ch_6 economic analysis_raipur - balodabaza

DPR for Chhattisgarh State Road Sector Development ProjectPackage - A [Loan -2, Phase -3 Asian Development Bank] Detailed Project ReportRaipur – Balodabazar Road Volume–I : Main Report

Economic Analysis

6.0 ECONOMIC ANALYSIS

1 Introduction

This chapter discusses the general principles of cost benefit analysis (CBA) and outlines the major costs and benefits considered for the economic appraisal of the project road. It discusses the adjustments needed to convert the financial costs into economic costs.

Economic evaluation of a project attempts to take into account all the costs and benefits to the society irrespective of who pay the costs and who receives the benefits. In the case of a road project, the benefits accrue mainly to the road users (society in general) in the form of vehicle operating cost savings and time savings. The costs are borne by the developer (government/ private operator).

2 Economic Costs

The cost of implementing a project to society is not necessarily the same as the costs in the market place. In terms of economic costs, such market or financial costs are devoid of any tax components and market imperfections. Thus, in the cost benefit analysis of an economic appraisal, financial costs have to be adjusted to derive the economic costs. In a project of the current nature many items are used in the construction with tax components known for certain items and not for others. It is a general practice to adjust the financial costs of items with unknown tax components by a standard conversion factor (SCF). A SCF of 0.9 is assumed for this study.

3 Homogenous Sections

The cost of improving the existing roads and development along the project corridor and the resultant benefits in terms of vehicle operating costs differ between various sections of the project road. This variation is primarily due to the condition of the pavement of the particular section and the quantum of heavy vehicles moving on it. Thus, the results of investigation of pavement strength and traffic levels on various sections were combined and the project road has been delineated in to homogenous sections as presented in Table 6.1.

Table 6.1: Homogenous Sections for Economic Analysis

Sec. No.Section as per Existing Chainage

Length (Km)Name Start Chainage (Km)

End Chainage (Km)

HS-01 Raipur-Kharora 10+800 39+000 28.20HS-02 Kharora-Balodabazar 39+000 83+600 44.60

4 Project Costs

The project costs such as construction; routine, recurrent and periodic maintenance; land acquisition; environmental mitigation and rehabilitation etc. have been discussed in detail in Chapter – 05: Cost Estimates. Cost estimate following modified item rates (Case-II) has been considered for economic analysis. The SCF stated earlier was applied to this cost during the cost benefit analysis.

The costs in general include the costs of improvement of the existing Intermediate and 2-lane to a 2-Lane with 1.5m Paved shoulder on either side facility.

Scott Wilson 6 - 1 November 2011


Economic Analysis



Economic Analysis

5

Project Sections

Improvement options considered for each of the homogenous sections are as shown in Table 6.2 and Figure 6.1.

Table 6.2: Project Improvement Sections

S.No.

SectionExisting Section

Existing Average

Carriageway Width

Proposed Improvement

Length (Km)

Improvement Proposal

1Raipur-Kharora

HS-01 7.02-Lane with 1.5 m

Paved shoulder28.20

Improvement on the

Existing Alignment

2Kharora-

BalodabazarHS-02 5.5

2-Lane with 1.5 m Paved shoulder

44.60

Improvement on the

Existing Alignment

Figure 6.1: Project Improvement Sections

6 Cost-Benefit Analysis Method

This analysis was carried out using the HDM-4 software. This appraisal included sensitivity analysis to assess the impact of increased costs of construction and decreased benefits. The analysis also considered the value of savings in travel time.



Economic Analysis

Economic benefits of the project were estimated in terms of savings in VOC and savings in travel time for passenger and goods vehicles. The estimates of VOCs and time costs of each vehicle type in with and without project scenario have been made using HDM-4.

The HDM-4 software comprises a set of models for estimating various values which effect the feasibility of road project, such as vehicle operating costs, travel time costs of passengers and commodities in transit, and the effect of maintenance standards and improvement standards on road condition and the resultant impact on VOCs etc. Some salient input parameters, which were considered for this project, are presented hereinafter.

Analysis Period : 20 years (2012-2032)

Construction Period : 24 months

Discount Rate : 12%

Comparable Alternatives : Alt-0 (Base)-Routine Maint. And Overlay Alt-X0 (For HS-01) – Improvement for widening to 7m with 1.5m Paved ShoulderAlt-X1 (For HS-02)-Improvement for widening to 7m with 1.5m Paved Shoulder

Routine Maintenance : Scheduled (Every Year)

Periodic Maintenance - Overlay : Scheduled (Every 5th Year)

Salvage Value : 25%

The calibration factors for some parameters of HDM-4 software used for this analysis are as indicated by ADB for some of the national highway projects undertaken in the recent past. These are presented hereinafter:

Parameter Initiation Progression

Cracking 1.10 1.00Raveling 0.40 0.45Pot-holing 1.00Rut depth 1.25Edge repair drainage coefficient 1.00Edge break coefficient 1.00Road side friction 0.95Effect of speeds 1.00

7 Cost-Benefit Analysis Results

The economic viability of the considered options for improving the traffic facility on the project corridor have been evaluated in terms of Economic Internal Rate of Return (EIRR) and Net Present Value (NPV) of the project benefits and the ratio NPV/Cost. The benefits of the project were estimated in terms of VOC savings and monetary value of savings in travel time. The economic returns of each section with normal scenario and with drop in traffic growth rates by 50% are presented in Table 6.3 and Table 6.4 respectively.

Table 6.3: Economic Returns of each Section and Project for Flexible Pavement option with Normal Scenario



Economic Analysis

Sec. Description

VOC + Time VOC

EIRR(%)

NPV(Rs.

Millions)NPV/C

EIRR(%)

NPV(Rs.

millions)NPV/C

HS-01 Raipur-Kharora 68.76 3299.83 6.15 53.17 2141.51 3.99HS-02 Kharora-Balodabazar 64.27 4543.86 5.84 47.86 2766.31 3.55

Project 66.08 7843.69 5.97 50.01 4907.82 3.73

Table 6.4: Economic Returns of each Section and Project for Flexible Pavement Option with Drop in Traffic Growth Rates by 50%

Sec. Description

VOC + Time VOC

EIRR(%)

NPV(Rs.

Millions)NPV/C

EIRR(%)

NPV(Rs.

millions)NPV/C

HS-01 Raipur-Kharora 62.61 2530.68 4.72 47.90 1621.65 3.02HS-02 Kharora-Balodabazar 57.57 3361.09 4.32 42.27 2007.88 2.58

Project 59.61 5891.77 4.48 44.55 3629.53 2.76

8 Sensitivity Analysis

Sensitivity analysis of economic returns of the project was carried out. The sensitivity scenarios considered in this analysis are as presented here in after.

Base Costs and Base BenefitsBase Costs plus 20% and Base BenefitsBase Costs and Base Benefits minus 20%Base Costs plus 20% and Base Benefits minus 20%

The results of this analysis are presented in Table 6.5

Table 6.5: Sensitivity of Economic Returns for Flexible Pavement Option With Normal Scenario

SectionVOC+Time (%) VOC (%)

Base C+20% B-20%C+20%B-20%

Base C+20% B-20%C+20%B-20%

HS-01 68.76 60.62 58.92 51.83 53.17 46.71 45.36 39.72HS-02 64.27 56.62 55.02 48.37 47.86 42.01 40.79 35.69Project 66.08 58.23 56.59 49.76 50.01 43.91 42.63 37.32

Note: C-Cost, B-Benefit



Economic Analysis

9 Conclusion

The results indicate that the project EIRR values, across sections, in the worst case of simultaneous increase in costs and decrease in benefits varies between 47 and 53 percent considering VOC savings alone and varies between 64 and 68 percent including value of travel time savings. As a general guideline, the proposed investment is considered to be viable if the EIRR is at least equal to the opportunity cost of capital, which is set at 12%. Hence under current development proposal the project is found to be viable in cost-benefit terms. The comparative cost streams (output of HDM-4) of the Base Alternative (Alt-0) with that of the proposed improvement options are presented in Annexure 6.1.


ch_6 economic analysis_raipur - balodabaza

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