uthm 12 - transportation n economics edited mac 2011

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Prof. Madya Dr Hj. Mohd Idrus Hj. Mohd MasirinUTHM

March 2011


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One of the most important pillars of a moderneconomy is the ability to move goods and peoplewhere they need or wish to go.

All modern economies are dependent upontransportation of some form to move people and goodsto and from other economies.

Access to other economies enables trade and facilitatesthe specialization of labor and capital, leading to

greater productivity growth and higher wages.

Without such access, many productivity-improvingdevelopments would not occur, resulting in loweraverage productivity and lower wages.


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Economic: Good transport provides a clear competitive edge providing:-

Easy access

Low congestion costs

Good environment; so

Efficient transport facilitates economic growth, But

Congestion hinders business efficiency and impacts onregeneration

Environmental

Efficient transport helps provide high quality of life andaddress climate change.

Unmanaged transport causes air quality problems, noise andtraffic accidents


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Sustainable communities

A good transport network enables equality of travelopportunity to all,BUT

Lack of transport provides a barrier to socialinclusion particularly in areas of persistent socialdisadvantage and jobless


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A fully integrated safe transport network whichsupports social and economic regeneration and,ensures good access for all which, is operated to

the highest standards to protect the environmentand ensure quality of life


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A statutory requirement set within theframework of National Priorities

Removing Congestion

Air quality and quality of life Accessibility

Road safety

Problems related to Climate change


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The transport sector is an important component of theeconomy impacting on development and the welfare ofpopulations.

When transport systems are efficient, they provide economic

and social opportunities and benefits that result in positivemultipliers effects such as better accessibility to markets,employment and additional investments.

The economic impacts of transportation can be direct and

indirect: Direct impacts related to accessibility change where transport enables larger markets

and enables to save time and costs.

Indirect impacts related to the economic multiplier effects where the price ofcommodities, goods or services drop and/or their variety increases.
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At the macroeconomic level (the importance of transportation for

a whole economy), transportation and the mobility it confers arelinked to a level of output, employment and income within anational economy. In many developed countries, transportationaccounts between 6% and 12% of the GDP.

At the microeconomic level (the importance of transportation forspecific parts of the economy) transportation is linked to producer,consumer and production costs. The importance of specific transport activities and infrastructure can thus be

assessed for each sector of the economy.

Transportation accounts on average between 10% and 15% of householdexpenditures while it accounts around 4% of the costs of each unit of output inmanufacturing, but this figure varies greatly according to sub sectors.
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SE197


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Is the project justified ?- Are benefits greaterthan costs?

Which is the best investment if we have a set of

mutually exclusive alternatives? If funds are limited, how should different

schemes be ranked?

When should the road be built?


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Are complementary investments required?

Should stage construction be used? What standards should be applied ?


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All appraisals need a framework or modelfor:

a) Forecasting changesb) Evaluating those changes


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SE697

These include:

Supervision

Management Manpower

Machinery

Materials

Land

Environmental Mitigation (e.g. Resettlement)


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Reduced vehicle operating costs

fuel and lubricants

vehicle maintenance

depreciation and interest

overheads

Reduced journey time

drivers, passengers and

goods


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Changes in road maintenance costs

Changes in accident rates

Increased travel

Environmental effects

Change in value of goods moved


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Any economic analysis should be designed togive maximum coverage of benefits.

But we must avoid double counting. Do not add

primary and secondary benefits (e.g changes inland values added to changes in transport costs)

In a competitive economy the consumers surplusapproach (used in HDM) should be adequate.


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An economic analysis involves a comparison of Withand Without cases.

Traffic forecasts are made for BOTH scenarios - Theanalysis should not be based on before and after.

An unrealistic Without case can give a false result. A range of with investment cases should be analysed

to find the best solution. A minimum investmentapproach often gives the best economic results andshould be tested.


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Do nothing

Minimise the cost

Concentrate on maintenance

No new construction Project alternative

New project/construction

Major maintenance

Higher in cost


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The major element of economic benefit arises in the form of vehicle operating cost savings, computed and valued in compliance with the road user surplus theory.

Benefits for the road users may include reduced driving time, reduced driving costs,

fewer accidents, and environmental improvements.

The comparison of traffic volumes, with and without the project, is anoutstanding aspect of the analysis. But in the case of low-traffic roads, sinceassessing with accuracy the structure and volume of the traffic generated bythe project may be challenging, an approach based on the producer surplus ormulti-criteria analysis may be preferable to take better account of direct andindirect impacts of the project or program on the local economic and social

system: development of agriculture, improved access to water supply, health or education

(see also below "specific issues concerning rural roads").


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SE797

In an Economic Appraisal we use ECONOMIC

(orSHADOW) prices NOT FINANCIALprices

Adjust financial prices as follows:

Exclude all taxes and duties and subsidies

Use the planning discount rate not the financial market

rate

If overvalued exchange rate then value imports and

exports more highly

Use the opportunity cost of labour

Standard Conversion Factors are now widely used for

road construction costs


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Changes in transport costs occur becauseof :

Lower road roughness

Shorter trip distance

Faster speeds

Reduced chance of impassability

Reduced traffickability problems

Change in mode


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Normal traffic: Existing traffic and growth that

would occur on the same road, with and without

the investment

Diverted traffic: Traffic diverted from another roadto the project road as a result of the investment

Generated traffic: New traffic induced by the

investment


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Transport cost savings for existing (ornormal ) traffic

= Traffic x Change in Transport Costs per

km x distanceMain changes in cost from:

a) change in transport MODE

b) reduced journey TIME

c) reduced VOCs

SE297


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Traffic induced by the road investment aretraditionally valued at:

Half the difference in transport costs

Hence total generated transport cost benefits= Generated traffic volume x change in costs per kmx distance x 1/2


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Normal traffic benefits: tripsN * d1 * (VOC1- VOC2)

Diverted traffic benefits: tripsD * ((d1 * VOC1)-(d2*VOC2))

Generated traffic benefits: tripsG * d2 * (VOC1- VOC2)/2

d1 = existing road length d2 new road length

VOC1 = vehicle operating costs per km withoutinvestment

VOC2 = vehicle operating costs per km with investment

VOC data relates to each road section and its condition atthe time


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SE397

Development benefits arise from a

combination of increased traffic and

reduced transport costs.

Benefits may also include :

Increased agricultural production

Increased service provision Increased industrial activity


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Normal traffic benefits

= traffic x change in transport costs

Development benefits- A function of (change in transport costs)2

Social benefits

- A function of population x change in transportcosts


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Acknowledgements to:

Ms Munzilah

Colleagues in FKAAS UTHM

uthm 12 - transportation n economics edited mac 2011

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