Roads Economic Decision Model (RED)

January 2008

Rodrigo Archondo-CallaoSenior Highway Engineer, ETWTR

The World Bank

RED Objectives

• Simplify the economic evaluation of low volume roads

• Better capture the economic benefits of a project• Characterize the wet and dry seasons separately• Include in the analysis the high level of

uncertainty related to low volume roads (risk analysis)

• Produce proper sensitivity, switching values, user impacts, and distribution of benefits analyses

• Perform budget constraint optimization and multi-criteria analysis

RED Development

• RED is being developed by the World Bank for the Africa Road Management Initiative (RMI)

• RED version 1.0 was released in 1999, version 3.2 was released in 2004

• RED is being used at project and network level in many countries worldwide (Nicaragua, Turkey, Ecuador, Chad, Argentina, Ethiopia, Guatemala, Lao, Cambodia, Yemen, South Africa, etc.)

• RED version 3.2, 2004, is available at the website:

http://www.worldbank.org/afr/ssatp/Models/RED_3.2/red32_en.htm

Economic Evaluation of Low Volume Roads

• Low Volume Road Versus High Volume Roads (> 300? AADT paved roads: HDM-4 evaluation)

• Low Volume Roads Versus Very Low Volume Roads (< 50? AADT unpaved roads: social evaluation, maximize population served per investment, multi-criteria)

• Consumer Surplus Approach Versus Producer Surplus Approach (difficult to judge the assumptions made, concern of double counting benefits)

• Customized Excel Model Versus HDM Models (HDM-III and HDM-4 models have the same unpaved roads deterioration models, which are not particularly customized for developing countries)

RED Characteristics

a) Constant average level of service over evaluation period

b) Three options to define levels of servicec) Two periods during a year: period with and without

direct passability (wet and dry seasons)d) User defined equations relating road user costs and

speeds to roughness e) Generated, induced and diverted traffic benefitsf) Risk analysis with triangular distributionsg) Budget constraint optimizationh) Multi-criteria and cost effectiveness analysis

a) Constant average level of service over evaluation period

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1 2 3 4 5 6 7 8 9 10Year

HDM-III RoadDeterioration RED Average Level of

Service

HDM-III/HDM-4 Roughness Estimates for Unpaved Roads

• Valid for engineered unpaved roads with good maintenance (good drainage). Therefore:

– Higher rainfall yields lower roughness– Higher percent of trucks yields lower roughness– Earth roads (finer soils) have lower roughness than

gravel roads

• In practice, the condition of an unpaved road can be different from what is being predicted by the HDM models

b) Three options to define levels of service

a) | b) | c)Input Road | Input Reference |Roughness | Vehicle Speed | Input Road

| | Roughness| || Estimated Road || Roughness || || |

Light Heavy | Light Heavy | HeavyCar Utility Bus Truck Truck | Car Utility Bus Truck Truck | Car Truck

VOC VOC VOC ....... VOC VOC | VOC VOC VOC ....... VOC VOC | VOC …. VOC| || |

Light Heavy | Light Heavy | Input SpeedsCar Utility Bus Truck Truck | Car Utility Bus Truck Truck | for All Vehicles

Speed Speed Speed ....... Speed Speed | Speed Speed Speed ....... Speed Speed | …….| |

Equations for each vehicle type and each terrain-road type:a) Vehicle Operating Costs = a0 + a1 * Roughness + a2 * Roughness^2 + a3 * Roughness^3b) Speed = b0 + b1 * Roughness + b2 * Roughness^2 + b3 * Roughness^3

Equation for each terrain-road type and for the defined reference vehicle:c) Roughness = c0 + c1 * Speed + c2 * Speed^2 + a3 * Speed^3

a) Roughness

b) Speed of a Reference Vehicle

c) Roughness& Speeds of All Vehicles

Vehicle Operating Costs and Speeds Function of Roughness Obtained from HDM-III, HDM-4

or Other Models

Flat / Paved / Car

0.00

0.05

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0.25

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0.35

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0.45

0 5 10 15 20 25 30

Roughness (IRI)

HDM-III Values

Flat / Paved / Car

y = -2E-05x3 + 0.0009x

2 - 0.0004x + 0.1151

R2 = 0.9997

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

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0.45

0 5 10 15 20 25 30

Roughness (IRI)

HDM-III Values Polynomial

Results from HDM(VOC X IRI)

Fitted Cubic Polynomial

c) Two periods during a year

Days Per Year Days Per YearWith Direct PassabilityWithout Direct Passability

- Different Length- Different Roughness- Different Speeds

Higher Transport Costs

- Different Traffic

d) User defined equations relating vehicle operating costs and speeds to

roughness

Terrain Type A B C

Road X

Type Y

Z AZ

Vehicle CarType Utility

Light BusMedium BusHeavy BusLight TruckMedium TruckHeavy TruckArticulated Truck

Vehicle Operating Costs ($/veh-km)

y = -2E-05x3 + 0.0009x2 - 0.0004x + 0.1153

R2 = 0.9997

0.000.050.100.150.200.250.300.350.400.45

0 5 10 15 20 25

Roughness (IRI)

Vehicle Speeds (km/hour)

y = 0.0073x3 - 0.2767x2 + 0.2562x + 86.24

R2 = 0.998

0

20

40

60

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100

0 5 10 15 20 25

Roughness (IRI)

e) Generated, induced, and diverted traffic benefits

• Normal traffic. Traffic without any new investment• Generated traffic. Traffic associated with existing users

of the road driving more frequently or driving further than before

• Induced traffic. Traffic attracted to the project road from other roads, changing its origin or destination, due to increased economic activity in the road’s zone of influence brought about by the project

• Diverted traffic. Traffic that diverts to the project road from an alternative road with the same origin and destination as the project

Generated Traffic <> Lower Transport Costs

Induced Traffic <> Local Economic Development

Decrease in Transport Costs Special Local Economic Development (Induced Traffic)

Transport Costs Transport Costs

Consumer ConsumerSurplus Surplus

COST1 COST1

COST2 COST2

ADT1 ADT2 Traffic ADT2 ADT3 Traffic

Normal Generated Traffic Generated TrafficTraffic due to Decrease in due to Special Local

Transport Costs Economic Development

User enters: User enters: - Percent of normal traffic or - Amount of generated traffic due to special local economic development or - Price elasticity of demand = Percent Increase in Traffic

Percent Decrease in Transport Cost

d1 d1

d2

f) Risks analysis with triangular distributions

Country Africa RegionProject Road Management InitiativeRoad Road from Point A to Point BOption 2 Upgrade to ST Frequency Distribution

ScenariosInternal Rate of Return

Upgrade Road to Surface Treatment Standard Minimum 4.2%Maximum 22.7%Average 11.9%Standard Deviation 3.5%Median 11.7%Percentile 25% 9.4%Percentile 50% 11.7%Percentile 75% 14.1%

Probability that IRR is less than 12% 50%Probability that IRR is greater than 12% 50%

Upgrade Road to Surface Treatment Standard

0%

1%

2%

3%

4%

5%

6%

7%

8%

5.0%

6.0%

7.1%

8.1%

9.1%

10.1

%

11.2

%

12.2

%

13.2

%

14.2

%

15.3

%

16.3

%

17.3

%

18.3

%

19.4

%

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%

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%

22.4

%

23.5

%

24.5

%

Internal Rate of Return

Fre

qu

en

cy D

istr

ibu

tion

Normal Traffic

0%

5%

10%

15%

20%

25%

30%

35%

0.50

0.58

0.65

0.73

0.81

0.88

0.96

1.04

1.12

1.19

1.27

1.35

1.42

1.50

1.58

1.65

1.73

1.81

1.88

1.96

Multiplier Factor

Fre

quen

cy D

istr

ibut

ion

Project Investment Costs

0%

2%

4%

6%

8%

10%

12%

14%

0.50

0.58

0.65

0.73

0.81

0.88

0.96

1.04

1.12

1.19

1.27

1.35

1.42

1.50

1.58

1.65

1.73

1.81

1.88

1.96

Multiplier Factor

Fre

quen

cy D

istr

ibut

ion

g) Budget constraint optimizationProgram Net Present Value

5% Margin

Net Internal Equivalent Modified PV Financial NPV NPV

Present Rate Annual Internal Rate of Economic Investment per per

Program-Alternative Value of Return Benefits of Return Agency Costs Cost PV Agency Investment

Code Description (M$) (%) ($/km) (%) (%) (M$) (#) (#)

U Unconstrained Budged 20.40 63% 322414 20% 9.01 8.92 2.26 2.29

A Budget Constraint A 20.25 70% 319993 21% 7.97 7.72 2.54 2.62

B Budget Constraint B 19.50 77% 308123 21% 6.92 6.52 2.82 2.99

C Budget Constraint C 18.94 81% 299261 22% 6.27 5.96 3.02 3.18

D Budget Constraint D 17.59 91% 277943 22% 5.22 4.76 3.37 3.70

E Budget Constraint E 16.13 101% 254813 23% 4.51 3.84 3.58 4.20

R Recommended Program 20.40 63% 322414 20% 9.01 8.92 2.26 2.29

R

ED

C BA U

0.00

5.00

10.00

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25.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

PV Economic Agency Costs (M$)

Ne

t P

rese

nt

Va

lue

(M

$)

h) Multi-criteria and cost effectiveness analysisUser Defined Financial Net NPV Internal Population

Recommended Alternative Investment Present per Rate Population perRoad Road Road Cost Value Investment of Return Served InvestmentNo. ID Name Number Name (M$) (M$) (#) (%) (persons) (person/1000$)1 R01 Road R01 with 25 AADT 0 Current Poor Condition 0.000 0.000 0.000 #N/A 750 02 R02 Road R02 with 50 AADT 1 Bring to Fair Condition 0.120 0.004 0.032 12.9% 1000 83 R03 Road R03 with 100 AADT 2 Bring to Good Condition 0.400 0.278 0.694 29.4% 1000 34 R04 Road R04 with 200 AADT 3 Pave with ST 1.600 1.230 0.768 31.4% 2000 15 R05 Road R05 with 300 AADT 3 Pave with ST 1.600 2.626 1.641 50.3% 3500 26 R06 Road R06 with 400 AADT 3 Pave with ST 1.600 4.023 2.514 68.0% 3000 27 R07 Road R07 with 500 AADT 3 Pave with ST 1.600 5.420 3.387 85.3% 4000 38 R09 Road R08 with 600 AADT 4 Pave with AC 6m 2.000 6.823 3.412 85.8% 3000 2

Multi-Criteria Weights Criteria Criteria Criteria Criteria Criteria Criteria Criteria Criteria Sum

1 2 3 4 5 6 7 8 Weights1 1 1 1 1 1 0 0 6

Multi-Criteria IndicatorsCriteria Criteria Criteria Criteria Criteria Criteria Criteria Criteria Criteria

Road 1 2 3 4 5 6 7 8 OverallName (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10) (-10/0/10)Road R01 with 25 AADT -10 -10 -10 10 0 10 -2Road R02 with 50 AADT 0 0 0 0 0 0 0Road R03 with 100 AADT 0 10 10 10 -10 0 3Road R04 with 200 AADT -10 0 10 -10 0 -10 -3Road R05 with 300 AADT 0 0 -10 -10 10 -10 -3Road R06 with 400 AADT 10 -10 0 0 0 0 0Road R07 with 500 AADT 0 0 10 10 10 0 5Road R08 with 600 AADT -10 0 0 0 -10 -10 -5

Importance Rank Importance Class(1-highest, 2-second, 3-third, etc.) (-10-low, 0-medium, 10-high)Economic Population Multi- Economic Population Multi-Analysis Served Criteria Analysis Served Criteria

NPV Population Multi- NPV Population Multi-per per Criteria per per Criteria

Road Investment Investment Sum Investment Investment OverallName (#) (#) (#) (-10/0/10) (-10/0/10) (-10/0/10)Road R01 with 25 AADT 8 8 5 -10 -10 0Road R02 with 50 AADT 7 1 3 -10 10 10Road R03 with 100 AADT 6 2 2 -10 10 10Road R04 with 200 AADT 5 7 6 0 -10 -10Road R05 with 300 AADT 4 4 6 0 0 -10Road R06 with 400 AADT 3 5 3 10 0 10Road R07 with 500 AADT 2 2 1 10 10 10Road R08 with 600 AADT 1 6 8 10 -10 -10

RED Excel Software Modules

Main EconomicEvaluation Module

RED - MAIN (version 3.2).XLS

HDM-III Vehicle Operating CostsModule

RED - HDM-III VOC (version 3.2).XLS

HDM-4 Vehicle Operating Costs Module

RED - HDM-4 VOC (version 3.2).XLS

Risk AnalysisModule

RED - RISK (version 3.2).XLS

Program AnalysisModule

RED - Program (version 3.2).XLS

New

New

What is Next for RED

• Further dissemination within the Bank and other Agencies (ongoing)

• Preparation of an Applications Guide presenting case studies based on real applications of the model (ongoing)

• Deal with cases with no passability• Deal with social benefits• Create a Seniors Executives Module