Prof. Madya Dr Hj. Mohd Idrus Hj.

Mohd Masirin UTHM

March 2011

One of the most important pillars of a modern economy is the ability to move goods and people where they need or wish to go. All modern economies are dependent upon transportation of some form to move people and goods to and from other economies. Access to other economies enables trade and facilitates the specialization of labor and capital, leading to greater productivity growth and higher wages. Without such access, many productivity-improving developments would not occur, resulting in lower average productivity and lower wages.

Economic: Good transport provides a clear competitive edge providing: Easy access Low congestion costs Good environment; so Efficient transport facilitates economic growth, But Congestion hinders business efficiency and impacts on regeneration Environmental Efficient transport helps provide high quality of life and address climate change. Unmanaged transport causes air quality problems, noise and traffic accidents

Sustainable communities A good transport network enables equality of travel opportunity to all,BUT Lack of transport provides a barrier to social inclusion particularly in areas of persistent social disadvantage and jobless

A fully integrated safe transport network which supports social and economic regeneration and, ensures good access for all which, is operated to the highest standards to protect the environment and ensure quality of life

A statutory requirement set within the framework of National Priorities

Removing Congestion Air quality and quality of life Accessibility Road safety Problems related to Climate change

The transport sector is an important component of the economy impacting on development and the welfare of populations. When transport systems are efficient, they provide economic and social opportunities and benefits that result in positive multipliers effects such as better accessibility to markets, employment and additional investments. The economic impacts of transportation can be direct and indirect:

Direct impacts related to accessibility change where transport enables larger markets and enables to save time and costs. Indirect impacts related to the economic multiplier effects where the price of commodities, goods or services drop and/or their variety increases.

At the macroeconomic level (the importance of transportation for a whole economy), transportation and the mobility it confers are linked to a level of output, employment and income within a national economy. In many developed countries, transportation accounts between 6% and 12% of the GDP. At the microeconomic level (the importance of transportation for specific parts of the economy) transportation is linked to producer, consumer and production costs.
The importance of specific transport activities and infrastructure can thus be assessed for each sector of the economy. Transportation accounts on average between 10% and 15% of household expenditures while it accounts around 4% of the costs of each unit of output in manufacturing, but this figure varies greatly according to sub sectors.

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Is the project justified ?- Are benefits greater than costs? Which is the best investment if we have a set of mutually exclusive alternatives? If funds are limited, how should different schemes be ranked? When should the road be built?

Are complementary investments required? Should stage construction be used? What standards should be applied ?

All appraisals need a framework or model for:

a) Forecasting changes b) Evaluating those changes

These include: Supervision

Management Manpower Machinery Materials Land Environmental Mitigation (e.g. Resettlement)
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Reduced vehicle operating costs fuel and lubricants vehicle maintenance depreciation and interest overheads Reduced journey time drivers, passengers and goods

Changes in road maintenance costs Changes in accident rates Increased travel Environmental effects Change in value of goods moved

Changes in agricultural output Changes in services Changes in industrial output Changes in consumers behaviour Changes in land values

Any economic analysis should be designed to give maximum coverage of benefits. But we must avoid double counting. Do not add primary and secondary benefits (e.g changes in land values added to changes in transport costs) In a competitive economy the consumers surplus approach (used in HDM) should be adequate.

An economic analysis involves a comparison of With and Without cases. Traffic forecasts are made for BOTH scenarios - The analysis should not be based on before and after. An unrealistic Without case can give a false result. A range of with investment cases should be analysed to find the best solution. A minimum investment approach often gives the best economic results and should be tested.

Do nothing

Minimise the cost Concentrate on maintenance No new construction

New project/construction Major maintenance Higher in cost

Project alternative

The main purpose of project economic analysis is to help design and select projects that contribute to the welfare of a country". To answer these question:

What is the objective of the project ? What will happen if it is implemented, and what if it is no ? Is the project the best alternative ? Are there any separable components, and how good are they separately ? Who are the winners and losers ? Is the project financially sustainable ? What is the project's fiscal (government finance) impact ? What is the project's environmental impact ? Is the project worthwhile ? Is it a risky project

It is necessary to analyze, in economic terms, whether the project is better carried out by the public or the private sector.

The major element of economic benefit arises in the form of

Benefits for the road users may include

vehicle operating cost savings, computed and valued in compliance with the road user surplus theory. reduced driving time, reduced driving costs, fewer accidents, and environmental improvements.

The comparison of traffic volumes, with and without the project, is an outstanding aspect of the analysis. But in the case of low-traffic roads, since assessing with accuracy the structure and volume of the traffic generated by the project may be challenging, an approach based on the producer surplus or multi-criteria analysis may be preferable to take better account of direct and indirect impacts of the project or program on the local economic and social system:

development of agriculture, improved access to water supply, health or education (see also below "specific issues concerning rural roads").

The cost to the economy of road rehabilitation and maintenance may differ from the financial cost because of : taxes and duties shortage of foreign exchange under-employment

The Government will usually be concerned with ECONOMIC costs. Contractors will usually be concerned with FINANCIAL costs.
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In an Economic Appraisal we use ECONOMIC (or SHADOW) prices NOT FINANCIAL prices
Adjust financial prices as follows: Exclude all taxes and duties and subsidies Use the planning discount rate not the financial market rate If overvalued exchange rate then value imports and exports more highly Use the opportunity cost of labour Standard Conversion Factors are now widely used for road construction costs
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Changes in transport costs occur because of : Lower road roughness Shorter trip distance Faster speeds Reduced chance of impassability Reduced traffickability problems Change in mode

Normal traffic: Existing traffic and growth that would occur on the same road, with and without the investment Diverted traffic: Traffic diverted from another road to the project road as a result of the investment
Generated traffic: New traffic induced by the investment

Transport cost savings for existing (or normal ) traffic = Traffic x Change in Transport Costs per km x distance Main changes in cost from: a) change in transport MODE b) reduced journey TIME c) reduced VOCs
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Traffic induced by the road investment are traditionally valued at: Half the difference in transport costs Hence total generated transport cost benefits = Generated traffic volume x change in costs per km x distance x 1/2

Normal traffic benefits:

tripsN * d1 * (VOC1- VOC2)

Diverted traffic benefits: tripsD * ((d1 * VOC1)-(d2*VOC2))

Generated traffic benefits: tripsG * d2 * (VOC1- VOC2)/2

d1 = existing road length d2 new road length VOC1 = vehicle operating costs per km withoutinvestment VOC2 = vehicle operating costs per km with investment VOC data relates to each road section and its condition at the time

Development benefits arise from a combination of increased traffic and reduced transport costs. Benefits may also include : Increased agricultural production Increased service provision Increased industrial activity
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Normal traffic benefits = traffic x change in transport costs

Development benefits - A function of (change in transport costs)2

Social benefits - A function of population x change in transport costs

Transportation planning and construction must ensure its benefits to society and economics activities Direct and indirect benefits must be considered in its justifications ROI must be calculated in order to ensure success Importantly, a transportation plan must ensure increase in effectiveness and efficiency The choice of transportation will have a direct impact on its economics

Acknowledgements to:
Ms Munzilah Colleagues in FKAAS UTHM