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Jiangxi Fuzhou Urban Integrated Infrastructure Improvement Project (RRP PRC 44007)

ECONOMIC ANALYSIS

A. Project Costs and Benefits

1. The project’s capital costs include the civil works, land acquisition and resettlement,
design, supervision and management.1 A residual value after 20 years was based on straight-
line depreciation of assets. The costs of operation and maintenance, periodic rehabilitation, and
vehicle replacement are included. Financial costs were converted into economic costs by
(i) excluding taxes, price contingencies, and financial charges; (ii) using a 0.8 shadow price for
low-skilled labor costs; (iii) applying standard conversion factors across different cost
categories, with the weighted average standard conversion factor for civil works costs at 0.891,
which is consistent with recent projects in the People’s Republic of China;2 and (iv) converting
nominal costs into constant 2011 yuan.

2. Cost estimates pertaining to the proposed Global Environment Facility project were
incorporated into the bus rapid transit (BRT) cost stream, as this component will reduce the
energy consumed operating the bus system. The period used for economic analysis was from
2013 to 2036. The economic analysis uses real prices, ignoring price inflation.

Table 1: Economic costs by project component


Station Access Urban Transport Bus Rapid Fenggang River
Year Roads Hub Transita Greenway Total Cost
2013 120.7 0.0 7.7 0.0 128.4
2014 120.7 29.5 7.7 0.0 157.9
2015 60.3 3.3 97.1 38.0 198.7
2016 n/a n/a 7.7 63.4 71.1
2017 n/a n/a 7.7 25.4 33.1
Total 301.7 32.8 127.9 126.8 589.2
a
Bus rapid transit costs include the Global Environment Facility project, costing CNY7.7 million annually
during implementation.
Source: Asian Development Bank estimates.

B. Economic Benefits

3. The benefit streams are expressed in 2011 prices and comprise savings on travel time
and vehicle operating cost (VOC). The Fenggang River greenway is expected to reduce costs
from flooding, open new land for urban development, and provide a substantial urban amenity
with benefits for the quality of life. However, as no reasonable method is available to value the
economic benefits of this component, the economic analysis focuses solely on the three
transport-related projects. The transportation benefits were based on the outputs of a travel
demand model developed to analyze the project.3 The value of some of the benefits, time
savings in particular, depends on assumptions about future economic growth. The analysis
assumes that that current growth in gross domestic product per capita in Fuzhou, at 15% per
annum, will decline by 2% per annum each year to 2015, and continue at 6% per annum
thereafter.

1
Land acquisition costs are based on regulated rates of 23.4 times the undiscounted agricultural production value. In
the People’s Republic of China, acquisition rates for agricultural land are much higher than the opportunity cost of
foregone agricultural production, so a separate adjustment for the opportunity cost of land is not needed.
2
ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s
Republic of China for the Xi’an Urban Road Network Improvement Project. Manila.
3
Summary Travel Demand Forecasts (accessible from the list of linked documents in Appendix 2).
2

4. Vehicle operating cost savings. VOC is used to relate distances travelled to the cost
of travel. The travel demand model produces estimates of vehicle kilometers, which can be
converted into monetary costs for evaluation. To estimate VOCs, an approach tailored to urban
environments is required. This analysis borrows the methodology employed for the World
Bank’s Anhui Urban Transport Project in 2009, which calculated VOCs as follows:

VOC = (A + B/S). (1 + (0.2 × (VolumeCapacityRatio^2)))

Where: S = speed in kilometers per hour


A, B = calibrated parameters, given in Table 2

Table 2: Vehicle Operating Cost Parameters


Motorcycle Taxi Auto Coach Bus Small Truck Large Truck
A 0.49 0.70 0.99 0.92 0.87 0.69 1.35
B 5.39 13.01 10.77 21.09 26.91 38.51 26.86
Source: World Bank. 2009. Anhui Urban Transport Project. Washington, DC.

5. These relationships are calculated for each vehicle type using average speeds and
volume–capacity ratios from the travel-demand forecasting model. As the VOC values are
economic costs in domestic prices, omitting tax and subsidies, it is not necessary to apply to
these values further factors, such as for shadow price conversion.

6. Economic value of time. The economic value of time (EVOT) is the value of travel time
to the economy as a whole. It is standard practice to assume an EVOT that is half of average
income per unit of time for nonbusiness travel and equal to average income for business travel.
However, the travel-demand forecasting model did not provide separate travel purposes. As
output statistics also do not differentiate by trip purpose, it was assumed that most travel is
nonbusiness. The economic analysis employed a weighted average EVOT of 60% of hourly
income per capita4 as the shadow price EVOT, which escalated in line with growth in the gross
domestic product per capita, as shown in Table 3.

4
Jiangxi Fuzhou Statistics Bureau. 2010. Jiangxi Fuzhou Statistical Yearbook. Jiangxi.
3

Table 3: Economic Value of Time by Year


EVOT GDP/capita growth
Year (CNY/hour) (%)
2010 4.81
2011 5.53 15
2012 6.25 13
2013 6.94 11
2014 7.56 9
2015 8.09 7
2016 8.58 6
2017 9.09 6
2018 9.64 6
2019 10.22 6
2020 10.83 6
2021 11.48 6
2022 12.17 6
2023 12.90 6
2024 13.67 6
2025 14.49 6
2026 15.36 6
2027 16.29 6
2028 17.26 6
2029 18.30 6
2030 19.40 6
2031 20.56 6
2032 21.79 6
2033 23.10 6
2034 24.49 6
2035 25.96 6
2036 27.51 6
EVOT = economic value of time, GDP = gross domestic product.
Source: Asian Development Bank estimates.

7. Fenggang River greenway benefits. The Fenggang River greenway will channelize the
river and increase its water-absorption capacity, which will reduce flooding in the project area
and open 230.7 hectares of currently flood-prone land to urban development. In addition to
reducing costs from flooding and generating land development benefits, the new urban
greenway will provide extensive parkland and recreation facilities for local residents and a safe
corridor for nonmotorized transport between the station area and the old city. Urban land in
Fuzhou is currently valued at CNY3.71 million per hectare which means the value of land newly
available for development is likely to exceed the cost of the greenway component. However,
uncertainty about timing, land use, and the cost of urban development in the area renders
problematic assigning an economic value of the additional land. Therefore, the economic costs
and benefits of this component are not included in the quantitative analysis.

C. Benefit–Cost Analysis

8. For transport-related projects—the station access roads and the urban transport hub
plus BRT—benefits were calculated as the monetized value of time and VOC savings over the
period under analysis. The difference between “no build” and “build without BRT” defined
benefits for the station access roads, while the difference between “build without BRT” and
“build all” defined benefits for the urban transport hub plus BRT.5 The benefit–cost ratio,
5
The base case alternative extends regular bus service to the new area. BRT is, by definition, the low-cost option for
providing higher-quality public transport. The project benefits are derived from the features of BRT that segregate
buses from other traffic to allow them to run more quickly than regular buses. With respect to road investments,
there are no reasonable lower-cost alternatives. The choice to forego constructing them is not a reasonable
alternative, as the railway and station area would be inaccessible. Narrower road alternatives would be inconsistent
with the design standards of existing roads and cause traffic and safety problems as lane configurations change.
4

economic internal rate of return (EIRR), and net present value at a 12% discount rate are
presented for each component in Table 4 and by benefit category in Table 5.

Table 4: Economic Benefit–Cost Results by Component


Urban Transport Hub + All Three
Benefit–Cost Metric Station Access Roads Bus Rapid Transit Transport Projects
Benefit–cost ratio 9.3 2.3 4.3
EIRR (%) 12.3 20.3 14.0
NPV @ 12% (CNY
million) 11.6 114.2 125.8
EIRR = economic internal rate of return, NPV = net present value.
Source: Asian Development Bank estimates.

Table 5: Summary of the Analysis of Costs and Benefits (Transport Components)


(CNY million)
Time Vehicle Operating Total Net
Year Total Costs Savings Cost Savings Benefits Benefits
2013 (113.60) 0.00 0.00 0.00 (113.60)
2014 (155.44) 0.00 0.00 0.00 (155.44)
2015 (169.08) 0.00 0.00 0.00 (169.08)
2016 (28.87) 20.30 (72.04) (51.74) (80.61)
2017 (29.11) 25.21 (61.25) (36.04) (65.15)
2018 (29.38) 33.36 (48.27) (14.91) (44.28)
2019 (29.66) 46.06 (32.62) 13.44 (16.22)
2020 (29.98) 65.08 (13.73) 51.34 21.37
2021 (30.32) 69.35 9.10 78.45 48.13
2022 (30.51) 97.82 22.64 120.46 89.95
2023 (30.70) 103.17 37.58 140.75 110.04
2024 (78.15) 108.80 54.06 162.86 84.71
2025 (31.12) 114.74 72.26 186.99 155.87
2026 (31.35) 120.99 92.34 213.34 181.99
2027 (31.58) 127.58 114.53 242.12 210.53
2028 (31.83) 134.52 139.05 273.57 241.74
2029 (32.09) 141.82 166.15 307.97 275.88
2030 (32.36) 149.52 196.11 345.62 313.27
2031 (32.64) 157.62 229.24 386.85 354.21
2032 (32.94) 166.14 265.88 432.03 399.09
2033 (33.25) 175.12 306.43 481.55 448.31
2034 (80.81) 184.57 351.31 535.88 455.06
2035 (33.91) 194.51 400.99 595.50 561.59
2036 146.72 204.97 456.00 660.97 807.69
Total (1,011.96) 2,441.23 2,685.79 5,127.02 4,115.06
IRR 14.0%
NPV 132.69
IRR = internal rate of return, NPV = net present value.
Source: Asian Development Bank estimates.

D. Sensitivity and Risk Analysis

9. Six sensitivity scenarios were tested. The scenarios and results are shown in Table 6.
Since transport project benefits are largely independent of the benefits of the river rehabilitation
component, sensitivity tests were devised to test the three transport components separately
from the river project. The analysis shows that, while the river rehabilitation project provides
healthy returns based on the assumptions used in the study, it is particularly sensitive to
increases in construction costs and reductions in benefits.
5

Table 6: Sensitivity Analysis


Base IRR NPV Switching
Scenario Main Assumptions IRR (%) (%) ($ million) Value
Scenario 1 Cost overrun of 20% 14.0 12.9 66.9 39.9
Cost overruns on three transport
projects
Scenario 2 Value of time is 20% lower 14.0 12.7 45.5 30.3
Decrease in the value of time for
three transport projects
Scenario 3 VOC is 20% lower 14.0 13.4 89.1 59.6
Decrease in VOC for three
transport projects
Scenario 4 Population in 2020 is 20% 14.0 12.3 20.1 23.5
Population decrease less than predicted
IRR = internal rate of return, NPV = net present value, VOC = vehicle operating cost.
Source: Asian Development Bank estimates.

E. Summary and Conclusion

10. All project components provide positive economic returns, based on the information
available and assumptions made in the economic analysis. The economic returns from the
station access roads are not high, with an EIRR equal to 12.3% in the base case. However, as
several kilometers of station access roads are required for the BRT system—which, together
with the urban transport hub, produces a very attractive EIRR of 20.3%—all transport project
components should be considered together, which produces an EIRR of 14.0%.

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