Highway Economics and Finance - part 3( Economic analysis)

Hi,
This is the 3rd part of our topic 'Highway Economics and Finance', in first part we talked about the need of highway economics and the some of the road user benefits with the vehicle operation cost. In second part we talked about the Highway costs which includes the capital cost and the maintenance cost. If you want to go again through the previous articles please visit the links below:

Highway Economics and Finance -part 1.

Highway Economics and Finance - Part 2 (Highway Costs)

Economic analysis of a highway improvement aims at determining the monetary benefit due to the additional expenditure. The analysis also helps to decide the most economical proposal among various alternatives.

• Methods of Analysis:

Methods of analysis of the economic justification of a highway project has same principle, that benefits must qualify for the expenditure on the improvement by comparing them with some appropriate method.

There are various methods of analysis but the most common are as given below:

• Annual Cost Method:

In this method the annual cost of each component of the highway improvement project is calculated by multiplying the capital value with some appropriate capital recovery which is calculated for the given life span.  Annual cost may be found by the following relation:
Cr = P[ {i(1+ i)^n}/{(1+ i)^n - 1}] = P (CRF)

Total annual cost of an improvement is sum of all annual costs of capital recovery(Cr) plus annual maintenance and road user costs. 

• Rate of return Method:

There are number of variations for the determination of rate of return of a highway improvement. In the rate of return method, the interest rate at which two alternative solutions have equal annual cost is found. If the rate of return of all projects are known, the priority for the improvement could be established. 

Road Research Laboratory(London) has recommended a simplified procedure of rate of return method. The percentage rate of return R is given by

R = [(O+A-M)/P ]*100

Where, O = Savings in annual road user costs

    A = Annual savings in accident costs

    M = Additional maintenance cost per anum

    P = Capital cost of improvement.

• Benefit Cost Ratio Method

The principle of this method is to assess the merit of a particular scheme by comparing the annual benefits with the increase in annual cost.

Benefit cost ratio   = Annual benefits from improvement / Annual cost of the improvement

                                   = (R-R1)/(H1-H)

Where, R = Total annual road user cost for existing highway

               R1 = Total annual road user cost for proposed highway improvement

              H = Total annual cost of existing road

               H1 = Total annual cost of proposed highway improvement.

The benefit-cost ratios are determined between alternate proposals and those plans which are not attractive are discarded. Then the benefit cost ratios for various increments of added investment are computed to arrive at the best proposal. In order to justify the investment, the ratio should be greater than 1.0. 

• Highway Finance:

Basic principle in highway financing is that the funds spent on highways are recovered from the road users. The recovery may be both direct and indirect.

Two general methods of highway financing are:

1. Pay us as you go method
2. Credit financing method

In pay as you go method, the payment for the highway improvements, maintenance and operation is made from the central revenue. In credit financing method, the payment for highway improvement is made from borrowed money and this amount and the interests are re-paid from the future income.

• Distribution of the highway cost:

The distribution of highway cost among the Government, road user and other has been a disputed task in several countries. Many economists are of the view that the financial responsibility for roads should be assigned only among the beneficiaries on the basis of the benefits each one receives. 

There are several theories suggesting the method of distribution of highway taxes between passenger cars and other commercial vehicles like the trucks. However in India the annual revenue from transport has been much higher than the expenditure on road development and maintenance. Therefore there is no problem of distributing the highway cost among other agency. Also the taxation on vehicles is being considered separately by the states and there seems to be no theory followed for the distribution of taxes between various classes of vehicles.

• Sources of Revenue:

The various sources from which the funds necessary for highway development and maintenance may be made available, are listed below:

1. Taxes on motor fuel and lubrication
2. Duties and taxes on new vehicles and spare parts including tyres
3. Vehicles registration tax
4. Special taxes on commercial vehicles
5. Other road user taxes
6. Property taxes
7. Toll taxes
8. Other funds set apart for highways,

• Highway financing in India:

The responsibility of financing different roads lies with the Central Government, State Governments and local bodies including Corporations, Municipalities, District boards and Panchayats.

Taxes levied by Central Govt. for Highway financing are:

• Duties and taxes on motor fuel
• Excise duty on vehicles and spare parts, tyre etc.
• Excise duty on oils, grease, etc.

Taxes levied by the State Govt. include:

• Registration fees for vehicles and road tax
• Permits for transport vehicles
• Passenger tax on buses
• Sales tax on vehicle parts tyres etc.
• Fees on driving licenses.

Taxes levied by the local bodies are mainly the toll taxes.

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Highway Economics and Finance - Part 2 (Highway Costs)

Hi,
In first part of this topic we have discussed about the various highway user benefits and highway operation costs. Being continuation of the same topic in this 2nd part we are going to discuss the highway costs.

• Highway Costs

In general the total highway cost for road user benefit analysis is the sum of the capital costs expressed on an annual basis and the annual cost of maintenance.  This total cost for highway improvement is obtained from the estimate prepared from the preliminary plans.
The total cost of highway improvement project is calculated from the following components:

1. Right of Way
2. Grading, drainage and minor structure
3. Major Structures like bridges
4. Pavement and appurtenances
5. Annual cost of maintenance and operation

• Annual Highway cost:

The annual cost is considered in the economic analysis of highway projects. Instead of considering the overall cost of a project the annual repayment of a capital loan plus the interest over a specified period of time of the annual capital cost is considered in the analysis.

Cr = P[ {i(1+ i)^n}/{(1+ i)^n - 1}] = P (CRF)

Here, Cr = Receipt in a uniform series for n periods to cover P at a rate of interest i

P = First cost of improvement of an element of a highway.

i = rate of interest per unit period

n = period of time in number of interest periods

CRF = Capital Recovery Factor 

In case Sv or salvage value is also there, then the above equation can be re-arranged as 

Cr = (C-Vs)[ {i(1+ i)^n}/{(1+ i)^n - 1}]  + i.Vs = P (CRF) + i.Vs

Thanks for your kind visit!

REFERENCE: Highway Engineering by S.K.Khanna and C.E.G. Justo

Highway Economics and Finance -part 1.

Hi,

• Introduction:

Improvements in the highways results in various benefits to the road users such as:

1. Reduction in the vehicle operation cost
2. Reduction in the travel time and resultant benefits in terms of time cost of vehicles and passengers.
3. Reduction in the accidents rates.
4. Ease of driving and improved level of services.
5. increased comfort to the passengers.

This indicates that level of improvement and service of a road may be assessed from the benefits to the road users.

The improvements in road net work also benefits the land owner by providing better access and consequently enhancing the land value.The cost of the land, materials, construction work and of other facilities should be worked out. 

In terms of the economic justification for the improvements, the cost reductions to the highway users and other beneficiaries of the improvements during the estimated period should be higher than the investments made for the improvement.

Therefore there is a strong need of analysis in planning and design of highway to indicate justification of the expenditure required, particularly when various alternatives are being compared.

Any new proposal for highway improvement or development should be justified in terms of the cost incurred and benefits derived.

Economic analysis is the only means for finalizing the proposal and convincing the public about the need for certain investments.

The government or any other agency finances highway developments. The funds for these are generally recovered from the road users in the form of the direct and indirect taxation.  Highway finance deals with various methods of raising and or providing money for the highway projects.

• Highway users benefits:

Road user benefits are the advantages, privileges of savings that accrue to drivers or owners through the use of one highway facility as compared with the use of another. Benefits are measured in terms of the decrease in road user costs and the increase in the road user services.  The road users services are the advantages or the privileges accruing to the vehicle driver or owner through features of the safety, comfort, convenience etc.  In some cases these can be calculated in rupees per vehicle- kilometer. 

A reduction in the transportation cost as a result of highway improvements, would result in the reduction in the cost of almost every commodity which is transported from place to place before being delivered to the consumer. 

The various benefits due to the highway improvement may be classified into two categories:

1. Quantifiable or tangible benefits in terms of market values and
2. Non-quantifiable or intangible benefits.

• Quantifiable Benefits:

Various benefits which can be quantified include benefits to road users such as reduction in the vehicle operation cost, time cost and accident cost. Also it enhances the land value. These are beifly explained below:

1. Saving in vehicle operation cost is due to the reduction in the fuel and oil consumption and reduction in wear and tear of Tyre and other maintenance costs. A road with sharp curves and steep grades require frequent speed changes;presence of intersections require stopping idling and accelerating; vehicle operation on road stretches with high traffic volume or congestion necessitate speed changes and stopping and increased travel time; all these factors result in an increase in every component of vehicle operation cost. Un-even pavement surface condition with ruts, pot holes, undulations, waves and corrugations increases the vehicle operation cost due to increase in fuel consumption, tyre wear and the general maintenance cost of the vehicle. 
2. Saving in travel time is of direct consequence to commercial vehicles due to possible increase in their trip length and earning per unit time. Benefits due to saving in travel time may be assigned in terms of time cost of vehicles.
3. Value may also be assigned for the saving in travel time of passengers. A part of the time saved by the passengers or commuters may be used  for some useful purpose and a value can be assigned for the saving in the travel time.
4. The reduction in the accident rate due to improvements in the highway facilities causes considerable benefits to the road users and others. The component of the accident costs may include cost of damages to vehicles and other properties, cost for investigations, legal proceedings etc.
5. The benefits to other than road users include the enhancement in land value, increase in the employment opportunities and related economic uplift.

• Non- Quantifiable Benefits:

The non- quantifiable benefits due to improvements in highway facilities include reduction in fatigue and discomfort during travel, increase in comfort and conveniences and improvement in general amenities, social and educational aspects, development of recreational and medical services, improved mobility of essential services and defense forces, aesthetic values, etc. Yet another important intangible road user benefit is the reduced suffering and pain of those involved in highway accidents.

Thanks for your kind visit!

REFERENCES:  Highway Engineering by S.K.Khanna and C.E.G.Justo

Equipment Used for Bituminous Pavement Construction

Hi,
The main list of the equipment that we need for the construction of the bitumen pavements are:

1. Boiler
2. Sprayer/Distributor 
3. Hot Mix Plants
4. Cold Mix Plants
5. Truck/Dumper
6. Mechanical Pavers/ Finishers
7. Rollers

• Boilers: Boilers are used to soften the bitumen by heating it to certain temperature for its easy application.
• Sprayer/Distributor: Sprayers are required for spreading/distributing the bitumen on the pavement.  If the bitumen is applied with pressure, they are known as pressure distributors.
• Hot Mix Plants: Hot mix plants are required for mixing the aggregates, bitumen and any other required material to prepare the hot mix of the asphalt concrete. Aggregates are bitumen are needed to be heated up to a temperature of 150 to 200 degrees Celsius. 
• Cold Mix Plants: Cold mix plants are required for mixing up the emulsion and the aggregates and so the main difference between the hot mix plants and cold mix plants is that we don't have to heat up the aggregates before mixing. Cold mixes are preferred in the cold regions because emulsions are applicable at low temperatures also.
• Truck/Dumper: They are used to haul the mix to the place of its application and dump it on the paver or finisher.
• Mechanical Pavers/Finishers: Mechanical paver are used to apply the asphalt concrete on the pavement and to partially smooth or compact it. 
• Rollers: Rollers are effectively used to compact the bituminous concrete. For this purpose we use either smooth wheeled rollers or pneumatic rollers.

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