CBA takes social surplus along with consumer surplus. The implementation of willingness to pay based values often led to a significant increase in safety values in appraisal. For example the UK fatality value rose from approximately $0.75 to $1.5 million in 1999 prices.
Steps in CBA:
- Inputs: Modeling and forecasting inputs required for a transport appraisal.
- Cost and benefits estimation: Estimates the benefits with respect to social and financial.
- Interpolation and extrapolation: This identifies the growth rates for quantities and unit values to estimate the benefits over the entire appraisal period.
- Discounting: Future costs and benefits are discounted in line with public sector convention and discount rates.
- Summary resources: giving overall measure of the projects performance in cost-benefit terms.
- Accept all projects with positive Net present value (NPV)
- Where there are mutually exclusive options or alternatives accept the project with the higher NPV
CBA could be used to rank policies on the basis of their improvements or reductions in well-being. For example, on the basis of such improvements, one could rank three air-quality policies that are related to urban ozone and that offer various ambient ozone standards to be attained, various reductions in illnesses related to ozone exposure, and various costs of attaining those standards.
Challenges in CBA:
- Extending CBA to the environment impacts of transport
- Local and regional environmental impacts
- Global climate change
- Wider Economic impacts
Strengths of CBA:
- Transparency: Results of CBA which is well- executed can linked to the assumptions, theory and procedures used in it and this makes it accountable.
- Ignorance Revelation: CBA requires information about the effects of a policy or project on social welfare. Hence the analysts get a template for collecting information and organising it. This give the analysts the idea whether there is any level of ignorance in the collection of information
- Comparability: The technique can be utilised to compare alternative options of a project and choose the best among them.
Limitations of CBA:
- The environment is a public good that is not exchanged in markets and therefore defies economic valuation. Thus, the use of CBA to evaluate environmental policies is inappropriate.
- Environmental protection is often desirable for reasons that cannot be quantified -- social, spiritual, and psychological values that defy monetization.
- CBA does not take the "rights" of future generations into account
With respect to Transport Options as well the environmental effects of different modes of transport cannot be easily quantified.
Financial Appraisal:
Financial appraisal is a method that is used to evaluate the financial viability of a proposed project. It identifies the level of revenues generated and also checks if they meet the financial obligations. All the cash flows under the project are taken into account.
Components of Financial Appraisal:
- Project cash flows
- The sensitivity of financial projections to key project risks
- The adequacy of the estimated investment cost, and
- The financial impact of alternative projects.
Steps in Financial Appraisal:
- Define the objectives of the project: Objectives that the project should meet when it is completed.
- Define the scope of the project: Every component of the project should be linked and not broken into smaller projects.
- Identify the options: Check for alternative options available or a different way of approaching the same project and check if there would be an impact on cash flows.
- Identify and measure the cash flows
- Effects to be considered in a financial appraisal
- Cost saving
- Option valuation
- Residual value
- Capacity Utilisation
- Financial Appraisal effects to be excluded
- Tax rate to apply
- Treatment of Dividend imputation
Application of Cost Benefit Analysis on Metro Rail System set up in New Delhi
Transport is a part of every human’s life. The reason could be anything from work travel to leisure travel. Environmental pollution is one of the serious concerns that need to be addressed in the growing cities in India. A sustainable urban transport system could be obtained with the help of an appropriate mix of alternative modes of transport. There was significant reduction in the atmospheric pollution in Delhi when CNG (Compressed Natural Gas) was in certain vehicles. Diverting some portion of the transport demand to the metro rail has also helped the reduction of atmospheric pollution. The Delhi metro has many other social benefits other than reduction in air pollution like time saving to passengers, reduction in accidents, reduction in traffic congestion and fuel savings. It also gave incremental benefits and costs to a number of economic agents like the government, private transporters, passengers, general public and unskilled labour.
New Delhi is the capital of India, one of the fastest growing cities of the world. The population of Delhi was close to 14 million in the Census of India Report for 2001 and projected to be 17 million in 2008. It could be the only city which uses road network for most of its transport needs. The total length of the road network in Delhi has increased from a mere 652 km in 1981 to 1122 km in 2001 and it is expected to grow to 1340 km in the year 2021. This increase in road length is not at par with the phenomenal growth in the number of vehicles on these roads in Delhi. The cumulative figure of registered private and government buses, the main means of public transport, is 41,872 in 1990 and it is expected to increase to 81,603 by the year 2011. The number of personal motor vehicles has increased from 5.4 lakhs in 1981 to 30 lakhs in 1998 and is projected to go up to 35 lakhs by 2011. With gradual horizontal expansion of the city, the average trip length of buses has gone up to 13 km and the increased congestion on roads has made the corresponding journey time of about one hour. Delhi has now become the fourth most polluted city in the world, with automobiles contributing more than two thirds of the total atmospheric pollution. In this context, the decision of the Government of India to develop a mass transport system for Delhi providing alternative modes of transport to the passengers was most appropriate.
The first concrete step in the launching of an Integrated Multi Mode Mass Rapid Transport System (MRTS) for Delhi was taken when a feasibility study for developing a multi-modal MRTS system was commissioned by the Government of the National Capital Territory of Delhi (GNCTD) at the instance of the Government of India in 1989 and completed by Rail India Technical and Economic Services Limited in 1995 (RITES, 1995a, 1995b). The Delhi Metro (DM) planned in four phases is part of the MRTS. The work of Phase I and part of Phase II is now complete while that of phase III is in progress. The first phase of DM consists of 3 corridors divided in to eight sections with a total route of 65.1 kms, of which 13.17 kms has been planned as an underground corridor, 47.43 kms as elevated corridors and 4.5 kms as a grade rail corridor. The second phase covers 53.02 kilometres of which the underground portion, grade and elevated section are expected to be 8.93 kilometres, 1.85 kilometres and 42.24 kilometres respectively. The construction of the first phase of DM was spread over 10 years during 1995-96 to 2004-05 while that of the second phase, which started in 2005-2006 is expected to be complete by 2010-11. The total capital cost of DM at 2004 prices for Phase I and Phase II are estimated as Rs. 64,060 and Rs. 80,260 million, respectively. Phases III and IV of DM will cover most of the remaining parts of Delhi and even extend its services to some areas such as Noida and Gurgaon belonging to the neighbouring states of Delhi.
Table 1: Overview of the MRTS
Financial Costs and Benefits of the Metro
Financial evaluation should be done first to indentify if the project is financially viable. The financial evaluation of a project requires the analysis of its annual cash flows of revenue and costs considering it as a commercial organization operating with the objective of maximizing private profits. The financial capital cost of DM represents the time stream of investment made by it during its lifetime. The investment expenditures made by the project in one of the years during its life time constitutes the purchase of capital goods, cost of acquisition of land and payments made to skilled and unskilled labour and material inputs for project construction. The operation and maintenance cost of the project constitutes the annual expenditure incurred on energy, material inputs for maintenance and payments made to skilled and unskilled labour. The investment goods and material inputs used by the project are evaluated at market prices, given the definition of market price of a commodity as producer price plus commodity tax minus commodity subsidy. If the government gives some commodity tax concessions to DM, they are reflected in the prices paid by DM for such commodities. If the financial capital cost of the project is worked out as the time flow of annualized capital cost, the annual cost of capital has to be calculated at the actual interest paid by it. This could be done using information about the sources of funds for investment by DM and the actual interest paid by it to each source. For example, if part of the investment of DM is financed out of loans provided by the government at the subsidized interest rate, the annual cost of this investment has to be calculated at the subsidized interest rate.
Table 2 provides the sources of funding investments of DM (phases I and II). More than 60 percent of the funds required for investment are raised as debt capital. Around 30 percent of total investments of DM are raised through equity capital with the Government of India (GOI) and GNCTD having equal shares in it. The remaining 10 percent of the investments of DM will be covered out of the revenues it earns. As reported in RITES (1995a), the DM had been provided with the following concessions by GOI to make the project viable, namely (a) The cost of land equivalent to Rs. 2180 million has been provided as an interest free subordinate loan by GOI/GNCTD to be repaid by the DM within 5 years after the senior debt is repaid fully by the twentieth year of taking the loan (b) The risk associated with the exchange rate fluctuations is borne by government in case of foreign debt, (c) The DM is exempted from payment of income tax, capital gains tax, property tax and customs duty on imports, (d) The DM is permitted to generate resources through property development over a period of 6-20 years and (e) No dividend is paid on GOI share of equity till the senior debt is repaid fully by the twentieth year.
Table 2: Sources of Funding
Table 3 provides information about various components of capital cost for Phase I of DM. The total project cost of Rs. 64,060 million at 2004 prices for Phase I consists of the foreign exchange cost of Rs. 7720 million and the domestic material and labour cost of Rs. 56,340 million. The corresponding figure for the Phase II of DM is Rs. 80,260 million at 2004 prices.
Table 3: Cost Estimate of DM (Phase I)
The financial benefits from the Metro are the fare box revenues and the revenues from advertisement and property development, as reported by RITES. Revenue streams for Phases I and II, as reported by RITES (1995b, 2005b) have been taken. The main source of revenue of the MRTS system is the fare box collection, which is a product of the total passenger ridership on the MRTS as reported in Tables 6 and 7 and the fare charged. RITES (1995b) considered four rates per trip: Rs 3, 4, 5, 6 at April 1995 prices and the fare sensitivity of ridership. Full ridership is expected to materialize on the metro with a fare comparable to the DTC bus fare of Rs. 3 per passenger trip. However, with higher fares, the ridership is expected to decline given that the willingness of passengers to travel by the metro depends on the value they place on time savings, frequency and safety of service, comfort and ease of travel, capacity to pay, etc. The financial model consisting of Rs. 5 per passenger trip and an annual fare increase of 7.5 per cent was considered optimal by RITES. The revenue collected by DM every year during its life time consists of revenue from the passenger traffic diverted from the road to the Metro and the revenue from serving part of the growing passenger traffic demand in Delhi. Table 8 presents the estimates of revenue collected by DM during its lifetime. Considering the estimates of financial flows of DM during the period 1995-2041, the financial cost-benefit ratio is estimated at 2.30 and 1.92 at 8 percent and 10 percent discount rates, respectively. The financial internal rate of return of DM is estimated as 17 percent.
Table 4 Fare Sensitivity of Ridership on the Metro
Identification of Economic Benefits and Costs of Metro
Description of economic benefits and costs of the Delhi Metro requires the identification of the changes brought out by it in the transport sector of the economy. Most importantly, DM contributes to the diversion of a very high proportion of current passenger traffic from road to Metro and serves part of the growing passenger traffic demand in Delhi. As a result, there will be a reduction in the number of buses, passenger cars and other vehicles carrying passengers on Delhi roads with the introduction of the Metro. There will be savings in travel time for passengers still travelling on roads due to reduced congestion and obviously also for those travelling by Metro. The Metro also brings about a reduction in air pollution in Delhi because of the substitution of electricity for petrol and diesel and reduced congestion on the roads. There will also be a reduction in the number of accidents on the roads.
Investment in the Metro could result in the reduction of government investments on road developments and buses as also in the private sector investment on buses, passenger cars and other vehicles carrying passengers. There will be reductions in motor vehicles’ operation and maintenance charges to both the government and the private sector. There could be cost savings to passenger car owners in terms of capital cost and operation and maintenance costs of cars if they switch over from road to Metro for travel in Delhi. The fare box revenue collections by Metro will be at the cost of the revenue, accruing earlier to private and the government bus operators and hence constitutes a loss in income.
The Delhi public will gain substantially with the introduction of the Metro service. It saves travel time due to a reduction of congestion on the roads and lower travel time of the Metro. There will be health and other environmental benefits to the public due to reduced pollution from the transport sector of Delhi. Land and house property owners gain from the increased valuation of house property prices due to the Metro. The Metro has the effect of increasing the income of the regional economy of Delhi Vis a Vis the rest of the Indian economy. Given that the per capita income of Delhi is far higher than the national per capita income, the redistribution of income in favour of Delhi may not be desirable from the point of view of income distribution in the Indian economy. The Metro provides employment benefits to the unskilled labour especially during its construction period. This labour is otherwise unemployed or under employed in the Indian economy.
Various economic agents relevant for Metro could be identified as the government, passengers, transporters, general public and unskilled labour. Unskilled labour employed on the Metro gains to the extent of the difference between the project wage rate and the shadow wage rate. The social premium on investment and savings and foreign exchange accrue to the society represented by the General Public.
The economic benefits from the reduced number of vehicles on Delhi roads due to the Metro could be identified as the following:
- Savings in fuel consumption
- Savings in Foreign Exchange due to reduced Fuel Consumption
- Reduction in Pollution
- Savings in Time for all passengers using Metro and Roads
- Savings in Accidents
- Savings in Vehicle Operating Cost (VOC) due to decongestion for residual traffic
- Savings in Capital and Operating cost of diverted vehicles
- Savings in the cost of Road Infrastructure
The completion of Phase III and IV would increase the quantity of benefits in greater extents. This success is now replicated in Bangalore, which one of fastest growing city in the world with very high density of vehicles.
Reference
Cole, Stuart; Applied Transport Economics: Policy, Management & Decision Making; 3rd edition 2005 Kogan Page LTD; CILT
The principles of practical cost-benefit analysis
By Robert Sugden, Alan Williams
Contributor Alan Williams
Published by Oxford University Press, 1978
ISBN 0198770413, 9780198770411
275 pages
Handbook of Transport Systems and Traffic Control: Handbook of transport systems and traffic control
By Kenneth J. Button, David A. Hensher
Contributor Kenneth J. Button, David A. Hensher
Published by Emerald Group Publishing, 2001
ISBN 0080435955, 9780080435954
602 pages
Cost-Benefit Analysis and Regulatory
Reform: An Assessment of the Science
and the Art
Raymond J. Kopp, Alan J. Krupnick,
and Michael Toman
Discussion Paper 97-19
January 1997
Resources for the Future
1616 P Street, NW
Washington, DC 20036
Telephone 202-328-5000
Fax 202-939-3460
© 1997 Resources for the Future. All rights reserved.
NSW Commercial Policy Framework:
Guidelines for Financial Appraisal, TPP 07-4, July 2007
Government of India, Planning Commission (2005), Economic Survey.
Murty, M. N. and B. N. Goldar (2006), Economic Evaluation of Investment Projects, Report of Project Sponsored by Planning Commission, Government of India.
RITES (1995a), Integrated Multi-Modal Mass Rapid Transport System for Delhi, Economic Analysis for Modified First Phase.
- (1995b), Integrated Multi-Modal Mass Rapid Transport System for Delhi, Financial Analysis for Modified First Phase.
- (2005a), Delhi Metro Rail Corporation, Environmental Impact Assessment for Phase II Corridors of Delhi Metro.
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Appendix
Stakeholder Analysis
The economic agents affected by having the Metro operational in Delhi could be identified as government, passengers, general public, private transporters and unskilled labour.
The Government gets fare box revenues, revenues from property development and advertisements and tax revenue on the goods and services bought for the investments and operation and maintenance of the Metro while it suffers revenue losses due to the displaced public buses. It incurs the investment and operation and maintenance cost of the Metro while it saves the cost on road infrastructure and the capital and operating cost of displaced public buses. The net benefits for the government during the year 2011-12 are estimated as Rs. 31760 million at 2004 prices.
The Passengers gain to the extent of the difference between the fares paid to buses in the absence of the Metro and the fares charged by the Metro. For instance, during the year 2011-12, the fare box revenue to the displaced buses should have been Rs. 10460 million while that of the Metro is estimated at Rs. 35280 million. Therefore, passengers have incurred an additional cost of Rs. 24830 million due to these fare differences. However, there is a time saving for the passengers due to the Metro. There is both time saving travelling on the Metro as also time saving to the residual traffic on the roads due to the reduced congestion. During the year 2011-12, these savings are together estimated as Rs. 22090 million. There are also benefits due to a reduction in accidents to the passengers due to the functioning of the Metro, which are estimated as Rs 448 million during the year 2011-12. The net benefits to the passengers from the Metro are estimated as Rs.22440 million during the year 2011-12.
The Private transporters lose the revenue from displaced private buses but at the same time save on their capital and operating costs. These are estimated as Rs. 9410 and Rs. 6550 million, respectively resulting in a net loss of Rs. 2860 million to the private transporters during the year 2011-12.
The Unskilled labour employed on the construction and maintenance of Metro gain to the extent of the difference between the project wage rate and the wage rate in an alternative employment in India. Murty and Goldar (2006) provide an estimate of the marginal productivity of unskilled labour in agriculture as Rs. 48 while on the average, the industrial wage for unskilled labour in India is Rs. 120 per day at 2004-05 prices. Assuming that the unskilled labour cost constitutes 10 percent of investment cost and 5 percent of operation and maintenance cost of the Metro, the benefit to unskilled labour is estimated as Rs. 316.4 million during the year 2011-12.
The General public representing the Indian society receives the benefits of social premium on investment and foreign exchange and the environmental benefits of reduced pollution due to the Metro. There are foreign exchange costs and foreign exchange benefits from the Metro. Foreign exchange cost accounts for 60 percent of the investment cost of the Metro. There are foreign exchange benefits to the extent of reduced fossil fuel consumption due to a change in the mode of transport. Murty and Goldar (2006) have estimated a 10 percent social premium on foreign exchange for the Indian economy. The net benefits to the general public from the Metro arising out of the social premium on foreign exchange is estimated as Rs. 1203.3 crores during the year 2011-12. There could be incremental benefits or losses of savings due to the Metro in the Indian economy depending upon the propensity to save of different agents affected by the project. Without accounting for the social premium on savings, the government, passengers, private transporters and the public get total net benefits worth Rs. 52550 million in the year 2011-12. Assuming a savings rate of 29.10 percent on an aggregate in the Indian economy in 2011-12, the incremental savings due to the Metro to the Indian economy works out to be Rs. 15290 million in the same year. Given an estimate of the social premium on investment as 36 percent (Murty and Goldar, 2006), the public receives benefits worth Rs. 5500 million on this account. It is assumed that the propensity to save of unskilled labour is zero in this estimation. Also the public receives benefits from the reduced air pollution due to the Metro. Section IV describes a method of estimating these benefits and provides an estimate of these as Rs. 6883 million in the year 2011-12. Therefore, public receives net benefits worth of Rs. 14260 million in the year 2011-12 due to Metro.
