transport sector.

3.2.1. Economic Definitions

As a background to discussion of benefits and costs, this section presents, in summary, some relevant economic definitions. Interested readers may consult standard economic texts for more detailed definitions.

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Benefits and Costs: Benefits are the economic gains arising from implementation of a project, which would not have been obtained without the project. Such gains can include net increases in economic activity (e.g., development and jobs), improvements in productivity of resource use (e.g., reduction in fuel used per passenger-kilometre of transport provided), and reductions in costs (e.g., reduction in emissions and corresponding damage to health). Benefits can also be negative if gains are negative (i.e., if benefits reduce or costs increase). Costs are the value of the resources used to implement the project.

Figure 3.1 : Demand Curve, Price, Quantity, and Consumers' Surplus

Consumer and Producer Surplus: Economic benefits from transport projects should ideally be valued from the changes in the underlying consumers' and producers' surpluses. Some people generally would be willing to pay more than the market price for transport services they derive. The concept of consumer surplus describes the extra value that they enjoy from their use of transport services compared to the market price they pay. Similarly, some producers would be willing to provide a transport service at a lower price. The concept of producers' surplus describes the extra value that they obtain by providing transport services at the market price compared to the price they would have been willing to accept. See Figure 3.1. If all markets affected by a transport project could be modeled to determine demand and supply curves, the derived changes in consumers' and producers' surpluses would indicate the net benefits and costs.

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Consumers' and producers' surpluses, however, can be measured only using econometric models, which are difficult to develop and calibrate. Moreover, surpluses are derived in conjunction with improvements in other sectors. An alternative approach, therefore, is to measure and value separately the components that would be included in such surpluses that is by suing willingness-to- pay as a measure of benefits and opportunity costs as a measure of costs.

Example: A village connected by a road in poor condition had a small weekly Pola (market) attended by a few wholesalers. With recent road improvements many more wholesalers have begun to arrive. This is attributed to the lowering of transport costs, as well as the fact that the Pola has now become more accessible. This has resulted in an increase in demand for vegetables at this village. As wholesalers are prepared to pay higher prices, more farmers are now motivated to grow vegetables. Therefore, the supply has increased, creating a producer surplus.

Example: A university student was in the habit of visiting her village off Matara, once a month. She could not travel more often, since the trip from Moratuwa took seven hours in each direction. The journey being so tiring, the benefit of going home was inadequate compared with the opportunity cost of time spent in study. Recently, an entrepreneur from her village commenced a luxury bus service to Colombo. Seats can be reserved in advance and the travel time is only four hours. “But now she must pay a higher price. Therefore her consumer surplus has

diminished from Pca to P1ba.

Financial versus Economic: Both financial and economic analyses assess project viability - the difference is in the frame of reference. Financial analyses assess viability from the point-of-view of the investor, whereas economic analyses assess viability from the point-of-view of society as a whole. Note that societal benefits and costs are not the same as benefits and costs to government, as society includes public and private institutions and individuals (the national economy and all its members).

The differences between the financial and economic points of view translate into differences in the definitions of benefits and costs. In financial analyses, benefits are the revenues generated by the project and costs are the monetary out-of-pocket expenses incurred by the investor. In economic analyses, on the other hand, benefits and costs are based on decreases or increases in use of underlying resources (e.g., such as labour and materials used for construction, or travel time saved due to implementation of the project). The economic values of the resources are based on their opportunity costs.

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Just as the value of resource inputs (measured in terms of their opportunity costs) are considered in the economic analysis, the true economic values of outputs are also taken into consideration. Typically outputs (i.e., goods or services provided by a project) are measured in terms of their monetary value based on market prices. Revenue thus generated by the project is considered a benefit in the financial analysis. However, such revenues must first be adjusted for distortions before consideration in the economic analysis. Distortions occur mainly from inclusion of taxes and subsidies in the revenue stream. These are simply transfer payments and therefore should not be included in the economic analysis. Only the remainder is considered as the true economic value of outputs.

Example: A private bus operator may charge Rs. 100/= to travel from Colombo to Matara. In the financial analysis of his project (i.e. operating a bus) his benefits from revenue would be estimated using the fare of Rs. 100/= per trip. However, the fare would include Goods and Services Taxes (GST) of 12.5%. Therefore, when one estimates the economic benefits from revenue, the calculation should be based on the value less GST. That is Rs. 100 x (1 – 0.125) = 87.50.

Opportunity Cost: Resources used in transport projects are not available for other use. Their economic value, therefore, is defined as the value of the best alternative use. This is also called opportunity cost. In liberalized economies such as Sri Lanka, it can be expected that prices of resource inputs such as labour, material and capital items reasonably reflect their true market values. What is left is to adjust prices for various government interventions in the form of duty taxes and subsidies. Such an assumption, however, may not be correct for goods and services purchased from the public sector (e.g., prices of diesel and petrol).

Example: The financial price of diesel is Rs 13.20 and that of petrol is Rs 50/= per litre (in Colombo). These prices, however, are set by government policy. Based on recent world oil prices of about $US 22 per barrel, the economic cost of diesel is estimated at about Rs 14/= per litre, and that of petrol at about Rs 15.50/= per litre.

Market prices, if available, can be converted to economic costs by adjusting for the effects of government intervention and of imperfect markets. In theory, this can be done using shadow price factors. Such factors are available for Sri Lanka, but have not been updated in recent years and, therefore, may no longer be representative (the most recent shadow price factors are given in Table 3.1). However the adjustment of financial prices to reflect economic values can also be done more simply by dis-aggregating into foreign and local components. Shadow price factors for foreign exchange, and several categories of local costs (i.e., skilled and unskilled labour and ‘other’) are

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commonly used in project analyses and can be obtained from recent project analysis or appraisal reports of the World Bank, Asian Development Bank, or some bi-lateral donor agencies. An adaptation of these shadow price factors can be found in the Case Study in Chapter 6.2.

In countries with high unemployment, the economic cost of labour may be less than the wage rate. On the other hand, if certain skilled labour is in short supply, and if suitable people cannot be trained in the required skills in a reasonable period, its shadow price might be higher than the market rate. This would affect determination of benefits as well as costs, but the economic conversion rates for benefits and costs might be different reflecting different types of labour involved.

Market versus Non-Market: Some economic benefits and costs of transport projects (e.g., labour, materials, capital assets) can be quantified based on the market costs of the resources used, adjusted as described above. These are sometimes also called tangibles. Other economic benefits and costs, however, are not typically measured through market transactions - for example, because they are not exchanged in the market for money (e.g., value of personal time saving). These are sometimes called intangibles or non-market benefits and costs.

Externalities; An externality is the effect of a project that is felt outside the project, but is not included in the valuation of the project. More formally, an externality exists when the production or consumption of a good or service by one entity has a bearing on the welfare of other producers and consumers. There are two types of externalities: technological and pecuniary. In the transport sector, examples of technological externalities may include traffic congestion caused or reduced by a project or an increase or decrease of air pollution.

Such externalities are identified and valued to the extent possible using techniques for valuing non- market goods or services described below. They are included in the analysis of the project benefits and costs. Pecuniary externalities are the price effects of a project that are felt outside the project. An example would be, the effect on bus fares because of an improvement in the train service between two towns. Such pecuniary externalities are not taken into consideration in the analysis of a project.

Since economic costs relate to the use of resources, factors for which the market does not set prices, but which nonetheless use resources and so reflect real gains or losses to society, should also be included in economic analyses. Examples are value of life, costs of externalities such as air pollution, etc.

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Table 3.1: Most Recent Shadow Price Factors5

Aggregate Conversion Factors Sectoral Conversion Factors Average Conversion Factor 0.785 Tea 1.080 Investment Conversion Factor 0.906 Rubber products 1.294 Agriculture Conversion Factor 0.785 Coconut products 1.100 Infrastructure Conversion Factor 1.115 Paddy 0.697 Consumption CF - Surplus 0.906 Other food crops 0.870 Consumption CF - Scarce 0.732 Livestock 0.774 Forestry 0.841 Firewood 0.787 Primary Input Conversion Factors Other Agriculture 0.723 Gems 1.002 Foreign exchange 1.000 Cement 0.746 Transfers - Food processing 0.775 Surplus labour 0.722 Textiles 0.665 Scarce labor 0.785 Garments 1.004 Capital charges 0.906 Machinery & equipment 0.776 Surplus profit - Chemicals & petroleum products 0.650 Metal products 0.717 Other Manufacture 0.791 Gas 0.598 Non Residential construction 1.050 Electricity 1.572 Road transport 0.814 Rail transport 4.534 Communications 0.924 Trade 0.579 Water & sewage 2.517 Financial Services 0.649 Other Services 0.578

3.2.2. Methods of Assessing Benefits and Costs

This section summarises techniques that are used to quantify, either directly or indirectly, the economic benefits and costs of transport projects and describes how they are used to value specific benefits and costs. Interested readers are directed to several useful references for further details6,7,8.

There are several techniques for valuation of benefits, which differ mainly in terms of the type of benefits that are measured. An explanation of these methods must be preceded by a brief description of the concept of economic value.

5 These shadow prices were calculated by the Department of National Planning in 1990. They need to be updated prior to use, 6 P. Meier and M. Munasinghe, Incorporating Environmental Concerns into Power Sector Decision Making, World Bank Environment Paper, Series No. 6., Washington, D.C. (1994). 7 H. Kotagama and S. Thrikawala, Environmental Valuation Studies and Estimated Unit Values in Sri Lanka, Postgraduate Institute of Agriculture & APREETA, 1998. 8 Economic Valuation of Economic Impacts, Environment Division, Asian Development Bank, March 1996.

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Economic value is best explained by disaggregating the different components. The following break-down is one that is commonly adopted in the literature. Total economic value is made up of two specific components: Use Value and Non-use Value. Use value in turn is made up of three components: Direct Use Value; Indirect Use Value and Option Value. The terms are, to an extent, self-explanatory. Direct Use Value refers to the value attached to a particular commodity because of its direct usage (e.g., water for consumption); Indirect Use Value is the value derived from an indirect use (e.g., use of a wetland as a flood protection buffer). Option Value is the value attached for having the option of using a resource in the future (e.g., the value of a wildlife sanctuary, in anticipation of visiting it in the future)9.

Non-use values are also broken down into two components: existence value and bequest value. Existence value refers to the value that one would attach to the knowledge of the existence of certain resources (i.e., the value of knowing of the presence of the Amazon rain forests). Bequest value is value attached to resources that may be used by others, perhaps even future generations.

Non-Use Values are particularly elusive and difficult to estimate. In any event, attempting to measure any of these components separately is not recommended since people would have difficulty isolating distinctively the different values they attach to a particular resource. The valuation techniques described below measure certain types of values. For instance the replacement cost method is primarily for valuing direct and indirect uses of a resource. However this is not to suggest that two techniques can always be combined to estimate the total economic value. When combining methods extreme care must be paid to preventing double counting of benefits.

Valuation techniques are based on identifiable changes in behavior of consumers in response to changes in the resource to be valued. These changes are sometimes reflected in conventional markets, can be implied from related (or surrogate) markets or must be inferred from constructed markets. At the same time certain methods are based on actual behavior while others are based on potential (or hypothetical) behavior. The following table summarizes the techniques, the related markets and behavior type on which they are based.

9 Option value is sometimes categorized with Non-use values.

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Table 3.2 : Valuation Techniques

Conventional Markets Implied Markets Constructed Markets

Based on actual · change in productivity · travel cost · artificial behavior · loss of earnings · wage difference markets defensive or · property values preventive cost · proxy market goods Based on potential · replacement cost · contingent behavior · shadow project valuation

This method is based on presenting individuals with a hypothetical scenario. The scenario is constructed in a manner conducive to asking respondents a question regarding their willingness to pay for the good or service. (Alternatively a similar question could be asked about the willingness to accept compensation in lieu of being deprived of the good or service in question.) The hypothetical scenario must be realistic in order for this method to produce meaningful results. Research has shown that the approach is most effective when respondents are familiar with the good or service and have adequate information regarding the proposed payment mechanism. Contingent valuation is the only method capable of eliciting the non-use values (i.e., existence and bequest values) described earlier in this section. However it is difficult to separate these value components from the overall of value for a good or service. Hence use of this method simply to elicit the non-use value component is not recommended.

Example: People may be asked about their willingness-to-pay for a reduction in traffic congestion. The hypothetical scenario could be installation of a traffic light system, which would cost the Municipal Council, say, Rs. 70 million. The Municipal Council proposes to raise this money by increasing rates and taxes. The willingness to pay question would then be related to the amount by which rates and taxes could (or could not) be raised.

Change in Productivity: Transport activities can affect the quantity, quality, or the production function of corresponding outputs. An improvement in transport facilities, for example, may result in an increase in productivity due to increased access to labour and to markets. The incremental change in productivity that can be attributed to the transport improvement could be valued at market prices to determine the corresponding benefit. This method may also be used to measure the economic development benefits of transport projects.

Example: Transport improvements may give workers a more comfortable journey to work in the morning and therefore make

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them more productive during the day. The increase in productive output would be a benefit of the project.

Preventative/Defensive Cost: Individuals often incur expenses to prevent certain damages. The cost of adopting such preventive measures can be used as an indication of the value placed on the potential benefit from correcting the problem. This method is most effective when people are well aware, and have an accurate perception of the costs or risks involved.

Example : In the transport sector, this method may be used to measure the reliability of a bus or train service. People may choose to walk further or use an alternate means of transport in anticipation of delays or cancellations. The cost of such alternative actions can be used to estimate the value of improving reliability of the transport service. Alternatively, the incremental cost of air-bags and other such safety measures on vehicles can be used to estimate the value of preventing travel related injury or death.

Human Capital (Loss of Earnings): The underlying rationale of this technique is that events that cause a person's future productivity to reduce, such as poor health caused by pollution, or injury/death caused by an accident, can be valued in terms of the loss of future earnings. This technique implies that the value of a rich person is worth more than that of a poor person, an educated person more than that of an uneducated person, a young person more than an old person, and so on.

Hedonic Valuation: This includes the property value and wage differential approaches, which try to determine values through indirect relationships, often using statistical techniques. For example, the value (or cost) of pollution might be determined by comparing prices of otherwise similar properties in polluted and in non-polluted areas. Lower property values in polluted areas, reflecting lower preference, would therefore indicate a cost of pollution. Similar analyses of wage differentials between jobs that are the same except in relative risk of injury or death can be used to estimate the value put on risk of injury or death. These methods are more effective in economies with efficient markets—for example, in property and labour—and therefore may not be appropriate for Sri Lanka at this time.

Example: If Job "A" has 1 in 500 chance of serious injury and Job "B" has 1 in 100 chance of serious injury, and if Job "A" pays Rs 5,000/= per month and Job "B" pays Rs 5,100/= per month (because of the higher risk), the implied value of a serious injury would be Rs 150,000/=. Such a value might then be used as a proxy for cost of serious injury in a transport accident.

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Travel Costs: This method is used mainly to value recreational facilities such as beaches and wildlife sanctuaries. The underlying concept is that the cost of travel by visitors to a site represents the value of that site. Travel costs include vehicle operating costs as well as the cost of time spent on travel. These costs are estimated for populations originating from concentric circles around the site. Obviously the cost of travel is directly proportionate to the number of visitors and directly proportionate to the distance between the point of origin and the particular site. The method can be adopted for use in the transport sector to measure straightforward costs related with traveling between locations.

Example. People who visit a wildlife sanctuary who may come from close by would have lower costs, and might visit more often, whereas people who come from far away would have higher costs, and might visit less often. The value would be the summation of the costs of all the visitors.

Benefits Transfer: This refers to using values determined from other sectors (or from other countries) to value benefits in current studies, with suitable modification for differences in income, land values, culture, and so on. An advantage is that data is sometimes more readily available from other sectors or countries. A disadvantage is that values so determined may not be applicable, even after adjustment.

3.2.3. Benefits of Transport Projects

Transport projects can yield benefits for users, for transport agencies, and for society as a whole; some examples are listed below.

· User benefits: improved access, reduced travel time, reduced vehicle operating costs, reduced personal costs of accidents, improved quality of transport, and value of additional travel, etc.

· Agency benefits: savings in operating and maintenance costs for transport infrastructure and assets; improved productivity of resources.

· Societal benefits: increased economic development, reduced congestion, reduced emissions, and reduced societal cost of accidents (including value of life), etc. Quantifiable Benefits

Quantifiable benefits refer to those for which monetary values can be determined, directly or by using reliable empirical models or other forecasting tools. Important quantifiable benefits that are relevant to transport sector projects are described in more detail below. In developed countries, most emphasis in improving transport facilities is on saving time and, to a lesser extent, on reducing accidents, as infrastructure is largely developed. In developing countries such as Sri Lanka, on the other hand, savings in operating and maintenance costs, and provisions of basic access, are still

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important objectives. Methods of calculating these benefits are discussed in detail in Chapter 4. A summary of the discussions, are given below.

Travel Time Savings: Saving in travel time is a primary economic outcome sought in transport sector projects. These savings are enjoyed by passengers as well as freight consignees. Savings enjoyed by transport operators are usually included in the savings of vehicle operating costs discussed in the next section.

Passengers : The value of saving travel time of a passenger can vary with (a) hourly income; (b) the purpose of the trip and (c) the quantum of travel time saved. The average Value of Time (VOT) for passengers by mode of transport have been calculated in Chapter 4. The Table 3.3 gives the summarised average VOTs for passenger travel in Sri Lanka.

Table 3.3: VOT for Transport User Groups (in 1999 Rs/Hour)

User Group Urban Rural Intercity All Sectors10

Car 100.06 78.62 135.81 106.50 Van 51.15 37.62 51.15 48.44 Motor Cycle 19.05 27.00 14.29 19.22 Public Transport 10.83 12.41 12.41 11.62 Non Motorised Modes 6.78 8.62 0.00 7.39 All Motorised Modes (AV)11 24.61 23.0112 28.81 25.55

Freight consignees: In this case, the time loss can lead to two different types of economic consequence; (a) having to carry higher inventory levels and (b) losses sustained by perishable commodities such as vegetables, milk, etc. The method of calculating these are shown in Chapter 4.1. Moreover, Table 3.4 gives a summary of values and typical commodity shares in road freight transport in Sri Lanka

Vehicle Operating Cost Savings

Savings in vehicle operating costs (VOC) are the most direct and one of the most important benefits from transport improvements. These savings are mostly achieved by upgrading technology, increasing speed, reducing congestion, reducing road roughness and improving geometric design. The value of the savings is usually calculated as a derivative of the vehicle specifications, road features, cost of operational inputs and operating speed. VOC savings from a project are usually estimated by calculating the differences before and after completion of the project concerned. The process of calculating VOCs is discussed in detail in Chapter 4.2. A sample VOC is given in Table 3.5.

10 Assumed as being composed of 50% urban, 20% rural and 30% intercity travel. 11 Assumed as being composed of 10% each for cars, vans and motorcycles and 70% for public transport. 12 If non-motorised travel is considered, for example in rural transport, this should change. If 50% of travel is assumed to be by non- motorised means, then the average VoT would be Rs. 15.31 per hour.

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Table 3.4 : Distribution and Value of Commodities in Road Transport

Type of Commodity Urban13 Intercity14 Cost per Ton (Rs 000s) Tea/Rubber/Coconut 0.1% 2.8% 10-150 Agricultural 0.2% 5.7% 10-100 Other perishable 0.2% 4.9% 20-150 Foodstuff 11.0% 9.5% 20-150 Forestry Products 1.3% 3.9% 5-20 Petroleum/Chemicals 0.7% 1.6% 10-15 Building Materials 10.8% 13.0% 5-100 Industrial Inputs/Outputs 11.7% 17.1% n/a Empty 50.2% 41.5% -

Table 3.5 : Vehicle Operating Cost at Road Roughness IRR=6

Speed Car M/ 3W Utility Medium Large Medium 2- Large 2- Large 3- Cycle / Van Bus Bus Axle Lorry Axle Axle Lorry Lorry 10 12.98 3.68 9.64 16.00 28.81 31.35 22. 59 28.96 37.41 15 11.22 3.21 7.94 12.74 22.35 23.82 17.51 22.33 30.10 20 10.38 2.98 7.09 11.13 19.10 20.04 14.95 19.00 26.43 25 9.90 2.86 6.58 10.17 17.14 17.77 13.43 17.01 24.23 30 9.59 2.79 6.25 9.54 15.85 16.28 12.42 15.70 22.79 35 9.38 2.74 6.01 9.10 14.93 15.23 11.72 14.80 21.78 40 9.23 2.70 5.84 8.78 14.26 14.47 11. 20 14.14 21.05 45 9.13 2.67 5.70 8.55 13.75 13.91 10. 82 13.66 20.52 50 9.14 2.69 5.64 8.37 13.36 13.49 10. 54 13.32 20.14 55 9.16 2.70 5.59 8.24 13.06 13.18 10. 32 13.07 19.86 60 9.18 2.71 5.56 8.14 12.83 12.96 10. 17 12.91 19.67 65 9.20 2.73 5.53 8.07 12.66 12.81 10. 05 12.82 19.56 70 9.23 2.74 5.51 8.02 12.53 12.72 9. 98 12.79 19.52 75 9.26 2.76 5.50 8.00 12.45 12.68 9.93 12.82 19.54 80 9.30 2.77 5.49 7.99 12.39 12.70 9.92 12.90 19.62 85 9.34 2.79 5.49 8.00 12.38 12.77 9.93 13.05 19.76 90 9.38 2.80 5.49 8.02 12.39 12.88 9.96 13.25 19.96 95 9.42 2.82 5.49 8.06 12.43 13.03 10. 02 13.51 - 100 9.46 2.84 5.50 8.11 12.49 13.24 10. 09 13.84 -

Accident Reductions

Accident costs generally comprise direct tangible components, which can be readily determined, plus intangible components relating to injury, death, and pain and suffering.

These costs are based on a number of assumed values discussed in detail in Section 4.3. They should be treated as tentative and approximate. They do, however, correspond to international norms – for example, the cost of a fatal accident, at Rs 1.5 million, is the equivalent of 24 years of

13 Colombo Traffic Study (UoM, 1992) 14 TransPlan: Traffic & Road Network Database (UoM, 1999)

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human output based on a per capita income of Rs 62,000. Given that 20% was added for grief and suffering, this corresponds to the 20-year period adopted in most western countries. Cost summaries for different types of accidents is given in Table 3.6.

Table 3.6 : Accident Costs in 1999 Rupees

Fatal Geievous Non-Grievous Damage Only Property Damage 51,846 51,846 51,846 51,846 Medical Costs 19,180 15,929 15,105 - Police Costs 4,704 2,455 200 200 Insurance Costs 2,400 2,400 2,400 2,400 Congestion Costs 16,000 8,000 2,000 2,000 Output Loss 1,179,197 58,959 11,792 - Pain & Grief 235,839 11,792 2,358 - Total 1,509,166 151,381 85,701 56,446

The Chapter 4.3 also shows the calculation for the cost of accidents per vehicle kilometer operated or passenger km traveled. These are summarised in Table 3.7.

Reduction in Vehicular Emissions

Transport activities generate environmental impacts such as air pollution, water pollution, and even noise pollution, all of which have economic costs – such as damage to health or agriculture and consequent lost productivity. Any savings in pollution costs that arise from implementation of transport projects are economic benefits. A valuation of air pollution by vehicle type and pollutant based on existing information has been carried out in Chapter 4.4. Other pollutants such as noise and effect on water have not been valued, as they still have not been studied in adequate detail.

Table 3.7 : 1998 Accident Cost per Vehicle/Passenger Km (@ 1999 Values)

Type of Accidents Fatal Grievous Non- Damage Total Grievous Only Annual Accident Cost (Rs. M) 2,899 431 995 1,913 6,238 Accident Cost (Rs/Vehicle Km) 0.184 0.027 0.063 0.122 0.396 Accident Cost (Rs/Psgr Km) 0.039 0.005 0.013 0.026 0.083 Socio-Economic (Regional) Development

Transport infrastructure is a prerequisite for socio-economic development. This is also referred to as regional development. This is illustrated by the new commercial, industrial, residential and agricultural activity that often springs up after a transport project such as a new road or bus terminal is implemented. Transport projects, however, do not guarantee that such development will occur. Availability of other factors of development, supporting infrastructure (e.g., electricity), and government policies also play a role. If development is dependent on investment in non-transport infrastructure, net benefits should not all be credited to the transport project, but must be apportioned in some way. Furthermore, transport projects generally would have less effect on

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economic development where adequate services are already available than where services are poor or not available.

Example: A road opening up a new area may encourage farmers to bring idle land into cultivation, as it is now possible for them to bring their goods to market. Similarly, an improved road may reduce transport costs, thereby making farming more profitable and so encouraging farmers to increase production. As long as there is demand for the new crops (i.e., as long as farmers elsewhere do not reduce cultivation because they cannot now sell their produce) there would be net economic development.

Example: A road such as the Marine Drive along the coast in Colombo is less likely to stimulate net economic development; its main benefits might be reduction in congestion related costs and improving access to sea frontage development.

It is difficult to measure the contribution of transport projects on economic development. This is usually demonstrated in a transport project through an increase in travel volumes. Either a consumer surplus or producer surplus or a combination of both causes this phenomenon (refer also section 3.2.1). This new (i.e. increase of) travel is referred to as generated or induced traffic. However, the increase in traffic itself has no economic value. It is nevertheless, an indication of increased economic activity in the region.

There are different approaches to estimating the contribution of a transport project to such a development, although, the methods of valuing regional benefits are less straight forward than in the case of other benefits. The general approach is to estimate the value of the producer or consumer surpluses, as the case may be, that has caused the increased travel. Thereafter, to apportion a part of such surpluses as economic benefits due to transport. This proportion could be equated to the proportion of the contribution of the transport sector (or road sector) to Gross Regional Development Product or any other valid basis.

Sometimes, however, the activities that spring up are not new, but have only shifted from somewhere else. Analysts and appraisers should be cautious not to include such transfers with benefits (refer also to section 3.2.5). Similarly, some activities nevertheless might have occurred, even without the project (analogous to accident reductions discussed in an earlier section, which occur anyway). Although these are new activities, they should not be credited to the project being appraised.

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Example: Improvement of one road may shift traffic from a parallel and unimproved road. Shops catering to such traffic may then also shift to the improved road to keep their business. Looking only at the improved road would suggest that these shops are a new economic activity; in fact, the activity is not new, it has only transferred from somewhere else. If a small factory shifts to take advantage of the better access and reduced VOC on the new road, the industrial activity would also be a transfer, not new activity.

Example: If a person, who was already looking for a site to open a new business, located it on the improved road mentioned above instead of somewhere else, the resulting activity, although new, would not be a benefit from the project because it would have occurred even without the project.

Productivity improvements arising from transport projects are also economic benefits. For example, improved transport service may make it possible for industry to attract skilled workers from greater distances, allowing production to be increased. Alternatively, workers may be less tired and therefore more productive on the job and less likely to make mistakes. On the other hand, business may be able to achieve greater economies of scale because materials can be brought in at lower cost.

Example: If the small factory and the new business mentioned in the examples above can expand, because they can attract more skilled workers, or because they have better access to materials, or because lower transport costs make them more competitive, then the net increase in activity is a benefit.

If prices of goods and services (buyer prices or seller prices) are monopolistic, or are set by a cartel, and if transport service improvements introduce price competition, then economic benefits also arise.

Example: If the farmers in the first example above can now get higher prices for their produce (e.g., because competing buyers come in) or lower prices for their farming supplies (e.g., because competing suppliers come in), then there is an economic benefit (increased producer surplus). A similar economic benefit (consumer surplus) arises if they can now buy their household supplies at lower prices (e.g., because competing retailers come in).

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Parking

Parking results in direct and in indirect economic costs. Direct costs are the opportunity cost of land used for parking, capital invested in parking facilities, and cost of staff to operate parking facilities or to provide security. Indirect costs relate to congestion caused by on-street parking.

Projects that improve private transport access to urban centres—for example, new or improved roads—generally increase traffic levels and thereby increase the demand for parking, resulting in a cost. Projects that reduce the use of private low occupancy transport modes or encourage a shift to public or modes of high occupancy transport—for example, by improving bus or rail service— reduce the demand for parking, resulting in a benefit.

Although transport projects can affect the demand both for on-street and for off-street parking, only on-street parking is relevant for benefit cost analysis, for the following reasons:

· Off-street parking is generally not a publicly provided service. Financial costs are paid by the vehicle users through parking charges, higher prices of goods purchased at shops with "free" parking, and so on. Economic costs are offset by additional consumer surplus (gained by the person using the parking space) or by additional producer surplus (gained by the person supplying the parking place). More importantly, off-street parking does not inflict costs on other road users except, perhaps, at road access points.

· On-street parking, on the other hand, is generally a publicly provided service. First, people who park their vehicles on the street are highly subsidised. Even where parking charges are levied—for example, in some commercial areas—the current charge of Rs 5/= per hour represents only a fraction of the underlying cost of providing the space. In most areas, even on busy arterial roads, no parking charges are levied at all. Because costs are subsidised, even people whose consumer surplus is lower than the marginal economic cost of providing the parking will use the facilities – resulting in an economic loss. Second, people who park on the street inflict a cost on other road users, including public transport users, in the form of congestion. On-street parking, therefore, is an externality.

The effects of on-street parking should be included in benefit cost analyses as follows:

· For road infrastructure projects, capital costs should include the cost of constructing extra lanes or lay-bys used for parking, which is generally done. Economic benefits, however, such as increased speed and reduced congestion, should be based only on the usable road capacity, excluding that part of the road used for on street parking. This will reduce the value of the benefits.

· Bus and rail projects that improve service induce some people to shift from private vehicles, which need parking, to public vehicles, which do not need parking or, at least, need less parking. Economic benefits, therefore, may include the additional congestion reduction that would result from less on-street parking, in addition to the congestion reduction from modal

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shift. In developed countries, analysts sometimes also claim economic benefits for reducing the number of parking spaces provided (i.e., opportunity cost of land) on the grounds that the space will become available for other purposes, such as expansion of pedestrian areas or development of small urban parks. This argument is not relevant for Sri Lanka, at this time, as there is still an acute shortage of on-street parking, reflected by double parking and by parking on pavements.

Given the high externalities of on-street parking, especially due to congestion, there is a strong economic argument to restrict parking on busy streets at all times of the day or to shift parking from

The Baseline Road upgrading project will provide 6 lanes at a total construction cost of Rs 400 million per kilometre. The economic cost of using 1 lane in each direction for parking can be worked out as follows:

Annualised Construction Cost per Parking Space (25 Years, 10% Discount) Ø Rs 400 m/km, 6 lanes, 160 spaces per km, 6 days/wk, 10 hrs/day Ø Cost per Space per Hour = Rs 13.40

Annualised Land Cost per Parking Space (25 Years, 10% Discount) Ø Rs 500,000/= per perch, 2 spaces per perch, 6 days/wk, 10 hrs/day Ø Cost per Space per Hour = Rs 8.00

Congestion Cost per Parking Space (20,000 Vehicles/Direction/10 Hours) Ø Speed Reduction 50 kph to 40 kph, 160 spaces per km, 6 days/wk Ø Cost of Increased Congestion = 8,600 per km per 10 hours Ø Cost per Space per Hour = Rs 5.40

Although only an illustration based on assumed data, the above calculations suggest a total economic cost of Rs 26.80 per parking space per hour. At peak hours, when congestion is greater and speeds are slower, congestion and therefore total costs would be much higher. This is presently allowed free of charge. Even if on-street parking was charged at the present approved rate of Rs 5.00 per hour, it remains a transport facility which receives the highest level of subsidy.

on street to off-street.

The above arguments also apply to pedestrian and other non-motorised traffic. When roads, especially in busy commercial areas, do not have pavements, pedestrian traffic is forced to use the edge of the roadway. Even where pavements exist, activities that reduce the pavement capacity (such as vehicle parking or encroachment by shops and hawkers) can force people onto the road. Like on-street parking, this reduces effective road capacity and increases congestion and associated economic costs.

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Accessibility

This section describes a short method of evaluating benefits in relatively small transport sector projects. In such as situation, the different types of benefits discussed earlier would be too small to be calculated separately. For such instances, a short method of assessing total benefits has been proposed. This is referred to as a composite index of measuring improvements in accessibility.

The index is based on population of the Project Impact Area and the total travel time savings that are possible from the project. Socio-economic (Regional) Development Benefits are computed as a percentage, based on the development potential of the project. This approach is discussed in Chapter 4.5. It should be noted that this should not be computed together with other benefits, as it would lead to double-counting

Other Benefits (Reliability and Comfort)

Because transport is essentially about access and mobility—arriving where you want to go at the expected time—reliability can be defined as the deviation of travel time from the mean. Reliability, thus, is not about shortness of journey times, but about the difference between the actual times and the expected times. People and goods want to travel quickly, but they also need to arrive at their destination on time – for example, at work to avoid losing wages, at a meeting to avoid upsetting a customer, at a factory to avoid shutting down production.

In the Sri Lanka environment, at present, reliability (or, more correctly, an allowance for unreliability) appears, in part, to be already factored into the average journey time. For example, people tend to leave home slightly earlier, so that even if they are delayed by unreliable transport service (e.g., sudden road congestion, bus breakdown, train delay or cancellation) they will not arrive too late. Similarly, factories might order materials earlier or keep extra stock on hand. When unreliability occurs, therefore, a buffer is available to reduce the possibility of negative consequences.

The cost of unreliability (and therefore, the benefit of improving reliability) would include the following:

· Value of time for the extra time that people and companies (for materials) build into their travel decisions and the value of extra inventory that companies maintain as safety stock against unreliability. This would require a study to determine if people really do include an allowance for unreliability in trip plans and, if so, how much.

· Incremental economic costs of other actions that people and companies take to protect against unreliability – for example, using a different mode if it is perceived to be more reliable (such as

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a motorcycle instead of a bus or a private lorry instead of a train). In such situations, however, analysts must be careful to exclude other benefits that might also accrue, such as from speed or comfort.

· The economic costs of decreased economic activity (or productivity) due to risk of labour or materials arriving late. This would require a study to determine the probability distribution of delays and the consequences on productivity.

As transport services and facilities improve, however, the above three costs would get reduced, as people and companies build less buffer time into their decisions, becoming less likely to select other alternatives, and as the probability of delays decreases.

Comfort refers to changes in physical and mental condition induced by the transport facility or service. The benefit of comfort, expressed in economic terms, would be "the additional consumer surplus enjoyed by the user". Expressed in non-economic terms, benefits of comfort might be:

· Being able to relax instead of becoming stressed while travelling.

· Sitting on a bus or train instead of having to stand.

· Travelling without getting tired and dirty.

· Avoiding having to breathe polluted air.

· Being able to read or listen to music while travelling.

· Being provided with extra services, such as toilets or meals, while travelling.

The value of comfort can be quantified, in part, using revealed preference methods. The value of "sitting comfort", for example, could be determined (a) by comparing prices and demand for ordinary and semi-luxury (i.e., seated but not air-conditioned) bus services, (b) by measuring the extra cost (value of time) of people who wait for the next bus at a terminal to get a seat, or (c) by comparing prices and demand for railway unreserved with reserved services. The value of "air- conditioning comfort" could be determined by comparing prices and demand for express but non- air-conditioned buses with express air-conditioned bus.

Although comfort has a high private value—hence air-conditioned buses and office vans—it is not clear that social values would be the same.

Non-Quantifiable Benefits

Non-quantifiable benefits refer to those that cannot be quantified in monetary terms easily. They include, but are not limited to, the following-

· Mitigating Ecological and Environmental Impacts

· Enhancing Visual and Aesthetic Considerations

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· Use in Emergencies

These non-quantifiable benefits would be particularly helpful in deciding between alternatives when the results from the benefit-cost analysis using quantifiable benefits are similar and inconclusive.

3.2.4. Cost Components in Transport Projects

According to the principles of benefit cost analysis, "costs" are the economic values of resources used to implement a transport project and to operate and maintain the project over its economic life. Relevant cost components include the following:

Procurement Costs of Buses Bus Type Cost D-Type (30 seater – one door) Rs. 1.40 mn B – Type (40 seater – two door) Rs. 1.75 mn A – Type (67 seater -two door Rs 2.00 Mn

These costs vary with mode of payment and credit facilities, component of local assembly etc.

Operating Costs of Buses Up-Country Flat land Variable Costs Rs/km 9.50 11.00 Fixed Costs Rs/month/bus operated 30,000 30,000

These costs also vary with institutional factors, climate, size of bus operation etc.

· Surveys, Designs, and Other Pre-Construction/Procurement Costs

· Capital Costs for Construction/Procurement

· Costs of Externalities due to Construction

· Cost of Training & Human Resources Development

· Recurrent (Operating & Maintenance) Costs

· Costs of Externalities due to Operation. Surveys, Designs, and Other Pre-Construction/Procurement Costs

These refer to costs that will be incurred after a decision has been made to proceed with implementation, but before construction and/or procurement can begin. Example of related costs are land and traffic surveys to finalise the route, soil investigations, property valuations for compensation, preparation of detailed engineering designs and architectural plans, and so on. Note

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that costs incurred before a decision is made, such as surveys and investigations for feasibility studies, environmental impact assessments, benefit-cost analyses, etc., should not be included, as these costs will be spent and sunk before the decision is made.

Representative Cost of Buses:

Some pre-implementation costs would be incurred by the transport sector institutions in the normal course of business - for example, work done by permanent salaried staff who are paid the same with or without the project. On the other hand, without the project, some staff costs might be avoided by having smaller numbers of staff, or some staff might be put to other productive activity (opportunity cost). It is, therefore, reasonable to include a portion of institutional overheads in pre- implementation costs, along with the other incremental costs of hiring outside surveyors, valuators, designers, and architects. To avoid calculating such costs separately for each project, most institutions estimate pre-implementation costs as a portion of total construction/procurement costs, which is also reasonable. The relevant costs, however, should always reflect the difference between "with the project" and "without the project".

Capital Costs for Construction/Procurement

These costs are generally based on engineering estimates using bills of quantity and schedules of rates (e.g., road/bridge/track/building construction, traffic signal systems), or on suppliers rates, such as quoted in tender bids (e.g., machinery, locomotives, buses, rail signalling systems).

Construction/procurement costs are generally better understood than other benefits and costs because of long practice in their estimation and because bills of quantities, materials unit costs, and suppliers’ rates are readily available.

Analysts and appraisers who are accustomed to working with financial costs should remember to convert such costs to economic costs when undertaking economic appraisals. Economic analyses are generally done in constant prices, in which case general price contingencies should not be included, unlike for financial analyses. Material & labour variations may be included.

Representative Cost of Railways

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Procurement Costs of Rolling Stock

New Locomotive (M8 Indian) Rs 110 m excl duties/taxes New Locomotive (M9 French) Rs 165 m excl duties/taxes New DMU Set (S9 Chinese) Rs 180 m excl duties/taxes New Wagon Rs 5 million excl duties/taxes New Carriage Not available as none purchased recently Signals (Local Tech) Rs 3 m per km (based on Plk-Rbk) Signals (Foreign Tech) Rs 20 m per km (based on Wda-Hkd)

Track (million Rs/km) for single track with jointed rail excluding departmental overheads. Wooden Sleepers Concrete Sleepers Rail 3.0 3.0 Sleepers 4.2 3.4 Ballast 0.9 1.8 Joints/Fastenings 0.6 0.8 EarthWork etc. 0.2 0.2 Labour for Laying 0.7 0.9 Total 9.6 9.9

Representative financial costs of typical transport sector projects are given below for bus, rail and highways. These are based on present experience in the sector and should only be considered as current industrial norms. It is recommended that some attention be paid at a future date to obtain construction and maintenance costs based on pre-defined levels of resource utilization and efficiency. All prices are in 1999 Rupees.

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Representative Cost of Highways

Item Sub Item Unit (per) Civil Works (Rs. Mn) New Gravel Road (5 m) Km 3.5 Infrastructure Metalled Road (5 m) Km 5.5 SBST Road (6.7 m) Km 14.5 DBST Road (6.7 m) Km 15.0 AC Road (6.7 m) km 17.0 AC Road (std 2 lanes) km 20.0 AC Road (4 lane divided) km 35.0-40.0 AC Road (6 lane divided) km 45.0-50.0 Expressway (4 lane divided) km 125.0 - 265.0 Expressway (6 lane divided) km Bridges single span sq.m 0.06-0.13 Bridges multi-span sq.m 0.08-0.15 Widening Gravel Road (2 lanes) km 0.5-1.0 And Metalled Road (2 lanes) km 1.0-1.5 Improvements SBST Road (4½ - 6 m) km 1.5-2.0 DBST Road (4½ - 6 m) km 2.5-3.5 AC Road (sub std 2 lanes) km 5.0-6.0 AC Road (std 2 lanes) km 6.0-8.0 AC Road (4 lane divided) km 25.0-35.0 Bridges single span sq.m 0.03-0.05 Bridges multi-span sq.m 0.04-0.05 Rehabilitation SBST Road (std 2 lane) km 8.0-10.0 DBST Road (std 2 lane) km 14.0-15.0 AC Road (std 2 lanes) km 15.0-22.0 AC Road (4 lane divided) km 25.0-35.0 Bridges single span sq.m 0.06-0.13 Bridges multi-span sq.m 0.08-0.15

It should be noted that these costs include the following mark ups from the Schedule of Rates:

· Price Escalation 10.0% · Consultancy 12.0% · Profit 28.0% · Contingencies 10-12%

Costs of Externalities due to Construction

Economic feasibility studies should include the costs of externalities such as delays and disruption due to construction. These would be relevant mainly for projects in which there are existing users who would get affected, such as infrastructure improvement projects (e.g., roads, bridges, railway tracks). Costs can be very high, especially for projects on routes with large numbers of vehicles and users and for projects that take a long time to complete.

Externalities are often overlooked in feasibility studies, although they are usually included in environmental impact assessments. Externalities can be measured and valued in a manner similar to benefits.

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· Cost of Increased Traffic Delays: This would be calculated similar to calculating the benefits of increased speeds after construction – that is based on the numbers of people affected, their incremental time delay (instead of incremental time reduction), and their corresponding value of time.

· Cost of Increased Vehicle Operating Costs: During construction, congestion might be greater, speeds lower, and road roughness greater (although this also depends on road condition before improvement), resulting in higher vehicle operating costs, especially for fuel and maintenance.

· Cost of Increased Accidents: This would be based on the relative number of accidents before and during the project.

· Cost of Environmental Impacts: This relates to the incremental air pollution caused by congestion delays during construction, emissions of construction machinery, and other pollution that might occur, including due to dust. If actions are taken to mitigate noise and dust during construction, such cost should also be included. When costs and/or benefits of environmental effects are valued and incorporated, such an analysis is called "Extended Benefit-Cost Analysis".

Relevant costs are not only the incremental costs of users who continue to use the section of infrastructure under construction, but also the incremental costs of users who detour to alternate routes (which may be longer), and the resulting congestion effects on the prior users of the alternate routes.

A great advantage of explicitly including externalities in project appraisal is that planners, in order to maximise project feasibility, will be encouraged to come up with engineering designs and construction plans that minimise such costs. This might be done, for example, by more efficient design or accelerated construction. Externalities are real costs to society, so actions to reduce them should definitely be encouraged.

Example: The economic costs of delays and congestion during implementation of the Baseline Road upgrading project are huge and might outweigh the eventual economic benefits. Accelerated construction—for example, by working day and night—although perhaps more costly in financial terms, would have increased economic viability through savings in externalities, savings in the opportunity cost of using construction equipment for an extended period with low utilisation, and for earlier realisation of benefits.

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Cost of Training and Human Resources Development

Costs of training and human resources development may or may not be included with project costs. This would depend on which category such training falls, as below.

· The costs of developing specialised skills required for construction, operation, or maintenance of a particular project should be built into the project.

· The costs of developing general scientific, technical, or managerial skills should be considered under separate human resources development projects. Costs of Operating & Maintenance

Operating and maintenance costs (or recurrent capital costs) must be included in the benefit cost analysis for each year of the economic life of the project to avoid understating life-cycle costs and to avoid a mismatch with benefits15.

Example: A bus (or train) generates economic benefits by providing a transport service. Without servicing and periodic maintenance the bus or train will stop operating and will, therefore, stop generating economic benefits. It is incorrect to include annual benefits in an economic benefit cost analysis without also including the annual operating and maintenance costs incurred to generate those benefits. The same rationale is true for roads or other infrastructure, which will deteriorate without maintenance and will, therefore, lose the ability to support services that generate benefits.

Examples of recurrent costs that might be incurred during normal operation and maintenance of an asset after project implementation are below. Care should be taken to take their "economic value" by applying shadow price ratios to convert market costs to resource costs.

· Energy (fuel, power consumption) · Labour (operating crews, maintenance crews) · Materials (lubricants, replacement parts, maintenance materials) · Machinery and tools (to support operations and maintenance) · Overheads (administration, etc., if incremental)

Transport institutions in other countries increasingly use well formulated asset management techniques to determine efficient levels of maintenance based on the nature of the assets, their capital costs, their age and utilisation, their operating and maintenance costs, and their desired level of service. Such systems have not yet been developed in Sri Lanka. Transport organisations such

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as the Road Development Authority, Sri Lanka Railways, and the bus companies generally base maintenance schedules on "rule of thumb" norms or "past experience", which do not appear to be based on technical efficiency or financial cost effectiveness. Operating and maintenance costs are generally measured only in terms of present expenditure.

It is highly recommended that Sri Lankan transport institutions should develop scientific assets management systems to support efficient use of assets. Such systems would, for example, indicate optimal maintenance levels to maximise utilisation of assets and minimise life cycle capital and recurrent costs of the assets.

Depreciation and amortisation are generally not included in economic analysis, which considers only the real flow of resources. Investment costs are usually included in full at the time of investment, which can be at the beginning of the project or during the economic life of the project in case of recurring capital (e.g., replacing the A/C overlay on a road). Residual or disposal values of assets are considered at the end of the project life. An exception can occur in the calculation of vehicle operating costs, which includes depreciation and interest to annualise capital costs, as it is too difficult to consider the individual capital outlays for all vehicles using a road.

External Costs due to Operation

External costs due to operation would be represented by environmental impacts such as the cost of air emissions, noise pollution, loss of productivity of land due to increased or unsustainable levels of transport activity. The cost of congestion may also be an external cost, if the project in question causes delays on the transport network elsewhere.

Example: The proposed Southern Highway, is intended to reduce overall travel time for those traveling between Colombo and Matara. This will induce new traffic. This new traffic would have to use the present road network in suburban Colombo to access the Southern Highway at Kottawa. Although, their individual travel times would be decreased, the increased traffic levels, would increase the travel time of other traffic not using the Southern Highway. This should be reckoned as an external cost to be borne by persons who are non-users.

15 The principle of life cycle cost evaluation is explicitly recognised in paragraph 125.3 of the Guidelines on Government Tender Procedures, Part I, General Treasury, Colombo (August 1997). Although this paragraph applies to tender evaluation, the same principle is also relevant to project evaluation.

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3.2.5. Transfers

Analysts and appraisers should take care to avoid confusing transfers with economic benefits and costs. Some factors that appear to be benefits from the point of view of the implementing agency, such as financial votes given by the national government, are actually transfers from the national point of view. Real economic benefits and costs relate only to net increases or decreases in economic activity and to net increases and decreases in use of resources.

Transfers are a special problem when trying to value economic development. Expansion of transport infrastructure clearly supports economic growth. However, if some of the economic activity that springs up at the project level would have occurred anyway or has relocated from elsewhere, the net national benefits are smaller.

Example: Providing small shops at bus stands or railway stations will stimulate commercial activity at those locations, but if this is merely a shift in activity away from other shops that consequently close, then there would be little net benefit.

Subsidies or duties/taxes are monetary transfers from one sector of the economy to another, which is not the same as a change in resource use. This is seen most clearly with respect to duties/taxes paid by government agencies, which are merely shifted from one pocket of the government to another.

3.2.6. Inflation and Price Escalation

Since inflation is a financial issue, it is not an important consideration in selecting of the best alternative. It is therefore, recommended that analysts avoid having to make assumptions about inflation by using constant (or real) values in analyses. Adjustments could however, be made for relatively significant differences in price escalation over the project life time.

Example: A railway electrification study compares diesel operation as an alternative over a 40-year project life time. It is assumed that since diesel is a limited and depleting resource, the world prices would increase in real terms. On the other hand, with greater technical innovations for converting different energy sources to electricity, it may be assumed that the price of electricity would remain constant or even decrease in real terms.

Example: The planning unit of a bus company is evaluating the introduction of computers and related software for data entry

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and analysis that is presently handled manually. It could be assumed in this case, that costs for computing hardware would decrease in real terms, whereas human resources needs for both options would continue to increase with real growth in incomes.

3.3. Benefit Cost Analysis

The following sections lay out the process of benefit costs analysis, discuss the appropriate discount rate to use, and point out some common problems against which to guard.

3.3.1. What is Benefit Cost Analysis?

Benefit cost analysis is a tool to identify and assess the economic feasibility of public infrastructure investments. It is widely used in other countries to evaluate transport projects because of its strengths in promoting economic efficiency and in supporting effective decision making. Its focus is mainly on efficiency – getting the most value for money.

In one way, the principle of benefit-cost analysis is quite simple - simply estimate the monetary values of the relevant benefits and costs of a project, add them over time, and determine if the benefits exceed the costs. The important feature of benefit cost analysis is that it gives a logical framework to examine alternatives and to undertake the economic appraisal. This includes specifying what benefits and costs may be included, how to value them, how to distinguish real benefits and costs from transfers, how to recognise timing, how to account for risk, and how to compare benefits and costs.

Some other strengths of benefit cost analysis are listed below:

· The need to quantify and put monetary values to benefits and costs encourages more thorough study and planning.

· Quantifying external effects (externalities) such as congestion or pollution in monetary terms allows them to be evaluated in a common framework.

· Benefits and costs that occur at different times can be compared.

· Benefit cost analysis is more transparent than multicriteria evaluation, as the latter can exaggerate benefits by using inter-related or redundant criteria.

Analysts and appraisers must guard against potential pitfalls in using benefit cost analysis, as discussed below and in several of the following sections. Such potential problems, however, do not invalidate the advantages of using benefit cost analysis in economic appraisal.

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· Results can be distorted if important benefits or costs are omitted from the evaluation or included when not relevant. This book attempts to avoid this problem by developing a list of potential benefits and costs and describing the circumstances in which they are relevant to use.

· Benefit-cost analysis is based on quantifiable costs. Intangible considerations that can be the main cause for success or failure could be ignored.

· Some potential benefits or costs cannot be accurately predicted. Their variations may be due to uncertainty of events occurring as anticipated.

· Some benefits or costs cannot easily be valued in monetary terms, such as pollution, ecological effects (wetlands, wildlife), visual aesthetics (landscape, waterfalls), and so on. However, methods such as described in Section 3.2.2 above are continually being refined to estimate monetary values for such factors. Even if some benefits and costs cannot be valued precisely, it is better to use the best available value than to ignore the benefit or cost completely.

All benefits should be included in benefit cost analysis, including those that do not have obvious market prices. Monetary values should be assigned where possible, but benefits for which monetary values cannot be developed also should be listed in the analysis. These can be used as an extra guide for decision making in addition to monetary benefits and costs. For example, such benefits might be important to decide between alternatives that have similar quantifiable benefits.

The savings from not implementing one alternative in a feasibility study are not benefits to other alternatives, as this violates the principles of benefit cost analysis that alternatives should be evaluated independently of each other and that second-best alternatives should not be used as the base case.

Example: Two recent studies into railway electrification have assumed, inappropriately, that an economic benefit of electrification is a saving in the cost of building a highway. In fact, building a highway cannot reasonably assumed to be part of the base case – rather, it is an alternative to improve transport in the suburban corridors. Each alternative must be assessed on its own merits to determine which is more viable. It would be equally incorrect to assume that the benefit of building a new highway is a saving in electrification.

Benefit cost analysis does not turn decision making into a mechanical process of approving the projects with the best numbers. Transport supports broad societal goals, some of which are not related to economic efficiency, are difficult to predict, or cannot be simply reduced to monetary equivalents. In public sector projects particularly, non-economic or political criteria, which cannot be incorporated in benefit cost analysis, must also be considered. The role of benefit-cost analysis, therefore, is to give policy makers better information on which to base their decisions and to make

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political decision making more transparent and informed.

When this book refers to "projects", the normal understanding might be "procurement projects", such as purchase of buses or railway rolling stock, or "construction projects", such as building or upgrading roads, bridges, and railway tracks. But "projects" can also mean "transport policy" or "regulation" and the principles of benefit cost analysis are equally valuable to determine whether the anticipated economic benefits (e.g., reduced congestion from traffic demand management) outweigh the economic costs (e.g., road user pricing or policing).

Incremental Benefits and Costs: When evaluating projects only the incremental benefits and costs should be considered. Sunk costs or benefits that have already been realised should be ignored.

Complementary Projects: Some transport projects can achieve benefits only if other complementary projects are also implemented.

Example: A project to build a highway might not attract expected traffic volumes unless feeder and access roads are also improved. In such a case, appraisal should consider the highway and the other roads as a single project for the purpose of appraisal.

Analysts and appraisers should take care that investments in such complementary projects are not forgotten. Options are as follows:

· Combine both projects in the economic appraisal. For example, a bridge might generate benefits only if an access road is also constructed. Therefore, develop a road/bridge project against which the joint benefits can be compared.

· Keep the projects separate, but divide the benefits between project components in a reasonable way. For example, railway double tracking might also require operation of new trains to achieve significant benefits. If the costs of buying new trains are kept separate, the benefits of the double tracking should relate only to those that can be generated by the existing trains.

Appraisers should carefully review benefits, as it is common to see the same benefits used to justify several projects (also refer to Section 3.3.4 on double counting).

Example: Three railway projects might count the economic benefits of passenger traffic (i.e., reduced road congestion due to shift of people from road to rail) to justify (a) new signalling, (b) double tracking, and (c) rolling stock. If the benefits of the program of projects are credited in full for each project component, economic viability will be greatly overstated. It

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would be more correct to divide the benefits between the three projects in a reasonable way. For example, signalling might reduce delays and thereby generate some value of time saving and some modal shift. Double tracking might further reduce travel times by avoiding crossing delays and thereby generate additional value of time saving and additional modal shift. It might also permit the existing fleet to make additional trips. New rolling stock might increase capacity and thereby support even greater modal shift. The benefits of each investment must be based only on the incremental effects on time and on numbers of passengers and must not be double-counted.

3.3.2. Efficiency versus Equity

As mentioned in the first paragraph of section 3.3.1, benefit cost analysis is mainly concerned with efficiency. The analysis, however, can also be used to consider questions of equity (i.e., if benefits and costs are distributed fairly among users and different sectors of society).

Example: The benefit cost analysis for an express highway would assess if the total economic benefits are greater than the total economic costs. Assume, however, that mainly high- income people enjoy the benefits (perhaps because the highway is used mainly by cars, vans, and air-conditioned buses). Assume, also, that mainly low-income people incur the costs of constructing and maintaining the highway, say, through a tax on consumption. The project, therefore, would not be equitable. On the other hand, if tolls or user charges were levied to cover the highway's capital and operating costs, equity would be greater.

Equity is an issue that is more appropriately considered when deciding how funds for a project can be raised instead of in benefit-cost analyses. Appraisers, however, should be given enough information to understand the distributional effects of projects and to determine if they are equitable.

Example: If VOT savings are a significant component of project benefits, it would be useful to know what portion of such benefits related to private vehicles users who have high values of time and what portion related to public transport users who have low values of time.

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3.3.3. Economic Life

An early step in benefit cost analysis is to define the economic life of the project (or of the alternatives) being assessed. Each project should be based on a designated life, which reflects the anticipated period during which the asset can be used reliably and efficiently without needing replacement or rehabilitation, but with normal levels of servicing and maintenance (e.g., based on manufacturers' specifications). Note that without the proper level of maintenance the economic life cannot be reached.

Example: The economic life of a bus might be 8-10 years, that of a locomotive 20-25 years, and that of a road 20-30 years. The bus might need a new engine every 1-2 years, the locomotive a major overhaul after 10-15 years, and the road a new surface every 5-10 years, but these are expected periodic repairs to achieve the designed economic life, not rehabilitation.

The concept of economic life is based on the rationale that the cost of maintaining assets increases as they age. At some stage—the end of the economic life—it becomes economically less costly to replace (or rehabilitate) the asset than to continue spending higher and higher amounts for maintenance. For assets that are subject to rapid technological change or obsolescence, the economic life would be less – even if the asset can still be maintained, the benefits of improved performance from new technology would make it economically beneficial to replace the asset early.

Example: Computers are subject to rapid technological change. Even if the old computers are still working, the higher capacity and enhanced features of new computers make replacement more efficient than continuing with the old.

Example: Advances in the technology of diesel engines, especially relating to fuel consumption and emissions, may make it more efficient to purchase new locomotives to gain from savings in fuel consumption and reduced emissions than to continue with old locomotives, even if they can still be maintained.

Keeping an asset in service beyond its economic life may result in a net loss to society if the stream of higher maintenance and operating costs and reduced economic benefits is greater than the corresponding stream of new asset cost, reduced maintenance and operating costs, and greater economic benefits.

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Example: It may be more efficient to re-surface a road before the surface gets completely worn and full of potholes, as the economic benefits of reduced vehicle operating costs and time saving from operating on a smooth surface may more than offset the cost of re-surfacing.

Figure 3.2: Costs and Project Life Span with and without Rehabilitation

Figure 3.2 shows how operating and maintenance costs change with age of an asset and how rehabilitation might affect its costs and extend its economic life. However, each successive rehabilitation would add less life due to agency of non-rehabilitated components, which would also cause operating and maintenance costs to be higher than a new asset. At some point, replacement becomes more cost effective than rehabilitation, depending on the cost of rehabilitation relative to replacement, the effect on operating and maintenance costs, and the effect on benefits. In some cases, replacement could be more cost-effective than any attempts at rehabilitation.

3.3.4. Double-Counting

Analysts and appraisers should take care to avoid double-counting benefits. One way is to list the expected benefits and describe how they would be generated (their cause). If several benefits appear to arise from the same causal activity, the risk of double counting is greater.

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Example: Four expected benefits of a project might include (i) travel time saving, (ii) better access, (iii) greater reliability, and (iv) higher land values. Analysis might show that (i) travel time saving is based on reduced journey times, (ii) access is based on reduced time and greater convenience (therefore reduced journey time), (iii) reliability is based on fewer delays (therefore reduced journey time), and (iv) land values are based on greater demand from people who will commute to/from work (because of reduced travel time). In fact, all four benefits over-lap and are based on reduced journey time. The most appropriate benefit to value is the one with the most direct link to the causal activity – in other words, travel time saving. The other three are redundant as they double count the same benefit, in whole or in part.

Analysts and appraisers should be very careful before counting increases in land values as economic benefits, as such increases often double-count other factors. For example, increases in land values generally double count value of time and travel cost savings for existing owners. Increases in land prices paid by new buyers, however, may reflect some consumer surplus in addition to value of time and travel cost savings.

Appraisers should also be cautious when trying to value indirect benefits, as they are often related to and therefore double count more direct benefits, or they can be transfers.

Example: Indirect benefits, such as reduced reliance on imported oil or motor spares, are double counts of fuel savings and spares costs already included in vehicle operating costs.

3.3.5. Determining the Appropriate Discount Rate

After all the project benefits and costs have been identified, after they have been reviewed to ensure that no transfers and double-counts are included, and after economic (monetary) values have been estimated for those items that can be so quantified, the total benefits and costs must be compared to assess feasibility. However, it is not correct simply to add up the benefits, add up the costs, and determine which is greater. Future benefits and costs must first be converted to their present values.

What is a Discount Rate: Receiving a benefit next year (or even next month) is less valuable than receiving the same benefit today. The opposite is true of costs – a cost incurred in the future has less value than a cost incurred now. Even without inflation, people prefer to receive benefits earlier and incur costs later. The same principle that applies to individuals also applies to society as a

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whole and is sometimes called the time value of money. The discount rate is the relative percentage by which future benefits and costs have lower values than benefits and costs today.

Why the Discount Rate is Important: A project is viable if its net present value is positive as there is contribution to an increase in wealth-i.e. economic development. To determine net present value, benefits and costs must be discounted to their present values depending on when they occur during the life of the project, using the discount rate. Net present value is positive if the sum of the present values of benefits is greater than the sum of the present values of costs (see also Section 3.5).

Benefits and costs are worth more if they occur sooner, as early years are not discounted as much as later years. Transport projects, however, generally have large initial capital outlays and generate benefits that are spread out for many years into the future. As the greatest costs occur in early years that are worth more and as benefits are spread throughout later years that are worth less, net present value depends critically on the discount rate used. The higher the discount rate, the more benefits are discounted relative to costs, the lower the relative present value of the stream of benefits, and the more difficult to achieve a positive net present value.

Determining the Discount Rate: According to economic theory, the discount rate should be equivalent to the shadow price of capital, but shadow prices have not been determined for Sri Lanka recently. Discount rates can also be approximated by removing inflation from the nominal opportunity cost of alternative uses of money. This can be based, for example, on the rate of return expected from investments in the private sector or on long-term cost of government debt.

According to the Central Bank, the average yield in 1998 on Treasury Bonds due in 2001 was about 12.5% 16. With annual inflation of 6.2%, as measured by the Colombo Consumer Price Index17, the real interest rate appears to be about 6.3%. In theory, when looking for reference discount rates, longer-term debt should be considered, with maturity periods similar to the economic lives of transport projects. Such debt, however, is not issued in Sri Lanka. Long-term debt usually has a higher yield than short-term debt to reflect greater uncertainty. Discount rates should also include an allowance for risk.

What Discount Rate to Use: The USA uses a real discount rate of 7%18 for public transport projects. Australia also uses a real discount rate of 7%19 for road projects, while Canada uses a real rate of 10%20 for national transport projects. In Sri Lanka, as in other developing countries, capital is scarce and the required rate of return on investments is high. Individuals' time value of money is

16 Central Bank of Sri Lanka, Annual Report 1998, Central Bank, Colombo, 30.04.99, Table 68. 17 Ibid., Table 40. 18 Office of Management and Budget, Circular No A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, (www.whitehouse.gov/omb/circulars/ao94.html), 29.10.92. 19 Ausroads, Benefit Cost Analysis Manual, Ausroads, Sydney, 1996. 20 Transport Canada, Guide to Benefit-Cost Analysis in Transport Canada, Transport Canada, Ottawa, September 1994.

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also high because of their urgent need to meet basic living requirements. Hence, interest rates and personal discount rates tend to be high.

In other countries, discount rates for public sector projects are set by the national bodies, such as the Office of Management and Budget in the USA and Transport Canada. It is recommended that the Department of National Planning should, in the same spirit, set appropriate discount rates for Sri Lanka and update them from time to time.

Some economists argue that different discount rates should be used depending on the type of project being analysed. For example, commercially oriented projects that compete with private sector investment should use high discount rates. Purely social projects (such as provision of schools) should use low social discount rates to give greater weight to long-term benefits. Environmentalists even argue for using zero real discount rates for longer term environmental

benefits and costs.

To avoid problems associated with trying to estimate inflation, benefits and costs should be measured in constant terms (i.e. excluding the effects of inflation) and the discount rate should also be the real rate.

3.3.6. Inefficient Pricing

The feasibility of transport projects is closely related to demand. High current demand and projected growth in demand encourages requests for extra transport capacity. Transport demand, however, is closely related to users’ internal transport costs (i.e., the costs transport users incur directly, such as travel time, variable vehicle operating costs for private vehicles, prices of tickets for public transport users). According to economic theory, efficiency is maximised and resources provide maximum economic benefit when prices are set at marginal costs. Low prices (i.e., below marginal cost) encourage excess use and thus exaggerate demand.

Usually, economic analyses assume that transport demand is based on efficient prices. However, if it is known that prices are subsidised, the effect on transport demand of setting prices at efficient levels should also be considered when looking at alternatives. Otherwise, the economic benefits of increasing capacity might be exaggerated and inefficient alternatives selected. Similarly, investment in the transport sector, based on exaggerated demand, might displace investment in other sectors.

Example: If there is excess demand and congestion due to low prices, the analyst should first estimate the revised demand (and revised congestion) if prices at set at marginal cost (e.g., based on the elasticity of demand). The economic benefits of increases

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in transport capacity should then be measured relative to the revised demand, not to the current demand. This is because one does not need capital investment to reduce congestion, to the extent that marginal cost pricing can reduce demand. Investment projects are required only for further reduction of congestion below that level.

3.4. Comparing Benefits and Costs

There are five common methods to compare benefits and costs as listed below:

3.4.1. Net Present Value (NPV)

This is calculated by taking the difference between the discounted present value of the benefits and the costs. NPV is the most suitable method to compare benefits and costs for transport projects. If NPV is positive at the appropriate discount rate, the project will generate a net benefit for the country, which is generally preferred. NPV is also most appropriate for selecting projects, as it meets the objective of choosing projects that yield the highest net benefits. The main problem with using NPV is deciding what discount rate is appropriate, as results are very sensitive to the figure used.

3.4.2. Economic Internal Rate of Return (EIRR)

This is the rate at which discounted benefits and costs are the same. EIRR is less preferred than NPV for ranking projects or for choosing between them, as differences in project life and in the time stream of benefits can result in higher rates of return for projects with lower net benefits. It is useful, however, for preliminary screening of projects and for evaluating projects when the appropriate discount rate is uncertain.

3.4.3. Benefit/Cost Ratio

This is the ratio of the discounted benefits over discounted costs. This is often used because of its simplicity, but is a poor method of choosing between projects, especially if they are of much different size. The B/C ratio favours projects with small costs, and does not indicate which projects provide the largest net benefits. Another problem is that B/C ratios can be distorted by counting benefits as reductions to costs and therefore decreasing the denominator.

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3.4.4. Payback Period

This is the number of years for annual net benefits to equal investment costs. Payback is a poor method for choosing between projects, as it favours projects with higher benefits in early years, but gives no indication of total benefits over the project life, which is more appropriate. It is more suitable for private investments, where quick payback might be an important factor in an uncertain environment.

3.4.5. Least Cost Method

This is a simplified application of the benefit-cost analysis that may only be used when the alternatives been compared have identical benefits. For example, if the objective is to purchase a bus, then evaluating the alternatives between import or local assembly, could be carried out using Least Costs, provided the entire life cycle costs are included. However, this method cannot be used to evaluate different technologies or alternative modes of transport, as benefits are never similar in typical transport applications. Moreover, this method does not provide for a means of prioritising between projects, and indeed does not provide the appraiser with the basic information on the project’s economic viability either (i.e; if the NPV is positive).

3.5. Sensitivity Analysis

When the amounts and timing of important benefits and costs are uncertain, which is usually the case because of imprecision in data and assumptions, the effects should be recognised and reported. Benefit cost analyses should provide enough information to allow appraisers to understand what is being assumed, what is the degree of inaccuracy in the data and assumptions, and how changes in the data and assumptions would affect results.

3.5.1. Risk and Uncertainty

Risk refers to the probabilistic outcome of an event based on known or estimated data. Risk can be estimated by using probability distribution functions to reflect the risk elements. Alternatively, the expected value of the benefits, costs, or events can be calculated by weighting each potential outcome by its expected probability of occurring, and then adding across all potential outcomes.

Example: A road project might have the following probability distribution of traffic growth, based on experience from other similar road projects and based on economists’ forecasts of economic growth (these figures are only for illustration). Similar probability distributions might be developed for factors

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such as cost overruns, delays in completion, and so on, based on previous experience. Growth (%) Probability (%) 0% 5% 2% 15% 4% 30% 6% 30% 8% 15% 10% 5% Weighted Average Growth = 5%

Uncertainty describers a situation where little is known about future conditions. Uncertainty therefore, refers to events that cannot be incorporated by estimating risk probability distributions. These events cannot be replicated because of a lack of data on frequency or because they are too complex to separate causes and effects. In the case of uncertainty, the approach to adopt in project appraisal is one of caution, supplemented by the judgement of the appraiser.

3.5.2. Crossover Analysis

Sensitivity analysis measures the degree of variation in the outcome of the analysis, if one of the variable assumptions was to change. It involves recalculating net present value and other outcomes after changing assumptions and variables for benefits and costs. The assumptions/variables that have the greatest effect on net present value, can then be given greater attention. A version of sensitivity analysis is to calculate the cross over point at which changes in assumptions/variables cause a project to become uneconomic.

Example: Cross-over analysis might show that a road project which is viable at 5% traffic growth, becomes non-viable if traffic growth falls below 3%.

Example: Values of time are point estimates, as actual distributions of income (willingness-to-pay) and work/non-work trips are not available for all transport users by project. As value of time can have a significant effect on viability, it would be appropriate to test the sensitivity of the results to lower values of time.

The following factors should generally be tested in sensitivity analysis-

· Changes in initial capital outlay (cost overruns).

· Traffic and traffic growth assumptions – with and without the project.

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· Modal shift assumptions – from private to public vehicles or from road to rail.

· Values of major benefits – such as value of time, vehicle operating costs, accident savings, etc.

Feasibility studies should point out which assumptions have the greatest effect on net present value, so appraisers can focus their attention on them. Assumptions about economic and traffic growth are particularly important, as they are interrelated and as they also affect VOC, VOT, and other benefits that are related to traffic volumes and congestion.

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CHAPTER FOUR

4. ESTIMATION OF BENEFITS

4.1. Value of Travel Time

Saving in travel time is a primary economic outcome sought in transport sector projects. Simply put, increased speeds or reduced waiting results in shorter travel time and in saving in the corresponding economic value of time. This is usually computed by taking the differences between travel times with and without the project and multiplying by the appropriate value of time. The following three types of transport user groups enjoy travel time saving:

· Passengers,

· Freight consignees, and

· Transport operators.

4.1.1. Passengers

Travel time saving for passengers is a recognised benefit in most transport sector projects. It comprises a significant proportion of all benefits and, therefore, is considered an important component. Total passenger time saved can be calculated by multiplying the numbers of passengers in each type of vehicle by the numbers of vehicles by type and by the vehicle travel time saved with the project.

Improved transport infrastructure and facilities often enable passengers to conclude their journeys more quickly and thereby effect a time saving. If time is valued for its utility, it can then be considered an economic commodity with an implicit opportunity cost and economic value. There are three principal methods to estimate the value of travel time saving, as follows-

(a) Income Rate (or Wage Rate) Method, which links the value of time to a person's income (or wages). Income and wage rates can be computed from a survey of income receivers and wage earners, respectively. The income rate, however, is generally preferred over the wage rate, as the value of time should reflect a person’s total earning capacity, not just the value of their wages. Moreover, the wage rate is more difficult to measure.

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(b) Opinion Survey (or Willingness to Pay) Method, which derives value of time from opinion surveys of the monetary value prospective users place on potential time savings.

(c) Revealed Preference Method, which determines value of time by statistically comparing the price differentials and time differentials of different transport related choices.

The Sri Lanka Road User Charges Study21 (RUCS) estimated Value of Travel Time (VOT) after extensive original research and analysis using data on passenger income and trip purposes. This followed a methodology established in the Intercity Passenger Travel Study in Sri Lanka22 and Analysis of Value of Travel Time Saving in Sri Lanka23. These studies analysed and compared values obtained from the income rate method and the revealed preference method and concluded that the value of time obtained from income rates is sufficiently close to that obtained from revealed preferences.

The value of time of the same person undertaking trips for different purposes can vary; accordingly, VOT is calculated on the basis of:

· hourly income rate of the passenger,

· trip purpose of the passenger, and

· quantum of travel time saved.

Hourly Income Rate: The hourly income rate is determined by obtaining the average annual income for the user group and dividing by the number of working hours per year. According to the RUCS methodology, this can be summarised as follows:

§ Hourly Income (Rs/Hr.) = Monthly Income (Rs/Month) x 12 (months/year) / 2000 (hrs/year)

RUCS assumed that public and private transport user groups (i.e., car users, motorcycle users, public transport users) could be linked to particular income categories. For example, RUCS assumed that car users were in the second half of the 10th income decile (95-100%), that motorcycle users were in the first half of the 10th decile (90-95%), and that public transport users made up the balance nine deciles (0- 90%).

Income and vehicle ownership patterns, however, have changed since RUCS, which used 1992 data. This Book, therefore, makes the following assumptions to reflect such changes:

· that car users generally would be in the 10th decile of income-earning households,

· that users of lower cost vehicles, such as vans , would be in the 9th decile,

21 Transport Studies and Planning Centre, Sri Lanka Road User Charges Study, Colombo (1993). 22 Intercity Passenger Travel Study in Sri Lanka, University of Calgary (1989). 23 A.S. Kumarage, Analysis of Value of Travel Time Saving in Sri Lanka, University of Moratuwa, (1992).

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· that motorcycle users would be in the 8th decile,

· that the majority of people who use public transport would in the 1st to 8th deciles, and

· that people who use non-motorised transport would be in the lowest income groups (i.e., 1st to 4th deciles).

A number of transport studies have computed value of time in Sri Lanka- i.e. (a) Sri Lanka Transport Sector Study (Louis Berger et al, 1988); (b) Colombo-Katunayake Expressway Feasibility Study ( JBSI Inc, 1991); (c)Feasibility Study for Inland Trunk Routes (RDC, 1992); (d) Colombo Urban Transport Study – Stage I (Halcrow Fox, 1995); (e) Batticaloa- Pottuvil Railway Extension Study (UoM, 1996); (f) Economic Feasibility of Southern Highway (UoM, 1997); (g) Southern Transport Corridor Study (Wilbur Smith Associates, 1998) and (h) Colombo Urban Transport Study – Stage II (WS Atkins/UoM, 1999). All have used some variation of the income rate approach, although (g) also obtained some values from a willingness to pay survey. All the studies except (a) to (c), which were done earlier, have accepted the validity of RUCS, and have used its methodology to determine VOT, with minor variations to account for changes in context.

Trip Purpose: VOT is assumed to vary by trip purpose. A review of literature reveals a consensus that trips undertaken during work time, and hence referred to as work time trips, should be valued at the hourly income rate plus an allowance for employers' overheads. Such overheads, which represent part of the cost of time to employers, generally vary up to 30% of the hourly income rate. There is lesser agreement about non-work time trips, which include trips to and from work. At one extreme, some economists argue that non-work trips have no significant value. At the other extreme, mostly prevalent in developed countries, some economists now argue that non-work trips should be valued at up to 60- 80% of hourly income, or even higher in uncomfortable situations such as severe congestion. RUCS assumed that employers' overheads are an average of 20% and that non-work trips have a value of 20% of hourly income, giving the following formulae:

§ Work Time VOT = Hourly Income Rate x 1.2

§ Non-work Time of VOT = Hourly Income Rate x 0.2

This study has also adopted the above factors. It is felt that use of higher values for non-work VOT are not appropriate for low-income developing countries such as Sri Lanka.

Quantum of travel time saved: While some studies ignore small travel time savings of 5-10 minutes, it is generally more accepted that even small savings have value, especially if they become the norm, because people can rearrange their activities to undertake other tasks within that time. Other studies argue that value of time is randomly distributed and that even minor travel time saving can sometimes have high value (e.g., if salary is deducted for arriving late or if a business opportunity is missed), but

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this reflects value of reliability rather than value of time per se. In general, saving in travel time, even if minor, should not be excluded.

Conclusion

The Income Rate Method appears to be suitable for estimating VOT in Sri Lanka. Data and/or models based on the "Willingness to Pay" and "Stated Preference" Methods may also be used in transport sector projects, but planners and appraisers should carefully review the results if they yield values that are much different from those obtained by the Income Rate approach.

Recommended Practice

The following practice is recommended to determine value of time for transport projects:

Step 1 - Calculate the Monthly Income Rate of User Groups: Monthly income by income group can be obtained from the most recent (e.g. 1996/97) Consumer Finance & Socioeconomic Surveys conducted by the Central Bank of Sri Lanka. Based on the assumptions described above, the average monthly income rate for different groups of road users may be calculated as shown in Table 4.1.

Table 4.1: Calculation of Mean Income by Users of Transport Modes (1996)

Operational Vehicles as % of Assumed Income Group Mean Mode of Transport Vehicle Households25 Income (Transport User Group) Fleet24 (Rs) 26 Car Passengers 128,049 3.4 10th Decile 21,465 Van Passengers 104,248 3.1 9th Decile 9,037 Motor Cyclists 462,493 14.1 7th & 8th Dec 4,770 Public Transport Passengers - - 1st to 8th Dec 3,387 Non Motorised Users - - 1st to 4th Dec 1,849

Step 2 - Calculation of Hourly Income Rate: The hourly income rate of a user group may then be obtained using the revised equation below:

§ Hourly Income of User Group (Rs/Hr) = Mean Monthly Income of User Group (Rs/Month)

x 12 (months/year) / 2000 (hrs/year)

Step 3 - Calculation of Weighted Hourly Income Rate: As illustrated in the above equation, the hourly income rate of individual users in a particular user group depends on the average income of the respective group.

24 Source: Estimation of Operational Vehicle Fleet (1996 Update), University of Moratuwa, (Kumarage, 1997). 25 Assumes 1 vehicle per household, source: Colombo Urban Transport Study Stage I (Halcrow Fox, 1996). 26 Source: Consumer Finance & Socio-economic Survey 1996/97 (Central Bank of Sri Lanka, 1999)

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However, mobility indices for travel in Sri Lanka computed by Kumarage et al (1989) show that the mobility of individuals using the same mode of transport increases with income. In other words, higher income earners within a particular user group make relatively more trips than lower income earners. As a result, the average income of all passengers within a bus, for example, would be higher than expected solely from income rates, as there would be a relatively greater proportion of higher income earners using the bus. Most studies ignore this effect, but in societies such as Sri Lanka, where mobility levels have been found to vary as much as five fold between the top and bottom levels of income earners using a single mode of transport, an adjustment is appropriate. The only information on this effect comes from the study mentioned above, but general observation suggests that the hourly income rate can be multiplied by a factor of 1.5 to adjust for mobility. A weighted hourly income rate can therefore be developed to incorporate the mobility effect, as follows:

§ Weighted Hourly Income of User Group (Rs/Hr) = Mean Monthly Income of User Group (Rs/Month) x 1.5 x 12 (months/year) / 2000 (hrs/year)

Step 4 - Calculation of Percentage of Work Time Trips: Ideally, a survey should be undertaken to ascertain the distribution of trips by purpose. If such data is not available, however, the percentages summarised in Table 4.2, which are based on observations from various transport sector studies, may be used.

Table 4.2: Percentage of Work Trips by Sector of Travel

Urban Sector27 Rural Sector28 Intercity Sector29 Car 10-20% 5-10% 25-30% Van 15-30% 10-15% 20-25% Motor Cycle 5-15% 15-30% 0-5% Public Transport 3-5% 5-10% 5-10% Non-Motorised 5-10% 10-20% -

Value of Travel Time for each user group can then be calculated as follows:

§ VOT of User Group = Weighted Hourly Income of User Group x (1.2 x Percent of Work Trips + 0.2 x Percent of Non-Work Trips) / 100

Step 5 - Calculation of Total Travel Time Saving: The total value of travel time saved can be calculated by multiplying the quantum of time saved by each user group against the respective VOT. If

the VOT of user group "i" is given as VoTTi, then total VoTT for all user groups is:

S VOTi x DTi for all user groups i

27 Source: TransPlan Database (UoM, 1999) 28 No proper studies exist, assumed from data in student projects. 29 Sources: Intercity Passenger Transport Project (UoM, 1989) and TransPlan Database (UoM, 1999)

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The mean VOT by user group, and for the transport sector in total, can be calculated using the assumptions on income given in Step 1 and on work trip distributions given in Step 4.

Step 6 - Year on Year Adjustment of VOT: Values of time must be adjusted to reflect the appropriate value for the study year. If income surveys are not available, values must be adjusted using indices. Since VOT is income based, the most rational index would be based on changes in per capita income. Income in Table 4.1 is based on 1996 – to adjust this to 1999 levels, the above values should then be changed by substituting the per capita income of the year of application with the per capita for 1999, the year for which the values given below have been computed. Alternately, the price indexing in terms of the CCPI could be used.

The per capita income (GDP) in 1996 at market prices is given as Rs. 41,940 and if the estimated per capita income for 1999 is assumed at say, Rs. 62,000, then the adjustment factor for VoTT would be 1.48. The resulting adjusted VoTT for 1999 is given in Table 4.3.

Table 4.3: VOT for Transport User Groups (in 1999 Rs/Hour)

User Group Urban Rural Intercity All Sectors30 Car 100.06 78.62 135.81 106.50 Van 51.15 37.62 51.15 48.44 Motor Cycle 19.05 27.00 14.29 19.22 Public Transport 10.83 12.41 12.41 11.62 Non Motorised Modes 6.78 8.62 0.00 7.39 All Motorised Modes (AV)31 24.61 23.0132 28.81 25.55

Step 7: Estimation of Vehicle Occupancy Rate (VOR) The VoT has to be multiplied by the Vehicle Occupancy Rate (VOR) to estimate the total value of travel time in a given vehicle. Obtaining the average occupancy of each type of vehicle usually does this. Some values observed for Sri Lanka are given in Table 4.4.

Table 4.4: Vehicle Occupancy (without crew) and Crew (in parenthesis) Rates

User Group Urban33 Rural34 Intercity35 Car 2.0-2.2 (0.2) 2.0-3.0 (0.3) 2.0-3.0 (0.3) Van 2.2- 3.8(0.3) 2.4- 3.8 (0.4) 3.0- 6.0 (0.4) Motor Cycle 1.15-1.35 1.20-1.35 1.4-1.6 Bus Transport 30-50 (2) 20-40 (2) 35- 45 (2)

30 Assumed as been composed of 50% urban, 20% rural and 30% intercity travel. 31 Assumed as being composed of 10% share for cars, vans and motorcycles respectively and 70% for public transport. 32 If non-motorised travel is considered, for example in rural transport, this should change. If 50% of travel is assumed to be by non-motorised means, then the average VoTT would be Rs. 15.31 per hour. 33 Source: Colombo Traffic Study (UoM, 1995); TransPlan Database (UoM, 1999) 34 No data exists, assumed. 35 Source: TransPlan Database (UoM, 1999)

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In this process, it must be noted that the VoT of vehicle crew should not be included in passenger VoT. This is because the crew income rate is usually quite different to the passenger income rate. The usual practice is to add the crew costs to the vehicle operating costs (discussed separately). Typical crew norms used in studies in Sri Lanka are given in parenthesis in the above table.

4.1.2. Freight Consignees

Travel time is an important function in the movement of freight. There are two dimensions to its impact on the economic implications of goods movement. On the one hand, increased travel time translates to higher transport costs. This is a cost to all transport operators that we shall examine in the next section. The other impact is the cost to the consignees of goods. In this case, the time loss can lead to two different types of economic consequences-

· Having to carry higher inventory levels.

· Losses sustained by perishable commodities such as vegetables, milk, etc.

The former can be estimated according the value of the commodity carried and the cost of carriage of extra stock of raw materials/finished goods etc. In the second instance, perishability becomes a major concern when unplanned delays occur. This should be accounted for in reliability. In the case of anticipated delays, it could be assumed that perishable goods would suffer increased loss of economic value in terms of marketability. While no studies can be found to ascertain values for these, it may be assumed that it may be worth at least the increased cost of refrigerating a truck.

Conclusion

It would be useful to value the cost to freight consignees, particularly since it has a direct economic bearing. In this instance, the value of the freight held as well as the cost of refrigeration for perishable commodities could be used as approximate but adequate measures of the benefits due to travel time savings in the movement of freight.

Recommended Practice

The following general practice is recommended:

Step 1: Calculating the Value of Freight: Typical freight compositions observed in Sri Lanka highways are given in Table 4.5.

Step 2: Calculating the Capacity of Vehicles : The capacity of freight vehicles also vary from around ½ ton for small delivery vans to up to 30 tons for prime movers. The average capacity can be generally worked out from the composition of freight vehicles obtained from a survey. It should be noted that nearly one half of all truck movements are empty. The Table 4.6 gives ranges of vehicle types that have been observed in Sri Lanka.

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Table 4.5: Distribution and Value of Commodities in Road Transport

Type of Commodity Urban36 Intercity37 Rural38 Cost per Ton (Rs 000s) Tea/Rubber/C’nut 0.1% 2.8% 10-150 Agricultural 0.2% 5.7% 10-100 Other perishable 0.2% 4.9% 20-150 Foodstuff 11.0% 9.5% 20-150 Forestry Products 1.3% 3.9% 5-20 Petroleum/Chemicals 0.7% 1.6% 10-15 Building Materials 10.8% 13.0% 5-100 Industrial Inputs/Outputs 11.7% 17.1% n/a Empty 50.2% 41.5% -

Table 4.6: Distribution of Freight Vehicles

Type of Vehicle Urban Intercity Rural39 Capacity (Tons) Delivery Vans 10-20% 3-6% 0.5 Trucks (2 axle) 60-80% 90-95% 10 Container & Multi Axle 5-10% 3-6% 30 Vehicles Tractors ( 2 wheel) - - ½ Tractors (4 wheel) 5-10% - 2

Step 3: Estimating the VoT for Freight : The VoT due to cost of inventory of freight could be valued as:

§ Time saving x S (av. Quantity of freight (tons) x value of freight (Rs/ton)) x interest rate (p.a.) / 2500 (hrs/yr)

where, 2500 hours is assumed as the economically active period for freight in a given year.

Step 4: VoT for Perishable Commodities : Perishable commodities can have an additional VoT arising from the prevention of deterioration in quality of the product being transported. A mitigatory measure would be the cost of refrigeration. The cost of refrigeration given in Table 4.7.

Table 4.7: Cost of Refrigeration of Trucks

Size of Truck Cost of Refrigeration (Rs. Per hr)40 Small (2 ton) 80 Medium (4 ton) 120

36 Colombo Traffic Study (UoM, 1992) 37 TransPlan: Traffic & Road Network Database (UoM, 1999) 38 Unknown 39 ibid 40 Source: from user estimates

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Large (8-10 ton) 200

4.1.3. Transport Operators

Transport operators of passenger and goods vehicles also enjoy financial benefits from travel time savings. This is from greater resource productivity of the vehicle as well as the crew. In this case, it is more appropriate to deal with such savings under vehicle operating costs, as the VOC for commercial vehicles are based on annual kms operated for a given time period. For example, if the crew are expected to work eight hours, a faster transport facility would lead to higher kms operated, and consequently, a lower operational cost per km.

4.2. Vehicle Operating Costs

Transport activities consume resources (e.g., energy, labour, spares, capital, assets) and therefore incur economic costs. Projects that reduce use of such resources—for example, by increasing passenger- kilometres per litre of fuel—generate corresponding economic benefits.

Savings in vehicle operating costs (VOC) are the most direct and one of the most important benefits from transport improvements. They can be achieved in four ways, as described below:

· By upgrading technology: New vehicles are generally more fuel-efficient and require less maintenance than old vehicles due to lighter weight, advanced engine technology, and design.

· By increasing speed: Vehicle operating costs are high at low speeds (i.e., due to lower fuel efficiency and lower utilisation), but decrease as speeds increase. At high speeds (above 70-90 kph depending on vehicle type) costs again tend to increase.

· By reducing congestion: Excessive acceleration and deceleration due to congestion increases costs, such as fuel consumption and wear-and-tear.

· By reducing road roughness and improving geometric design: At any given speed, costs are higher on rougher roads due to increased wear-and-tear (e.g., tyre and maintenance costs) and reduced vehicle life (e.g., depreciation). Slower speeds on rough roads also tend to result in higher costs.

Projects that increase speeds, reduce congestion, and reduce road roughness will generate VOC savings, as summarised in the table above. Such savings can be significant, depending on the type of project, the change in speed/congestion/roughness, and the number of vehicles affected.

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4.2.1. How VOC are Determined

VOC are fuel, lubricants, tyres, labour and parts for repairs, operator (crew) labour if applicable, depreciation and interest, and overheads such as insurance and license fees and administration. Determining VOC requires two sets of information, as below:

· The economic costs of inputs – such as labour, fuel, spares, replacement costs, etc.

· The relationships between consumption of inputs and speed, congestion, and roughness, by type of vehicle.

Table 4.8: VOC Savings by Investment Type

New Replacement/ Technology Asset Improvement Rehabilitation & HR Develop. Infrastructure Asset (a) (a) (a) - Rolling Stock (b) (b) (b) - Supporting Asset (b) (b) (b) - Where:

(a) VOC saving will occur for road projects that increase speed, reduce congestion, and reduce roughness and for rail projects that induce modal shift from road to rail.

(b) VOC saving will occur for rail and bus projects that induce modal shift from low occupancy vehicles such as cars or motorcycles to high occupancy vehicles such as buses, or from road to rail.

Costs of Inputs

The financial costs of inputs can be determined through local surveys, as market prices are available for most components. Financial costs, however, must be converted to economic costs by removing duties and taxes and by adjusting for the effects of market distortions. Usually, this would be done using shadow price factors, but current ones are not available. Therefore, 1999 financial and economic costs of inputs for each vehicle type, which are shown on the speed/cost tables at the end of this appendix, have been determined as follows:

Fuel Costs: The financial prices for diesel and petrol are set by the government and do not reflect economic costs. They have, therefore, been converted to economic costs in the following manner:

- According to calculations done in the Road User Charges Study (RUCS)41, the economic cost of diesel in 1992 was Rs 8.0 per litre when the world oil price was $US 20 per barrel and the exchange rate was Rs 43.2.

41 Transport Studies and Planning Centre, Sri Lanka Road User Charges Study, TSPC, January 1993.

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- With current world oil prices varying between $US 20-22 per barrel (say $2142) and with a current exchange rate of Rs 71, the adjusted cost per litre is Rs 14/=.

- According to additional calculations done in the Road User Charges Study, the economic cost of petrol is about 10% greater than that of diesel, giving a value of about Rs 15.50.

Lubricants: Financial prices are based on local brands and have been converted to economic costs using conversion rations from CUTS-243.

Tyres: Financial prices are based on the tyre models and the mix of local and imported prices specified in RUCS. They have been converted to economic costs using conversion ratios from CUTS-2.

Maintenance Labour: Financial prices per hour are derived from charges and hours quoted by several Colombo area service centres and garages for different types of servicing and repair, and include direct labour and overheads. They have been converted to economic costs by removing GST. It could be argued that given high unemployment, the economic cost of labour should be lower. This has not been considered.

Maintenance Parts: These are based on a percentage of economic vehicle replacement cost, according to the relationship used by the HDM-III model.

Crew Costs: These are based on average numbers of crew per vehicle, from RUCS, and monthly salaries from CUTS-2 and other sources.

Vehicle Replacement Costs: Financial costs are from CUTS-2, supplemented by quotations from local dealers for vehicle types not included in CUTS-2. Cars, motorcycles, and medium 2-axle lorries are based on a mix of new and reconditioned vehicles and medium buses are based on reconditioned vehicles. Prices were converted to economic costs using conversion ratios from CUTS-2.

Interest Rate: An economic rate of 10% is used.

Overheads: Financial costs are based on RUCS indexed to a 1999 level. They were converted to economic costs using conversion ratios from RUCS.

Readers should refer to RUCS for more information on how financial and economic costs of inputs are developed.

42 Oil prices have been volatile in recent months and have climbed even above $25 per barrel in recent weeks. A new average may be worked out when prices stabilise. 43 WS Atkins International, Colombo Urban Transport Study - Stage 2, Working Paper 21, June 1999.

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Speed/Roughness/Cost Relationships

Relationships between speed, roughness, and costs have not been developed for Sri Lanka. The most detailed work done to date was by the Road User Charges Study, which calculated roughness-cost relationships for eight representative vehicle types using the Highway Design & Maintenance Standards Model (HDM-III)44. In doing so, RUCS calibrated the HDM-III vehicle types and maintenance inputs to Sri Lankan conditions. Other relationships were generally set at the model default values.

Calibration factors and costs from RUCS have been used in a number of subsequent studies, including CUTS-145, Southern Transport Corridor Study (Wilbur Smith Associates, 1998), and Draft Implementation Completion Report for the Colombo Urban Transport Project (TSPC, August 1999). CUTS-1 also estimated changes in costs due to speed, which were updated in CUTS-2, but the speed- cost relationships were not documented.

This book has calculated fuel and lubricant consumption, tyre costs, and maintenance costs using the HDM-III model, with inputs calibrated according to RUCS except utilisation ratios, which were set to lower values. Economic costs of inputs were determined as above. The HDM model has a facility to calculate changes in costs with changes in speed, as well as with changes in roughness; this facility was used to determine speed-cost relationships, instead of the unknown relationships used in CUTS-1 and CUTS-2. Crew, depreciation and interest, and overhead costs were calculated separately, as described below, to address weaknesses in the HDM model that were pointed out by RUCS.

· Annual crew and overhead costs were divided by annual utilisation in kilometres (according to speed). Annual interest cost was calculated by taking 50% of economic vehicle cost, multiplying by the interest rate, and dividing by annual utilisation. Depreciation cost was calculated by dividing replacement cost by lifetime utilisation (annual utilisation times life).

· Annual and lifetime kilometres were calculated by adjusting the vehicle utilisation determined by RUCS to account for different speeds. This was done using the following formulae, which are variations of the utilisation formulae in the HDM-III model:

Km Base x Hours Base

(a) Km Adj = ------

[HoursBase x (1 – Utilisation Ratio)] + [Annual Km x Utilisation Rate + SpeedAdj] 0.5 (b) Life Adj for Speed = Life Base x [ 1/3 x (Speed Base + Speed Adj + 2) ]

44 HDM-III was developed by the Transportation Department of the World Bank for highway authorities in developing countries to evaluate road construction and maintenance. The model includes a VOC sub-routine that can calculate operating costs for ten vehicle types based on relationships developed from research in Brazil, Kenya, the Caribbean, and India. 45 Halcrow Fox London, Colombo Urban Transport Study - Stage 1, Working Paper 8, December 1995.

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· For increasing roughness, life was reduced using the following formula46, which is based on data from Thailand:

Life Adj for Speed

HDM-III does not include motorcycles and 3-wheelers, which are widely used in Sri Lanka. Costs for these vehicle types, therefore, have been estimated relative to the cost of operating cars, using the factors listed in Table 4.9. Crew, depreciation and interest, and overhead costs were calculated as described above. Summary speed/cost tables, for four levels of roughness, are provided in Appendix III.

Table 4.9: Assumptions to Estimate VOC for M/C & 3/W

Cost Category Motorcycle 3-Wheeler Fuel 33% 50% Lubricants 50% 50% Tyres* 30% 40% Maintenance Labour 33% 50% Maintenance Spares 10% 20% * Based on differences in wear, in number of tyres, and in tyre costs.

4.2.2. How to Use VOC

VOC can be used to determine the benefits of increasing speed, reducing congestion, and reducing roughness as follows:

· For the "without project" (base case) scenario, determine the present number of vehicles using the road (by vehicle type), the average speed, and the average road roughness. As congestion—therefore speeds and VOC—will be different depending on time of day, calculations should, at least, reflect differences between peak and non-peak hours. For each year (or perhaps each 3rd year or 5th year to simplify calculations) determine the growth in traffic volumes and the new speed (which would drop if traffic volume and congestion increase). Results for missing years should be interpolated.

· Look up the VOC by vehicle type, speed (for peak and non-peak hours), and roughness and multiply by the corresponding number of vehicles (peak and non-peak) for each year studied. Costs for levels of roughness not shown on the tables can also be interpolated. · Repeat the first and second steps for the "with project" scenarios (alternatives). · If the "with project" scenarios have lower costs, the savings may be counted as benefits.

Speeds may be determined by traffic surveys at different times of day or by using models that relate speed to road width and to other factors (e.g., number of side roads, shops, pedestrians, etc.). The

46 Christopher R. Bennet, The HDM-4 Road User Effects Model, International Study of Highway Development and Management Tools, University of Birmingham, December 1996, page 14, (www.roadsource.com).

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University of Moratuwa, for example, has developed a speed prediction model. HDM-4 also includes a sub-routine to estimate speeds.

4.2.3. Updating VOC in the Short Term

In the short term, VOC can be updated by indexing the economic costs summarised in the speed-cost tables at the end of this appendix. For example, economic fuel costs per kilometre, at each speed and roughness, can be indexed by the ratio of the new economic cost relative to the old economic cost (i.e., based on world oil prices and exchange rates). Similar calculations can be done for oil, tyres, crew labour, maintenance labour, and annual overheads. Depreciation and maintenance parts can be indexed based on the changes in economic vehicle replacement costs. Interest costs can be indexed for changes in economic vehicle replacement costs and for changes in the interest rate.

4.2.4. Updating VOC in the Long Term

VOC calculated as above have a number of weaknesses, the greatest being that they do not accurately reflect the effects of congestion on operating costs and thus are less suitable for use under urban driving conditions.

An international group funded by the World Bank, Asian Development Bank, Overseas Development Administration (UK), and Swedish National Road Administration is presently finalising development of an HDM-4 model, which is expected to be available soon. This is an updated version of HDM-III that incorporates a number of refinements as follows-

· Additional vehicle types that are in common use in Sri Lanka but are not included in HDM-III, such as motorcycles, and Pajero-type 4-wheel drive vehicles. · Congestion effects, including delays caused by roadwork. · Environmental effects including emissions. · Relationships for pavement deterioration and maintenance.

HDM-4 comes with calibration tools and manuals and so can more easily be adjusted for Sri Lankan conditions than HDM-III. It is recommended that feasibility studies undertaken by consultants should use the HDM-4 model, suitably calibrated, instead of other models.

4.3. Accident Costs

Studies undertaken by the World Bank (Hills and Jones-Lee) suggest that the lower the level of vehicle ownership in a country, the higher the accident rate. Accident rates in Sri Lanka are still relatively high compared with developed countries, but are consistent with most other developing countries. This is

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due to a number of reasons: poor road design and geometry, congestion in urban areas, mix of slow moving (i.e., non-motorised) and fast moving vehicles, poor enforcement of traffic regulations, inexperienced drivers and poor driver training, poor vehicle fitness, overloaded vehicles, and so on.

Accidents and fatalities, measured in absolute terms, are still increasing in Sri Lanka, but when measured per billion vehicle-kilometres have been decreasing by about 5% per annum over the past 20 years (Kumarage, 1998) compared with a decrease of 2-4% per annum in developed countries (Laum & Choueni, 1997). The overall fatality rate in Sri Lanka is currently about 140 deaths per billion vehicle kilometres, compared with 10-40 deaths per billion vehicle kilometres in developed countries. Typical costs of accidents are listed below:

· Direct Tangible Costs · Damage to property (vehicles, goods, road furniture) · Medical costs (private and social) · Administrative costs · Costs of delays to other road users · Intangible Costs Relating to Injury or Death · Private Costs Relating to Pain and Grief This book describes accidents under four categories, as listed below, which correspond to the categories used in police reports. · Fatal · Grievous · Minor Injury · Damage Only

4.3.1. Methods to Estimate Accident Costs

Accident costs generally comprise direct tangible components, which can be readily determined, plus intangible components relating to injury and death, and pain and suffering. Several approaches to valuing the latter two categories are described below:

Loss of Output

This method values injuries and death on the loss of productive activity (output). The "gross output approach" uses the discounted value of future output that is lost due to injury (temporarily or permanently, depending on severity) or to death. The lost output is quantified in terms of time lost and is valued at the income rate. The "net output approach" varies from the gross output approach in that it deducts from the gross output the reduction in future consumption needed to produce the output. These approaches assume that a person's value to society is directly related to earning power.

If this method is used, total accident costs would be the direct tangible costs described above, plus loss of output, plus an allowance for pain and grief.

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Willingness to Pay

This method, which is gaining in popularity, bases "value of injury" or "value of life" on individuals willingness to pay to reduce risk of injury or of death. The contingent valuation approach determines values from surveys to ascertain people's expressed preference. The insurance approach determines values from what people are prepared to pay to insure against risk of injury or death. The hedonic valuation approach determines values from differences in wage rates demanded by people to work in jobs that are similar except in risk of injury or death. The latter two approaches do not appear suitable for use in Sri Lanka at this time, as the insurance market is still developing and as the labour market is not competitive enough to fully reflect risk differences in wage rates.

If this method were used, total accident costs would be the public components of the direct tangible costs described above plus the value people are prepared to pay to avoid the risk of accident. Note that this value would already include an allowance for the private costs of property damage and medical expenses, and of pain and grief.

4.3.2. Relevant Studies

Values obtained from willingness to pay approaches are generally much higher than values obtained from the output based approach. In part, this may be because the former includes an implicit allowance for avoiding pain and suffering. Willingness to pay, however, is more difficult to calculate and may reflect other macroeconomic effects.

Until recently, countries that put explicit monetary values on transport safety relied on the output method. In the USA, for example, the present value of life for an average car user was estimated at around US$ 250,000 (NHTSA, 1983), which equated to about 20 years of per capita income. Willingness to pay to avoid risk of death was estimated at around US$ 1,500,000 or about six times the value of output loss. Many European and USA studies using this approach have now valued loss of life from US$ 2,500,000 to 3,600,000.

The only comprehensive attempt to cost accidents in Sri Lanka was done by Fernando and Fernando (1994), using the Gross Output Approach, in 1990 costs, and the following assumptions:

· output loss was assumed to be the same for vehicle occupants and non-occupants,

· cost of pain and suffering was considered only for fatal accidents and was assumed to be 20% of output loss,

· no output loss was assumed for grievous or non-grievous injuries, and

· some direct costs, such as for insurance and congestion, were not included.

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The willingness to pay approach, although gaining popularity in developed countries, does not appear suitable for Sri Lanka at this time as it yields very high values that do not seem appropriate for developing countries. The output approach, with an allowance for pain and grief, appears to be the most suitable approach for now.

4.3.3. Estimation of Values

Step 1 - Estimate Unit Accident Costs: There is an urgent need to recalculate accident costs for Sri Lanka. Until this is done, the values in Table 4.10, which are based on Fernando & Fernando (1994), with adjustments as described below, are suggested for use-

· Property damage has been re-estimated and has been assumed equal in severity for all types of accidents. · A nominal police cost of Rs 200/= has been assumed for non-grievous injury and personal damage accidents. · Insurance costs have been developed by dividing estimated costs of accident insurance (Rs 120 million per annum) by the number of reported accidents (50,000), irrespective of severity. · Congestion costs have been estimated on the basis of a one-minute delay for 500 vehicles for damage only and in non-grievous accidents, a two-minute delay for 1,000 vehicles for grievous injury accidents, and a two-minute delay for 2,000 vehicles for fatal accidents. Average congestion cost is assumed to be Rs 240/= per vehicle per hour. The annual congestion costs due to accidents therefore works out to Rs 125 million per annum or 1% of all traffic congestion costs estimated by TransPlan (UoM, 1999). · Output loss for fatal accidents has been based on Fernando and Fernando. Output loss for grievous accidents have been valued at 5% of fatal accidents and for non-grievous accidents at 1% of fatal accidents. · Property damage and medical and police costs have been updated from 1990 values using the CCPI index. · Output loss has been updated from 1990 based on increases in per capita income.

Table 4.10: Accident Costs in 1999 Rupees

Fatal Grievous Non- Damage Grievous Only Property Damage 51,846 51,846 51,846 51,846 Medical Costs 19,180 15,929 15,105 - Police Costs 4,704 2,455 200 200 Insurance Costs 2,400 2,400 2,400 2,400 Congestion Costs 16,000 8,000 2,000 2,000 Output Loss 1,179,197 58,959 11,792 - Pain & Grief 235,839 11,792 2,358 - Total 1,509,166 151,381 85,701 56,446

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These costs are based on a number of assumed values and should be treated as tentative and approximate. They do, however, correspond to international norms – for example, the cost of a fatal accident, at Rs 1.5 million is the equivalent of 24 years of output based on a per capita income of Rs 62,000. Given that 20% was added for grief and suffering, this corresponds to the 20-year period adopted in most western countries.

Step 2 - Estimating Cost of Accidents per Operated Vehicle: It is possible to determine the accident cost per vehicle kilometre based on the unit cost of accidents, multiplied by the number of accidents in a given year, and divided by the vehicle kilometres operated during that year. Vehicle kilometres can be estimated from vehicle registration data. The accident costing is shown in Table 4.11.

Table 4.11: 1998 Accident Cost per Vehicle/Passenger Km (@ 1999 Values)

Types of Accidents Fatal Grievous Non- Damage Total Grievous Only Cost per Accident (1999 Rs) 1,509,166 151,381 85,701 56,446 - Cases Reported (1998) 1,921 2,849 11,608 33,896 50,274 Vehicle Kms Operated (1998) ß15,725 millionà Passenger Kms Carried (1998) ß74,979 millionà Accident Rates (1998) ] Per Billion Vehicle Km 122.2 181.2 738.2 2,155.5 3,197.1 ] Per Billion Passenger Km 25.6 38.0 154.8 452.1 676.5 ] Accident Cost (Rs. Mn.) 2,899 431 995 1,913 6,238 ] Accident Cost (Rs/Vehicle Km) 0.184 0.027 0.063 0.122 0.396 ] Accident Cost (Rs/Psgr Km) 0.039 0.005 0.013 0.026 0.083

Step 3 - Adjusting for Unreported Accidents: The work by Fernando & Fernando incorporated an allowance for unreported accidents in the unit costs, based on observations by Kumarage & Wijesuriya (1992) and therefore no further adjustment is necessary.

Recommended Practice

Historical trends indicate that road accident rates can be expected to drop by around 4% per annum, due to improved enforcement of traffic regulations, general increase in driver experience, safety education, improved road design and traffic management, better vehicle design and inspection, and so on. No single factor can be credited for the reduction, but, in total, they should contribute to further reductions in the accident rates.

Savings in accident costs are a significant factor in the evaluation of highway projects in developed countries. Experience in Sri Lanka, however, suggests that road improvement can lead, at least initially, to increases both in absolute numbers of accidents and in accident rates (Fernando, 1998). This might be because improved roads encourage people to drive at higher speeds than those to which they are accustomed, because improved roads reduce the perceived risk of accidents and so cause drivers to

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behave more carelessly, or because improved roads do not incorporate corresponding safety features. For example, improving road geometry may reduce visibility-related accidents, but increase speed related accidents, unless Police enforce speed regulations.

It is recommended, therefore, that road projects should not assume savings in accident costs, unless the projects explicitly include strategies for reducing accidents. Such strategies might comprise physical and design measures, such as constructing highways with restricted access to non-motorised users, with medians to restrict overtaking, with road furniture to facilitate merging of traffic at junctions and to force speed reductions on curves, and so on. Strategies might also comprise "soft" measures such as formulation of international standard safety practices, implementation of road safety education programs for drivers and non-motorised users, improvements to enforcement of traffic regulations, etc. Even so, the reduction in accidents should be greater than the natural reduction of 4% per annum that can be expected as a result of other factors, before a benefit can be claimed.

If the above conditions were satisfied, economic benefits from the reduction of accidents could be calculated by taking the difference in accident rates, by type of accident, with the project and without the project (adjusted for 4% annual decline in accident rates), and multiplying by the corresponding accident cost.

4.4. Vehicular Emissions

Transport activities generate environmental impacts such as air pollution, water pollution, and even noise pollution, all of which have economic costs – such as damage to health or agriculture and consequent loss in productivity. Some impacts are direct (e.g., from operation of motor vehicles) while others are indirect (e.g., pollution from refining petrol and diesel).47 Savings in pollution costs that arise from implementation of transport projects are economic benefits. Such external costs of transport sometimes are overlooked in the early years of a country's development, when greater emphasis is placed on the production of goods and services.

4.4.1. Air Pollution

Air pollution is arguably the most important, in terms of economic costs, of the various types of pollution caused by transport activities and its effects have been widely studied in other countries. Main categories of costs are health effects, damage through corrosion to building materials, agricultural damage, and global warming. Examples of some main pollutants and their corresponding damage are given below.

47 Interested readers can refer to Indicators of the Environmental Impacts of Transportation, United States Environmental Protection Agency, October 1995, for a detailed description of impacts. A copy of the report can be downloaded from www.epa.gov.

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· Ozone: This is formed from the reaction of volatile organic compounds (from motor vehicles or industrial sources) and nitrogen oxide (from motor vehicles). Effects are coughing, painful breathing, respiratory disease, and reduction in crop yields.

· Carbon Monoxide: This comes mainly from motor vehicles and can cause headaches and low-level health effects.

· Particulate Matter: These include carbon and sulphates from motor vehicle exhaust and particles from brake and tyre wear. Effects are coughing, asthma, respiratory disease, restricted activity, hospitalisation, and premature death.

· Lead: This is a toxic heavy metal, which comes from use of leaded petrol. It can damage the nervous system and reduce intelligence in children and cause heart disease in adults.

· Carbon Dioxide and Methane: These contribute to global warming.

· Hydrocarbons and sulphur oxides are other air pollutants from transport activity.

4.4.2. Valuing Air Pollution

Direct studies have not been undertaken to measure the economic costs of air pollution in Sri Lanka – for example, in terms of higher health costs and decreased human and agricultural productivity.

Munasinghe and Meier48, however, have estimated costs for four pollutants—CO, NOx, SOx, and Particulate Matter—emitted by thermal power generating projects. These are based on studies in other countries and adjusted for Sri Lanka conditions. Failing better data, the Munasinghe and Meier figures, adjusted for current exchange rates, have been used as a proxy for the costs of these pollutants emitted by motor vehicles, a practice that is also followed in developed countries.49 It is recognised, however, that this might understate the costs of vehicular emissions, as power plant emissions are dispersed high in the air in rural areas whereas vehicular emissions are concentrated at ground level and often in densely populated areas.

Table 4.12: Pollutant Damage Costs

Pollutant Damage Cost ($US per Ton) CO 15 NOx 180 SOx 447 Particulate Matter 262

It should be recognised that there are no "correct figures" for the cost of damage from air pollution. Various studies in North America and Europe give widely differing results, depending on the types of

48 M Munasinghe and P Meier, Incorporating Environmental Concerns into Power Sector Decision Making – A Case Study of Sri Lanka, Environment Policy and Research Division, The World Bank, Washington, 1992. 49 Peter Miller and John Moffet, The Price of Mobility, Natural Resources Defense Council, (Washington, www.crest.org/efficiency/nrdc)

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damage being measured, the location, and the study techniques and data used. For example, some studies suggest that nitrogen oxides have lower costs than sulphur oxides, opposite to the figures developed by Munasinghe and Meier.

It is recommended that cost of damages from carbon dioxide and methane, which are greenhouse gasses, should not be considered at this time. While it is generally accepted that global warming exists, measuring damage is difficult and estimates, which are often based on control costs or sequestration costs (e.g., costs to remove carbon dioxide from the air by planting forests or changing agricultural methods), vary widely. It can also be argued that costs from global warming are not relevant for Sri Lanka because greenhouse gases are mostly emitted by developed countries and because the greenhouse gasses emitted by Sri Lanka diffuse into the atmosphere beyond its borders. On the other hand, if the Kyoto Protocols relating to greenhouse gasses come into effect, and if a market therefore develops for greenhouse gas credits, greenhouse gases would have a market-based value that could be used to quantify the benefits of reducing emissions.

4.4.3. Other Pollutants

Water Pollution: This is caused by particles being washed out of the air (e.g., in the form of acid rain, which is formed from nitrogen and sulphur oxides together with unburned hydrocarbons), contaminants from fuel and oil leaks, and particles from exhaust and brakes and tyres that are washed from the road into surface and ground water when it rains. While such pollution exists in Sri Lanka, it has not yet been studied and hence amounts and values are not available.

Noise Pollution: This relates to the effects on people from traffic noise (e.g., engines, horns, tyres), which can include disruption of sleep, study, work, and other activities. Economic appraisals in developed countries now generally include noise reductions (e.g., due to road design, use of noise barriers, shift of traffic to less noisy modes) as economic benefits. Noise costs are estimated using hedonic methods (e.g., by determining if higher levels of noise reduce property values) or contingent valuation methods (e.g., by trying to survey people to determine their willingness-to-pay to reduce noise). It is recommended that noise costs should not be considered for economic appraisal in Sri Lanka at this time for three reasons:

· People still do not generally consider traffic noise a problem. Studies in the USA, for example, suggest that people with higher income are more concerned with noise than people with lower income.50

· Most residential and office buildings are surrounded by walls, which reduce noise.

50 Mark Delucchi and Shi-Ling Hsu, The External Damage Cost of Noise Emitted from Motor Vehicles, Journal of Transport and Statistics, October 1998, (http://socrates.berkeley.edu/~uctc/text/papersuctc.html).

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· Property markets are undeveloped, making it difficult to use hedonic valuation techniques to determine cost of noise. Differences in income, in housing design and layout, and in perceptions make use of values from developed countries inappropriate.

Others : As transport equipment is mostly imported, costs of pollution during manufacturing are not relevant. Environmental costs from refining petrol and diesel could be estimated from a study of emissions from the Ceylon Petroleum Corporation refinery at Kolonnawa. Other costs, such as disposal of old vehicles, tyres, and spares, have not been studied and representative values are not available.

4.4.4. Costs from Emissions by Vehicle Type

Emissions costs by vehicle type were estimated in a three-step process, as below.

· First, representative emissions per litre of fuel consumed, by vehicle type, were estimated based on information from various sources including NBRO Environment Division (1998), "Revised 1996 IPCC Guidelines for National Greenhouse Gas Inventories", and "Air Pollution from Motor Vehicles". These are summarised in Table 4.13.

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Table 4.13: Summary of Grams of pollutant per litre of Fuel for various Types of Vehicle

Emission Rs per Small Car Motorcycle gr. 3 Wheeler Van /Ute Med Bus gm. Lrg Bus Med Lorry gr Lrg Lorry gr. 3-Ax Lorry gr. MT gm. per ltr per ltr gm per ltr gm. per ltr per ltr gm. per Ltr per Ltr per Ltr per Ltr CO 1,100.0 283.00 400.00 283.00 11.00 15.00 22.00 15.00 22.00 22.00 CO2 - 2,200.00 2,200.00 2,200.00 2,600.00 2,600.00 2,600.00 2,600.00 2,600.00 2,600.00 Nox 12,800.0 18.00 3.60 15.00 10.00 15.00 20.00 15.00 20.00 20.00 HC n/a 46.00 88.00 67.00 14.00 14.00 14.00 14.00 14.00 14.00 CH4 - 0.80 4.40 2.40 0.10 0.18 0.25 0.18 0.25 0.25 NMVOC n/a 41.60 160.00 100.00 5.00 6.50 8.00 6.50 8.00 8.00 PM 18,600.0 1.00 3.50 6.00 5.00 5.00 5.00 5.00 5.00 5.00 Lead n/a 0.40 0.40 0.40 0.00 0.00 0.00 0.00 0.00 0.00 Sox 31,700.0 0.25 0.25 0.25 13.00 13.00 13.00 13.00 13.00 13.00 N20 n/a 0.03 0.04 0.04 0.13 0.13 0.13 0.13 0.13 0.13 Total Rupees per Litre 0.57 0.56 0.62 0.65 0.71 0.79 0.71 0.79 0.79

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· Second, the cost of emissions per litre of fuel consumed, were calculated by multiplying grams of emissions per pollutant, by the respective costs of damage. This is also shown in Table 4.13.

· Finally, costs of emissions per kilometre, by vehicle type and speed, were calculated by multiplying the fuel consumption rates from HDM-III (as described in Section 4.2) against the total emissions cost per litre. This assumes that emission rates remain the same at various speeds, although it is recognised that some may decrease (e.g., carbon monoxide) and others increase (e.g., NOx), especially at high speeds.

The resulting emissions costs per kilometre for road vehicles given above are only for smooth roads, as the HDM model predicts only a minor relationship between roughness and fuel consumption. It should be recognised that these costs are incomplete, as damage costs could not be found for several important pollutants such as ozone and lead.

Emission costs for rail vehicles are given in Table 4.14. These are based on cost from emissions per litre from Table 4.13 multiplied by consumption rates.

Table 4.14 : Estimated Costs from Emissions for Rail

Type of Train Litres per Km Cost/Litre Cost/Km (Rs) Loco-hauled Train 3.50 0.89 3.10 Diesel Multiple Unit 2.50 0.89 2.25

4.4.5. How to Use Cost from Emissions

Costs from emissions will reduce if transport projects reduce the amount of fuel consumed – for example, by reducing congestion and increasing speed (at least in the range of speeds below 60-70 kph) or by shifting passengers from low occupancy vehicles to high occupancy vehicles (buses or trains).

4.4.6. How to Update Costs from Emissions

As noted above, costs from emissions are incomplete. Certain pollutants are not included and fuel consumption is based on HDM-III, which does not model congestion and which, therefore, understates fuel consumption and emissions in congested urban conditions. Costs from emissions should be updated as follows: (a) Improve estimates of emissions per litre of fuel used, at different speeds. (b) Improve information on fuel consumption, especially to account for congestion. This will be available with the HDM-4 model, which will also model emissions. (c) Improve estimates of the economic cost of emissions, for all relevant categories of pollutants, by undertaking studies in Sri Lanka or by adapting studies from other countries.

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4.5. Improved Accessibility

This section describes a short method to evaluate transport sector benefits using approximations and assumptions to ascertain a value for benefits in relatively small transport sector projects.

4.5.1. Review of Practice

Practice in Other Countries: Small projects typically refer to village roads and other rural transport services and infrastructure. A review of similar methods in other countries can be found in Howe and Richards (1984). In Thailand, for example, feasibility is assessed using a points table with the following indicative factors-

· Number of people directly (and indirectly) benefiting from the road.

· Current agricultural production.

· Forecast of increased area to be brought under cultivation.

· Number of passengers in buses.

· Estimated construction costs.

Points are prorated when they fall below a stipulated impact level. For example a maximum of 20 points is given for a road serving 5,000 people, but only 12 points are given if the road serves only 3,000 people.

In Botswana, a similar scheme of rating is used, based on the following factors-

· Persons per km.

· Import substitution possibilities.

· Contribution to income distribution.

· Vulnerability to breakdown of maintenance organisation.

· Internal Rate of Return.

Similar practices are found in many states in India. Karnataka, for example, uses a point scheme based on-

· Population levels.

· The present level of connection available (all-weather, fair weather etc.).

· Connectivity to markets, services etc.

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Conclusion

The short method of assessing benefits of small transport sector projects could be carried out using a points scheme as adopted in other countries. However, in order to calculate a benefit-cost ratio, the points scheme should be converted to an economic value.

Recommended Practice

Saving in travel time for passengers and in cost of transport for goods would comprise the largest quantifiable benefits for projects of this nature. It is therefore recommended that a short method of valuing these benefits should be adopted. Regional Benefits would also be significant, although more difficult to measure. Therefore, an index should be developed to factor the quantifiable travel time benefits to incorporate contribution to regional development.

The following method, which has been simplified to be objective but not overly dependent on data, should be used only to value the benefits of improved accessibility for small projects such as rural roads or new rural railway stations.

One of the basic positive impacts of transport is the access it provides to markets, resources, services, and employment opportunities. Accessibility is measured by the quality of transport infrastructure and services available. Improved access gives a number of socioeconomic benefits such as-

· Reduced cost of transport (lower vehicle operating costs).

· Travel time savings (higher speed of travel).

· Increased resource utilization (lower cost of accessing resources).

· Increase of productivity of resources (reduced losses, marginal revenue is higher).

· Increased employment (cost of access to employment is less).

The above benefits can be combined into the following general categories-

· Travel Time Savings.

· Vehicle Operating Cost Savings.

· Regional Development Impacts.

4.5.2. Travel Time

Travel time is important mostly for passenger travel. The general approach would be to conduct a survey and obtain details of trips made and current time taken, to estimate times per trip after project implementation, and to calculate potential time saving. In the short method, travel time saving could also be estimated using average trip rates as shown below:

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Step 1: Calculate the number of Households in the Project Impact Area: The project impact area should be the area that would have a direct benefit in terms of significantly improved access. Areas that would not have a significant impact—for example, because facilities are already available or because they are too far away—should not be included.

In this respect, and in the Sri Lankan context, households located more than 1 km (on either side) from the road (or station) should not be included, unless it can be proved that no other equal facility exists at a closer distance for such households.

It would be most useful to mark the location of the facility on a map and thereafter identify villages and households that would benefit.

Table 4.15: Calculation of Households in Project Impact Area

Name of Area (Village) Distance from Proposed Road (or Station) Number of Households

TOTAL

Step 2: Calculation of Travel Time Saving: The travel time saving generated for the project impact area can be summarized by trip purpose as shown in Table 4.3. Some of the locations to which trips are attracted, such as the DS Secretariat, would be actually be a proxy for all Government Offices such as Agricultural Extension Offices, etc. If a facility already exists within the PIA and if access to that facility is not improved significantly, then there should be no difference in travel times shown with and without the project and there should be no travel time saving for that particular trip purpose.

Step 3: Estimation of Cost savings from Goods Transport: Savings from goods transport may be estimated using Table 4.5, where quantity of goods transported for a week, by type, and the range of transport costs of such goods is given. These would have to be estimated either from a small survey or from a knowledgeable and reliable source from the area.

Step 4: Valuation of Direct Transport Benefits: The value of annual benefits accruing from the project can be obtained by converting the savings calculated in Tables 4.15 and 4.16.

§ Savings in Passenger Travel = Daily Sum of Travel Time Saved (from Table 4.15) x Average Value of Time (Rs/hour) x 330 (days/year)

§ Savings in Freight Transport = Weekly Sum of Freight Transport Saving (from Table 4.15) x 52 weeks/year

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§ Total Direct Transport Savings = Savings in Passenger Travel + Savings in Freight Travel

The mean value of travel time appropriate for rural transport can be obtained from Table 4.3. If distribution of user groups (by vehicle type) is known then a mean value could be calculated based on the proportion of travel by each group. Otherwise a mean value based on assumed composition of rural transport in Sri Lanka which is Rs 23.00 per hour (1999 prices) for motorized passenger travel and Rs. 8.62 per hour for non-motorized travel.

Table 4.16: Calculation of Passenger Travel Time Saving

One-way Round Trips Travel Time Travel Time per day Saved per day (minutes) per Household (minutes/day Access to per HH) Without With From Standard 2 x [(1)-(2)] x Project Project Survey Rate51 [3(a) or 3(b)] (1) (2) (3a) (3b) § Primary School 0.4 § Secondary School 0.4 § Clinic/Hospital 0.2 § Post Office/Major Banks 0.2 § DS Secretariat 0.1 § Employment Within PIA52 - § Employed Outside PIA53 - § Visitors to PIA (traders, § officials, friends, relatives) 1.0 § Total Minutes - - - - § Total Hours - - - - § Households in PIA - - - - § Total Hours in PIA - - - -

Step 5: Calculation of Index for Regional Development: Regional development refers to new development that is anticipated to occur due to the transport project. For the short method, such benefits may be estimated using an index to factor Total Direct Transport Savings. The index is based on access to different services, employment opportunities, resources, etc., as given in Table 4.17.

Step 6: Calculation of Accessibility Index: Availability of existing transport would also influence regional benefits. This can be assessed in terms using an index as shown in Table 4.18. The points for this would be added to the points for regional benefits and an index with 130 maximum points could be earned.

Step 7: Calculation of Regional Development Benefits: The following multiplication would give the annual benefits from the project:

51 Source: Rural Transport Policy Study (IT Sri Lanka, 1993) and PG Student Projects (UoM, 1999) 52 Project Impact Area as defined in Step 1. 53 This should be obtained from a survey, as it depends on employment rate and nature of employment.

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§ Regional Development Benefits = Total Direct Transport Savings x Total of Regional Benefit Index/100.

Table 4.17: Calculation of Cost of Freight Transport

Goods Cost per Unit Freight Type of Commodity (Kgs/Liters) (Kgs/Liters) Transport per week (Rs.) Savings Without With Per week Project Project (Rs) Cash Crops (Tea/Rubber/ C’nut) Paddy/Rice Vegetables/Fruits Other Agricultural Products Forestry Products Animal Husbandry (milk, meats) Processed Foods Manufactured Consumables Fuels Agricultural Inputs Industrial Inputs Industrial Output (handicrafts) Other TOTAL

Step 8: Calculation of Total Transport Benefits: Total transport benefits can be obtained by adding the direct transport benefits to the regional development benefits calculated above. This can then be given as:

§ Total Annual Transport Benefits = Total Direct Transport Benefits + Regional Transport Benefits

Step 9: Calculation of Project Lifetime Benefits: It is generally observed that in regional areas, where new transport facilities are provided, the growth in traffic is higher than the national averages. This is because transport demand in such developing areas is in the stages of initial rapid growth. National travel growth rates of 4% have been observed since Independence, but rural areas could be assumed to experience 6-7% growth per annum. Benefits, however, should be discounted over the project period using the discount rate. As discussed in Section 3.3.5, the discount rate to be applied depends on a number of factors. However, in order to simplify the estimation of lifetime benefits, this process can be made easier by assuming that the growth in traffic would be approximately equal to the discount rate. In which case, the lifetime benefits would be computed as follows:

§ Lifetime Project Benefits = Total Annual Transport Benefits x Project Life Time (years)

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Table 4.18: Estimation of Regional Development Index

Is there Significant Improvement in Range 0 to 1 Max. Points Points Earned Access to…. (1)54 (2) (1) x (2) Primary School 10 Secondary School 10 Clinic or Hospital 10 Bank 5 Post Office 5 Long Distance Bus Route/Railway Station 5 DS Secretariat 5 Weekly Pola 15 Produce Collection Centre 10 Industrial Area 15 SUB TOTAL 90 Bonus Points for Poor Access No other road/footpath available 20 Only footpath/non-motorable road available 10 Only fair-weather road available 5 Longer Road Available 5 TOTAL 130 (max)

54 To be defined by the analyst to reflect the degree of impact. Zero would mean no improvement in access and one would mean a high impact. Intermediate values also could be given.

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CHAPTER FIVE

5. CRITERIA FOR SELECTION

5.1. Fundamentals

The basic determinant in selecting projects for implementation is that they produce socio-economic benefits that are greater than their economic costs and so contribute to national development. Similarly, when choosing among projects, the ones that produce the greatest net benefits should be preferred, other things being equal. Net Present Value (NPV), which is defined in Section 3.4, most directly measures this net benefit and thus is the most suitable criterion for appraising competing projects and for ranking them by priority. Economic Internal Rate of Return (EIRR) is useful for general screening of projects, but is less appropriate for ranking projects.

Benefit-cost analysis, with its associated valuation techniques, is an objective and valuable procedure to determine NPV and is generally accepted as the best tool to evaluate transport sector projects. It allows decision making to be more informed, but does not turn decision making into a mechanical process of approving the projects with the highest numbers. The judgement of the appraiser is still critical – for example, in evaluating the "correctness" of feasibility studies, in appraising projects with similar net benefits, in appraising projects with significant non-quantifiable benefits and costs, in considering the institutional capabilities of agencies to effectively implement the projects, and so on.

Transport supports broad societal goals, some of which are not related to economic efficiency, are difficult to predict, or cannot be simply reduced to monetary equivalents. In public sector projects, especially, non-economic or political criteria, which cannot be incorporated in benefit- cost analysis, must also be considered in project selection. In such cases, the role of benefit-cost analysis is to give policy makers better information on which to base their decisions and to make political decision making more transparent and informed.

Even when benefit-cost analysis can include all relevant factors and accurately determine net benefits, there may still be other practical considerations that require different decision criteria to be applied. This chapter examines the practical issues faced by decision-makers in deciding between projects in the transport sector—diverse as they are—and introduces different decision criteria that may be used.

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5.2. Other Bases of Selection

Benefit-cost analysis provides the decision-maker with information about the comparative viability of given projects or alternatives. In order to make the “optimum” decision, such information may be used in conjunction with other decision making criteria, such as-

· Matching investment ceilings.

· Total NPV or Weighted Rate of Return.

· Least capital cost.

· Meeting Legislative imperatives.

· Other.

5.2.1. Matching Investment Ceilings

Investment proposals are usually not appraised with an “open-ended” investment envelope. To the contrary, the decision-maker often has to “manage” within a given resource allocation. In this situation, no matter how high the viability parameters of a project alternative, the decision-maker will be unable to select the project if the investment envelope is inadequate. Therefore, one of the important criteria for decision would be the “investment ceiling”.

Example: Let us say that three projects—A, B and C—have been categorised as “viable” according to BCA results. Assume that Project A, at the appropriate discount rate, offers the highest Net Present Value (NPV) of Rs 500 million, Project B the next (Rs 300 million), and Project C the lowest in this category (Rs 200 million). Project A requires Rs 100 million as investment, whereas B and C require Rs 50 million and Rs 20 million, respectively. If the available investment envelope is Rs 60 million only, the decision is constrained by this, and Project B will be selected, as A cannot be implemented even though it has the highest viability parameters as indicated by the BCA.

The above situation frequently occurs when authorities responsible for resource allocation, such as the Department of National Planning, consider an investment portfolio. Consider the following situation:

Example: Let us consider a situation where the "investment envelope" for new roads in a Province is Rs. 100 million and

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three different road projects are competing for the funds. A study has considered three alternatives for each project, with the results shown in Table 5.1.

Table 5.1: Economic Parameters of Projects & Alternatives in Portfolio

Project Alternatives Project Cost (Rs. Mn) NPV @ r% DF Rank Road between 1 : Thro C 10 100 Mn 1 A & B 2 : Thro D 50 50 Mn * 3 : Thro E 20 - 10 Mn No Road between 1 : Thro U 50 75 Mn 1 X and Y 2 : Thro V 20 40 Mn 2 3 : Thro W 10 -2 Mn No Road between 1 : Thro R 30 60 Mn 2 P & Q 2 : Thro S 60 150 Mn 1 3 : Thro T 40 10 Mn 3

It is clear that Alternative 3 for the road between X and Y does not offer a positive NPV at the required economic rate of return (if the economic rate of return required from road sector projects is considered as r%, for example). Therefore, that Alternative can be rejected. Similar screening can be done for Alternative 3 of the road between A and B (although with less confidence, as the negative values are smaller).

An important inference in this example, would be the rejection of Alternative 2 of the project for a road between A & B (refer * in Table 5.1) based on the Principle of Incremental Analysis, even though this particular alternative offers a positive NPV. The logic is that an alternative with a higher capital investment will be considered only if it offers a positive incremental net present value. However, Alternative 2 requires Rs. 40 mn more incremental investment, whereas, the incremental NPV is negative (i.e. reduction from Rs 100 to Rs 50 mn.). Therefore, it can be inferred that Alternative 2 will never be considered for implementation where Alternative 1 is available. As such, we can eliminate Alternative 2 altogether from the analysis, although it has a positive NPV at the Minimum Accepted Rate of Return (MARR).

The remaining alternatives can then be ranked according to their NPV as indicated in Table 5.2, where their investment requirements are tabulated:

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Table 5.2: Capital Requirements for Alternatives in Project Portfolio

Capital Requirement (Rs Mn) Alternatives/ Project Road between Road between Road between A – B X – Y P – Q (Project I) (Project II) (Project III) Alt Ranked 1 10 50 60 Alt Ranked 2 - 20 30 Alt Ranked 3 40

If the total available investment envelope is Rs 100 million, there is no way to choose the best alternatives in all three projects. If for example, the best alternative for the road between P and Q (Project III), is picked up, only Rs 40 million will be left for the other two projects. Therefore, the decision will have to be made to pick up the best alternative for the road between A and B (Project I) with the second best alternative for the road between X and Y (Project II).

This shows how investment ceilings could impose constraints on making decisions purely based on the viability parameters revealed by the benefit-cost analysis.

5.2.2. Total NPV or Weighted Rate of Return

In the above example, we have indicated the possibility of selecting the best alternatives for Projects I and III, and the second best alternative for Project II. However, other combinations may also be possible to meet the objective of implementing all three projects. For example, one can decide to select the best alternatives for Projects I and II, and the second best alternative for Project III. It is important, in such a situation, to identify the most beneficial combination.

One way in which this may be done is simply by adding the NPV of the different combinations of alternatives and choosing the combination with the highest total NPV.

Example: In our earlier case, the order of alternatives for each project could be tabulated as shown below:

Table 5.3: NPV of Alternatives

Alternative/ Project I Project II Project III Project (Invest) (NPV) (Invest) (NPV) (Invest) (NPV) Best Alt. 10 Mn 100 Mn 50 Mn 75 Mn 60 Mn 150 Mn 2nd Best Alt 20 Mn 40 Mn 30 Mn 60 Mn 3rd Best Alt 40 Mn 10 Mn

Combination A—the best alternatives of Projects I and II and the second best of Project III—has an investment envelope of Rs 90 million. Combination B—the best alternatives of Projects I and III

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and the second best of Project II—also has an investment envelope of Rs 90 million. Combination A, however, has a total NPV of Rs 235 million for the three projects, whereas Combination B has a total NPV of Rs 290 million.

As the total NPV of Combination B is greater than that of Combination A, the Combination of B — i.e. the best alternatives of Projects I and III and the second best alternative of Project II, should be selected.

Another way to identify the most viable combination of projects is to use the weighted Economic Internal Rate of Return (hence the name “weighted rate of return” approach), particularly if the investor is looking for faster returns. The logic in this case is that resources should be used in ventures that give the highest overall rate of return.

Example: In our earlier case, let us say that the EIRRs of the “viable” alternatives are as shown in Table 5.4 below:

Weighted average rate of return is calculated by weighting the return on each alternative according to its investment. Accordingly, Combination A—with Rs 10 million at 15%, and Rs 50 million at 12%, and Rs 30 million at 12%—would have an average weighted return of 12.33%. Similarly, the weighted average rate of return for Combination B would be 13.22%. This means that Combination B of alternatives would maximise the rate of return on investment.

Table 5.4: EIRR of Alternatives

Alternative/ Project I Project II Project III Project (Invest) (EIRR) (Invest) (EIRR) (Invest) (EIRR) Best Alt. 10 Mn 15% 50 Mn 12% 60 Mn 14% 2nd Best Alt 50 Mn 10% 20 Mn 10% 30 Mn 12% 3rd Best Alt 40 Mn 10%

In the above example, the decisions implied by bot NPVC and EIRR based criteria are the same, i.e. combination B of alternatives should be selected for implementation. However, there can be a possibility that the two bases of analysis give rise to divergent decisions.

If in our earlier example, we assume a different set of EIRRs as given in Table 5.5, then, the Combination A with projects of Rs 10 mn at 15%, Rs 50 mn at 12% and Rs 30 mn at 14%- would have an average weighted EIRR of 13%. Combination B – with projects of Rs 10 mn at 15%, Rs 20 mn at 10% and Rs 60 mn at 12% respectively, would have an average weighted EIRR. of only 11.89%. This means that based on the 'faster return' criteria, Combination A should be accepted as it offers greater weighted EIRR compared with Combination B.

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Table 5.5 : Example of NPV & EIRR

Alternative/ Project 1 Project II Project III Project Invest NPV EIRR Invest NPV EIRR Invest NPV EIRR

Best 10 mn 100 mn 15% 50 mn 75 mn 12% 60 mn 150 mn 12% 2nd Best 20 mn 40 mn 10% 30 mn 60 mn 14% 3rd Best 40 mn 10 mn 10%

The above is an example, where two different decisions are implied by two different analytical bases. Analysts should therefore be mindful that total NPV indicates the net benefits offered by a given combination, whereas the EIRR indicates how quickly the benefits can be reaped. In theory, if higher returns are expected, then such an investor should use a higher discount factor, which would automatically correct the divergence between the decisions implied in two methods. Therefore, once the MARR is determined, the indicators given by the NPV analysis should be preferred.

However, when the difference of the NPV between the two alternatives is close enough and the investor preference is for early recovery of costs, then the alternative that offers the greater EIRR maybe selected- even though it may have a lower NPV compared to the alternative at the MARR.

5.2.3. Least Capital Cost

When investors are faced with a capital shortage, an obvious constraint is the investment ceiling. The above sections show how to make the best selections in such circumstances. However, there are instances where investors become so pressed by capital shortages that they are compelled to sacrifice benefit-cost criteria to save capital. This is not a favourable position, but the possibility of such realities occurring cannot be ruled out.

Assume that the investor in the above case is concerned with saving capital, in order to make additional investment with the saved funds (this is always true as demand for resources in developing economies always exceeds availability). The investor might then choose to assign greater priority to less capital-intensive alternatives, even if they are not the optimum combinations.

Example: if the best alternative of Project I and the second best alternatives of Projects II and III are selected, the total capital cost would be Rs 60 million for all three projects, enabling the investor to save Rs 30 million vis-à-vis Combination B as described above. The weighted average rate of return, for this choice, would only be 11.8%, much lower than that of

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Combinations A and B. However, the investor, in this case, could implement a fourth project, while going with viable alternatives (EIRR above benchmark) for Projects I, II, and III. An example would be constructing a wooden bridge instead of an iron bridge. The net benefits might be lower, perhaps due to speed and load restrictions, but the access road is provided (with acceptable viability parameters), achieving the main objective of connecting two localities.

The deviation from benefit-cost logic is more significant in this case, but having performed a BCA enables one to pick from “above the bench-mark” alternatives and, hence, to be confident that the selected combination will not result in an economic loss, even if it is not the best combination.

However, the analyst must ensure that, in such circumstances, the capital that is saved is invested in ventures with as high returns as possible. This is because the more the deviation from the combination of best projects, the more would be the deviation from the maximum achievable NPV as clearly depicted in the Principle of Incremental Analysis.

5.2.4. Least Cost Approach

There is a possibility in certain situations, that the benefits of a set of alternatives to a project are the same. Though such is not commonly found in the transport sector, one cannot exclude the possibility. In such cases, it is possible to ignore the benefits streams and evaluate the alternatives based on costs alone. Naturally the 'least cost' (life cycle costs in this case should include the operating and maintenance costs) alternatives can be selected in such a case, as the benefits would be common to all alternatives considered.

Example: In generation of electricity, one kwh supplied to the national grid will be valued similarly, irrespective of the source of generation. Therefore, this could be evaluated on the basis of determining the source of supply with the least costs.

However, one has to be careful in adopting this method. It leads to ignore the benefits accruing from the project activity (such as those concerned during the construction phase, employment etc) and externalities.

Example: There are two alternatives to obtain buses of a certain technical specification. In the one case, these buses may be imported and in the other, they could be assembled locally. The latter could have a number of benefits where although the

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economic costs are similar, there are additional benefits that need to be included in the selection criteria.

5.2.5. Meeting Legislative Imperatives

Selection criteria are influenced by legislation. A project and/or an alternative with a very high rate of return may nonetheless have to be rejected because of statutory requirements. For example, the shortest and lowest cost alternative for a road project might be across a nature reserve, resulting in the highest NPV and EIRR among the alternatives, particularly if the costs of environmental impacts are not valued and incorporated. However, if environmental legislation prohibits such activity in the reserve, the alternate route may have to go around the reserve at greater cost and with lower returns. Note also that legislative requirements do not necessarily conform to economic logic. If they do, then the extended benefit-cost analysis will coincide with the legal requirements. Otherwise, even the 'best economic alternative' would not be legally possible as the legislative imperatives would outweigh economic criteria and a decision-maker would have to forego the best alternatives in favour of next best.

When project proponents choose alternatives for evaluation, those that contradict laws or regulations should not be considered, as it is a waste of resources to study options that are prohibited.

5.2.6. Other criteria

Decision makers may sometimes have to select less viable alternatives due to urgency – for example, when a bridge has been washed away and must be replaced as soon as possible. Care should be taken, however, not to confuse real urgency caused by external forces (e.g., "force majeure") with artificial urgency caused by earlier delays in taking action.

Public pressure and political interests also interfere with decision makers’ freedom to select the most optimal alternative. As interference that results in sub-optimal decisions may result in heavy socioeconomic costs, it is advisable to keep such interventions to a minimum. This might be done, in part, by educating pressure groups about the economic benefits and costs of different alternatives.

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CHAPTER SIX

6. CASE STUDIES

6.1. The Appraisal of the Southern Highway (A Review of Previous Studies)

6.1.1. Introduction

The Southern Highway Project (now referred to as the Southern Transport Development Project) has been one of the largest infrastructure development projects considered in Sri Lanka. It is at present in its detailed design stage after having been accepted for funding by a combination of donor agencies.

This Case Study will be based on a comparison of three previous studies on the Southern Highway over a period of seven years. By such a comparison, the case study will seek to investigate the general lapses that occur in a study of this nature. The case study will then present the recommended practice for a project of this nature and its appraisal. A model Concept Paper is also provided.

The three studies will be referred to as Study 1, Study 2 and Study 3.

6.1.2. Stages in a Highway Feasibility Study

The evaluation of a project of this nature should investigate the adequacy of each of the steps given as follows: 1. Identification of Project Objectives. 2. Identification of Project Impact Area. 3. Identification of Alternatives. 4. Consideration of Government Policy. 5. Justification of Alternatives Selected. 6. Collection & Analysis of Historical & Present Data- · Transport Demand. · Vehicle Ownership & Use.

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· Socio-economic. · Transport Network Features. 7. Formulation of Future Project Scenarios- · Socioeconomic features. · Transport Features (with project). · Vehicle Ownership. · Regional Development & Growth.

· Regulation.

Project Benefits 8. Estimation of Future Transport Demand for each project alternative and each testing scenario- · Total demand on network. · Demand generated by project. · Diverted demand (or choice of using) new facility. 9. Estimation of Benefits & Valuation for each project alternative and each testing scenario- · Savings in Vehicle Kms. (or directly VOC). · Savings in Travel Time savings (or directly VOT). · Reduction in Accidents. · Impact of regional Development. · Estimation of Vehicle Emissions.

Project Costs 10. Collection of Data for Physical design of each project alternative- · Terrain. · Land Use. · Geological. · Hydrological. · Environmental. 11. Design of Facility for each project alternative- · Physical features (size, length). · Technical features (speed, capacity). · Design Life. 12. Collection and Analysis of Cost of each project analysis for each testing scenario- · Construction. · Operation & Maintenance.

Benefit Cost Analysis · B/C Ratio. · NPV. · EIRR.

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6.1.3. Identification of Project Objectives

There is evidence of a lack of consistency in the objectives for the project between the three studies. The implicit objective in Study 1 is to provide an ‘Inland Trunk Road from the Outer Circular Road to Galle and Matara’. In the case of Study 2, the RDA has provided the following objectives-

· To provide the required accessibility for future development of the Southern Province and part of the Western Province and the Uva Province included in the proposed Southern Area Development Plan.

· To provide a highway to act as catalyst in encouraging and attracting industries and services for the economic and social development of the Western and Southern Provinces and beyond.

· To provide a highway that will be part of a proposed access controlled highway network in Sri Lanka to improve inter-regional transportation.

However, in the case of the Study 3, the objectives do no appear to be explicit. There is an implicit objective to maximize the traffic diversion from the existing A2 highway, presumably in order to investigate the feasibility of operation as a toll road.

Conclusion

There is evidently an absence of a clear and consistent set of objectives for the proposed road. The stated objectives change significantly from study to study, perhaps reflecting the thinking of the officers concerned or that of different funding agencies. Whatever the reason, the objectives for this study should have been set out early, and refined and modified from study to study, if so required or when additional information became available. This has not happened.

Recommended Objectives

A suitable set of objectives for this project would have been-

1. Increase the mobility (overall speed of travel) between the 2nd and 3rd order urban centers in the Galle and Matara Districts and Colombo District, the Port of Colombo and the Airport at Katunayake.

2. Provide for improved accessibility for future economic development of the hinterland areas of the Galle and Matara Districts, especially areas that have:

§ high incidence of poverty,

§ availability of natural and human resources for industry, and

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§ the potential for developing eco-tourism.

3. Reduce congestion and accidents on the existing A2 highway between Colombo and Matara .

4. Provide a highway that would be part of a proposed access controlled highway network in Sri Lanka.

6.1.4. Identification of Project Impact Area

The geographical project area is not defined in Study 1. In the case of Study 2, the project area has been defined by the consultant as the districts of Colombo and Kalutara in the Western Province, and Galle and Matara in the Southern Province. The project area for Study 3, referred to as the Southern Transport Corridor, is defined in the TOR for the study ‘as a corridor 10-15 kms from the coast’.

Conclusion

It appears from the reports that adequate thought has not been given to defining the project impact area at the time when studies were commissioned. This has lead to a number of problems particularly in assessing benefits related to traffic movement.

Recommended Practice

For a project of this nature, it would have been best to define the project impact area in the TOR. This could be given in terms of the DS Divisional areas that should be considered for direct impact for improved access and mobility.

6.1.5. Identification of Alternatives & Justification of Selection

The issue of alternatives has also varied between studies. In Study 1, the terms of reference were for ‘an inland trunk road’. Therefore, the consultants have investigated four different (in some cases partial) traces. The study has not called for any other alternative such as improvement of the existing A2 or any form of railway improvement.

In the case of Study 2, although the objective stated is ‘to provide a highway’, a detailed and parallel consideration is made of (a) the improvement of the A2 and (b) the improvement to the railway. However, it assumes that the trace selected by the pre-feasibility (Study 1) is the best trace and does not attempt to investigate different road traces. It does however, examine two secondary alternatives named (a) with and (b) without the proposed Outer Circular Road. This is a useful exercise since the Outer Circular Road is a complementary project that would significantly affect the use of the Southern Highway.

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Consideration of alternatives in Study 3 seems to have departed from this approach, where it appears that a decision is made ‘a priori’ to construct a highway. However, the provision of cost and benefit information that would have been considered necessary to evaluate alternatives such as the railway or the improvements to existing roads have not been addressed in depth. The only alternatives discussed are the four different road traces, one of which is the original trace adopted by the previous studies. The objective ‘of increasing traffic diversion and hence the potential for toll revenue and project viability’ has been stated as a criterion for selection of these alternatives.

Conclusion

No systematic consideration of alternatives has been made throughout the investigation. This partly stems from the differences in objectives. This comparison also shows that there is no methodology in place to consider alternative transport projects. For example, the appraisal process should have investigated rail transport as an alternative at an early stage.

Recommended Practice

The better practice would have been to consider all the reasonable alternatives that can be proposed for attaining the stated objectives known at the time of the pre-feasibility stage. Even if the project proponent agency (in this case the RDA) is not responsible for development of the railway, the Ministry of Transport should have initiated the investigation of the railway alternative. Similarly, if a regional development plan is to be implemented then the NPD should take initiative to include it in the objectives.

The following alternatives that could have satisfied the stated objectives and should have been considered at both pre-feasibility and feasibility stages are given in the table. A primary alternative refers to a change in the transport mode itself. Secondary alternatives would investigate sub alternatives of a chosen (or proposed) primary alternative.

Table 6.1: Selection of Alternatives

Objectives55

1. Mobility 2. Access 3. Congestion 4. Network & Accidents Development Primary Alternatives Improvement to A2 Ö Ö Ö Improvement to Railway Ö Ö Ö New Highway Ö Ö Ö Ö Secondary Alternatives Trace I (Coastal) ***** ** **** ** Trace II (Inland- Low Ground) ***** **** **** **** Trace III (Inland- High Ground) ***** *** **** ****

55 Recommended objectives stated in Section 6.1.3

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The Ö indicates that the alternative has the potential to satisfy the stated objective. The number of stars (*) denote the anticipated level of attainment of the objectives by each secondary alternative (trace).

6.1.6. Consideration of Government Policy

Study 1 has very little consideration of any overall policy framework for the proposed road. In the case of Study 2, the objectives refer to the proposals in the Southern Area Development Plan (SADP). This study has therefore investigated the different development scenarios including the proposed formation of the hierarchy of urban centers given in the SADP. Moreover, Study 2, also investigates two different secondary traces based on the intended connection to the proposed access controlled highway network in Sri Lanka, which is referred to in the objectives. Study 3, however, has taken a different path from Study 2, in assuming that future development would follow the patterns of present development rather than on a planned basis. Only present industrial locations are considered. An implicit assumption is made that the development environment would not be policy based per se. The Government comments on Study 3 have pointed out the lack of consideration of regional development benefits. However, very little investigation has been carried out in this study on overall policy framework of either socioeconomic growth or the connectivity of the future limited access network.

The studies also take different approaches towards financing and cost recovery of the project. In Study 2, there is no consideration of external funding. Tolls are investigated for cost-recovery. In Study 3, the intention is for donor agency funding and tolls are investigated on the basis of maximizing revenue, although a Government Policy in this regards does not seem to exist.

Conclusion

The absence of coherent and relevant development plans and policies appear to lead to different assumptions by different studies. In this context, the importance of national planning and policy formulation cannot be over emphasized.

Recommended Practice

The Department of National Planning should, at the outset of a major study, provide the basic national and regional planning polices and objectives within which the study should be carried out. Particular attention should be given to the following policies and strategic plans-

· Transport. · Land Use. · Urban Development. · Regional Development. · Industrial Development. · Tourism. · Environmental. · Infrastructure Investment.

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· Financial Cost Recovery.

6.1.7. Collection & Analysis of Historical & Present Data

The historical and present data that has been collected is shown in each of the studies is summarized in Table 6.2. Historical data refers to that which will describe the situation within the project impact area up to date.

Table 6.2: Historical & Present Data Used in Studies

Historical & Present Study 1 Study 2 Study 3 Data Transport Demand Traffic Estimates Not considered Traffic Counts (94-96) Traffic counts (88-96) updated shown. New counts and by new counts and O-D O-D matrix through matrix through interviews interviews. Vehicle Growth Patterns Historical national Provincial growth rates National growth rates used for growth rates revised with 96 data on historical growth with DSD basis provincial data for estimating present ownership levels. Fuel Sales Historical/national Not considered Historical growth rates by growth rates. district Public Transport Demand Estimates from Surveys and counts to Counts to determine present DEMIDEPT Model determine present flows. demand. Socioeconomic Population Historical provincial Historical provincial Present data by DSD. growth rates. growth rates. GDP Historical national Historical national growth National growth rates by growth rates and rates and present by sector. present by province. province.

Land Use Not considered. Present data at district Not considered level Employment Not considered. Present data at DSD level. Present data at DSD level Tourism Not considered Not considered Not considered Agricultural Production Not considered Not considered Present data at district level Industrial Production Not considered Not considered Present data at district level Natural Resources Not considered Minerals, Coastal Not considered. Transport Network Travel Speeds Estimated only for Speed survey on all links Speed survey on A2. present travel on A2. in PIA Public Transport Not considered. Route and transfer Not considered. Network analysis. Road Characteristics Not considered 20 items of data collected Data assumed in order to for all links in PIA for classify links to 5 pre- input to TransPlan model determined types for input to HDM model Accident Statistics Not considered Data for 3 years on A2 Data for 1 year on A2

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Conclusion

It is evident from the above calculation, that while the three studies have considered most of the basic data that is usually collected in a study of this nature, that the manner in which they were collected varies sharply. In some cases, there is reliance on historical data, while in others model estimates are used even without validating with present traffic estimates to check for accuracy. A question regarding the accuracy of the data is also evident. Accuracy levels have not been specified in the TORs for these studies.

Recommended Practice

Different project studies and appraisals may adopt different methods for analyzing the transport demands. However, the following specifications should be made in the TOR with respect to the analysis-

· Collection of Historical Data for 10 years where available.

· A sample size of not less that 10% for traffic and transport surveys.

· Specification of data that has to be analyzed (e.g. tourist nights, flooding, vehicle registrations etc.).

6.1.8. Formulation of Future Project Scenarios

The basis of making transport demand forecasts and benefits has to be assumptions of socioeconomic and development growth. Table 6.3 gives a summary of the assumptions made in the different studies.

Conclusion

The three studies have used different mathematical models for estimating future transport demand. While this is not a problem in itself, the assumptions that are built into such models are not sufficiently discussed to ascertain if such models, which are usually calibrated in a different context (and country), can be applied locally. There is also no investigation on the sensitivity of these models to test the transport demand for different scenarios.

Recommended Practice

The following practice is recommended for future studies-

· Use of transport demand models only after validation for local conditions. · Use of models only if sensitive variables such as population growth, employment, vehicle ownership can be tested. · Use models that can clearly incorporate local road features.

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Table 6.3: Data & Assumptions Used for Future Estimates

Present Data Study 1 Study 2 Study 3 Socioeconomic Population Assumes 1.2% p.a. Uses declining rates Not used in model growth for model from 1.16% to 0.63% estimations. estimates p.a. for model inputs. GDP Assumes different Assumes different rates Assumes different rates between 5.3% between 4.5% to 7% values between 2% to p.a. to 7.1% p.a. in p.a. in PIA. 6% as three growth Southern Province scenarios. Land Use Not used in Not used in estimations Not used in estimations estimations Employment & Labour Force Not used in Projected but not used Not used in estimations estimations in final estimation Regional Development Tourism Not used in Although not identified Not used in estimations estimations separately, these Agricultural Production Not used in impacts are considered Not used in estimations estimations by estimating regional Industrial Production Discusses the impact development. The Not used in estimations of the Koggala FTZ different developments and Galle Port within the PIA are impacts treated by differential Natural Resources Not used in growth rates assumed Not used in estimations estimations for different DSD areas. Transport Demand Vehicle Growth Not used in Not used in estimations Not considered reliable estimations Traffic Growth Based on a macro Based on an assumed Based on a macro model model of 1.2 time growth rate between of 1.1 to 1.3 times the income elasticity for DSD in the PIA based growth rate of GDP. passenger travel and on the OD matrix 1.0 for freight travel. calculated. Public Transport Growth Based on 1.2 times Based on an assumed Based on a macro model income for passenger growth rate between of 1.1 to 1.3 times the travel. DSD in the PIA based growth rate of GDP on the OD matrix calculated. Transport Network Travel Speeds Speeds calculated Based on TransPlan Based on estimates of using HCM curves. model HDM-Q model Public Transport Network Not considered Considered separately Not considered for intercity travel separately Road Characteristics Not considered Considered in Assumed to fall within calculating free flow one of five link types speed of each link Scenarios Tested I – Initial Growth Only moderate growth Only high growth Rate of GDP6% reducing to 4%. II – Initial growth rate of GDP at 9% reducing to 7%

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· Use models that can clearly represent local traffic mix and conditions.

· Provide an acceptable method of estimating regional development benefits (as discussed elsewhere in this book).

· A clear description of how different development policies and plans have been incorporated in the transport demand estimations.

6.1.9. Estimation of Demand for Project Alternatives and Testing Scenarios.

The future levels of transport demand for each alternative projects and for each scenario tested should be estimated using an accepted methodology. This process should have at least three distinct stages namely-

· Total demand on network.

· Diverted demand (or choice of using) new facility.

· Demand generated by project.

Estimation of Total Demand: In this process estimates of future total transport demand in the region is calculated using an accepted method of forecasting. In the three studies, different approaches have been adopted. In Study 1, the total demand is based on two models (a) inter-district O-D model for passenger vehicles and (b) DEMIDEPT O-D model for public transport. The University of Moratuwa has calibrated both models in Sri Lanka. The proposed road has been sectioned to four and estimates are made for each of these. Future demand estimates are based on a flat rate growth rate that varies between sections but is constant over the project life of 20 years. There is no evidence if the model estimates have been verified with present day counts.

In Study 2, the project area is divided into 25 zones. The total demand is estimated by first calculating the existing flow between these zones by means of a traffic and transport survey. Growth rates that vary between zones, vehicle types and time period are then applied to obtain the growth in the flows between the zones.

Study 3 adopts a similar approach, where the differences with Study 2 are confined to the selection of zones, vehicle types, growth rates applied and the locations where the data was collected. The results however, have varied sharply with the Study 2 estimates since the survey locations in this study have been exclusively on the A2, and thus traffic between hinterland zones are not included.

Diversion of Traffic: The proposed road will only attract a part of the traffic. The remainder of the traffic would be diverted to existing modes such as railways and onto the existing A2. There is potential for other forms of traffic such as domestic air and coastal shipping.

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In Study 1, a simple diversion has been used with travel time as the only criterion of diversion. In the case of Study 2, a logit type model has been used taking both vehicles operating cost and travel time as a composite variable to determine the diversion. In Study 3, the HDM model is applied to determine this on the basis of vehicle operating costs (which in the HDM model also includes travel time).

However, none of the models investigates the movement of traffic from rail to road or even the movement from road to a future new mode of transport.

Generated Demand: Generated demand refers to demand in addition to the historical trend. This is usually produced when new or improved transport infrastructure reduces overall transport costs. Then accordingly, there is a higher demand for transport. This marginal increase is referred to as Generated Traffic.

In Study 1, a flat rate of 50% of the diverted traffic has been assumed as generated traffic. In the case of Study 2, the DEMIEPT model has been used to generate a factor that would illustrate the increase in traffic between any two zones. In the case of Study 3, it is not clear how this is considered.

Conclusion

The demand projections in terms of Average Annual Daily Traffic (AADT) of the three studies are summarized as follows:

Study 1:

· By year 2000, AADT is estimated to range from 7,522 to 11,640 and at low projections from 18,130 to 28,065 by 2020.

· By year 2000, AADT is estimated to range from 9,943 to 15,389 and at high projections from 42,227 to 65,354 by 2020.

Study 2:

· By year 2001, AADT is estimated to range from 2,268 to 6,613 and at moderate projections from 12,866 to 29,015 by 2020.

· An alternative scenario testing the possible connection of the Southern Highway to the Outer Circular Road shows that higher AADT ranging from 9,045 to 14,001 in the year 2001 can be obtained if this is done. That is an approximate 200% increase in traffic levels.

Study 3:

· By the year 2003, AADT is estimated to range from 2,760 to 6,890. AADT is not given for following years.

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Conclusion

The estimates from the three studies have similarities as well as far ranging differences. The differences arise from a number of differences discussed previously, which can be summarized as-

· Differences in stated objectives. · Differences in definition of Project Impact Area. · Differences in data collection methods adopted. · Differences in assumed Growth rates. · Differences in assumptions built into models. Recommended Practice

It may be prudent to ensure that the transport demand estimation process is worked out using more than one technique/model. Results could then be compared with the two results. It is also evident in the comparisons that even when previous estimates were available, the consultants have not compared their results to those obtained previously.

6.1.10. Estimation of Benefits for Each Project Alternative and Testing Scenario

Different benefits have been assumed in the three studies. These along with a brief description of the methodologies used and valuation techniques used are summarized as follows-

Savings in Travel Time: In Study 1, travel time savings have been estimated using assumed average travel times. Time savings are generalized over entire sections of road rather than by link. Also the time taken for accessing the proposed highway does not seem to have been included. The travel time savings are given for private vehicle passengers and for bus passengers separately. It is stated that only 50% of the benefits of travel time savings of diverted traffic have been assumed. The value of travel time savings has been based on a car owning income of Rs 91.67 per hour and Rs 10.97 for bus passengers. Percentage of work trips has been given at between 40-44%. How this is arrived at is not known. It is further assumed that travel time savings of less than one hour have lesser value and are therefore valued at only 10%. Also, the time value factor for work trips is assumed as 100% and that for other trips as 0%.

Travel time savings in Study 2 have been calculated using the TransPlan56 model where, the traffic speeds on the entire network have been calculated together with the diverted flows. Time savings are then calculated on the new road sections as well as existing sections on the Galle Road and link roads.

The different value of travel time savings is given in the following table. In Study 3, the travel time savings are calculated using the HDM model. The differences in speeds are based on the model outputs,

56 Developed by Transportation Engineering Division, University of Moratuwa.

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which in turn are based on the specification of roads (as one of five pre-determined types) and the estimated traffic.

Value of Travel Time: The value of travel time used in the calculation of benefits of the three studies can be summarized in the following table.

Table 6.4: Value of Travel Time Used in Studies (Rs/hr)

Study Vehicle Type Car Bus Study 1 (1991) 37.00 5.00 Study 2 (1996) 44.82 21.81 Study 3 (1998) 57.15 11.10

While there is agreement among the VOT for car users, the VOT for bus transport in Study 2 seem to be much higher than others. These appear to have been taken from the CUTS 1 study and should have been more thoroughly checked for consistency with, say, the Road User Charges approach.

Vehicle Operating Costs: Vehicle Operating Costs in Study 1 have been based on distance and speed for an assumed roughness and roadside conditions, which are considered the same on both roads. Moreover, only the benefits to those vehicles that have transferred have been included.

In Study 2, the unit VOCs are computed from the CUTS I study. The total vehicle operating cost on all links of the road network is calculated using the TransPlan model, where the costs on all links are added up. The economic costs used for the calculation of VOC at 40km/hr. are given in Table 6.5.

Table 6.5: Vehicle Operating Cost used in Studies (Rs/km)

Study Vehicle Type Cars Medium Truck Large Bus Study 1 (1991) 5.01 7.00 6.84 Study 2 (1996) 12.70 14.79 14.39 Study 3 (1998) 11.80 17.50 23.80

Reduction in Accidents: Accidents are considered in Study 1 but not costed. In Study 2, accident costs on the existing A2 highway have been estimated using accidents statistics from the A2 for three years and multiplying with unit costs57. Accident costs are estimated at Rs 0.27 per vehicle km traveled on the existing A2. The study assumes that the portion of traffic diverting to the Southern Highway will operate at an accident cost of Rs 0.08 per vehicle km traveled. In Study 3, accident costs have been calculated from values referred to the Sri Lanka Road Safety Study. These values are comparable to Study 1. However, in Study 3, an assumption is made that only one in ten ‘damage-only’ accidents are

57 Accident Cost in Sri Lanka, Post Graduate Research Project, by M.B.S. Fernando and W.A.J.E. Fernando, 1995

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reported. Moreover, these accidents too are valued at the full economic rate of Rs. 57,000/=. This singular assumption has increased total accident costs several fold.

Impact of Regional Development: In Study 1, although generated traffic and contributions to industry and increased freight transport have been discussed, they have not been included in the final table of benefits. In Study 2, the economic value of the generated traffic at Rs 4.5 mn per day, has been used as a guiding factor in assuming that it will give rise to overall economic activity worth much more in the project impact area. The final value is determined at Rs 3.2 mn per day after adjusting for the economic contribution of the transport sector as against other sectoral inputs necessary for regional growth to occur. This is checked with the regional GDP and found to be around 10%.

Estimation of Vehicle Emissions: This has not been undertaken in any of the three studies.

Summary of Benefits: The benefits of the three studies summed up over 20 years (before discounting) are given Table 6.6.

Table 6.6: Total Project Benefits Estimated in Studies

Benefits (Rs mn./year) Study Vehicle Travel Time Accident Regional Total Operating Cost Savings Reduction Development Benefits savings Study 1 (1991) 15,534 145,880 0 0 161,414 Study 2 (1996)58 ß235,680à 1,173 94,810 331,033 Study 3 (1998) ß23,218à 8,221 1,107 32,546 Conclusion

It is clear from Table 6.6 that vast differences exist in the calculation of benefits among the three studies. Study 1 and Study 2 have closer total benefits although regional benefits have been ignored in Study 1. By comparison, with Study 3, the VOC and Travel Time savings are much higher in these two studies, while the opposite is true for accident benefits. The reason for the differences in accident costs has been discussed earlier. However, the differences in other benefits appear to arise from the following reasons-

· The high value of travel time for buses assumed in Study 2 (25% reduction).

· The non-consideration of hinterland trips in Study 3 (35% reduction).

· The differences in assumed GDP growth rates (35% reduction).

· The traffic generation due to lower travel times is ignored in Study 3 (30-40% reduction).

58 High Estimate as Outer Circular Road is assumed to proceed the Southern Highway

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· The Study 2, benefits are shown for the scenario of the Southern Highway with the Outer Circular Road which increases substantially the benefits for the Southern Highway (35% reduction).

If the estimates in Study 3 are increased (or those of study 2 reduced), some degree of consistency can be found in the estimates. However, these differences indicate how vastly different values can be presented for the same project.

Recommended Practice

The reporting format of benefits should be more specific, so that an appraiser could check the values. This is necessary, because some computer models have a ‘black box' image, where the internal working are not transparent and only final values are displayed. The TOR must specify that the evaluation should give certain basic travel demand statistics as shown below-

· Vehicle kms.

· Total vehicle-operating cost.

· Vehicle hours.

· Passenger hours.

· Total passenger travel time.

· Total passenger travel time costs.

· Estimated accidents.

· Total estimated accident costs.

· Quantity of Air Emissions.

· Total Value of Emissions.

· Total of goods transport volume.

· Time value of goods.

These statistics should be given for the existing (do nothing) facility as well as the proposed facility and each alternative.

Table 6.7: Comparison of Data Sources for Cost Estimates

Study 1 Study 2 Study 3

Terrain From 1:50,000 maps From 1:50,000 maps From 1:50,00 maps and 1994 aerial hots/1998 satellite images Land Use Not Discussed From 1:50,000 maps and From 1:50.000 maps and field survey field surveys.

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Geo-technical From 1:50,000 maps; Uses Study 1 data Not done. reconnaissance survey; sub surface auger tests Hydrological Catchment; Rainfall; flood Uses Study 1 data Not done runoff; drainage and flood relief structure survey Environmental Description of impacts IEE Carried out separately EIA Carried out separately

6.1.11. Project Cost

Project costs can be estimated from the collection of data for the physical design of each project alternative. The accuracy with which such data is collected will determine the accuracy of the cost estimates.

Physical & Technical Features (size, length): The physical features of the proposed project are:

Study 1: Study length 110.9 kms; initial four lane –divided, 13 meter center median; acquisition for six lanes; 4.4m bicycle lane and 6.4 m shoulder on each side. 4 major bridges; 5 intermediate bridges; 24 small bridges; 72 vehicle over/under passes; 16 pedestrian over/underpasses and 4 grade separated interchanges

Design Life: Study 1 and 3 have adopted 20 years, whereas study 2 has assumed 25 years

Conclusion

All three studies have assumed fairly close technical specifications, design life and physical features.

6.1.12. Analysis of Cost of Each Project and Testing Scenario

The construction and O & M costs are given below for the three studies:

Study 1: Construction Costs Rs 11,670 mn. (at 1992 prices) + O & M costs Rs. 2,844 mn.

Study 2: Construction Costs Rs. 17,326 mn (at1996 prices) + O & M costs Rs 2,228 mn.

Study 3: Construction Costs Rs. 18,422 mn. (at1998 prices) + O & M costs Rs 2,100 mn.

Conclusion

The above shows that construction costs unlike estimated benefits are quite close and consistent with each other.

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6.1.13. Benefit Cost Analysis

The results of the BCA and the assumption made in the analysis for the three studies can be summarized as follows: Study 1: · For Scenario I (low growth) of GDP 5.2% and traffic growth 6% @ Discount Rate of 12%; gives an EIRR 22% & NPV (1991) of Rs 5,862 mn. · Sensitivity Testing: (i) Maintenance @ 110% and benefits @ 90% gives an EIRR 22% (ii) Maintenance @120% and benefits @ 80% gives an EIRR 21% Study 2: · NPV with OCR59 at 5% is Rs 170,907 mn; · NPV with OCR at 12% is Rs 59,798,mn · EIRR with OCR but without regional benefits is 19.4%, · EIRR with OCR and regional benefits is 25%. · Sensitivity to last case : (i) without growth in traffic, EIRR is 11.9%; (ii) with constant traffic growth, EIRR 23.8%; (iii) 20% increase in costs, EIRR is 23.4% and (iv) 40% increase in costs, EIRR is 21.6%.

· Without OCR the values are NPV Rs 78,410 and Rs. 21,986 respectively, EIRR 17.3% and 18.7%; sensitivity at 2.7%; 16.6%; 17.2% and 15.6% respectively. Study 3: · EIRR of the Combined Trace is 6.2%. · Sensitivity (i). At-grade highways EIRR is 8% (ii). Cut-backs NPV at 10% is –4,404 mn

6.1.14. Proposed Project Concept Paper

The following Concept Paper has been prepared as a model. It is based on the recommendations in the previous section. The alternatives are chosen in keeping with the objectives. The estimation of costs and benefits given in the paper are based on assumed values as the detailed and accurate computation of such is beyond the scope of this study.

59 Outer Circular Road – a complementary project

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Table 6.8:Concept Paper for Southern Highway

Project Southern Highway

Classification

& t n t

e n o n

i c y e t t e n g e a m t a s o m i l e s n l e i o v e c A t b n o

a n r l a h D i l w p p h c a a e R e e e t m n N I R R M T H

e c i m n

Infrastructure m í o l o r a i n i v o

Rolling Stock c c n o

Supporting Assets E S E Objectives / Goals · Regional Development í · Faster Travel from Colombo/Port/Airport to South í · Reduce Accidents on the A2 í í · Develop a technologically superior high speed road network í · Reduce poverty in hinterland areas of the South í · Reduce congestion in the towns on A2 í í · Reduce Unemployment in hinterland areas í · Promote Eco-Tourism in hinterland areas í · Obtain technology transfer í Project Impact Area The project impact area is considered as the Kalutara, Galle and Matara districts with special emphasis on the needs of the areas beyond reasonable access from the present A class roads. Alternatives § Improvements to A2 (Colombo-Galle-Matara Road) · Improvements to Coastal Railway Line · Alternative hinterland trace Government Policy · Regional Development To provide development impetus to the Southern Province Directions · Transport To develop a high speed rail and road network · Urban Development To develop a urban township hierarchy in SP · Tourism To develop eco-tourism as new area in SP · Environmental To safeguard the natural resources as a priority · Financial Cost Recovery To recover at least O&M costs in transport projects · Industrial Development To assist the formation of small centres away from centres Justification of Proposed · High poverty in hinterland Alternative · A2 high accidents rate · Congestion at a number of places on A2 · Access to hinterland from A2 or Coastal rail line insufficient · Country needs a network of high speed roads · Will not open up natural eco-resources for tourism Selection of Alternatives Objectives for Testing 1. Mobility 2. 3. 4. Access Congestion Network & Accidents Development Primary Alternatives Improvement to A2 í í í Improvement to Railway í í í New Highway í í í í Secondary Alternatives Trace I (Coastal) ***** ** **** ** Trace II (Inland- Low Ground) ***** **** **** **** Trace III (Inland- High Ground) ***** *** **** ****

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Locality Life of Project · Project Formulation & Evaluation Period 01 Year · Construction Period 05 Years · Operational Life 25 Years Commencement 1999, January Conditions · Must be able to generate enough toll revenue for O & M · Must have an EIRR > 12% p.a. · Must be completed within 06 years (i.e. by 2005) · Must have the state of the art- technologically Scenarios to be tested · High Economic Growth of 8% p.a. with unrestrained vehicle growth · Moderate Economic Growth of 6% p.a. with unrestrained vehicle growth · Moderate Economic Growth of 6% p.a. with restrained vehicle growth · Low Economic Growth of 4 % p.a. with restrained vehicle growth No Project Project Alternative #1 Alternative #2 (Base Case) Southern Highway Improved A2 Improved Railway Costs Before Discounting

· Land Acquisition & Resettlement 1,000 3,000 · Civil Works 13,000 4,500 4,500 · Consultancy & Supervision 1,000 500 200 · Maintenance & Operations § Annual 1,000 250 500 § Periodic 1,000 250 500 · Training - · Variations & Contingencies 1,000 500 300 Sub Total 18,000 8,000 6,000 Cost of Externalities - · Congestion - 1,000 - · Environmental - · Others - Total 18,000 9,000 6,000 Benefits Before Discounting · Travel Time 80,000 20,000 20,000 · Goods Travel Time 20,000 5,000 2,000 · Vehicle Operating Cost 80,000 20,000 8,000 · Accident Reduction 8,000 13,000 10,000 · Vehicular Emissions 2,000 2,000 5,000 · Regional Development 50,000 35,000 15,000 Total 240,000 100,000 60,000 BCA @ 0 % Discount Rate (Before Discounting) BC Ratio (Benefits/Costs) 12.5 11.1 10 NPV (Benefits- Costs) 220,000 91,000 54,000 EIRR 30% 22% 20% BCA @ 10 % Discount Rate BC Ratio (Benefits/Costs) 3.0 2.0 1.4 NPV (Benefits- Costs) 27,000 9,000 2,400 BCA @ 20 % Discount Rate BC Ratio (Benefits/Costs) 2.0 1.3 1.00 NPV (Benefits – Costs) 18,000 2,700 0 BCA @ 30 % Discount Rate BC Ratio (Benefits/Costs) 1.00 0.80 0.6 NPV (Benefits- Costs) 0 -1,800 -2,400

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6.1.15. Selection Criterion

The selection of the alternatives is a complex issue. The proposed new highway clearly has the better economic parameters. However, the two alternatives also are feasible projects in their own right. The only disadvantage with the proposed alternative would be the fact that its costs are considerably higher than either of the other alternatives. If capital was constrained and required for developmental work in other sectors-even say in the integrated development of the Southern Province, then the capital envelope might have several infrastructure projects say from electricity, telecommunication, water supply etc. In this case, there might be some scope to consider the second best or even the third best alternative. This process has been discussed in detail in Chapter 5 of the Main Report.

Another consideration might be with respect to transport policy. For example, the railway alternative costs only Rs 6,000 mn. as opposed to the new highway at Rs. 18,000 mn. If the additional Rs 12,000 mn. were to be used for a complementary railway project, such as the development of the suburban rail operations, then the value of the overall benefits in terms of EIRR and NPV might be even higher. This will of course depend on the policy directive with respect to high-speed land transport. Such an investment will clearly favour the development of a high-speed rail network. This policy would then influence the selection of railway, as it satisfies the development policy for the Southern Province as well as the transport policy. On the other hand, if the policy directive was to develop a high speed road network, then even at higher costs, the new highway would be more acceptable.

6.1.16. Conclusions

The review of the three studies can be summarized as follows:

1. The objectives and the project impact area should be well thought of and properly formulated at the beginning of a project of this nature.

2. The process of estimating costs appears to be acceptable and generally consistent with each other.

3. The process of calculating benefits can be divergent (in this case as much as ten fold!). It is partly due to different objectives and impact areas assumed in the different studies. It can also arise from using different assumptions on growth rates, development impacts, traffic diversion rates, accident rates, value of time, vehicle operating costs and several other factors that would affect the final estimate of benefits. It is important for studies to be directed in this matter. The values given in this book could be used as a guide to the use of such values and assumptions.

4. It would be useful to require that a study should validate any model that it intends to use for local conditions. Furthermore, such models should be sensitive to the policy variables and parameters of

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change that a feasibility study should investigate. Moreover, the output of such models should be made available at intermediate computational stages-as discussed earlier so that the appraiser can cross-check the different stages of computation and the final results produced.

5. Project Studies of this nature require a high degree of technical skill to prepare. One or more persons who can combine to surpass or at least match the skills of those who have prepared such reports should undertake the appraisal.

6.2. Procurement of 500 New Buses (D Type)

The Sri Lanka Central Transport Board proposes to purchase 500 new (D Type) buses. The buses are primarily to service new routes so far not serviced by public transportation. However, some of buses may also be used to improve reliability on existing routes. The SLCTB will decide on the allocation of buses between new and existing routes. It is shown below that the choice between allocating buses to new routes and existing routes does not alter the analysis of the project.

6.2.1. Project Objectives and Economic Rationale

The overall objectives of the project can be stated as follows- (1) To alleviate existing transportation problems in rural areas by servicing new areas and improving reliability of areas already served. (2) Reduce pressure on the existing fleet and thereby prolong the life of buses, and (3) The project has an IRR of 38.8% and is therefore economically viable.

6.2.2. Forecasting the demand

The demand for new buses was established by a study conducted by the SLCTB. The study involved a survey of the existing bus fleet, projections of depletion of the existing stock and a survey of the existing and projected demand for buses on rural routes. Results revealed that an additional stock of 1,400 buses is needed within the next year to fulfill the most basic demand on rural routes. Accordingly, the SLCTB has submitted this initial proposal for 500 buses via the Ministry of Transport.

6.2.3. Project alternatives - choosing the least-cost alternative

The only viable alternative to the proposed project is to invite the private sector to service the areas that would be served by the project.

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6.2.4. Justification for proposed project over alternatives

From an economic standpoint of the Government, the main aim is to achieve the above objectives in the most cost-effective manner. Hence, the choice between the proposed project and alternatives must be compared in this context.

The private sector has been co-opted to service rural routes in the past; hence, historical information is used to derive certain conclusions here-

(i) Capital costs of buses, be they private or state sector, are similar.

(ii) Operation and maintenance costs of privately operated buses are generally higher than those of state sector buses for several reasons-

(a) The SLCTB maintains a much larger fleet of buses than any private sector operator. Hence, the SLCTB has the advantage of economies of scale in operation and maintenance of buses. Private bus companies simply do not have sufficient numbers of buses to capitalize on similar effects of the economies of scale.

(b) Due to the nature of the arrangement between the bus owners and operators60, private buses tend to overload passengers to maximize revenue per trip. Wear and tear on privately operated buses is therefore much higher than on state sector buses.

(c) Most private buses are not regularly serviced and maintained because of the opportunity cost of not operating the bus. Hence, minor repairs are not attended to until they become serious problems. The cost of maintaining vehicles in this manner is much higher.

(iii) In addition to the higher cost of operations and maintenance, some of the factors mentioned above also translate into negative externalities on society. First, the tendency to maximize revenue per trip is often adopted at a risk to other vehicles and pedestrians on the road. Private buses often violate road safety regulations in order to beat a competitor to the next bust stop. Second, due to poor maintenance private buses often cause significant air pollution61.

(iv) Most private bus operators are guided by the purely private motive of profit maximization. Therefore, they tend to maximize trips during peak hours and minimize off-peak travel.

60 The typical contractual agreement between private bus owners and operators is for a fixed sum on a daily basis. Any revenue over and above this amount is kept by the operator. Similarly any shortfall must also be borne by the operator. 61 This is not to imply that other vehicle do not. The case of private buses is singled out because it is subject to inquiry in this case. State owned buses also tend to cause significant pollution.

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Private buses on average, operate 50 km less than state owned buses, according to a study conducted by the Ministry of Transport (see Table 6.9 below)

Table 6.9: Average Vehicle Utilization (AVU) of state and private sector buses

Average Vehicle Utilization Km/day/bus State sector 200 Private sector 150

(v) The rural routes targeted for the proposed fleet of buses are characterized by regular flows of passengers throughout the day, with minor variations between peak and off-peak hours. Service during off-peak hours is essential on these routes since alternative means of transport are minimal or non-existent. It may not be reasonable to expect the private sector to service these routes regularly unless they are provided additional incentives and are strictly monitored.

Due to the above reasons, the alternative of inviting the private sector to service the rural routes targeted by the 500 new buses is rejected.

Note: A benefit cost analysis of the alternative is not shown here. Instead, the alternative is rejected on factual information. However, if the arguments given for rejecting the alternative are not considered plausible, the evaluator may request that a quantitative analysis also be conducted.

6.2.5. Benefit Cost Analysis

The objective of this case study is to demonstrate the procedure for carrying out a benefit cost analysis. Hence, simple and straightforward methods are adopted to estimate costs and benefits. Instances where the analysis could be elaborated upon are highlighted and discussed in Italics immediately following the analysis.

The BCA is carried out in the case of one bus. Values of certain variables used in the analysis represent averages of possible ranges of values and an explanation is provided when such values are used in the analysis.

6.2.6. Estimation of Costs

The capital cost of each bus is Rs. 1.4 million in current (1999) prices62. Operating costs are split between fixed and variable costs. Fixed costs include the cost of staff and other overheads associated with administering the operations of a bus. The variable costs are determined on the basis that an

62 The analysis is done using 1999 constant prices.

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average bus travels 200 km per day as mentioned in Table 6.9 above. Variable costs include the cost of fuel, tyres and other regular maintenance.

An average value of Rs. 25,000 per month is used as the fixed cost component of Operating and Maintenance. Several factors were taken into consideration in estimating this number. Fixed costs do not increase incrementally per bus, but do increase step-wise in proportion to the total number of buses. At the same time, economies of scale have a counteracting effect, which tends to reduce the fixed costs per bus in proportion to the number of buses. The fixed cost of Rs 25,000 per month per bus was estimated taking these factors and the proposed number of buses (i.e., 500) into account.

Financial values are converted to economic values by applying appropriate shadow prices. The shadow price factors adopted in this analysis are given in Table 6.10 below.

Table 6.10: Shadow Price Factors

Component Value Foreign Exchange 1.00 Labour – Skilled 1.00 Labour – Unskilled 0.70 Standard conversion factor (other) 0.94

Accordingly, all costs are broken down into foreign exchange and local cost components first, as illustrated in Table 6.11. The local costs are further broken down into unskilled, skilled and other components. The rationale for the breakdown is as follows. 60% of the capital cost of the bus is considered to be foreign capital since the engine, other mechanical parts and the chassis are imported. The body work is constructed locally. Therefore skilled labour accounts for 20% of the total cost and the remaining 20% is categorized as ‘other’ local expenses. Variable costs also involve a foreign exchange component since most spare parts are imported. The remainder is split between skilled labour and ‘other’. No foreign exchange component is involved in fixed costs; it is therefore split almost evenly between the three local components.

Table 6.11: Cost components and breakdown (per bus)

Distribution Component Cost (Rs.) Foreign Local Total Unskilled Skilled Other Capital cost 1,400,000 60% 20% 20% 100% Operating costs § Variable (per month) 65,000 35% 30% 35% 100% § Fixed (per month) 25,000 30% 30% 40% 100%

6.2.7. Estimation of Benefits

Revenue from ticket sales: The only direct benefit of the project is revenue from ticket sales. This is calculated as follows (see Table 6.12 for details). The average fare for a rural sector route is Rs. 0.25

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per km. A typical bus will travel 200 kms63 per day and carry, on average, 30 passengers. A load factor of 80% is assumed on rural routes. This is likely given that the bus will serve distant areas from which other means of transport are minimal. Accordingly, the revenue from ticket sales is calculated to be Rs. 1,200 per day or Rs. 360,000 per year.

Table 6.12: Benefits from operating a bus

Item Price Fare for rural sector (Rs per person per km) 0.25 AVU for typical public sector bus (km/day) 200 Passenger capacity (persons) 30 Load factor 80% Revenue per day (Rs.) 1,200 Revenue per year Rs. (300 days) 360,000 Shadow price factor 1.1 Economic value of revenue (Rs. Per year) 396,000

Revenue from ticket sales is a financial value, which must be adjusted for distortions in order to be converted into an economic value. The main distortion of revenue from public transportation is the subsidy on fares. On the other hand, if ticket prices reflect taxes on expenditure, these would also tend to cause a distortion. Taking these factors into account we have assumed a shadow price factor of 1.1 to adjust revenue, the subsidy on fares is considered to be the overriding distortion.

Value of time savings: In the absence of bus transport to the targeted rural community, most people would walk to the town to attend to their needs. Hence, the bus service provides a significant benefit in terms of time savings to the target population. This benefit is quantified in the following manner (see Table 6.13 for summary)

The distance between the rural community and town is assumed to be 20 kms64. However, the walking distance is likely to be less since people would use short-cuts rather than the motorable route. Therefore, the average walking distance is considered to be 13 kms each way. The average walking speed of an individual is taken as 6 km per hour. The speed is averaged between individuals walking slower (carrying loads) and those walking faster (no loads). Therefore, the time taken for a return trip to the town is approximately 4.3 hours. An individual will realistically only attempt one such trip per day. The average time taken for a return trip by bus is 2 hours (assuming an average speed of 20 km per hour). Hence, an individual can save 2.3 hours traveling by bus, rather than walking to town.

The value of time saved due to travelling by bus is estimated to be Rs. 12.40 per hour. Accordingly, the value of 2.3 hours per day saved by each person is Rs. 29. The bus is assumed to make five return trips to the community each day, carrying on average 24 passengers on each such trip (passenger capacity of 30 and load factor of 80%). Hence, the time savings of 120 passenger trips is Rs. 3,472 per day or Rs. 1,041,600 per year.

63 Average Vehicle Utilization – see Table 6.9

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Table 6.13: Estimation of value of time savings

Item Quantity Distance between village and town (km) 20 Walking distance between village and town (km) 13 Walking speed of a person (km per hour) 6 Time spent for return trip to town (hrs) 4.3 Average speed of bus travel (km per hour) 20 Time spent for return trip to town by bus (hrs) 2 Time savings by taking bus trip (hrs) 2.3 Value of time saved by bus travel (Rs. Per person per hour) 12.40 Value of time saved by bus travel (Rs. Per day per person) 29 Value of time savings of all passengers (Rs. Per day) 3,472 Value of time savings of all passengers (Rs. Per year)65 1,041,600

Based on the above estimations of benefits and costs, the project shows an IRR of 38.8%. The Net Present Value at a 10% discount rate is Rs. 966,249.

Sensitivity Analysis: The above analysis is sensitive to several variables as illustrated below in Table 6.14. A 10% increase in costs gives an IRR of 18.3%. An average walking speed of 6 km per hour was assumed in the analysis. If this is increased to seven km/hour, the IRR reduces to –5.5%; and if it is reduced to 5 km/hour, the IRR increases to 138.4%. If the walking distance between the village and town in increased by 2 km, the IRR is 106.1%; and if it is decreased by 2 km, the IRR is –9.4%. If the average speed of the bus is increased by 5 km/hour, the IRR increases to 74.0% and if it is decreased by 5 km/hour, the IRR decreases to –9.4%.

This illustrates how sensitive the model is to minor changes in certain key variables. It is important that values used for such variables be realistic (i.e., the walking speed of individuals can vary substantially). If certain variables are sensitive as illustrated above, the analyst should test values within a realistic range to determine the different results of the analysis.

Table 6.14. Sensitivity Analysis

Adjustment IRR (%) Base case 38.8 10% increase in all costs 18.3 Walking speed increased by 1 km/hr -5.5 Walking speed decreased by 1 km/hr 138.4 Walking distance between Village and town increased by 2 km 106.1 Walking distance between Village and town decreased by 2 km. -9.4 Average speed of bus decreased by 5 km/hour -9.4 Average speed of bus increased by 5 km/hour 74.0

64 The analysis is done in the case of one bus. However figures such as distance between communities and towns are taken as the average of all the rural communities to be served by the 500 buses. 65 Assuming 300 traffic days per year

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6.3. Power Coach Shed Upgrading

6.3.1. Introduction

To meet its thrust objectives of strengthening suburban railway service, doubling railway share of the passenger market, and reducing road congestion by shifting traffic to rail, Sri Lanka Railways has purchased 15 Chinese built diesel-electric power sets (S9 sets), which are expected to arrive in April 2000.

Space can be made available, temporarily, to stable the S9 sets when they are not in service, but the existing power coach servicing facility at Dematagoda (PCS), which is used at present to service and repair older S3 to S8 sets, is not suitable for S9 sets. First, working conditions are poor and plant and machinery are limited, which contributes to low productivity of staff and low availability of current power sets. Second, older sets are diesel hydraulic, and the Dematagoda PCS does not have the specialised plant and machinery needed to maintain the S9 sets, which are diesel electric. Third, the entrance to Dematagoda PCS, which is also used by locomotive-hauled trains, is a bottle-neck that sometimes causes delays to trains entering and leaving the yard and thereby causes delays to scheduled trains. Such delays are likely to get worse if the additional 15 S9 sets also have to use the facility. Fourth, Dematagoda PCS is located in a low-lying area that regularly floods after heavy rains, and this can damage the traction motors of the diesel-electric S9 sets. Fifth, Dematagoda PCS does not have enough space to stable the S9 sets, so they will have to be stabled elsewhere and incur extra costs for empty running to and from the shed.

Without PCS Upgrading, the Railway will have to continue using the existing facilities at Dematagoda, but stable the S9 sets at Colombo Yard (which is the best available location for stabling) during the night. This will result in extra empty running, congestion at the entrance to Dematagoda PCS, and lower availability and reliability.

The 1st alternative is to upgrade the present Dematagoda PCS with new plant and machinery, protect the yard against flooding, and improve entrance to the yard to minimise congestion. This will still result in some empty running and will not eliminate congestion at PCS yard.

The 2nd alternative is to build a new PCS at Colombo Yard, using available space. This would minimise empty running as power sets would be stabled near Fort and Maradana stations and would reduce congestion.

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6.3.2. Review of Concepts

Classification by Type of Investment: This project is classified as an improvement to supporting infrastructure. Improvement because a facility already exists, which will be replaced by a new facility with increased capacity and improved capability to undertake servicing and light repairs, not just replaced or rehabilitated to the same standard. Supporting infrastructure because the PCS is not a direct infrastructure, such as tracks or signals on which the trains operate, but an infrastructure that supports train operation.

Table 6.15 : Concept Paper for PCS Upgrading Project

Project · Upgrading of Power Coach Shed

t n . & t

e n o p n

i c y e t t o e n l g e Classification a m t a e s o m i l e s n v l e i o

v e e c l A t b n o

a a D n r l a h t

i w p p h c n a e R e e e

e m c N I R R M T H i

n m

o l o r

Infrastructure a i n i v o c c n Rolling Stock o Supporting Assets 3 E S E Objectives / Goals · Meet servicing requirements of S9 power sets to ensure 3 good availability and reliability · Improve availability and reliability of older sets 3 · Reduce empty trips to Ratmalana for light repairs 3 · Reduce empty trips to/from Fort and Maradana 3 · Operate more trips with existing fleet 3 3 3 · Meet future requirements 3 Project Impact Area · Colombo suburban rail network Alternatives · Base Case: Use Dematagoda PCS but stable at Colombo Yard · Alt 1: Upgrade Dematagoda PCS · Alt 2: Develop new PCS at Colombo Yard Government Policy · Increase rail market share to reduce road congestion Directions Justification of · Existing facility does not have adequate plant and machinery Proposed Alternatives · Existing yard is congested and floods after heavy rains · Existing facility does not have space for expansion · Colombo Yard has better access to Fort and Maradana · Colombo Yard has room for expansion

Selection of Objectives Alternatives Alternatives Increase Reduce Increase Meet for Testing Avail & Empty Trips & Future Reliability Trips Mkt Share Needs Without project - - - - Upgrade Dematagoda PCS 333 3 333 3 Develop Colombo Yard 333 333 333 333 PCS Locality · Colombo Life of Project · Operational life of PCS – 25 years Project Commencement · 2000 Conditions · Facility must be able to service S8 and S9 sets

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· Facility should be designed to ensure effectiveness and efficiency of staff · Stabling facilities for S9 sets must be available before April 2000 · Facility must be able to accommodate future requirements Environmental Issues · Facility should be designed to minimise pollution & Clearance Scenarios to be tested · Variations in costs · Variations in power set availability · Variations in shift from road to rail

Classification by Size of Investment: This project is of a size that should require the long method of appraisal to, at least, the level of pre-feasibility.

6.3.3. Identification of Project Objectives

Objectives are not simply to construct a new power coach shed or even to improve the power coach servicing facility, although increasing staff productivity and reducing costs can be important benefits. The role of PCS is to make reliable rolling stock available for service. The fundamental objective, therefore, is to develop a facility that will assure improved reliability and availability of power sets, so they can then be used to operate additional suburban passenger trains.

6.3.4. Identification of Project Impact Area

Although the project will be implemented in Colombo, the impact area is the Colombo suburban rail network and the people using the adjacent roads who might benefit from using the new trains or from reduced road congestion.

6.3.5. Definition of Base Case

The "base" or "without project" case, is to continue using the old PCS facility, although with some investment in relaying tracks to stable the new S9 sets when they arrive.

6.3.6. Identification of Alternatives

The two main alternatives identified are as follows:

· Upgrade the existing power coach facilities at Dematagoda, including by replacing or renovating the old buildings as appropriate, raising the level of the yard to protect the power sets from flooding, and improving the yard entrance to reduce delays while waiting for admittance. A variation of this alternative—to construct a separate facility at Dematagoda only for S9 sets—was rejected after preliminary screening because (a) investment would not be much less, (b) problems with reliability and availability of older sets would not be addressed,

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and (c) staff productivity would be lower and overheads greater as staff would be divided between two facilities.

· Develop a new and modernised facility on unused land at Colombo Yard, including by constructing a new maintenance shed, relaying tracks as necessary to stable power sets and to facilitate admittance to the Main Line between Fort and Maradana stations, and providing necessary signals. Two variations of this alternative were rejected after preliminary screening. The first variation—to provide a separate facility only for S9 sets—would require similar investment but would not address problems with the older sets and would require establishment of a separate staff. The second variation—to locate the facility at the present outward goods yard—would save some civil engineering costs for tracks and buildings, but would not provide access to all platforms at Maradana and would restrict development of freight business in future.

Other alternatives, such as establishment of a new facility outside Colombo (e.g., at Ratmalana) were not considered as it was considered unpractical to move present staff too far from their present work sites and quarters.

6.3.7. Data Requirements

A list of required data and of estimates/assumptions is as follows:

· Investment costs for new facilities at Dematagoda (DMA) and at Colombo Yard (CLY), including plant and machinery, civil works for buildings/track/signals, training, and protecting DMA yard from flooding. These could be obtained from the Way & Works, Signalling, and Motive Power Sub-departments. Required investments in plant and machinery have been estimated from Rs 58 million (excluding special equipment for S9 sets) to Rs 310 million (all- inclusive turnkey project), in shed construction from Rs 23 to 130 (turnkey project), and in training from Rs 2 to Rs 10 million (turnkey project). For the purpose of this case, the following additional costs were assumed, but better estimates should be obtained for an actual appraisal. – civil works (tracks) to stable S9 sets under the base case: Rs 5 million; – civil works (filling) to protect DMA from flooding: Rs 75 million; – civil works (tracks) to relay track at DMA: Rs 5 million; – civil works (tracks and signals) to improve yard entry at DMA: Rs 25 million; – civil works (tracks) to relay tracks at CLY: Rs 10 million; and – civil works (track and signals) to connect CLY to Main Line: Rs 25 million.

· On going operation and maintenance costs of PCS over its economic life, including periodic replacement of plant and machinery and staffing requirements. This could be obtained from the Motive Power Sub-department. It has been estimated that PCS staffing requirements would be 320 without an upgraded facility and 260 with an upgraded facility. For the purpose

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of this case, it was assumed that other costs of facility maintenance and replacement of machinery would be the same under the base case and the two alternatives (therefore no incremental cost), but this should be confirmed for an actual appraisal.

· Effect of PCS improvements on power set availability and the number of extra trains that can be operated. This could be obtained from the Motive Power and Mechanical Sub-departments. It has been estimated that with improved maintenance, the availability of S8 and S9 power sets would increase by an average of 2-3 per day. These could be used to operate an additional 2-3 trips during the morning peak and the evening peak, plus off-peak trips. For the purpose of this case, it was assumed that two trips each would be made in the morning peak and in the evening peak.

· Effect on yard congestion and empty running. This could be obtained from the Motive Power and Operations Sub-departments. A survey might be done to determine present delays due to yard congestion at Dematagoda. This would, however, increase, as the extra S9 sets come into service. 1999 data suggest that power sets make about 2 trips per month to Ratmalana (15 km) to undergo repairs that could be done at the new facility. The distance from DMA to Maradana is similar to the distance from CLY to Maradana, but about 20 trains per day starting from or terminating at Fort would save about 2 kilometres per trip.

· Routes where new trains would operate. This could be obtained from the Operations and Commercial Sub-departments. For purpose of this case, it was assumed that the trains would operate on the Puttalam Line, which has poorer service than other lines.

· Traffic volumes on roads parallel to the rail lines that will get improved service. Counts were obtained for the Negombo Road from the Road Development Authority, which undertakes traffic counts of major roads at regular intervals (see Table 6.16). Note that RDA data combined cars, vans, and 3-wheels. For the purpose of this case, distribution was assumed as 40% cars, 35% vans, and 25% 3-wheels. Also, for purpose of this case, only traffic counts to Colombo were used. It was assumed that counts in the opposite direction in evening would be similar.

· Incremental operating and maintenance costs of the new trains. This would be obtained from the Motive Power and Operations Sub-departments (through Principle Costing Officer).

· The number of people that would shift from road to rail due to extra trains/improved reliability and the corresponding effect on road congestion and speeds. This could be estimated or determined from a modal shift model based on factors such as relative price and quality of service by road and by rail. The effect on speeds could be determined from traffic volume- speed relationships. For purpose of this case, it was assumed that the extra power sets would make 2 trips per day in the morning peak (3,000 places) and 2 trips per day in the evening peak

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(3,000 places) for 300 days per year. It was also assumed that given road congestion during this time, passengers would shift from bus to fill the extra capacity (equivalent of 60 buses in the morning peak and 60 buses in the evening people on the basis of 50 passengers per bus). Finally, it was assumed that private vehicle users would not shift unless service was significantly improved. The change in speed was estimated using a flow-speed relationship developed by the University of Moratuwa66, which suggests the changes in speeds as summarised in Table 6.16 below.

Table 6.16: Change in Speed due to Modal Shift (Kph) Without & With Project

Estimated After 10 Years of 5% Section of Road Present Speed Traffic Growth) Without With Without With Project Project Negombo – Seeduwa 45 46 41 43 Seeduwa – Jaela 35 36 25 27 Jaela – 7 km Post 22 23 <10 <10 7 Km Post – 2 Km Post 10 11 <10 <10 2 Km Post – Colombo <10 <10 <10 <10

6.3.8. Estimation of Benefits

Railway Operating Benefits: As described in the previous section, operating benefits would include savings in costs of empty running and in congestion delays at Dematagoda. These are valued as follows:

· Economic cost savings for 2 trips per month to Ratmalana = Rs 19,710

· Fuel: 15 km x 2 dir. x 12 mth x 2.5 litre/km x Rs 14 = Rs 12,600 · Lubricants: 15% of fuel = Rs 1,890 · Spares: 15 km x 2 directions x 12 months x Rs 6.50 = Rs 2,340 · Crews: 15 km x 2 directions x 12 months x Rs 8 = Rs 2,880

· Economic cost savings for 20 trips/day between PCS and Fort =Rs 657,000

· Fuel: 2 km x 20 trips x 300 x 2.5 litre/km x Rs 14 =Rs 420,000 · Lubricants: 15% of fuel =Rs 63,000 · Spares: 2 km x 20 trips x 300 days x Rs 6.50 =Rs 78,000 · Crew: 2 km x 20 trips x 300 days x Rs 8 =Rs 96,000

· Costs of delays due to congestion have not been valued, as information was not available; however, it would include extra fuel consumption, wear and tear on the engine, and crew wages (overtime) while idling, plus passenger/freight VOT if congestion causes delays to passenger trains or freight trains

· Upgrading PCS would save hiring 60 staff to service S9 power sets.

66 V. Muralitharan, S. Niranjanan, W.D.D. Chaminda, Estimation of Capacity Reduction Factors for Sri Lankan Highways, undergraduate project Department of Civil Engineering, University of Moratuwa, April 1997.

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· 60 x Rs 100,000/= per year including overtime and allowances = Rs 6 million.

· If power sets go to Ratmalana less frequently for light repairs, Ratmalana will be better able to undertake scheduled repairs without interruption, which will provide some additional benefit. This was not valued.

· Shifting PCS to Colombo Yard will release some space for Maligawatte coach yard, which is congested, resulting in further operating savings (e.g., shunting). This was not valued.

· Shifting PCS to Colombo Yard will release land at Maligawatte. As Maligawatte is adjacent to a major road, the land released for potential development may be more valuable than the land used at Fort, which is separated from a major road by the Main Line. This has not been valued.

· Operating 2 additional return peak trains between Colombo and Negombo in the morning and in the evening will incur incremental costs, as below:

· Fuel: 4 trips x 2 dir. x 300 days x 39 km x 2.5 litre x Rs 14 = Rs 3,276,000 · Lubricants: 15% of fuel = Rs 491,400 · Spares: 4 trips x 2 dir. x 300 days/year x 39 km x Rs 6.5 = Rs 608,400 · Crew: 4 trips x 2 dir. x 300 days/year x 39 km x Rs 8 = Rs 748,800 · Total: = Rs 5,124,600 · Emissions: 4 trips x 2 dir. x 300 days/year x 39 km x Rs 2.25 = Rs 210,600

6.3.9. Benefits from Shift of Traffic from Road to Rail

It is estimated that operation of the extra trains will shift passenger traffic from bus to rail. Corresponding VOC and VOT and emissions savings (due to replacement of 60 buses with power sets and to reduction in congestion) are summarised below. Benefits have been determined based on 2 peak morning hours (06:00-08:00 or 07:00-09:00 depending on distance from Colombo). It was assumed that benefits in the evening peak would be similar to benefits in the morning peak.

· VOC saving = Rs 52 million

· VOT saving = Rs 117 million

· Emissions saving = Rs 0.5 million

Note that these would grow as traffic volumes increase, even if rail did not transport more passengers, as the effect of removing buses from the road is greater when congestion is greater.

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6.3.10. Benefit-Cost Analysis

The NPV (and EIRR) of Alternative 1—Upgrading Existing Facility and that of Alternative 2—New Facility in Colombo Yard. The results show a higher NPV and EIRR for Alternative 2, but this should be confirmed when actual data is available.

Another major benefit of using Colombo Yard is that, unlike Maligawatte, it has room for expansion. It can reasonably be expected that the fleet of power sets will increase in future, especially given the need to reduce the rapidly increasing congestion on Colombo roads; therefore, room to stable and service additional power sets in future is an important criterion in selection of a site. On the other hand, a disadvantage of Colombo Yard is that an access road passes near the proposed location of the shed, reducing security.

6.3.11. Sensitivity Analysis

Sensitivity analyses have been performed on several variables and the results are presented in Table 6.17 below. The results show that PCS upgrading is feasible even if traffic shift is 33% less than assumed and even if only one extra trip can be made per day (traffic shift 50% less than assumed).

Table 6.17: Sensitivity Analysis

Sensitivity of Alternative 2 NPV (Rs M) EIRR Capital Costs 25% Higher than Expected 999 39% Shift from Road 33% Less than Expected 602 31% Only 1 Extra Trip per Day (Shift –50%) 365 22%

6.4. A Provincial Road Project

6.4.1. Introduction

This case study presents a provincial road project for which it is intended to apply the short method of appraisal. However, the cost of this project, at Rs 69 million, indicates that a pre-feasibility study should have been conducted, at least, as projects of this value are more appropriately appraised using the long method.

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6.4.2. Project Impact Area

The project impact area (PIA) includes five villages, totaling around 50 households. The following table and map can be used to estimate the total number of households that would come under the project impact area.

6.4.3. Valuation of Benefits

According to the practice described in more detail in Chapter 4.5 of this book, benefits in the short method are calculated in two steps. These are (a) estimation of direct transport user benefits, and (b) adjustment of user benefits for potential regional benefits.

Table 6.18: Calculation of Households in Project Impact Area

Name of Area Distance from Proposed Road Number of Households Hettigegama Within 1 km 12 Minuwandeniya -do- 14 Mahatenna Within 100 m 8 Pitakanda Within 200 m 6 Polgaswatta Within 500 m 10 TOTAL 50 Direct Transport User Benefits

The direct transport user benefits include two main components; value of travel time saving for passenger travel and vehicle operating cost saving for freight transport.

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Figure 6.1: Project Impact Area

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Table 6.19: Calculation of Passenger Travel Time Saving

One-way Round Trips Travel Time Saved Travel Time per day per day (minutes/day (minutes) per Household per HH) Access to Without With From Standard 2 x [(1)-(2)] x Project Project Survey Rate67 [3(a) or 3(b)] (1) (2) (3a) (3b) Primary School Available in village 0.4 0 Secondary School 90 30 0.4 48 Clinic/Hospital 90 30 0.2 24 Post Office/Major Banks 90 30 0.2 24 DS Secretariat 120 30 0.1 18 Employment Within PIA68 ßNo Effectà 0 Employed Outside PIA ßNo Effectà 0 Visitors to PIA (traders, 90 30 1.0 120 officials, friends, relatives) Total Minutes - - - - 234 Total Hours - - - - 3.90 Households in PIA - - - - 50 Total Hours in PIA - - - - 195

Value of Travel Time Saving for Passenger Travel: The Value of Travel Time Saving is calculated by first estimating the travel time saving per day, by activity, for each household. These are then summed up by household and multiplied by the number of households in the PIA to give total travel time saved. Total value of travel time saved is estimated by multiplying the total travel time saved, in hours, by the corresponding Value of Travel Time obtained from Table 4.3 of Chapter 4.

The total value of travel time saved per annum for the PIA is:

§ Savings in Passenger Travel = Daily Sum of Travel Time Saved (from Table 2) x Average Value of Time (Rs/hour) x 33069 (days/year)

195 x 12.4170 x 330 = Rs. 798,584/year

Cost Savings from Freight Transport: The savings in freight transport is calculated by first estimating the quantity of freight transported per week due to the activity within the PIA. This is then multiplied by the transport cost per unit of freight with and without the project to determine the savings effected by the project.

67 Source: Rural Transport Policy Study (IT Sri Lanka, 1993) and PG Student Projects (UoM, 1999) 68 Project Impact Area as defined in Step 1. 69 Number of equivalent traffic days per year is considered as 330. 70 Value of Travel Time Savings for typical public transport use, from Table B1.3

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Table 6.20 : Calculation of Saving in Cost of Freight Transport

Goods Cost per Unit Freight Transport Type of Commodity (Kgs/Liters (Kgs/Liters) (Rs.) Savings Per week per week) (Rs.) Without With Project Project Cash Crops (Tea/Rubber/ C’nut) - - - - Paddy/Rice - - - - Vegetables/Fruits 1600 kg 0.33 0.07 416 Other Agricultural Products 800 kg 0.33 0.07 208 Forestry Products 200 kg 0.40 0.10 60 Animal Husbandry (milk, meats) 600 lts 0.10 0.04 36 Processed Foods 700 kg 0.25 0.10 105 Manufactured Consumables 200 kg 0.25 0.10 30 Fuels 400 lts 0.07 0.03 16 Agricultural Inputs 200 kgs 0.25 0.10 30 Industrial Inputs - - - - Industrial Output (handicrafts) - - - - Other - - - - TOTAL - - - 901

The total savings in the cost of freight transport can then be summed up for a year as follows:

§ Savings in Freight Transport = Weekly Sum of Freight Transport Savings (from Table 6.20) x 52 weeks per year

901 x 52 = Rs. 46,852/year.

Total Direct Transport User Benefits: This is calculated by adding up the Value of Travel Time Saving for Passenger Travel and the Cost Savings from Freight Transport. In the case study, this amounts to

§ Total Direct Transport Savings = Savings in Passenger Travel + Savings in Freight Travel

Rs. 798,584+ Rs. 46,852 = Rs. 845,436/year

6.4.4. Regional Development Benefits

Regional development is dependant on a number of different contributory factors. Transport access is one of them. Section 4.5 of this book has discussed this at length and recommends the following practice for estimation of regional development benefits.

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Table 6.21: Computation of Regional Benefits

Level of Impact Maximum Points Is there Significant Improvement (0 to 1) Points Earned in access to…. (1) (2) (1) x (2) Primary School 0 10 0 Secondary School 1 10 10 Clinic or Hospital 1 10 10 Bank 1 5 5 Post Office 0.5 5 2.5 Long Distance Bus Route/Railway Station 0.5 5 2.5 DS Secretariat 1 5 5 Weekly Pola 1 15 15 Produce Collection Centre 1 10 10 Industrial Area 0 15 0 SUB TOTAL 90 60 Bonus Points for Poor Access No other road/footpath available 0 20 0 Only footpath/non-motorable road available 0 10 0 Only fair-weather road available 0 5 0 Another much longer route available 1 5 5 TOTAL 130 65

The total value of regional benefits are then calculated by the equation: § Regional Development Benefits = Total Direct Transport Savings x Total of Regional Benefit Index/100.

= Rs. 845,546 x 65 /100 = Rs. 549,533/ year.

In the above calculation it is assumed that the regional development benefits would be worth 65% of the direct transport user benefits (from a possible maximum of 130%). Therefore the total transport benefits per annum would be: § Total Annual Transport Benefits = Total Direct Transport Benefits + Regional Transport Benefits

Rs.845,546 + Rs. 549,533 = Rs. 1,395,079 / year.

6.4.5. Benefit–Cost Analysis

The recommendation in Section 4.5, that traffic growth should be equated with the discount rate for small projects, would be adopted in this case study. In this, for a project of 15 years lifetime, we can estimate the lifetime benefits to be § Lifetime Project Benefits = Total Annual Transport Benefits x Project Life Time (yrs)

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Rs. 1,395,079 x 15 years = Rs. 20,926,186.

The benefit-cost analysis shown in the following table indicates that the total construction cost of the proposed project is Rs 66 million. The operational and maintenance costs over the design lifetime are another Rs 3 million. It is also estimated that Rs10 million will have to be provided to prevent illicit felling of forests in the area, by setting up and operating a Forest Department sub-office over 15 years.

Based on this methodology, the benefits of the proposed project over the 15 year period is Rupees 31.78 million. As laid out in the following table, this results in a benefit-cost ratio of 0.40, which indicates that the proposed project is economically not feasible. The NPV in this case is –47.22 million rupees.

The alternative trace is approximately of the same distance, but affects only 40 households. It is more costly, at Rupees 116 million since it has to cross a major river at Kitulgala. The benefits are also less at Rupees 18.96 Million, since the reduction in travel time saving are not as high as that of the proposed project.

The other alternative is the case of shifting the villages. In this case, the cost of voluntary re-settlement is estimated at Rs 100,000/= per household for land and a further Rs 100,000/= per household for civil works such as building new houses. The total cost as shown in the table is estimated at Rs. 14 million. In this case, since, the benefits of relocating a village are difficult to estimate, they shall not be considered.

Table 6.22: Computation of BCA (Rs mn)

Proposed Road Alternative 1: Alternative 2 : (PMR Rd.) Trace Kitulgala Road Shift Village Costs @ Pre-Discounted Rate Land Acquisition & Resettlement 0.5 0.4 5.0 Civil Works 51.0 22.0 5.0 Consultancy & Supervision 8.3 14.1 1.0 Maintenance & Operations Annual 2.0 3.0 - Periodic 1.0 1.5 - Training - - - Variations & Contingencies 6.2 10.0 1.0 Sub Total 69.0 111.0 12.0 Cost of Externalities Congestion - - - Environmental 10.0 5.0 - Others - - 2.0 Total 79.0 116.0 14.0 Benefits @ Discount Rate = Rate of Traffic Growth Travel Time 12.00 12.06 - Goods Travel Time 0.69 0.57 - Regional Development 8.24 6.32 - Other - - - Total 20.93 18.96 0 BCA @ Discount Rate = Rate of Traffic Growth BC Ratio (Benefits/Costs) 0.27 0.16 0 NPV (Benefits- Costs) -49.07 -97.04 -14.0

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The comparison of the alternative of shifting the village with that of the two traces, shows that shifting the village has the lowest cost. It also has the highest NPV (though negative). In other words, the cost of relocation would be less than the net economic cost of the proposed project and alternative road trace.

The proposed road would have a benefit-cost ratio of 1 (i.e. breakeven) if the number of households were 125. The alternative of relocating the village appears the most feasible when the level of beneficiaries is 100 households or less. In other words, it could be concluded that the proposed cost could be justified only if the number of beneficiaries were 125 households or greater.

6.4.6. Project Concept Paper

The project concept paper which will include the concerns and calculations discussed above, has been given below.

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Table 6.23: Concept Paper

Name of Project Construction of Polgaswatte–Minuwandeniya–Hitigegama Rd

t n t

e n o n

i c y e t t e n g e a m t a s o Classification m i l e s l n e i o v e c

A t b n o

a l r l a n h D i a w p p h c t a e R e e e n m

e N I R R M T H c i Infrastructure m 3 n m

l o o r a i n Rolling Stock i v c o c n Supporting Assets o E S E Objectives / Goals Provide motorable access to administrative district Ginigathhena 3 Provide motorable access to schools, Hospitals, Police station etc 3 3 Transport agricultural products to Ginigathhena 3 Connecting Nuwara-Eliya and Kegalle Districts by a shorter route 3 Long term objective to reduce distance to Sri Pada (Specification and Design standards 3 3 to be taken into consideration) Project Impact Area The project is in Nuwara-Eliya District and Ambagamuwa / Ginigathhena DS Division The villages connected to the project are Hitigegama, Minuwandeniya, Mahantenna, Pitakande and Polgaswatte. Locality At present there is only a footpath with steps, since the area is a hilly terrain. The villages are situated in hill features and each village has 10 – 12 houses. The villagers are farmers who produce cloves, tea, kitul treacle, timber and fire wood. It is difficult to transport these agricultural products to the town (Ginigathhena is the closest and the present market place), since they have to carry heavy produce up/down steps. So vendors from the town come to the villages and collect their agricultural products at cheap rates. There is a primary school for all these villagers but for secondary education they have to go to Ginigathhena. Hospital, Post office, Police station is at Ginigathhena and they walk about 3Km and 20Km by bus to reach Ginigathhena. The alternative route is to Kitulgala, which has a long span suspension bridge to cross. Alternatives · Find an alternative trace · Relocate the Village Justification Objectives 1. 2. 3 4. 5. Motorable Access Motorable Access to Transport of Connecting Nuwara- Reduce to Admin. District Schools, Hospitals, Agricultural Eliya & Kegalle Distance to etc. Products Districts Sri-Pada 1. Project (Build 3 3 3 3 3 PMH Rd) 2. Find Alternative 3 3 3 3 Trace 3. Relocate the Villages Life of Project · Project Formulation period 6 m o n ths · Construction period 3 years · Operational life 15 y e a rs Commencement of · 1996 Project Technical · Length of the road – 10 Km, Sufficient drainage provided with hume pipe culverts (6 No.s) Specifications and earth drains. Cross section attached.

Conditions · Must not have a significant social impact in project impact area · Should be all weather road · To be completed before the next provincial election Operational Costs · Construction Cost Rs 66,000,000 · Maintenance Cost Rs 150,000 per year

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Proposed Road (PMR Alternative 1: Alternative 2 : Rd.) Kitulgala Trace Shift Village Costs @ Pre-Discount Rate Land Acquisition & 0.5 0.4 5.0 Resettlement Civil Works 51.0 22.0 5.0 Consultancy & Supervision 8.3 14.1 1.0 Maintenance & Operations Annual 2.0 3.0 - Periodic 1.0 1.5 - Training - - - Variations & Contingencies 6.2 10.0 1.0 Sub Total 69.0 111.0 12.0 Cost of Externalities Congestion - - - Environmental 10.0 5.0 - Others - - 2.0 Total 79.0 116.0 14.0 Benefits @ Discount Rate = Rate of Traffic Growth Travel Time 12.00 12.06 - Goods Travel Time 0.69 0.57 - Regional Development 8.24 6.32 - Other - - - Total 20.93 18.96 0 BCA @ Discount Rate = Rate of Traffic Growth BC Ratio (Benefits/Costs) 0.26 0.16 0 NPV (Benefits- Costs) -49.07 -97.04 -14.0

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APPENDIX I

CONCEPT PAPER FOR TRANSPORT SECTOR PROJECTS

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Concept Paper for Transport Sector Projects (page 1 of 2)

1. Project Proponent 2. Project Name

3. Classification

t n . & t

e n o p n

i c y e t t o e l n g e a m t a e s o m i l e s l n v e i o v e e c l A t b n o

a a D r l a n h t

i w p p h c n a e R e e e

e m c N I R R M T H i

n m

l o o r

(a) Infrastructure a i n i v c o c n (b) Rolling Stock o (c)Supporting Assets E S E 4. Objectives / Goals · · · · 5. Project Impact Area 6. Alternatives · · · 7. Conformity to Government · Policy Directions · 8. Justification of · Proposed Alternative · 9. Selection of Objectives Alternatives (a) Primary Alternatives I II III IV for Testing

(b) Secondary Alternatives I II III IV

10. Geographic Locality ·

11. Life of Project · 12. Project Commencement · 13.Conditions for undertaking · project 14. Environmental Issues · Is it a prescribed project as per Gazette No: 722/22 of 1993? & Clearance Required · Other requirements 15. Scenarios to be tested for · BCA · 16. Arrangements for post- (a) Sustainability implementation activity (b) Feedback (c) Post-evaluation (d) Monitoring

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APPENDIX II

Revised Concept Paper for Transport Sector Projects (page 2 of 2)

Alternatives Base Alt 1 Alt 2 Alt 3 Case 17. Costs @ Pre-Discounted Rate [Rs. (mn)] (a) Land Acquisition & Resettlement (b) Civil Works (c) Consultancy & Supervision (d) Maintenance & Operations § Annual § Periodic (e) Training (f) Variations & Contingencies Sub Total (g) Cost of Externalities · Congestion · Environmental / Social · Others (i) Total 18. Benefits @ Pre-Discounted Rate [Rs. (mn)] (a) Travel Time (b) Goods Travel Time (c) Vehicle Operating Cost (d) Accident Reduction (e) Vehicular Emissions (f) Regional Development (g) Other (i) Total 19. Non - Quantifiable Benefits [Rs. (mn)]

20. BCA @ 0 % Discount Rate [Rs. (mn)] (a) BC Ratio (Benefits/Costs) (b) NPV (Benefits - Costs) (c) EIRR 21. Investment Plan for Project Period [Rs. (mn)] (a) Capital Investment (b) Recurrent O & M (p.a.)

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GUIDELINES FOR PROJECT CONCEPT PAPER

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1. Project Proponent: name of agency making the proposal. 2. Project Name: name by which the project is identified (less than 40 characters including spaces). A project ID number may also be useful. 3. Classification: the two-way dimensional classification of the type of project. ¨ New Assets: Investments that provide new and hither-to non-existant facilities. ¨ Improvements: Investments that develop or "make better" existing assets. ¨ Replacement/Rehabilitation: Investments that replace existing assets with identical assets in terms of capacity and/or quality at the end of their economic design life. ¨ Maintenance: Normal recurrent expenditures—annual and periodic—required over the expected life of an asset. ¨ Technology and Human Resources Development: Investments in research and development, in training, and in studies/surveys to develop transport-related information and databases. ¨ Infrastructure: refers to roads, bridges, rail tracks, signals & communication systems, etc. ¨ Rolling Stock: refers to vehicles used for transport services, such as buses, locomotives, carriages, and wagons. ¨ Supporting Assets: refers to facilities that support the core transport function, such as (a) technical (workshops, plant & machinery), (b) administration & management (offices), (c) operations, (d) marketing, (e) public relations, and (f) planning & monitoring. 4. Objectives/Goals: The economic, social and environmental goals that are pursued in the project as objectives should be listed here and ticked off against the appropriate column. These goals should be set after considering the existence of any anticipated problems that need to be solved through intervention by public investment. 5. Project Impact Area: A brief description of the geographical area that will be directly impacted by the project during construction and the distribution of the direct recipients of the benefits. In large projects, it is recommended that a map be attached. 6. Alternatives: All alternatives that are technically possible and are potentially capable of achieving one or more of the objectives stated in item 4 above. 7. Government Policy Directions: How the proposed project relates to documented Government Policy, strategic plans and investment plans. 8. Justification of Proposed Alternative: As the project proponent, the basis on which the project is being proposed over other alternatives. 9. Selection of Alternatives for Testing: From the alternatives tested in item 6 above, that are selected for testing in the appraisal method. These are referred to as primary alternatives. Their degree of potential attainment of objectives maybe indicated by ticks/stars with a maximum of 5 for highest potential. In the case of secondary alternatives, these should be possible alternative variations of the proposed project itself.

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10. Locality: the description of the Project Impact Area (PIA) in terms of administrative zoning. 11. Life of Project: the lifetime of the project over which benefits are anticipated. 12. Commencement of Project: the year (and possibly the month) when the project is to commence. 13. Conditions: the conditions under which the project would be pursued. 14. Environmental Issues & Clearance: If the project is a prescribed project under Gazette Extraordinary 722/22 of 1993. Also other clearance such as coastal, flora & fauna, archeological etc as may be necessary. 15. Scenarios for BCA: The economic, transport policy and any other scenario under which the project alternatives should be tested in the appraisal process. 16. Post Implementation Activity: the activities that are proposed for (a) sustainability of the project, especially funds, resources and technical capacity required for ensuring the optimum level of maintenance and (b) monitoring of performance of the project and the capabilities of the agency in its actual achievement of the anticipated benefits, (c) post-evaluation and (d) feed-back. 17. Costs: the estimated total costs over the project life before discounting. These may be computed from unit costs given in the Report ‘Assessment of Public Investment in Transport Sector’, or from Agency SOR or estimates. In this, maintenance costs should be calculated for the project lifetime given in item 11 above. The total annual and periodic costs for the life time should be included. Consultancy and supervision costs include the cost of administering the project, which should be apportioned on some basis. Training refers to specialised training that needs to be a part of the project and required for its proper operation. A suitable percentage may be added for variations and contingencies based on project experience. Cost of externalities may also be estimated using unit values available for this purpose. 18. Benefits: Total benefits estimated over the project life before discounting. These maybe estimated using approximate values and experience from previous detailed calculations. Unit values and methods of estimating these benefits are to be found in the Report ‘Assessment of Public Investment in the Transport Sector’. 19. Non-Quantifiable Benefits: A descriptive statement regarding nature and extent of such benefits not included in item 18. 20. Benefit Cost Analysis at pre-discounted rates computed as; BC ratio (benefits (18 (i) divided by Costs 17 (i)) (b) NPV (benefits 18 (i) less Costs 17(i)) and (c) EIRR, the discount rate at which NPV is equal to zero. 21. Investment Plan : The capital and recurrent expenditure required over the life of the project, totaled but not discounted.

Note: Item 17-19 should be completed for the proposed project and each of the selected alternatives.

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APPENDIX III

VEHICLE OPERATING COSTS

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Estimated Vehicle Operating Cost at Road Roughness IRR = 3.00 (Rs./km)

Mediu Large Medium Large M/ Utility Large m 3-Axle Speed Car 3W Bus 2-Axle Cycle /Van Bus 2-Axle Lorry Lorry Lorry 10 12.27 3.49 9.47 15.17 27.38 30.02 21.55 27.35 34.82 15 10.53 3.02 7.77 11.93 20.99 22.55 16.50 20.76 27.59 20 9.69 2.79 6.92 10.31 17.77 18.80 13.97 17.46 23.95 25 9.21 2.67 6.42 9.36 15.84 15.56 12.46 15.49 21.78 30 8.90 2.59 6.09 8.73 14.56 15.08 11.46 14.20 20.35 35 8.69 2.54 5.85 8.30 13.66 14.04 10.77 13.30 19.36 40 8.54 2.50 5.67 7.98 12.99 13.29 10.26 12.65 18.64 45 8.43 2.48 5.54 7.74 12.49 12.73 9.89 12.17 18.11 50 8.44 2.49 5.48 7.57 12.11 12.32 9.60 11.83 17.73 55 8.46 2.50 5.44 7.44 11.81 12.01 9.39 11.58 17.45 60 8.48 2.51 5.40 7.34 11.59 11.79 9.23 11.42 17.26 65 8.50 2.53 5.37 7.27 11.42 11.64 9.12 11.32 17.15 70 8.53 2.54 5.35 7.22 11.29 11.55 9.05 11.29 17.10 75 8.56 2.56 5.34 7.19 11.20 11.51 9.00 11.32 17.12 80 8.59 2.57 5.33 7.18 11.15 11.53 8.99 11.40 17.19 85 8.63 2.59 5.33 7.19 11.13 11.59 9.00 11.53 17.32 90 8.67 2.60 5.33 7.21 11.15 11.69 9.03 11.73 17.51 95 8.71 2.62 5.33 7.25 11.18 11.85 9.08 11.98 - 100 8.75 2.64 5.34 7.29 11.25 12.04 9.16 12.29 -

Estimated Vehicle Operating Cost at Road Roughness IRR = 6.00 (Rs./km)

Large Medium Medium Large M/ Utility Large 3-Axle Speed Car 3W Bus 2-Axle 2-Axle Cycle /Van Bus Lorry Lorry Lorry

10 12.98 3.68 9.64 16.00 28.81 31.35 22. 59 28.96 37.41 15 11.22 3.21 7.94 12.74 22.35 23.82 17.51 22.33 30.10 20 10.38 2.98 7.09 11.13 19.10 20.04 14.95 19.00 26.43 25 9.90 2.86 6.58 10.17 17.14 17.77 13.43 17.01 24.23 30 9.59 2.79 6.25 9.54 15.85 16.28 12.42 15.70 22.79 35 9.38 2.74 6.01 9.10 14.93 15.23 11.72 14.80 21.78 40 9.23 2.70 5.84 8.78 14.26 14.47 11. 20 14.14 21.05 45 9.13 2.67 5.70 8.55 13.75 13.91 10. 82 13.66 20.52 50 9.14 2.69 5.64 8.37 13.36 13.49 10. 54 13.32 20.14 55 9.16 2.70 5.59 8.24 13.06 13.18 10. 32 13.07 19.86 60 9.18 2.71 5.56 8.14 12.83 12.96 10. 17 12.91 19.67 65 9.20 2.73 5.53 8.07 12.66 12.81 10. 05 12.82 19.56 70 9.23 2.74 5.51 8.02 12.53 12.72 9. 98 12.79 19.52 75 9.26 2.76 5.50 8.00 12.45 12.68 9.93 12.82 19.54 80 9.30 2.77 5.49 7.99 12.39 12.70 9.92 12.90 19.62 85 9.34 2.79 5.49 8.00 12.38 12.77 9.93 13.05 19.76 90 9.38 2.80 5.49 8.02 12.39 12.88 9.96 13.25 19.96 95 9.42 2.82 5.49 8.06 12.43 13.03 10. 02 13.51 - 100 9.46 2.84 5.50 8.11 12.49 13.24 10. 09 13.84 -

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Estimated Vehicle Operating Cost at Road Roughness IRR = 12.00 (Rs.km)

Large Medium Medium Large M/ Utility Large 3-Axle Speed Car 3Wl Bus 2-Axle 2-Axle Cycle /Van Bus Lorry Lorry Lorry

10 14.86 4.26 10.10 18.01 32.49 34.71 25.14 32.59 43.58 15 13.08 3.79 8.38 14.70 25.80 26.97 19.90 25.78 35.80 20 12.24 3.58 7.52 13.05 22.41 23.06 17.26 22.35 31.97 25 11.76 3.47 7.01 12.07 20.37 20.71 15.67 20.29 29.67 30 11.46 3.40 6.67 11.44 19.01 19.16 14.63 18.94 28.16 35 11.26 3.35 6.43 10.99 18.05 18.07 13.90 18.00 27.11 40 11.12 3.32 6.25 10.67 17.34 17.28 13.36 17.33 26.35 45 11.02 3.30 6.11 10.43 16.81 16.69 12.96 16.83 25.80 50 11.04 3.31 6.05 10.25 16.40 16.25 12.67 16.47 25.39 55 11.06 3.33 6.01 10.12 16.08 15.93 12.44 16.22 25.11 60 11.09 3.35 5.97 10.02 15.83 15.70 12.27 16.06 24.92 65 11.12 3.36 5.94 9.95 15.65 15.54 12.15 15.96 24.81 70 11.16 3.38 5.92 9.91 15.51 15.45 12.07 15.94 24.77 75 11.19 3.40 5.91 9.88 15.42 15.41 12.03 15.98 24.80 80 11.23 3.41 5.90 9.88 15.36 15.43 12.01 16.07 24.89 85 11.27 3.43 5.89 9.89 15.34 15.50 12.02 16.23 25.05 90 11.32 3.45 5.89 9.91 15.35 15.62 12.05 16.45 25.27 95 11.36 3.47 5.90 9.95 15.39 15.79 12.11 16.73 - 100 11.41 3.49 5.90 10.01 15.46 16.00 12.18 17.07 -

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ASSESSING PUBLIC INVESTMENT IN THE TRANSPORT SECTOR

INDEX

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INDEX

A G

Accessibility · 17, 46, 94, 95, 97 GDP · 28, 74, 114, 116, 121, 124 accident costs · 84, 85, 87, 120, 121, 122 Generated Demand · 118 accident reductions · 26, 42 Accident Reductions · 40 I Air pollution · 88 Inflation · 55 B Internal Rate of Return · 65, 94, 100, 104

Base Case · 25, 126, 135, 136 L Benefit/Cost Ratio · 65 Least Cost Method · 66 C Long Method of Appraisal · 6, 17

Classification · 6, 8, 9, 13, 14, 125, 135, 136, M 149 congestion cost · 10, 85 Maintenance · 12, 13, 14, 48, 53, 79, 80, 81, consumer surplus · 30, 31, 42, 44, 47, 62 109, 124, 125, 126, 131, 135, 147, 149, 150 Mega Projects · 14 E Monitoring · 6, 20, 21

economic analysis · 32, 54 N economic life · 2, 9, 12, 13, 48, 53, 54, 60, 61, 138 Net Present Value · 65, 100, 101, 133 Emissions Costs · 90, 93 New Assets · 9 Environmental Impacts · 48, 52, 88 Externalities · 33, 48, 49, 51, 52, 126, 147, 150 O

F Objectives · 8, 22, 23, 24, 108, 110, 112, 125, 128, 135, 136, 149 Feasibility · 2, 4, 6, 14, 19, 27, 29, 68, 71, 108 operating costs · 10, 18, 23, 38, 39, 52, 54, 59, financial analysis · 32 60, 61, 62, 64, 68, 75, 77, 80, 82, 95, 118, 127 Opportunity Cost · 32

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P S

Parking · 44 Sensitivity Analysis · 66, 133, 134, 141 Payback Period · 66 shadow price factors · 32, 78, 131 pedestrian · 45, 123 Short Method of Appraisal · 6, 16 Pre-feasibility · 6, 18 social goals · 9 Price Escalation · 55 subsidies · 32 Productivity · 36, 43 Project Authorisation · 6, 19 T Project Life Span · 61 Project Pipeline · 6, 20 taxes · 32, 36, 55, 78, 132 Project Proponent · 6, 8 Technology · 13, 14, 17, 78, 125, 135, 149 Project Selection · 6 Terms of Reference · 19, 27 traffic management · 24, 26, 87 R Transfers · 34, 54, 55 Travel Time Savings · 39, 95, 121, 144 regional development · 17, 18, 41, 95, 98, 112, 113, 116, 117, 145, 146 V Rehabilitation · 11, 14, 27, 61, 78, 125, 135, 149 Valuation · 17, 34, 35, 36, 37, 96, 109, 119, Replacement · 10, 11, 14, 78, 79, 125, 135, 149 142 research and development · 13 Valuation techniques · 35 risk · 37, 47, 56, 61, 63, 66, 67, 84, 85, 87, 129 Vehicle Operating Costs · 52, 77, 120

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