ECONOMIC ANALYSIS. Table 1: Economic costs by project component

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1 Jiangxi Fuzhou Urban Integrated Infrastructure Improvement Project (RRP PRC 44007) A. Project Costs and Benefits ECONOMIC ANALYSIS 1. The project s capital costs include the civil works, land acquisition and resettlement, design, supervision and management. 1 A residual value after 20 years was based on straightline depreciation of assets. The costs of operation and maintenance, periodic rehabilitation, and vehicle replacement are included. Financial costs were converted into economic costs by (i) excluding taxes, price contingencies, and financial charges; (ii) using a 0.8 shadow price for low-skilled labor costs; (iii) applying standard conversion factors across different cost categories, with the weighted average standard conversion factor for civil works costs at 0.891, which is consistent with recent projects in the People s Republic of China; 2 and (iv) converting nominal costs into constant 2011 yuan. 2. Cost estimates pertaining to the proposed Global Environment Facility project were incorporated into the bus rapid transit (BRT) cost stream, as this component will reduce the energy consumed operating the bus system. The period used for economic analysis was from 2013 to The economic analysis uses real prices, ignoring price inflation. B. Economic Benefits Table 1: Economic costs by project component Station Access Urban Transport Bus Rapid Fenggang River Year Roads Hub Transit a Greenway Total Cost n/a n/a n/a n/a Total a Bus rapid transit costs include the Global Environment Facility project, costing CNY7.7 million annually during implementation. 3. The benefit streams are expressed in 2011 prices and comprise savings on travel time and vehicle operating cost (VOC). The Fenggang River greenway is expected to reduce costs from flooding, open new land for urban development, and provide a substantial urban amenity with benefits for the quality of life. However, as no reasonable method is available to value the economic benefits of this component, the economic analysis focuses solely on the three transport-related projects. The transportation benefits were based on the outputs of a travel demand model developed to analyze the project. 3 The value of some of the benefits, time savings in particular, depends on assumptions about future economic growth. The analysis assumes that that current growth in gross domestic product per capita in Fuzhou, at 15% per annum, will decline by 2% per annum each year to 2015, and continue at 6% per annum thereafter. 1 Land acquisition costs are based on regulated rates of 23.4 times the undiscounted agricultural production value. In the People s Republic of China, acquisition rates for agricultural land are much higher than the opportunity cost of foregone agricultural production, so a separate adjustment for the opportunity cost of land is not needed. 2 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Xi an Urban Road Network Improvement Project. Manila. 3 Summary Travel Demand Forecasts (accessible from the list of linked documents in Appendix 2).

2 2 4. Vehicle operating cost savings. VOC is used to relate distances travelled to the cost of travel. The travel demand model produces estimates of vehicle kilometers, which can be converted into monetary costs for evaluation. To estimate VOCs, an approach tailored to urban environments is required. This analysis borrows the methodology employed for the World Bank s Anhui Urban Transport Project in 2009, which calculated VOCs as follows: VOC = (A + B/S). (1 + (0.2 (VolumeCapacityRatio^2))) Where: S = speed in kilometers per hour A, B = calibrated parameters, given in Table 2 Table 2: Vehicle Operating Cost Parameters Motorcycle Taxi Auto Coach Bus Small Truck Large Truck A B Source: World Bank Anhui Urban Transport Project. Washington, DC. 5. These relationships are calculated for each vehicle type using average speeds and volume capacity ratios from the travel-demand forecasting model. As the VOC values are economic costs in domestic prices, omitting tax and subsidies, it is not necessary to apply to these values further factors, such as for shadow price conversion. 6. Economic value of time. The economic value of time (EVOT) is the value of travel time to the economy as a whole. It is standard practice to assume an EVOT that is half of average income per unit of time for nonbusiness travel and equal to average income for business travel. However, the travel-demand forecasting model did not provide separate travel purposes. As output statistics also do not differentiate by trip purpose, it was assumed that most travel is nonbusiness. The economic analysis employed a weighted average EVOT of 60% of hourly income per capita 4 as the shadow price EVOT, which escalated in line with growth in the gross domestic product per capita, as shown in Table 3. 4 Jiangxi Fuzhou Statistics Bureau Jiangxi Fuzhou Statistical Yearbook. Jiangxi.

3 3 Table 3: Economic Value of Time by Year Year EVOT (CNY/hour) GDP/capita growth (%) EVOT = economic value of time, GDP = gross domestic product. 7. Fenggang River greenway benefits. The Fenggang River greenway will channelize the river and increase its water-absorption capacity, which will reduce flooding in the project area and open hectares of currently flood-prone land to urban development. In addition to reducing costs from flooding and generating land development benefits, the new urban greenway will provide extensive parkland and recreation facilities for local residents and a safe corridor for nonmotorized transport between the station area and the old city. Urban land in Fuzhou is currently valued at CNY3.71 million per hectare which means the value of land newly available for development is likely to exceed the cost of the greenway component. However, uncertainty about timing, land use, and the cost of urban development in the area renders problematic assigning an economic value of the additional land. Therefore, the economic costs and benefits of this component are not included in the quantitative analysis. C. Benefit Cost Analysis 8. For transport-related projects the station access roads and the urban transport hub plus BRT benefits were calculated as the monetized value of time and VOC savings over the period under analysis. The difference between no build and build without BRT defined benefits for the station access roads, while the difference between build without BRT and build all defined benefits for the urban transport hub plus BRT. 5 The benefit cost ratio, 5 The base case alternative extends regular bus service to the new area. BRT is, by definition, the low-cost option for providing higher-quality public transport. The project benefits are derived from the features of BRT that segregate buses from other traffic to allow them to run more quickly than regular buses. With respect to road investments, there are no reasonable lower-cost alternatives. The choice to forego constructing them is not a reasonable alternative, as the railway and station area would be inaccessible. Narrower road alternatives would be inconsistent with the design standards of existing roads and cause traffic and safety problems as lane configurations change.

4 4 economic internal rate of return (EIRR), and net present value at a 12% discount rate are presented for each component in Table 4 and by benefit category in Table 5. Table 4: Economic Benefit Cost Results by Component Benefit Cost Metric Station Access Roads Urban Transport Hub + Bus Rapid Transit All Three Transport Projects Benefit cost ratio EIRR (%) % (CNY million) EIRR = economic internal rate of return, NPV = net present value. Table 5: Summary of the Analysis of Costs and Benefits (Transport Components) (CNY million) Year Total Costs Time Savings Vehicle Operating Cost Savings Total Benefits Net Benefits 2013 (113.60) (113.60) 2014 (155.44) (155.44) 2015 (169.08) (169.08) 2016 (28.87) (72.04) (51.74) (80.61) 2017 (29.11) (61.25) (36.04) (65.15) 2018 (29.38) (48.27) (14.91) (44.28) 2019 (29.66) (32.62) (16.22) 2020 (29.98) (13.73) (30.32) (30.51) (30.70) (78.15) (31.12) (31.35) (31.58) (31.83) (32.09) (32.36) (32.64) (32.94) (33.25) (80.81) (33.91) Total (1,011.96) 2, , , , IRR 14.0% NPV IRR = internal rate of return, NPV = net present value. D. Sensitivity and Risk Analysis 9. Six sensitivity scenarios were tested. The scenarios and results are shown in Table 6. Since transport project benefits are largely independent of the benefits of the river rehabilitation component, sensitivity tests were devised to test the three transport components separately from the river project. The analysis shows that, while the river rehabilitation project provides healthy returns based on the assumptions used in the study, it is particularly sensitive to increases in construction costs and reductions in benefits.

5 Table 6: Sensitivity Analysis Base IRR NPV Switching Scenario Main Assumptions IRR (%) (%) ($ million) Value Scenario 1 Cost overrun of 20% Cost overruns on three transport projects Scenario 2 Value of time is 20% lower Decrease in the value of time for three transport projects Scenario 3 VOC is 20% lower Decrease in VOC for three transport projects Scenario 4 Population decrease Population in 2020 is 20% less than predicted IRR = internal rate of return, NPV = net present value, VOC = vehicle operating cost. E. Summary and Conclusion 10. All project components provide positive economic returns, based on the information available and assumptions made in the economic analysis. The economic returns from the station access roads are not high, with an EIRR equal to 12.3% in the base case. However, as several kilometers of station access roads are required for the BRT system which, together with the urban transport hub, produces a very attractive EIRR of 20.3% all transport project components should be considered together, which produces an EIRR of 14.0%. 5