Transport Economics Component Assignment | My Assignment Tutor

1Transport Economics Component Assignment:Background MaterialIn this assignment students are (individually) required to carefully study andanalyse Example 1: Flood Mitigation (Section 3.1 of Part 8 of the AustroadsGuide to Project Evaluation). Please carefully study the material described inthe rest of this document (which is Sections 1, 2, and 3.1 in the Part 8Report).When you get comfortably familiar with the information provided below, youneed to refer to the animated example (Excel file provided and also posted foryou on Canvas for this Subject and Assignment).Students are asked to analyse the example using the Excel template andbackground material provided, so they can perform required calculations andsuccessfully address the questions in the assignment.All students must submit this assignment individually. Assessment of theassignments will be based on clarity and understanding of all inputs used andoutputs obtained. Please ask questions if unclear.21. INTRODUCTIONPart 8 of the Guide to Project Evaluation (the Guide) presents worked examples ofproject evaluations applied to a selection of infrastructure upgrading projectscommonly faced by practitioners. Some of these examples are updated andexpanded from the Austroads Benefit Cost Analysis Manual (1996). A number ofadditional examples have also been included to discuss a bus priority scheme, abicycle infrastructure project evaluation within a broader multi-criteria type approach,a project delay example and a risk analysis example.These examples are intended to demonstrate the Benefit-Cost Analysis (BCA)methodology and techniques described in Part 2: Project Evaluation Methodology ofthe Guide. Data for the BCA can be obtained from Part 3: Models and Proceduresand from Part 4: Project Evaluation Data. Each worked example is linked to an(executable) excel spreadsheet showing all relevant BCA calculations.1.1 Steps in a Benefit-Cost AnalysisThe following six steps are identified in the Austroads Guide to Project Evaluation(the Guide) to provide a practical description of the building blocks for conducting aproject benefit-cost evaluation:STEP 1: Define problem and set objectives – Obtain a clear picture of what theproject purpose is, and what the specific outputs and outcomes to be achieved fromthe proposed project are (for more detail see Part 1 and Part 2 of the Guide).STEP 2: Generate options – Establish a range of viable projects options. A basecase must also be defined (for more detail see Part 1 and Part 2 of the Guide).STEP 3: Set the basic parameters – These will include selecting the evaluationperiod for the project investment, the start year for project benefits and costs and theprice year and discount rate. For the examples contained in Part 8, the nominaldiscount rate of 7% has been used, and an evaluation period ranging from 20 to 30years has been set depending on the characteristics of the particular example (formore detail see Part 2 of the Guide).STEP 4: Identify and quantify impacts (costs and benefits) where possible –For transport projects, benefits are likely to include travel time savings (includingreduction in congestion costs), social crash cost reduction, savings in vehicleoperating costs and environmental cost reduction (for more detail see Part 2 of theGuide).The practitioner should note that operating costs (i.e. infrastructure maintenance,compliance and traffic management costs) are accounted for by road agencies ascosts in the denominator of the Benefit-Cost Ratio (BCR) calculation. This reflectsthe planning decisions, including ongoing maintenance costs agencies need toconsider when undertaking a project. However, an alternative approach to use wouldbe to account for these costs as negative benefits in the nominator of the BCR1.STEP 5: Discount costs and benefits – In this step all identified benefits and costsare properly measured and monetised to produce aggregate estimates for each yearover the evaluation period. An appropriate discount rate is then applied to express in1 See Part 2 for more detail about using BCA measures such as NPV and BCR for decision making(e.g. project prioritisation).3present value terms all costs and benefits included in the evaluation (for more detailsee Part 2 of the Guide). A calculation engine to perform this step is also included inthe corresponding Excel Spreadsheet developed for each example. (See executableExcel based spreadsheets provided for each example).STEP 6: Calculate NPV, BCR, IRR and FYRR – These four output measures (NetPresent Value, Benefit-Cost Ratio, Internal-Rate of Return and First-Year-Rate ofReturn) can be obtained using the Excel Spreadsheet calculator. (See executableExcel based spreadsheets provided for each example)STEP 7: Undertake sensitivity tests or risk analysis – Testing the impact of somechanges in assumptions about traffic growth, cost estimates and discount rate usedcan provide information on project risks (for more detail see Part 2 of the Guide).This 7 step broad process is followed in developing the selected examples that aredescribed below:2. THE EVALUATION TOOLThe evaluation of a number of some common types of road project examples wasmainly carried out by means of the spreadsheet-based evaluation tool described inthis section.At this stage the tool comes in two versions: one that excludes congestion butincludes demand elasticity, and one that includes congestion but excludes demandelasticity. Because congestion is assumed to be insignificant in all but one of thefollowing examples, it is the former version that is explained in this chapter and usedto evaluate all examples except one. The latter version is instead described in thesection dealing with the one example which uses it: ‘Road widening and duplication’.As both model versions share the same underlying logic and structure, it would bepossible to combine them in the future into a single model incorporating the featuresof both; this possible integration of the two models is beyond the scope of the currentproject for developing Part 8. Such a combined model might also embody provisionfor stochastic data inputs and the computation of additional outputs such as noiseimpact and air emissions.2.1 Characterising projectsIn the typical road related project, the road agency incurs increased expenditures,and in return road users save on travel time, vehicle operating costs, and crashes.There may be significant third-party impacts as well, mainly reduced noise.The examples of evaluations of some common types of project developed for Part 8are shown in Table 2.1. Project options are characterised in terms of a set of datainputs specified by the evaluation tool, which then computes incremental NPVs andBCRs for all options.4Table 2.1: Principal impacts, by project type Project typeImpactFlood mitigationSealing and realign’ tBridge maintenanceFerry upgradingBlackspot treatmentDelayBus priorityTown bypassWidening andduplic’ n123456789Road user impactsTravel timeVOCsSafetyRoad agencyimpactsCapital costsOperating costsThird-party impactsNoise Key: = Always or nearly always occurs. = Often occurs.All projects normally produce savings of all types of road user impact;only the significant ones are shown.Note: 2.2 Data requirementsThe evaluation tool requires that all projects be characterised in terms of standarddata inputs as shown in Table 2.2.Although all data inputs must be specified when evaluating a project, only certainones (indicated on the table) normally differ as between options. For instance, roadsealing (example 2) typically increases ‘average speed’, and decreases ‘crash rate’and ‘VOC rate’; it does not affect anything else, such as ‘trip length’ or ‘trafficcomposition’. Likewise, a town bypass case (example 8) normally increases ‘roadlength’ (by sending traffic around, not through, a town), and usually increases‘average speed’ and decreases ‘crash rate’, as traffic avoids crowded downtownstreets. ‘VOC rate’ may also change if the design standard of the road is altered. Butnot all traffic will take the bypass, and this is reflected in ‘traffic proportion’ affected.5Table 2 2: Data required by the model, by project type Project typeData inputFlood mitigationSealing and realign’ tBridge maintenanceFerry upgradingBlackspot treatmentDelayBus priorityTown bypassWidening andduplic’ n123456789Project-specific dataDiscount rateOperational life StartEndTraffic: AADT in year 0Growth rateGrowth typeDemand elasticityOption-specific dataTraffic: ProportionaffectedTrip lengthAverage speedCompositionTravel time Unit cost (pax)AverageoccupancyUnit cost (Freight)Crashes RiskUnit costVOC Unit costRoad-agency cost dataCostTiming Key:  = Usually varies between options. = Sometimes varies between options. = Never varies between options.blank = Rarely varies between options.62.2.1 Project-specific dataDiscount rateImpacts for all options are discounted at the rate stipulated by the governing roadagency.Operational life of the projectTo enable a fair comparison between project options the practitioner must stipulatethe project’s operational life, being the period during which road-user costs areaffected by the project. This is done by specifying the first and last years of projectoperation.Note that the timing of road-agency costs does not necessarily coincide exactly withthe operational life of the project: initial capital cost for instance is usually incurred inthe year preceding the first year of operation. In deciding whether or not to include aspecific road-agency cost the following test is helpful: costs should only be included ifthe benefits they give rise to are also included. So if a particular project requiresperiodic maintenance every ten years, the cost should only be included if theoperational life of the project includes the subsequent ten years of road-user savings.To define a shorter operational life would unfairly penalise the project as costs wouldbe counted against it while the subsequent attendant benefits were not.TrafficData inputs relating to traffic never vary between project options. This is not to saythat traffic is always the same for all options. If an option relieves congestion it willnormally attract traffic from competing routes and, possibly, public transport. Likewiseif an option simply makes travel easier it can generate new trips, ones that otherwisewould not have been made at all. The volume of traffic generated in this way iscalculated automatically within the model from the data provided. These datatherefore can more properly be said to describe the underlying demand for trips, notthe amount of traffic produced under any given project option.AADT in year 0—Traffic flow is expressed in terms of vehicles per day or year andused to compute traffic volume in vehicle-km. It is forecast from a base-year AADT(Annual Average Daily Traffic). AADTs are normally available from historical records,but may need to be updated specifically for the evaluation in question.Growth rate—The growth rate is used for forecasting traffic over the planninghorizon of the project, normally up to 30 years. Past growth rates can normally beestablished from historical records. However, it should never be assumed thathistorical trends may be extrapolated in all cases. Traffic forecasting is potentiallycomplex and outside the scope of this document.Note that the growth rate stipulated in the model applies to the level of traffic thatwould pertain in the absence of any change in road-user costs; that is, it assumesthat the prices borne by road users are unchanged by the project. Generally this is soif demand is inelastic and traffic un-congested. But if either condition is notsatisfied—that is, if there is a significant volume of generated traffic—then traffic willchange for reasons unconnected with the ‘growth rate’ parameter. Specifically, trafficmay grow if travel on the affected link is getting ‘cheaper’ in terms of travel time andcost, not because there is any underlying growth in demand (though this may behappening as well). Because of its complexity, a full discussion of this issue ispresented in Example 5: Road widening.7Growth type—Two types of traffic growth can be specified in each example: linearor exponential.Demand elasticity—Projects typically make the affected link more attractive to roadusers. Demand elasticity is a parameter that determines how much new traffic will begenerated in this way: an elasticity of, say, -2 means that a 1% decrease in road-usercost results in a 2% increase in traffic (that is, -2 -1% = 2% ). Generated traffic isassumed to produce half as much net benefit per unit of traffic as existing traffic2.Demand elasticities depend crucially on the nature of the project. A project thataffects a road for which there are no closely competitive links typically has a lowelasticity—its demand is said to be ‘inelastic’. Rural highways are often of this type: ifa rural highway is improved, traffic volume is largely unaffected because nearly allthe traffic that will ever use it is doing so already. Conversely, traffic demand onurban roads can be highly elastic: in a highly interconnected urban network,improvements on any link immediately attract traffic from competing links, particularlywhere congestion is widespread.For these reasons, it is often hard to estimate demand elasticity. For small projects,practitioners may usefully rely on rules of thumb derived from experience of formercomparable projects. Large projects, however, generally warrant detailed trafficmodelling and are therefore unsuited to the simple evaluation tool demonstrated inPart 8.2.2.2 Option-specific dataThe following data inputs are required for the computation of road-user costs. Theyoften vary between project options, reflecting differences in, say, average speeds orcrash rates. For consistency, the computation of road-user costs should as far aspossible be based on uniform parameters and procedures that are applied equally toall projects and all options.Road-user unit cost data mostly differ by vehicle type. Currently the model used foreach example uses a threefold breakdown for vehicles:• cars• light commercial vehicles (LCVs)• heavy vehicles (HVs).Road-user costs are calculated and reported separately for each vehicle class. Moredetailed breakdowns are possible and may be incorporated in future if data areavailable and they offer significantly greater precision.TrafficProportion affected—Project options do not necessarily affect all traffic on the partof the network where the project takes place. For instance, a bypass will normallyonly attract a certain percentage of the traffic through a town; and a flood mitigationproject will only benefit traffic during periods of inundation.The proportion of traffic affected by an option will normally depend on its particularnature and circumstances. In the case of flood mitigation, for instance, hydrological2 The reasons for this are found in economic theory and assume a linear demand curve.8records may be needed to determine the proportion of the year when roadways ofvarious heights will be inundated.Trip length—The treatment of road length depends on whether the project affects asignificant length of road (such as resurfacing or widening) or it effectively takesplace at a point location (such as an intersection treatment). Naturally trip length canvary between project options, for instance where an option provides a more directroute that eliminates detours.Trip length is expressed in kilometres and is required for the computation of roaduser costs. Road-user costs are derived from unit costs that are expressed in termsof dollars per vehicle-km (which naturally requires road length to be specified) ordollars per vehicle-hour (which requires vehicle speed to be specified as well).A computational issue arises where a project effectively takes place at a pointlocation—say, a bridge or an intersection. In that case the computation of road-usercosts must be based on unit costs that are independent of distance; that is, dollarsper trip not per kilometre.Average speed—Different types of vehicle have different average speeds, whichrespond differently to different types of project. Average speed affects travel time,crash costs, and VOC. It will normally be necessary to record average speeds inadvance of each project. If this is not practicable, global parameters may be used.Composition—Classified AADTs (that is, disaggregated by vehicle type) are oftenavailable from historical records, but may need to be updated specifically for theevaluation in question.Travel timeUnit cost (pax)—Different types of vehicle entail different hourly costs of travel time,mainly because commercial vehicles carry drivers who are remunerated atcommercial rates while private cars do not. Global parameters, which are periodicallyupdated, are available for the unit cost of passenger travel time.Average occupancy—Different types of vehicle have different averageoccupancies. Average occupancy affects travel time savings. Although averageoccupancy does not explicitly affect crash costs under the algorithm used in thismodel, they are calculated from global parameters (below) that already embodyassumptions concerning average occupancy. Global parameters, periodicallyupdated, will normally suffice for average occupancy.Unit cost (freight)—Different types of vehicle entail different hourly costs of freighttime, mainly because vehicles carry different quantities of freight. Global parameters,which are periodically updated, are available for the unit cost of freight travel time.CrashesRisk—The risk (or rate) of crashing can vary greatly between locations. Normally,crash risk will be established from the crash records kept by the relevant roadagency.Unit cost—The unit cost of crashes varies by road type and speed zone. Globalparameters, which are periodically updated, are available for the unit cost of crashes.9VOCUnit cost—VOCs vary by vehicle type and speed, and road type. Normally, VOCsare calculated using econometric models with empirically estimated parameters.Global VOC parameters, which are periodically updated, are available for thecomputation of VOC.Road agency costsRoad agency costs normally vary between project options reflecting differences inengineering works and/or traffic management procedures, and will typically beworked up on a consistent basis by the road agency in charge of the project. Theevaluation tool recognises three classes of road-agency cost:• capital expenditure, which occurs once only at the outset and typically precedesthe commencement of operations by a year• routine maintenance, which is incurred annually and normally does not vary fromyear to year• periodic maintenance, which is incurred at periods greater than yearly, and mayvary through time.The timing of each class of cost is stipulated by the practitioner over the life of theproject.More detailed breakdowns of road agency cost are possible and may beincorporated in future if data are available and they offer significantly greaterprecision. Regardless of how road agency costs are classified, it is important todistinguish capital expenditure from other costs. When the road agency’s capitalbudget is constrained, projects must be prioritised by the ratio of net benefits tocapital expenditure—a definition of BCR in which capital expenditure constitutes thedenominator of the ratio (see Part 2).ResultsNet Present Value (NPV)—The model computes the incremental NPV for all projectoptions as compared to the base-case option.Benefit-Cost Ratio (BCR)—The model computes incremental BCR for the projectoptions as compared to the base-case option. For this purpose, BCR is defined asthe sum of all non-capital costs and benefits, divided by capital expenditure. This isthe appropriate definition to use for prioritising projects when the road agency’scapital budget is constrained.Internal rate of return (IRR) and first-year rate of return (FYRR) results are alsocalculated and shown.Using the evaluation toolThe evaluation tool takes the form of a spreadsheet. Up to four project options maybe evaluated, one of which must be the base-case option against which the othersare compared. Data are entered in the cells with red digits. Results are presented inthe form of four charts: incremental NPV, BCR, IRR and FYRR.Copies of the evaluation tool spreadsheet containing the appropriate data areprovided for all but one of the examples that follow. The exception is Example 5:Road widening. Because congestion is significant in this example, a different10evaluation tool is required. The logic of this tool is explained in the example, and acopy provided.3. EXAMPLES3.1 Flood mitigation3.1.1 Project description and optionsA rural road suffers from periodic inundation. This imposes costs on road users, whoare forced to divert or abandon their trips, and on the road agency, which incurspavement repair costs.The agency may mitigate the impact of periodic inundation by building a bridge orraising the road level. If this is not feasible, because the inundation is toowidespread, it may limit access until the saturated pavement dries out. This saveson maintenance but inconveniences/costs road users.There is a trade-off between road-user and road-agency costs. The more the roadagency spends on capital works and post-flood repairs, the less road-users areinconvenienced, and vice versa. At one extreme, the agency may opt to spendnothing on capital works, and to close the road for long periods after each flood inorder to avoid pavement damage. At the other extreme, it may opt to build bridgesand causeways wherever needed, and so eliminate all possibility of road closure.Between these two extremes, compromise is possible. The road agency shouldselect the option that optimises the trade-off between road-user and road-agencycosts — that is, the option that maximises net benefit.The current example considers three project options besides the base-case:Option 0: Base-case. The road continues to be closed periodically and users areforced to make long detours.Option 1: Low-level causeway. A low-level causeway is constructed. It is cheaperto build and maintain than options 2 and 3, but still subject to occasional flooding.Option 2: Medium-level causeway. A higher causeway is constructed. Morecostly to build and maintain than option 1 but cheaper than option 3, it copes with allbut the worst floods.Option 3: High-level bridge. A high-level bridge is constructed. The most costlyoption, it is never closed due to flooding. 3.1.2Data inputsDatainputsareshownintheattachedspreadsheet(Example-1FloodMitigation.xls).The following data inputs differ as between options, and are therefore those that can be said to characterise the various options that make up thisproject.Proportion of traffic affected. The higher the roadway, the less time it is closed onaverage during the year. Currently it is estimated to be closed for 4% of the time.Hydrological studies show that this will fall to 3% for the low-level causeway (option1), 1% for the medium-level causeway (option 2), and zero for the high-levelcauseway (option 3).Capital costs. The higher the roadway, the more costly it will be to construct. Nocapital costs are incurred for the base-case (option 0); $1 million for the low-level11causeway (option 1), $1.8 million for the medium-level causeway (option 2), and $6.5million for the high-level causeway (option 3).Routine maintenance. Routine maintenance currently runs at $20,000 per year forthe base-case (option 0). This is because the existing roadway sustains extensivedamage every year. Routine maintenance will be $3,000 per year for the low-levelcauseway (option 1), $3,000 per year for the medium-level causeway (option 2), and$12,500 for the high-level causeway (option 3).Periodic maintenance. There is currently no periodic maintenance under the basecase (option 0). Periodic maintenance will be $20,000 every 10 years for the lowlevel causeway (option 1), $50,000 for the medium-level causeway (option 2), and$400,000 for the high-level causeway (option 3).3.1.3 ResultsNPV — The best option is clearly option 2 (Figure 3.1). NPV for this option is $2.5million as compared with $0.6 million for option 1 and -$1.2 million for option 3.Figure 3.1: Flood mitigation, incremental NPV, by optionBCR — The best option is again clearly option 2 (Figure 3.2). BCR is 2.6 ascompared with 1.7 for the option 1 and 0.8 for option 3.-804-1 627-6 7141 3884 1645 5520 0 05842 536-1 162-8 000-6 000-4 000-2 00002 0004 0006 0008 000Option 1 Option 2 Option 3Incremental NPV ($000)Road agency costsRUC: Existing trafficRUC: Generated trafficTotal12Figure 3.2: Flood mitigation, BCR by option1.732.560.830.00.51.01.52.02.53.0Option 1 Option 2 Option 3Incremental BCR