Cost-Benefit Analysis of the Act Light Rail Project - Case Study Example

Cost Benefit Analysis Report Introduction This report will focus on cost benefit analysis of the ACT Light Rail Project. A costs benefit analysis involves application of economic value to alternative proposals for project delivery; this enables direct comparison of costs of alternatives with the benefits the alternative brings. Generally, a cost and benefit analysis is used in illustrating a project’s value (Brand et al, 2001). Therefore, in the ACT Rail Project, benefit and cost analysis will be used to evaluate the economic value of the project as well as provide indicators of social value for money. In this report, the costs benefit analysis will also provide various performance measures to compare the costs of alternatives with the benefits the alternative will deliver. The analysis will also be utilized in highlighting the different elements of the value of the project alternatives. The objectives of the ACT Rail Project consist of: Reducing travel time, enhancing connectivity and mobility; decreasing congestion; reducing environmental and community impact that are caused by transportation; ensuring consistency regarding regional strategies; and maximizing cost efficiency of investments. Project Scope The light rail alignment is just about 9.0 miles long, with 4.0 miles of aerial sections and 5.0 miles of bored tunnel sections. Light Rail is a transit system typified by high speed and high passenger capacity. The elements of the rail consists of the route, the station, the vehicle, as well as the information technologies systems devised to improve the efficiency, safety and reliability of service. Since the proposed rail project is a new one, the known project elements of the system are the route and the station locations. The route for rail project should satisfy the criteria of linking main destinations, increasing accessibility, maximizing dependant and non-dependant riders, providing value to property adjacent to the route and also providing a dedicated right of way. On the other hand, the stations location should meet the criteria of maximizing access for individuals using the rail via proximity to the residential areas. In addition, the station location is supposed to improve numerous opportunities for activities besides transport to work, for example shopping and recreation. Basically, the design of the project’s route and the location of stations ought to stimulate development to attain the objectives of transit oriented development. Transit oriented development lowers transport costs as well a car reliance, particularly for families from low income. It also decreases congestion, enhances air quality and also increases socialization (Cisternas, 2006). In this context, the proposed ACT Light Rail project has the potential of catalyzing new development likely to accomplish most of the objectives acknowledged in transit oriented development. This project is therefore projected to be transformative just like other light rail projects. The basis of co-benefits of the rail project is on the presumption that other components of the system, for example; housing, road transportation and business centers) will change in a big way. The light rail project is designed to revitalize private sector economic as well as employment opportunities in the region. Other projected benefits consist of reducing dependency on private vehicles, enhanced equity and improved land productivity. The rail project is aimed to tackle the mobility problems in the area and relieve congestion (Collins, & Evans, 2002). The key objective of the project is to effectively and efficiently accommodate the local and regional travel demands in the area, consisting of the following considerations: enhance efficiency of the regional freeway and transit networks; decrease congestion on local arterials adversely impacted, as well as reduce environmental effects allied to mobile sources (Coto-Millan, et al, 2007). Proposed Framework Cost Benefit Analysis Cost Benefit Analysis Overview Detailed Model for a Cost Benefit Analysis Economic assumptions Costs The total cost of construction and operations of the light rail project encompasses of three main parts, specifically infrastructure costs, operating costs in addition to external cost (Psunde, 2013). These costs have been discussed as below: 1. Infrastructure costs Infrastructure costs include planning costs, land acquisition costs, construction costs and superstructure costs. The planning costs include the feasibility studies, technical design, administrative costs and such. These costs will take about 8 percent of the total infrastructure costs. Infrastructure construction costs include terrain preparation and platform construction, which will be a key cost for the project and will range to approximately 45 percent of the total cost (Djalalinia, et al, 2014). Finally, the rail specific components for example tracks, signaling systems, safety gadgets and electrification communication, among other components, which are important for a rail construction also are included in the infrastructure costs. The planning costs and land acquisition costs are estimated to be approximately $1.0 billion while the infrastructure construction and super-structure costs are estimated to be approximately $5.0 billion. 2. Operating costs The operating costs include the service operating costs, maintenance costs as well as rolling stock maintenance costs. The operating costs of the light rail encompass the labor costs, traffic management, safety systems as well as the energy and materials that the project consumes during operations (Eugene & Doug, 2002). The operation costs are estimated to be about $500 million. Secondly, the maintenance cost of the rail is estimated to be about $1.0 million every year. On the other hand, the stock maintenance cost annually is estimated to be about $50.0 million. Finally, the total operations cost for the rail annually is estimated to be about $700 million. 3. External costs Construction of the light rail project will have negative effects on the environments in regard to land resumption, barrier effects, pollution, and also contribute to global warming. The negative impacts on the environment will most definitely have environmental costs that are termed as external costs (Lenfle, 2012). The external costs for this project are estimated to be about $0.05 million per year. Benefits The light rail project comes with numerous benefits other than financial benefits and they include saving travel times, reducing pollution, increasing reliability and improved safety. The project is also projected to fasten the economic development in the area (Nickel, 2009). However, it is difficult to estimate the economic benefits of the light rail project due to significant changes with the fundamental parameter of the local economic development. Accordingly, this report will focus on the following kinds of social benefits: 1. Ticket proceeds The ticket for the light rail is projected to be affordable for most travelers who will use the rail as means of transport. The annual ticket revenue is estimated to be at $500 million. 2. Saving travel times User travel time encompasses the access time, waiting, egress time, as well as the time in the vehicle (Parker et al, 2013). The normal rail operates at a speed less than 100 kilometers per hour and hence the light rail has potential of saving up to 1 hour for a distance of approximately 500 kilometers. Assuming that the access time, egress as well as the waiting time for the normal railway and the light rail is the same, the light rail project will be saving about 1 hour. The standard social benefit of travel time is estimated to be at $400 million per year. 3. Lowering Pollution The right rail is projected to use sustainable and environmental friendly technology. The carbon emissions are estimated to be relatively low when compared to emissions from other means of transport (Small, 1992). Studies show that rails that use technology such as in the light rail project can lower air pollutants by around 150, 000 tonnes of carbon dioxide annually. As per (), the standard value of pollution decrease in carbon dioxide emissions within big towns is approximately $7000 per tonne. Accordingly, the standard annual benefit of pollution decrease is approximately $9.0 million. 4. Reduced Congestion and Improved Reliability Normally, unreliability is a major problem in transportation. The planned light rail project is projected to lower this type of uncertainty as well as enhance the reliability in regard to congestion avoidance and delays. In comparison to using roads and the typical railway as a means of travel, the light rail project has exemplary reliability benefits that ought to be incorporated within the cost benefit analysis (Flyvbjerg et al, 2004). The value of improved reliability is projected to be about $50.00 million per year. 5. Improved Safety Levels Light rail is among the safest means of transport and can be important in reducing traffic accidents. Accordingly, this project is projected to reduce the number of individuals that die and sustain injuries while on transit. According to Keys (2012) traffic accidents cause social life and property loss and this is directly linked to the GGP per capita. The value of how this project will lower accidents and saving lives is derived basing on the Australian valuations. Accordingly, the benefits of improved safety levels per year are estimated to be about $200 million. Cumulative PV of total benefits The cumulative present value (PV) of the benefits is approximately $21,000.00 million. Alternatives Road Transport Road as an alternative means of transport has a negative value of approximately $-1500 million. The negative value of the road transport is due to long travel time which results to big negative effect on the benefit of saving travel time (Lenfle, 2012). Cost benefit and NPV comparisons of the Light Rail project and other alternatives Cost benefits Rail Project Road Convectional Railway Costs Infrastructure costs Operating costs Operating cost of service Infrastructure maintenance cost Locomotives maintenance cost External cost Total $800 M $11 M $600M $1, 000 $ 54 M $1, 565 million - 5, 000 M 350, M 4, 000 M 9, 350 million - 5, 000 M 300 M 420 M 29 M 1 M 5, 750 million Benefits Ticket proceeds Saved travel time Lowered pollution Improved reliability Enhanced safety Total NPV (10-4) $ 750 M $ 412 M $ 20 M $ 56 M $ 345 M $1, 583 million $ 1, 500 million 200, M -300 M -100 million $-98 million 90 M - 5 M 40 M 200 M $335 million $302 million Net Present Value (NPV) of the Light Rail Project The NPV of the light rail project can obtained from the cumulative PV of total benefits and then subtract cumulative present value of the total cost of the light rail project (Psunde, 2013). Therefore, the NPV is approximately $1,500 million and this indicates that the project has net gain in regard to the benefits and therefore it is a worthy investment. Sensitivity Analysis The accuracy and precision of cost benefit analysis is normally impacted by some unpredictable components, for example changes in population, economic growth rate, and various scopes of transportation services as well as competitive pressures alternative modes of transport exercise. Therefore, it will be necessary to ensure that a sensitivity analysis is performed to ensure stability and reliability of the cost benefit analysis (Lenfle, 2012). The sensitivity analysis also is necessary to provide a basic idea regarding the scale of the probable effects provided by the components discussed above. For example, there is a probability of operating costs of the light rail project being affected by changes in design, period, as well as some other factors that normally take place whenever a construction is taking place. Moreover, it takes a big percentage of total operations costs of project. Accordingly, operations costs are likely to be affected by various factors. Another example is the effect of the number of passengers every day on the total benefits. For instance, the ticket revenue directly affects the total revenue of the project. Therefore, passenger play has potential of impacting this project. As a result, estimation of NPV on every adjustment of the flow of passengers by 15% has been estimated in the range of -20% +15. This indicates that the NPV is likely to be positive until the flow of passengers decrease by 15%. Generally, the above analysis show that the various factors that have the likelihood of affecting the NPV of the light rail project are erratic and are not likely to contribute to the project failing in any way (Keys, 2012). In addition, the basis of the cost benefit assessment for this project is on the best available information. Nonetheless, there is some ambiguity regarding all of the projections. To examine how uncertainty or any ambiguity might impact decision making on the project, various ranges have been placed on all the cost benefit line items. The NPVs were calculated again to develop NVPs for every alternative. Below sensitivity assessments were performed: Adjustment of capital and operating costs was performed between 5% lower than approximated and 10% higher than approximated A VMT reduction was integrated as a lower limit The emissions volume data from comprehensive air quality technical assessment performed for the environmental evaluations was used in place of the standard outputs A discount rate of 7% was used Conclusion Investing in light rail project is an important decision. One of the main negative aspects of the ACT light rail project is the high capital cost. Nonetheless, financial costs should not be the only focus. The positive impact the project will have on the society such as reducing congestion and faster and efficient travel. In addition, the project is likely to bring many social benefits in regard to the ticket proceeds, saving travel time due to faster travelling, reduced pollution, reliability and safety enhancement, among other benefits. A costs benefit analysis of the project indicated that the project has positive NPV, which indicates that the investment of this project is worth being performed. In addition, other pertinent transport alternatives such as the existing roadway and old railway line have also been assessed and a comparison done with the light rail project. Due to the outstanding performance in ticket proceeds, reducing congestion, saving travel time and safety enhancement, light rail project has the highest NPV among the analyzed modes of transport. In a nutshell, the light rail project is a very cost-effective when compared to the other alternatives. References Arndt J, Morgan C, Overman J, Clower T, Weinstein B & Seman, M., 2008, Transportation, Social and Economic Impacts of Light and Commuter Rail, Texas: Texas Transportation Institute. 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Eugene E & Doug B, 2002, Estimating the Benefits and Costs of Public Transit Projects: A Guidebook for Practitioners, Washington DC, National Academy Press. Flyvbjerg, B., Skamris Holm, M.K, & Buhl, S, 2004, What causes cost overrun in transport infrastructure projects? Transport Reviews, 24(1), pp: 3-18. Keys E, 2012, Light Rail Development in Australia 2012 – 2016, Melbourne: Centre for Urban Research, RMIT University. Lenfle S, 2012, Exploration, project evaluation and design theory: a rereading of the Manhattan case, International Journal of Managing Projects in Business, 5(3), pp: 486 – 507. Nickel, J., Ross, A.M., & Rhodes, D, 2009, Comparison of project evaluation using cost-benefit analysis and multi-attribute tadespace exploration in the transportation domain, Second International Symposium on Engineering Systems, MIT, Cambridge. Psunde I, 2013, Evaluating construction project success with use of the M-TOPSIS method, Journal of Civil Engineering and Management, 19(1). 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