Basic Appraisal Format
The economic evaluation of a transport project attempts to compare the benefits resulting from the investment with the costs of the investment. Ideally this would measure the total benefits in increased output across all final product sectors in a spatially and sectorally identified input output model. Such a model would also ideally pick up all external effects, including environmental impacts. In practice such models do not work at the necessary degree of refinement for project evaluation. More partial equilibrium approaches have been adopted in some rural transport project cases by estimating the increase in agricultural and other outputs associated with a project. Even this is not generally tractable with the result that appraisals generally concentrate on the "first round" impacts on transport users and producers. The comparison made in the analysis is between the situation "with project" and "without project", which must not be confused with a simplistic "before and after" comparison. In practice, however, the "do-nothing" alternative may be difficult to define. The costs and benefits considered should include all elements which contribute to individual welfare. On the cost side these include purchased inputs (for example, fuel), non-purchased inputs (time) and quality of service characteristics (such as comfort, convenience, reliability, flexibility, etc.) This is referred to as the "generalized cost" of transport, for further discussion of which click here. The total benefit measurement includes benefits both to existing users and producers of transport services, and to those who are new users generated by an improvement, picked up in the "rule of half" measure. Effects on non-users (for example, noise or air pollution impacts on residents adjacent to a road or airport) should also be included. All values should be stated in constant price terms (i.e., 1998 dollars), except where changes in relative real prices can be confidently forecast. For more on the treatment of real price trends click here. To allow costs and benefits accruing at differing points in time to be aggregated a discounting process is used, for which the specification of an appropriate discount rate is necessary. The relative merits and uses of the alternatives indicators used to represent the merit of the project (either a net present value (NPV) or the internal economic rate of return (ERR)) are discussed in detail in the OPR evaluation handbook. As many of the elements of the rate of return or net present value estimation are subject to error, calculations of the sensitivity of the calculated net benefit indicator to ranges in individual parameters (capital cost, traffic growth rate, etc.) and calculation of "switching values" of individual parameters at which the project NPV or ERR becomes sub-marginal are a minimum requirement. Monte Carlo simulations can be used to explore more complex risk distributions.
Return to top of document
Generic Valuation Conventions
The calculated economic value of a project depends critically on a small number of parameters which have to be assumed or estimated. National economic growth rates are the main basis for most future demand forecasting. These should always be consistent with the rates adopted in the CAS, and advice on these should be sought from the country economist. The impact of growth on transport demand will then depend on the income elasticity of demand (the rate of change of quantity of transport services demanded with respect to rate of changes in income). This varies between passenger and freight, by mode, and by country type. Where possible local experience should be analyzed. For freight, the elasticity of ton kms with respect to GDP appears to lie between 1.05 and 1.25, with the higher values more appropriate for developing countries. Values around 1.25 appear to be appropriate conservative default values for road freight, while those for rail appear to be somewhat lower. For passenger transport, the elasticities of passenger kilometers demanded with respect to income are usually substantially below 1 for bus transport, between 1 and 2 for rail and auto transport, and may be above 2 for air transport. Price elasticities show even greater variability. For land freight transport estimated price elasticities mostly fall in the range fall in the range from 0.4 - 1.2, suggesting a default value of about 0.8. For passenger transport elasticities are typically higher: for leisure than for business trips, for off-peak than for peak, and for air and rail than for bus or urban transit. For a fuller analysis and some suggestions on default values, read "A Survey of Recent Estimates of Price Elasticities of Demand for Transport," Oum/Waters/Jong Say Yong, WPS 359, World Bank, 1990 (a copy of this paper is available from the Transport Help Desk transport@worldbank.org. Operating cost savings estimation are dealt with under the modal sections of this knowledge base. Shadow prices of resource inputs, of labor and of foreign exchange should always conform to country team norms and advice on these should be sought from the country economist. Values of time should usually distinguish at least between working time and non-working time, and wherever possible should be based on local data. For further information on the assembly of local values, and suggestions of default values where no local studies are available, click here. Valuing savings in accident costs should also be based on local estimates of accident incidence rates in different conditions as well as local values for both the resource impacts (loss of net output, repair and medical costs) and the human costs (pain and grief). For further information on the assembly of local values, and suggestions of default values where no local studies are available click here.
Return to top of document
The Roads and Highways section of the knowledge base will be expanded in the near future to address the following additional issues:
