Bridge Replacement for Improved Rural Access Sector Project (RRP PNG 43200) ECONOMIC ANALYSIS A. Introduction 1. The economic analysis of the proposed project has been carried out in accordance with ADB s Guidelines for the Economic Analysis of Projects. 1 It focuses on quantifiable expected benefits and costs produced by the project. B. Approach, Methodology, and Assumptions 2. The Bridge Replacement for Improved Rural Access Project includes replacement of about 27 bridges on five priority national roads at a cost of $82.32 million. The economic analysis of the proposed investment was undertaken in accordance with the with and without project framework, comparing the congestion, likely bridge failure, higher maintenance requirements of bridge decks, and accidents arising on existing single-lane bridges, compared with newer two-lane bridges. The measures of benefits include vehicle operating cost and value of time savings, construction costs saved by timely replacement of bridges, periodic maintenance avoided, and the value of life and injuries saved through improved safety. 3. For economic analysis, domestic prices are used as the numeraire. The long-term average foreign exchange rate is K2.49 = $1 and reflects the average daily market rate over the 12 months ending June 2011. The economic values in the analysis of costs and benefits were obtained through the removal of taxes and duties from financial costs and the application of a standard conversion factor (SCF) of 0.89 applied to the non-traded goods and services. All costs are stated in constant 2011 prices. 4. The shadow wage conversion factor is assumed to be 1.0 for skilled workers on the basis that there is a tight market for such labor in Papua New Guinea s (PNG s) resource extraction industry and service sectors; and 0.67 for unskilled workers. 2 Value of time parameters derive from the PNG Department of Transport s Transport Infrastructure Priority Study. 3 The anticipated growth in per capita gross domestic product (GDP) raises the weighted average value of time per vehicle from $7.60 in 2011 to $29.60 in 2037. 5. Traffic growth is assumed to follow national income growth, with adjustments for regional differences. The growth factors derive from the Development Strategic Plan, 2010 2030: 8.4% GDP growth per year from 2010 to 2030. 4 This high GDP growth rate is confirmed by increases in national income approaching and even exceeding that rate in recent years, major mineral finds under development, and the fact that the plan begins from a low base. This analysis assumes slower 6.4% annual GDP growth from 2030 to 2037. The analysis adjusted GDP growth for regional variances by introducing a sub-model based on that for estimating a market potential index, employing a gravity function to identify differences in the productivity and accessibility of different centers, 5 and normalized to be consistent with the overall national 1 ADB. 1993. Guidelines for the Economic Analysis of Projects. Manila. 2 ADB. Economic Analysis for Rural Primary Health Services Delivery Project. Unpublished. 3 Australian Agency for International Development and Department of Transport. Transport Infrastructure Priority Study. Unpublished. 4 Government of Papua New Guinea Department of National Planning and Monitoring. 2010. Papua New Guinea Development Strategic Plan, 2010 2030. Port Moresby. 5 Economic Outlook. 1999. The Economy of New Europe. September.
2 growth estimates mentioned above. Table 1 shows the traffic counts obtained in 2011 (as part of the project preparatory technical assistance) and the projected traffic in 2037. Table 1: Traffic Counts (2011) and Projected Traffic (2037) (vehicles per day) National Highway Traffic Counting Site Actual (2011) Projected (2037) Hiritano Highway 141 km from Port Moresby 180 1,350 Magi Highway 76 km from Port Moresby 250 3,350 New Britain Highway 135 km from Kimbe town 649 2,077 Ramu Highway 16 km from Lae-Goroka-Madang Junction 754 9,051 Sepik Highway 40 km from Wewak 490 1,401 km = kilometer. Source: Government of Papua New Guinea Department of Works. 6. This analysis borrows vehicle operating cost parameters for vehicles traveling different roads on different surfaces at 60 kilometers per hour (km/h) from the Transport Infrastructure Priority Study. Table 2: Vehicle Operating Costs (K) Sealed Road Unsealed Road Vehicle Type Good Fair Poor Good Fair Poor Cars 0.31 0.34 0.37 0.34 0.37 0.41 Pick-Up 0.36 0.40 0.44 0.40 0.44 0.49 Public Motor Vehicle 0.49 0.54 0.60 0.54 0.60 0.66 Light Truck 0.48 0.53 0.59 0.53 0.59 0.64 Medium Truck 0.72 0.80 0.88 0.80 0.88 0.97 Heavy Duty 0.99 1.10 1.21 1.10 1.21 1.33 Articulated Truck 1.28 1.42 1.56 1.42 1.56 1.72 Source: Australian Agency for International Development Transport Infrastructure Priority Study. 7. The analysis assumes that travel on existing Bailey bridges represents the cost of a poorly sealed road, and that of the new replacement bridges that of good sealed bridges. The analysis of bridge failures assumed that the vehicle operating cost parameter for vehicles fording a dry river are 50% greater than that of a driving on a poor unsealed road; fording a wet river will be another 50% greater. Anecdotes appearing in the press indicate that charge for common portage and canoe at a 50-meter river crossing is K5. 8. The value of life, derived using the irap method 6 of 70 times per capita GDP to estimate the value of life in willingness-to-pay terms, is $96,895 in 2011. This is consistent with the guideline that the willingness-to-pay approach should produce a result 10 times half an individual s discounted lifetime earnings (except that in PNG the ratio is 20, since the typical lifetime earnings in this country are 20 years rather than 40 years.) The irap method is also consistent with the high compensation claims demanded in the case of wrongful death. The value of a serious injury (again using the irap method) is 17 times per capita GDP, or $23,532. C. Economic Costs 9. The analysis concentrates on the investment cost for the proposed project estimated at $82.32 million for 27 priority bridges. Applying the SCF of 0.89 produces a $73.30 shadow price, applied across the 4-year development period. 6 International Road Assessment Program. 2007. The True Cost of Road Crashes. London.
3 D. Economic 10. There is no standardized methodology for estimating the benefits of a bridge replacement project. The estimation of benefits draws on various economic, planning, and engineering texts, especially New Zealand s Economic Evaluation Manual. 7 11. Avoiding traffic slowdown. Traffic on a two-lane road will slow down as vehicles approach and cross a one-lane bridge, especially a narrow one. The analysis captures the increased vehicle operating costs (VOCs) at slower speeds under one-lane bridge conditions (without the project) versus that of the speeds on a good road and two-lane bridge (with the project). 8 12. The analysis calculates the increased cost per vehicle traveling at reduced speed as it crosses a bridge, 9 and multiplies that increased cost with annual traffic volume. The added cost of slow travel over bridges represents vehicle operating cost savings. Similarly, the analysis factors time lost crossing the bridge times the value of time to represent bridge replacement benefits. The analysis also includes the VOCs associated with deceleration from normal 60 km/h speeds to the target speed calculated for crossing the bridge, and takes the average of the two as the basis for the vehicle operating costs, for the appropriate deceleration distance. 10 13. Avoiding congestion. This gauges the congestion arising at bridges if the single-lane bridges are not replaced with two-lane bridges. While today s traffic allows for smooth passage, future growth will involve considerable delays. The benefits of new two-lane bridges represented in terms of congestion avoided appear in the form of vehicle operating cost savings and time savings. 14. The analysis employs a simple queue delay model to estimate the time and volume of vehicles waiting for opposing traffic on one-way bridges to clear, and then borrows from US research 11 on work zones to estimate the increased VOCs for idling and slower speeds. The analysis multiplied the time lost idling at bridges times the number of passengers and the value of time to determine the value of time savings for the two-lane bridges. 15. Reduced maintenance costs. The new permanent bridges under the project will require less maintenance than the older temporary bridges they will replace. Maintenance savings represent the benefits of a prudent capital asset management program making scarce resources available for other purposes. 12 This is especially important as the PNG s National Transport Development Plan (NTDP), 2006 2010 places great emphasis on maintenance. 13 The analysis assumed that the estimates of annual maintenance costs for the bridge deck is 0.5% of the value of new permanent bridges and 2.0% of the replacement cost of the existing temporary bridges. The analysis indicates $0.55 million reduced maintenance costs per year. 7 Land Transport New Zealand. 2007. Economic Evaluation Manual. Wellington. 8 Transportation Research Board. 2005. Highway Capacity Manual 2000 (Chapter 20). Washington, DC. 9 Government of Papua New Guinea Department of Transport. 2010. Report for PNG Transport Infrastructure Priority Studies Draft final report. Port Moresby. 10 R. Brian et al. 2008. National Cooperative Highway Research Program Report 613: Guidelines for Selection of Speed Reduction Treatments at High-Speed Intersections. Washington, DC. 11 National Cooperative Highway Research Program. 2004. Guide for Mechanistic-Empirical Design of New and Rehabilitated Pavement Structures. NCHRP. page C.33. 12 New South Wales Treasury. 2007. NSW Government Guidelines for Economic Appraisal. Sydney. 13 Government of Papua New Guinea Department of Transport. 2006. National Transport and Development Plan 2006 2010. Port Moresby.
4 16. Avoiding disruption following bridge failures. The benefits of replacing bridges in a planned manner before they exhaust their residual life is the reverse of the costs associated with the disruption following a bridge failure. This includes the cost of constructing a temporary bridge (i.e., emergency works), trips canceled, and diverted travel. 17. The analysis factors the shadow price of a $14,312 per meter construction cost for a temporary bridge to the existing bridge s length to determine the cost of the temporary bridge avoided under the project-funded construction. This calculation of benefits includes this additional cost during the year of failure. 18. Bridge failures divert travel patterns until emergency works are in place. The only alternative means of traversing the river is to ford it if dry or shallow, or to ferry persons and goods in canoes, or simply port them with the help of individuals who provide their services. (The country s linear road system provides few network linkages and no alternative paths.) The cost and time inputs for trips diverted by fording dry and wet rivers, canoe, or portage derive from information in newspaper articles and data from the field. The model assumes a negative 0.5 price elasticity to determine the number of trips made and not made using the more expensive diversion. The number of diverted trips and associated VOC and value of time costs are small. 19. The analysis of non-diverted trips under bridge failures estimates those no longer able to travel as a result of the increased expense of the crossing, and values the cost to society in terms of half of the VOC costs of the trips not taken. Most VOC benefits under avoidance of bridge failure derive from non-diverted trips. 20. Improved safety. A single-lane bridge runs a greater risk of vehicle collisions than a two-lane bridge. The value of the estimated annual reduction in accidents represents the improved safety benefits. The analysis adopts a pair of formulae adopted by both the United States Federal Highway Administration, and the Government of New Zealand, for accident rates on single- and two-lane bridges. 14 The formulae use bridge length and traffic volumes as inputs. The difference between predicted accidents on each new permanent bridge and the corresponding old temporary bridge is the accident reduction. The value of life and serious injury parameters derive from GDP per capita estimates, using the irap method (footnote 6). See also assumptions in Section B. E. Economic Internal Rate of Return and Sensitivity 21. Table 3 presents the costs and benefits of the project over a 25-year period. 14 New Zealand Transport Authority. 2007. Economic Evaluation Manual - Volume 1, Amendment 1, Road Infrastructure. Wellington.
5 Costs Table 3: Bridge Replacement for Improved Rural Access Project Economic Discounted Cash Flow ($ million) Temp. Bridge Construction Savings (Bridge Failure) VOT Savings VOC Savings Avoided Avoided Traffic Avoided Congestion Slow- Congestion Down Avoided Traffic Slow- Down Reduced Maintenance Costs Year Construction Bridge Failure Improved Safety Net 2013 (8.9) (8.9) 2014 (21.1) (21.1) 2015 (21.5) 2.1 0.1 0.1 0.0 0.5 5.5 0.2 0.0 (13.0) 2016 (21.7) 0.0 0.3 0.2 0.0 1.3 0.0 0.4 0.0 (19.5) 2017 4.8 0.4 0.3 0.0 2.0 7.7 0.6 0.0 15.7 2018 0.0 0.5 0.3 0.0 2.3 0.0 0.6 0.0 3.7 2019 0.0 0.6 0.4 0.0 2.6 0.0 0.6 0.0 4.3 2020 0.0 0.8 0.5 0.0 3.0 0.0 0.6 0.0 4.9 2021 0.0 0.9 0.7 0.0 3.4 0.0 0.6 0.0 5.7 2022 5.6 1.1 0.9 0.1 3.7 7.0 0.6 0.0 19.0 2023 0.0 1.3 1.2 0.1 4.1 0.0 0.6 0.0 7.2 2024 0.0 1.4 1.5 0.1 4.5 0.0 0.6 0.1 8.2 2025 0.0 1.7 2.0 0.1 4.9 0.0 0.6 0.1 9.3 2026 0.0 1.9 2.7 0.1 5.4 0.0 0.6 0.1 10.7 2027 0.0 2.1 3.5 0.1 5.8 0.0 0.6 0.1 12.2 2028 0.0 2.4 4.7 0.1 6.2 0.0 0.6 0.1 14.0 2029 0.0 2.7 6.2 0.1 6.6 0.0 0.6 0.1 16.3 2030 0.0 3.0 8.4 0.1 7.0 0.0 0.6 0.1 19.2 2031 0.0 3.3 11.2 0.1 7.5 0.0 0.6 0.2 22.9 2032 0.1 3.7 15.2 0.1 7.9 1.0 0.6 0.2 28.7 2033 0.0 4.1 20.5 0.1 8.3 0.0 0.6 0.2 33.8 2034 0.0 4.5 27.9 0.1 8.7 0.0 0.6 0.3 42.1 2035 0.0 5.0 38.1 0.2 9.2 0.0 0.6 0.3 53.3 2036 0.0 5.5 52.1 0.2 9.6 0.0 0.6 0.4 68.4 2037 0.0 6.1 71.6 0.2 10.1 0.0 0.6 0.5 89.1 EIRR 15.5% ENPV $20.29 ( ) = negative, EIRR = economic internal rate of return, ENPV = economic net present value, VOC = vehicle operating cost, VOT = value of time. Source: Asian Development Bank. 22. The analysis produces a 15.5% economic internal rate of return, which is favorable. 23. Sensitivity analysis. The analysis includes standard measures of sensitivity, varying the capital cost, benefits, traffic projections, and delays in project completion. Base Case EIRR Table 4: Economic Internal Rate of Return and Switching Values NPV @ 12% ($ million) 10% Decrease in Sensitivity Analysis 10% 20% Decrease in Increase and 20% in Cost Increase in Cost % Decrease in Switching Values (Constrained at 12%) % Increase in Cost Equal % Decrease in and Increase in Cost 15.5% $20.29 (14.3%) 14.4% 11.2% -27.3% 37.6% 15.8% ( ) = negative, EIRR = economic internal rate of return, NPV = net present value. Source: Asian Development Bank. 24. In addition, assumptions were changed to consider modifications to the traffic growth projections. A 10% reduction in traffic growth below that projected would cause the rate of return to fall to 14.4%.