ASSESSING PUBLIC INVESTMENT IN THE TRANSPORT SECTOR Department of National Planning Ministry of Finance & Planning Colombo, Sri Lanka. December, 2000 PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com ASSESSING PUBLIC INVESTMENT IN THE TRANSPORT SECTOR 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. PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com Copyright © December 2000 Department of National Planning, Sri Lanka Assessing Public Investment in Transport Sector, 2000 174p. ISBN 955-8514-00-4 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 PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com 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 PDF created with FinePrint pdfFactory Pro trial version http://www.pdffactory.com Table of Contents 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 ________________________________________________