Roads Economic Decision Model (RED)

January 2008

Rodrigo Archondo-Callao Senior 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 multicriteria 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/red 32_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, multicriteria) Consumer Surplus Approach Versus Producer Surplus Approach (difficult to judge the assumptions made, concern of double counting benefits) Customized Excel Model Versus HDM Models (HDMIII 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 service c) 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 benefits f) Risk analysis with triangular distributions g) Budget constraint optimization h) Multi-criteria and cost effectiveness analysis

a) Constant average level of service over evaluation period

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) Roughness
a) Input Road Roughness | b) | | | | | | | | | | Car | VOC | | | | Car | Speed |

b) Speed of a Reference Vehicle

Input Reference Vehicle Speed

c) Roughness & Speeds of All Vehicles

| c) | | Input Road | Roughness | | | | | | Heavy | Car Truck | VOC . VOC | | | Input Speeds | for All Vehicles | . |

Estimated Road Roughness

Car VOC

Utility VOC

Bus VOC

.......

Light Truck VOC

Heavy Truck VOC

Utility VOC

Bus VOC

.......

Light Truck VOC

Heavy Truck VOC

Car Speed

Utility Speed

Bus Speed

.......

Light Truck Speed

Heavy Truck Speed

Utility Speed

Bus Speed

.......

Light Truck Speed

Heavy Truck Speed

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

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

Results from HDM (VOC X IRI)

Fitted Cubic Polynomial

c) Two periods during a year

Days Per Year With Direct Passability Days Per Year Without Direct Passability

- Different Length - Different Roughness - Different Speeds - Different Traffic

Higher Transport Costs

d) User defined equations relating vehicle operating costs and speeds to roughness
Vehicle Operating Costs ($/veh-km) 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 0
y = -2E-05x3 + 0.0009x2 - 0.0004x + 0.1153 R2 = 0.9997

Terrain Type A Road Type X Y Z AZ B C

10

15

20

25

Roughness (IRI)

Vehicle Type

Car Utility Light Bus Medium Bus Heavy Bus Light Truck Medium Truck Heavy Truck Articulated Truck

Vehicle Speeds (km/hour) 100 80 60 40 20 0 0 5 10 15 20 25 Roughness (IRI)

y = 0.0073x3 - 0.2767x2 + 0.2562x + 86.24 R2 = 0.998

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 roads 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
Transport Costs

Special Local Economic Development (Induced Traffic)

Transport Costs

Consumer Surplus

Consumer Surplus

COST1

COST1

COST2

COST2

d2 d1 d1

ADT1 Normal Traffic

ADT2

Traffic

ADT2

ADT3

Traffic

Generated Traffic due to Decrease in Transport Costs

Generated Traffic due to Special Local Economic Development User enters: - Amount of generated traffic due to special local economic development

User enters: - Percent of normal traffic or or - Price elasticity of demand =

Percent Increase in Traffic Percent Decrease in Transport Cost

f) Risks analysis with triangular distributions

Normal Traffic
35% 30%

Country Project Road Option

Africa Region Road Management Initiative Road from Point A to Point B 2 Upgrade to ST Internal Rate of Return Upgrade Road to Surface Treatment Standard

Frequency Distribution

25% 20% 15% 10% 5% 0%

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

Minimum Maximum Average Standard Deviation Median Percentile Percentile Percentile Probability that IRR is less than Probability that IRR is greater than

25% 50% 75% 12% 12%

4.2% 22.7% 11.9% 3.5% 11.7% 9.4% 11.7% 14.1% 50% 50%

Multiplier Factor

Upgrade Road to Surface Treatment Standard

8% 7%

Frequency Distribution

Project Investment Costs

14% 12%

6% 5% 4% 3% 2% 1% 0%
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% 20.4% 21.4% 22.4% 23.5%

Frequency Distribution

10% 8% 6% 4% 2% 0%
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

Internal Rate of Return

24.5%

g) Budget constraint optimization

Program Net Present Value
5% Margin

25.00

Net Present Value (M$)

20.00
D E

A R

15.00

10.00

5.00

0.00 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$)

Net Present Program-Alternative Code U A B C D E R Description Unconstrained Budged Budget Constraint A Budget Constraint B Budget Constraint C Budget Constraint D Budget Constraint E Recommended Program Value (M$) 20.40 20.25 19.50 18.94 17.59 16.13 20.40

Internal Rate of Return (%) 63% 70% 77% 81% 91% 101% 63%

Equivalent Annual Benefits ($/km) 322414 319993 308123 299261 277943 254813 322414

Modified Internal Rate of Return (%) 20% 21% 21% 22% 22% 23% 20%

PV of Economic Agency Costs (%) 9.01 7.97 6.92 6.27 5.22 4.51 9.01

Financial Investment Cost (M$) 8.92 7.72 6.52 5.96 4.76 3.84 8.92

NPV per PV Agency (#) 2.26 2.54 2.82 3.02 3.37 3.58 2.26

NPV per Investment (#) 2.29 2.62 2.99 3.18 3.70 4.20 2.29

h) Multi-criteria and cost effectiveness analysis

User Defined Recommended Alternative Road No. 1 2 3 4 5 6 7 8 Road ID R01 R02 R03 R04 R05 R06 R07 R09 Road Name Road R01 with 25 AADT Road R02 with 50 AADT Road R03 with 100 AADT Road R04 with 200 AADT Road R05 with 300 AADT Road R06 with 400 AADT Road R07 with 500 AADT Road R08 with 600 AADT Number 0 1 2 3 3 3 3 4 Criteria 1 1 Financial Net NPV Internal Population Investment Present per Rate Population per Cost Value Investment of Return Served Investment Name (M$) (M$) (#) (%) (persons) (person/1000$) Current Poor Condition 0.000 0.000 0.000 #N/A 750 0 Bring to Fair Condition 0.120 0.004 0.032 12.9% 1000 8 Bring to Good Condition 0.400 0.278 0.694 29.4% 1000 3 Pave with ST 1.600 1.230 0.768 31.4% 2000 1 Pave with ST 1.600 2.626 1.641 50.3% 3500 2 Pave with ST 1.600 4.023 2.514 68.0% 3000 2 Pave with ST 1.600 5.420 3.387 85.3% 4000 3 Multi-Criteria Weights Pave with AC 6m 2.000 6.823 3.412 85.8% 3000 2 Criteria Criteria Criteria Criteria Criteria Criteria Criteria Sum 2 3 4 5 6 7 8 Weights 1 1 1 1 1 0 0 6 Multi-Criteria Indicators Criteria Criteria Criteria Criteria Criteria Criteria Criteria Criteria 2 3 4 5 6 7 8 Overall (-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 -10 10 0 10 -2 0 0 0 0 0 0 10 10 10 -10 0 3 0 10 -10 0 -10 -3 0 -10 -10 10Importance -10 Rank -3 Class Importance -10 0 0 (1-highest, 0 2-second, 0 3-third, etc.) 0 (-10-low, 0-medium, 10-high) 0 10 10 Economic 10 0 5 Population MultiEconomic Population Multi0 0 0 -10 -10 -5 Analysis Served Criteria Analysis Served Criteria NPV Population MultiNPV Population Multiper per Criteria per per Criteria Road Investment Investment Sum Investment Investment Overall Name (#) (#) (#) (-10/0/10) (-10/0/10) (-10/0/10) Road R01 with 25 AADT 8 8 5 -10 -10 0 Road R02 with 50 AADT 7 1 3 -10 10 10 Road R03 with 100 AADT 6 2 2 -10 10 10 Road R04 with 200 AADT 5 7 6 0 -10 -10 Road R05 with 300 AADT 4 4 6 0 0 -10 Road R06 with 400 AADT 3 5 3 10 0 10 Road R07 with 500 AADT 2 2 1 10 10 10 Road R08 with 600 AADT 1 6 8 10 -10 -10

Road Name Road R01 with 25 AADT Road R02 with 50 AADT Road R03 with 100 AADT Road R04 with 200 AADT Road R05 with 300 AADT Road R06 with 400 AADT Road R07 with 500 AADT Road R08 with 600 AADT

Criteria 1 (-10/0/10) -10 0 0 -10 0 10 0 -10

RED Excel Software Modules

New
HDM-III Vehicle Operating Costs Module RED - HDM-III VOC (version 3.2).XLS HDM-4 Vehicle Operating Costs Module RED - HDM-4 VOC (version 3.2).XLS

Main Economic Evaluation Module RED - MAIN (version 3.2).XLS

New
Risk Analysis Module RED - RISK (version 3.2).XLS Program Analysis Module RED - Program (version 3.2).XLS

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