3.

6 Option analysis
Possible design options in transport include: i) mode; ii) location/route; iii) alignment, iv)
technical solutions; v) interchanges; etc. Different options may have different demand, costs
and impacts.
For option selection, the suggested approach is generally to use Multi-Criteria Analysis for
shortlisting the alternatives, then CBA to compare the results of the shortlisted options and
consequently select the most promising one.
Finally, option analysis can also be used later to review the efficiency of previous designs,
especially when socio-economic circumstances have changed. This can lead to project re-
design.

3.7 Financial analysis

3.7.1 Investment costs
Investment costs disaggregation is project-specific, although the transport sub-sectors are
usually characterised by common cost categories for both initial investment and renewals.
As general remarks valid for any transport investment, the following can be highlighted:
• estimates must be based on appropriate benchmarks with projects of comparable
characteristics, based on best available technologies, etc.;
• it is recommended to present both the total cost of the project and the unit value (e.g.
cost per km, cost per unit of rolling stock, etc.);
• costly engineering structures (tunnels, bridges, overpasses, etc.) should always be
shown separately in a cost statement to allow for benchmarking;
• it is necessary to ensure that the project will include all the works required for its
functioning (for example, links to the existing networks, technological plants, stations with
related services, urban renewal works adjacent to public transport investments, etc.);
• cost of land85 and costs for environmental protection, including e.g. noise barriers and
other noise protection, drainage, greenery, animal passages, etc., and/or for the
integration of the works in the territory (e.g. for the preservation of the landscape
integrity, etc.) are usually main items to be included in the investment costs.
3.7.2 Operation and Maintenance (O&M) costs
In the transport sector, O&M costs can be generally grouped into the following categories:
• infrastructure operations, e.g. repairs, current maintenance, materials, energy, Traffic
Management System;
• services operations, e.g. staff cost, traffic management expenses, energy consumption,
materials, consumables, rolling stocks maintenance, insurance, etc.;
• services management, e.g. services management itself, fare/tolls collection, company
overheads, buildings, administration, etc.
As for the timing of the expenditure, O&M costs should cover (and is usually distinguished
in):
• routine maintenance: yearly work required to keep the infrastructure technically safe and
ready for day to day operation as well as to prevent deterioration of the infrastructure
assets;
• periodic maintenance: all activities intended to restore the original condition of the
infrastructure.

3.7.3 Revenue projections

The estimation of revenues should be based on the following elements:
• traffic volume forecast (changes of passenger and cargo traffic);
• projection of changes in charge system and pricing policy;
• traffic forecast for each projection of charge system;
• subsidy/compensation projection.
An indicative list of typical revenues to be considered for calculation of the financial
profitability is provided in the table below.

Table 3.2 Typical sources of revenue by transport mode

Revenues from transport Revenues from non-transport activities
activities
Road Tolls and/or other users charges • Value of scrap material
• Rental of service stations
• Advertisement on service stations
Railway • Access charges to railway • Advertisement on trains and/or in railway
line stations
• (in the case of infrastructure • Commercial premises in railway stations
projects)
• Tickets (in the case of rolling
stock projects)
Urban • Tickets and subscriptions • Commercial premises in stations
Transport • Advertisement on vehicles and/or on
stations or bus stops
Airports • Take-off or landing charge • Commercial services
• Passenger charge • Real estate rental
• Parking charge • Food services
• Cargo charge • Transport services
• Advertising services
• Car parks
Seaports • Basin, berth dues, etc. • Commercial premises
and inland • Tariff for inland cargo ship • Logistics
waterways • Advertising on vessels
Intermodal • Access charges to railway • Commercial premises
facilities line • Logistics
• Tariff/fee for cargo storage
and transhipment

3.8 Economic analysis

In transport projects the main direct benefits are measured by the change of the following
measurable.
• The consumer surplus, defined as the excess of users’ willingness-to-pay over the
prevailing generalised cost of transport for a specific trip. The main items to be
considered for the estimation of the consumer surplus are:
– fares paid by users;
– travel time;
– road users Vehicle Operating Costs.
• The producer surplus, defined as the revenues accrued by the producer (i.e. owner and
operators together) minus the costs borne. The main items to be considered for the
estimation of the consumer surplus are:
– fares paid by users (and received by the producer); and
– producer operating costs.
This implies that the economic analysis of transport projects can be structured differently
depending on two main situations:
• in cases where the project is not expected to change traffic volumes, there is no need to
estimate the changes of the consumer and producer surplus because the fares paid by
users will always be cancelled out.
• in cases where the project is expected to change traffic volumes or when transport
pricing strategies are introduced or expected to be changed, the fares paid by users will
not be cancelled out.

Table 3.3 Typical economic benefits (costs) of transport project

Effect Valuation Method
Travel time savings - Stated preferences
- Revealed preferences (multi-purpose
household/business surveys)
- Cost saving approach
Vehicle Operating Costs savings Market Value
Operating costs of carriers Market Value
Accidents savings - Stated preferences
- Revealed preferences (hedonic wage
method)
- Human Capital approach
Variation in noise emissions - WTP//WTA compensation
- Hedonic price method
Variation in Air Pollutions Shadow price of air pollutants
Variation in GHG emissions Shadow price of aGHG emissions

THE RULE OF HALF

The Rule of Half (RoH) relies on the consideration that, without the project, non-travelling
users Willingness To Pay (WTP) is lower than the (prior) generalised cost of transport.
The RoH can be therefore expressed by the following formula: gc = p+z+vτ
where: p is the amount paid for the trip by the user (tariff, toll); z is the perceived operating
costs for road vehicles (for public transport is equal to zero);τ is the total time for the trip; v in
the unit value of travel time.
Total consumer’s surplus (CS0) for a particular i and j in the Business As Usual (BAU)
scenario is shown diagrammatically in the first figure. It is represented by the area beneath
the demand curve and above the equilibrium generalised cost, area CS0.

User benefit = Consumer’s surplusij 1 - Consumer’s surplusij 0

where: 1 is the do-something scenario and 0 is the BAU scenario.

If there is an improvement in supply conditions the consumer’s surplus will increase by an
amount of ∆CS, due to a reduction in equilibrium generalised cost and the total user benefit
(for existing and new users) can be approximated by the following function, known as the
rule of a half:
𝐺𝑆0
1
∆𝐶𝑆 = ∫ 𝐷 (𝐺𝐶)𝑑𝐺𝐶 ≈ 𝑅𝑢𝑙𝑒 𝑜𝑓 𝑂𝑛𝑒 𝐻𝑎𝑙𝑓 (𝑅𝑜𝐻) = (𝐺𝐶0 − 𝐺𝐶1 )(𝑇0 + 𝑇1 )
2
𝐺𝑆1
For the generated demand only (i.e. for new users), the benefits may be approximated by
the following formula :

1
∆𝐶𝑆 = (𝐺𝐶0 − 𝐺𝐶1 )(𝑇0 + 𝑇1 )′
2
3.8.1 Travel time
Passengers traffic time savings
The first method is to carry out specific empirical research and/or surveys in that country to
estimate both work and non-work travel time. The approach consists of interviewing
individuals using the stated preference method or conducting multi-purpose
household/business surveys using the revealed preference method and then to estimate a
discrete choice model on these data.

As a second option, value of time can be estimated adopting the cost saving approach.
The recommended process for valuing work time with the cost savings approach is as
below.
• Establishing wage rates for a given country or region: the gross hourly labour cost (Euro
per hour) must be derived from observed (or, in absence, from average national) wage
rates. The main data source should be the national statistical office;
• Adjustment to reflect additional employee related costs: this would include paid holidays;
employment taxes; other compulsory contributions (e.g. employer pension contributions)
and an allowance for overheads required to keep someone employed. Social security
payments and overheads paid by the employer shall therefore be computed and added
to the estimated hourly labour cost.

For non-work travel time, the economic value of time savings is given by the difference
between the marginal valuation of time associated with travelling and that associated with
leisure.

FACTORS AFFECTING VALUE OF TIME

• Labour market. The cost savings approach assumes that the gross wage rate in the
labour market equals the marginal value product which the labour yields.
• Industrial sector. Under the cost savings approach the economic value of work time
savings is the marginal productivity of the person making the saving; thus different
workers will have different time valuations.
• Mode. Considering the relative qualities and comforts of one mode compared to the
other modes (all other conditions being equivalent), value of travel time can be related to
the mode of transport.
• Walking and waiting time. All other things being equal, an individual typically prefers
travelling within a vehicle to spending time walking, waiting or transferring between
services.
• Trip distance. The relationship between the value of (non-work) travel time and journey
length includes increasing marginal disutility of travel time with journey length, greater
significance of time constraints in longer distance journeys and differences in the trip
purpose mix at long, relative to short distances.
• Travel conditions. The comfort associated with travelling conditions, including the ability
of the traveller to take advantage of the time spent travelling, also affects value of time.

Freight traffic time savings

Reduction in travel times will benefit freight traffic in the following ways:
• reduced driver (and any other persons necessarily travelling with the load,) wage costs
per trip;
• reduced vehicle operating costs per trip;
• improved reliability, i.e. timely delivery of transported goods.