Module 5:Cost-Benefit

Analysis for Transportation

Projects1

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Costs, benefits and transport decisions
• Cost-Benefit analysis (CBA): Is the main framework used for the assessment of
socio-economic benefits of investment.
• Benefit –cost analysis is commonly used to evaluate public(government )
projects
• Socio-economic benefits could be money benefits, environmental benefits or
social benefits
• In practice,CBA Involves assessing all costs and benefits and evaluating the
aggregate impact on welfare in monetary terms
• Today, both transport policies and projects require an impact assessment
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 Why is cost-benefit analysis important

• Socio-economic assessments are crucial to understand whether :

• A project is viable or should be rejected
• Different project elements are appropriately selected
• A project is of high or low priority within an overall program
• The timing of the project is correct

• To allow proper comparison of options, an objective uniform framework is important

• CBA ultimately is about ensuring value for money and efficiency of public spending
• Serves as an important guiding principle in the presence of competing demands for funds and limited
public budget
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 How to do benefits cost-analysis?
• Transportation improvements can benefit individuals and communities
• How to evaluate these benefits?
• Rodway improvements benefits:
• Measured by reduction in travel time, vehicle operation and crash cost reductions

• So the first step of doing the analysis is to calculate the costs.

• In the past , the benefits of transportation planning were focused on a fast
and cheap automobile travel
• Transportation activities provide benefits and impose costs. The goal of
transportation planning is to maximize net benefits (benefits/cost raito)
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Benefits Considered in Transportation Planning

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 Conventional planning vs comprehensive
planning
• Conventional planning tends to evaluate transportation system performance based on
vehicle travel conditions (indicators : average speed.roadway level of service ), goal is only to
maximize mobility
• Comprehensive planning evaluates transportation system performance based on accessibility
(ability to reach a desired activities ) ,considering multiple indicators such as automobile and
non-auto travel conditions, transportation network connectivity, land use density and mix
• Accessibility-based planning evaluates transport system performance based on the quantity
and quality destinations that people can access with a given time and money budget
• for example, the number of shops they can reach within a 15-minutes trip, or the number of
appropriate jobs they can reach within a 30-minute commute.

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Shifting to accessibility-based planning

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 Benefits by mode

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 Benefits by Mode Evaluation

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 Marginal Analysis
• Transportation planning involves marginal analysis: it is the incremental differences between various options
• It is important to clearly define the base or alternative cases when evaluating transportation policies and
projects
• A roadway expansion benefits should be compared with a no-action case, alternative
investments(combination of biking, walking and public transit improvement )
• Marginal analysis will be on travel time, vehicle operation and crash cost savings
• Non-marginal benefits example of road improvement :a combination of walking, bicycling, public transit
and taxi service improvements may allow non-drivers to access healthcare services, shops, school and
jobs, allowing them to live comfortable and productive lives in that community.
• Higher value trips (prioritize more ) include emergency, freight and service vehicles
• Resource–efficient mode (prioritize more ):walking, bicycling, ridesharing and public transit
• Prioritizing efficient modes is called a sustainable transportation hierarchy
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Cost-Benefit analysis focuses on the monetary value
• Focus the analysis on the monetary benefits of alternatives
• Evaluation’s purpose is to determine how well each alternative will achieve the objectives of
the project
• Two economic tests :benefit-cost ratio, net present worth of benefits and costs
• Discounting : transportation investment and costs are incurred in the initial years while the
benefits from the investment accrue over many years into the future
• Therefore, we need to take into the account time value of money by converting the costs and
benefits that take in different years into a common year.This process is called discounting
•  Discounting converts future costs and benefits that occur in different years into a value for a
common year (present value)

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Present value of a future cost or benefit

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 Example

• A new section of highway is estimated to cost $5,000,000.

Construction will occur in 2010. The year of analysis is 2005. If the
discount rate is 3.6 percent for the year 2005, what is the present
value of the construction cost?

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 Example

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Estimated Values for Timing Savings for
Business Travel

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 Resource Values of Time per Person

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 Highway Use Benefit Calculation

• First Assemble highway user data(VMT,VHT…etc)

• Second Compute difference in travel time, vehicle operation cost or safety
• Find the annual savings for each year in the analysis period
• Discount the annual benefits back to the year of analysis.
• Find the overall savings for travel time, vehicle operating costs, and safety
• Find the total user benefit of the alternative(s) as compared to the based
condition by summing overall savings for travel time ,vehicle operation costs
and safety
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 Highway Use Benefit Calculation

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 Total Highway User benefit

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 Cost calculation

• Calculating construction cost for the proposed alternative

• Calculating maintenance costs for each year (based case and alternative
case )
• Calculating the remaining capital value of the constructed infrastructure (at
the end of the year and discounted to the year of analysis; useful life of
investment

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 Useful life of the investments

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 Costs of Road schemes

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Total Present Cost for The Base Case and
Alternatives

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 Evaluation of the project

• The result of the benefit-cost analysis can be shown as a benefit-cost ratio

and/or as net present value. These results show if the Alternative is
economically justified compared to the Base Case
• If the result is greater than or equal to 1.0, the infrastructure
improvement is economically justified.

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 Environmental Cost-Benefit analysis

• Focus the analysis on the environmental benefits of a project

• Benefits of a nonmonetary nature need to be quantified in dollar terms as much as possible to be included
in the analysis
• Environmental analysis needs many criteria so the use of a cost-effectiveness matrix to evaluate the
environmental project is more suitable.
• Cost-effectviness matrix is to assign costs to each parameter in the matrix and compares it with the
parameter’s benefits(effectiveness )
• Cost of carbon: it measures the present value in monetary terms of the damages incurred when an
additional carbon (or any other Greenhouse gas) is released into the atmosphere. This cost can be added to
the projects and as a benefit item for projects that reduce carbon emissions

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 Costs and Benefits

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 Example of Cost-Benefit analysis

• Converting a city to a free–car city (base case vs alternative )

• Environmental impact?(costs and benefits)
• Convert it to money
• More of subjective calculation

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Annual Average Estimate of Carbon
Emissions:per metric ton of CO2

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 Social Cost-Benefit analysis focuses on the social
value
• Focus the analysis on the social benefits of a project
• Benefits of a nonmonetary nature need to be quantified in dollar terms as much as
possible to be included in the analysis
• Social analysis needs many criteria so the use of a cost-cost-effectiveness to evaluate the
environmental project is more suitable.
• Equity: income distribution consideration(Through better accessibility of decent jobs) :
• Not only consider the project contributes to the economy efficiency but also who gains and
who loses from it
• Can be done through identifying groups in terms of function (motorists,consumers,bus users,
government, transport operators and residents ) , income level. To give higher weight to poorer
sectors ofTTEsociety
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 Example of Equity Analysis

• For instance, suppose that a project reduces the costs of freight

transport to a city center. The results obtained may be a mixture
of higher profits for freight operators, higher profits for retailers,
higher rents for property owners, higher taxes for central and
local government, and lower prices for consumers.

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 Example of Cost-Benefit analysis

•Accident reduction project on an intersection (before and after)

•Cost? Benefits?

•Measure the reduced number of accidents

•the monetary value is measured based on the severity of accidents

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Estimated values for avoided accidents

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