Benefits of Infrastructure Projects for its Rational Determination - Essay Example

Valuation of the benefits of infrastructure projects (built environment) may sometimes be difficult but it is essential for the rational determination of sector. Introduction Worldwide, there is an increasing demand for high quality public service in order to sustain socio-economic growth of our society. This is because the environmental demands in the 21st Century are getting more and more complex, with each passing day, and it is becoming increasingly necessary to keep ahead with the changing times. Infrastructure plays a pivotal role in improving the standards of public services and in the maintainence of high levels of build environment. But it would not be wrong to maintain that the public services has failed the community on several fronts- like transport, education, telecommunication, water and natural resource, to name just a few. The public services are not able to mobilize resources to meet the increasing demand in these areas, mainly due to bureaucratic interventions, organizational lapses and political lethargy. Therefore, it has become necessary for the private sectors to involve themselves prominently in this strategic area of human living. The fact remains that the implementation and execution of infrastructure developmental projects have remained uppermost in the hands of their planners and executors, but they have not considered its implications nor pondered over the necessary ways in which these projects could provide long time succor and increased standard of living for the masses effected by these projects or the ultimate beneficiaries of these efforts. Hence these projects have been carried out in an ad hoc manner, which is why it has become imperative to upgrade and enhance the quality of service to bring it at par with acceptable standards. The emphasis should be on providing infrastructure projects with a national or regional development policy or strategy and also to link the resources decision with local social, economic and environmental requirements. This way, not only the broader objectives of the project would be met but its utility value, in the grassroots level would also stand ensured. This is because all important infra structural projects should have social upliftment and emancipation of the underprivileged and marginalized sections of society in mind when they are conceptualized and also when they are finally implemented. Difficulties of Valuation of benefits of infra structural projects The economic evaluation of development projects should be such that it renders maximum benefit to social welfare. Although the objectives may be clearly delineated, the derivation of net benefits or its quantitative benefit value may not be assessable in real money terms. To take an illustration, the Government wished to seek the help from a consortium of Banks for technical and financial assistance for upgrading its Transport infrastructure, especially the condition of rural roads which are in an utterly chaotic and appalling condition in the state. It is proposed to submit projects to the Banks for improving the present conditions of the roads for making it motorable.and safe for use. The Cost Benefit ratio for this project has to be assessed and also the increase in safety, frequency and mobility of vehicles plying over the roads, caused directly by the repairing and reconditioning of the roads. It would not be definitely assessable to determine the monetary benefits derived from the process of up gradation of road condition. Cost Benefit analysis for appraising Investments in the road infrastructure was first developed for roads in urban areas. However, it became prone to certain criticism that the investments were biased towards the urban, richer areas since the demand for traffic, and the capability to bear the high cost of investments in these projects could only be met by the affluent strata of society through indirect financing. Again the question arose that such projects were partial to urban areas having heavy traffic, especially during peak hours, to the total exclusion of rural areas having lower volume of traffic. The Cost Benefit Ratios are currently practiced in the Transport sector although the determination of benefits accruing may be a subject matter of contention. The value of benefits of non-market goods for which prices are unknown or non-quantifiable in money terms or assessment of its usage is also difficult. There are also other benefits that better and improved road transports can bring about in terms of increased accessibility to schools, educational institutions, hospitals and health care centers etc these being subjective benefits cannot be easily quantified. Moreover, in an inflationary economy, it would be difficult to set up prices since it is fluctuating on day- to- day basis. The benefits that may be considered in projects relating to road improvement would be: 1. Increased passenger traffic in vehicles, post rehabilitation of the roads. It would be necessary to find the actual increase directly attributable due to the rehabilitation of the road. 2. Reduced cost of freight or average inventory transportation costs resulting out of the improvements made on surface transport system. 3. Savings in Input and output transportation costs of agricultural produce in and around the area of road improvement. For this it is necessary to obtain accurately the required data regarding both the inputs for agricultural produce including input costs like fertilizers, cost of seeds etc. and also transportation costs of final outputs or agricultural produce. For determining the incremental revenue, it is necessary to know the market value of the agricultural or farm produce in order to arrive at the correct output determinants. These figures may vary in quantitative terms due to several variants and it may not be possible to set fixed amounts for this as a lot would depend upon market conditions and the prevailing prices during the period. Thus it may be said that the benefits derived from infrastructural development plans may not be immediately visible and may in some cases be difficult to evaluate, since the benefits that is derived, is not the cause of one particular factor but is the culmination of a multitude of factors that play a determining role in building up benefits. . PROPOSED CASE ANALYSIS Our proposed study is regarding the surface transport improvement programme of around 700 kms of Feeder Roads in total road area of 2680 kms in rural Uganda. The Capital Cost of rehabilitation would be not more than $15,000 for every km. of rural Feeder Road with a markup of 10% contingency reserve. The unit costs are provisional and are subject to competitive biddings. 25% of the Capital costs would be reserved for maintenance work beginning 5 years after constructions and subsequently, every 5 years there would be periodic maintenance. Regular maintenance would done after the 1st year from the date of completion of the Rehabilitation of the roads following budget of 2% of the Capital cost in year 2, 3%of cost in year 3 and so on. Objectives Of The Feeder Road Rehabilitation Plan 1. The primary objective is to provide all climate and year round road access, which is presently not possible due to bad conditions of the roads and inaccessibility problems 2. The second objective of the plan is to drastically reduce the Input and Output transportations costs which, because of bad conditions of roads, are becoming exorbitantly high and prohibitive and are reducing profits margins significantly 3. The third major objective is to obtain the Transport Operating Cost Savings accruing to the non-agricultural sector 4. The final aim is to reduce the travel time of commuters significantly by better road conditions, which would encourage speedy and efficient driving. This would also increase the occupancy rate of commuter vehicles and enhance overall commuter satisfaction levels Benefits expected from the Feeder Road Rehabilitation Plan There would be benefits accruing as a result of Motorized Vehicle operating cost savings, commuter time savings due to faster vehicle movement and greater use of bicycles due to better road conditions, bicycles would be used instead of motor vehicles for 50% of the load, resulting in reduced transport costs. It is believed that by making investments in relaying the roads, substantial savings in vehicle operating costs and also, in terms of the travel time of commuters would ensure. The Design and appraisal of rural transport infrastructure would be determined in terms of the volume of Traffic that is present. For traffic volume of less than 50 Vehicles per day, the effective costs would be assessed and for traffic between 50-200 Vehicles, the Rural Economic decision model would be employed. The roads having less than 50 vehicles are excluded from the economic appraisal methodology. The criteria for meriting screening of roads would be as follows: 1. The road must pass through or give access to agricultural production areas, or the road must cross commercially active areas. 2. Roads should not be isolated and should be connected to network and should be classified as bad or unmotorable. 3. The said road should not be received funds from other private parties or Government agencies. 4. Road should be located within the projected area and it should be within the projected area of influence. 5. The Agricultural development roads must be technically feasible and the rehabilitation level of each road would be $ 15,000/km 6. The nature of roads should be such that they could be subject to regular maintenance after rehabilitation 7. Besides regular rehabilitation, there would also be periodic maintenance every 5 years after the 1st year after rehabilitation There should be 1. Savings accruing from the motorized vehicle operating costs 2. Value of passenger timesavings. 3. Producer Surplus Transportation Cost Savings comparisons in both with and without improvement situations for comparing benefits with relevant costs. 4. Initial road rehabilitation 5. Periodic 6. Regular maintenance services spread over a period of 20 years. The benefits of item 1 and 2 would require the process of traffic count data for the motorized vehicles whereas the item 3 would require transport cost of non motorized vehicles such as bicycles. For instance, 50% of the load transported through motorized vehicles could now be transported on bicycles on the rehabilitated roads, and thus there would be heavy transport cost savings which would go to increase the profit margins and also enhance scope for capital reinvestments for future profits Methodology of the study of Feeder Plan 1. All financial costs and benefits are duly shadow priced to convert them to their economic costs and benefits. The first aspect is gives the road’s length and other datas including the capital cost of rehabilitation, yearly traffic growth and other parameters. 2. The second aspect deals the estimation of benefits based on Vehicle Operating Costs savings for the initial period. Information requirement here includes the Average Daily Traffic (ADT) for the motorized vehicles that ply the road, the road length which is derived from Unit 1 above and the difference in Vehicle Operating Costs from the rehabilitated and unrehabilitated road respectively and the kms savings arrived at. 3. The third aspect deals with the commuter time savings which could be arrived at by calculating the differential vehicle speeds before and after improvements and also the average vehicle occupancy rate and the return road length. 4. This area estimates the benefits accrued in terms of the transport cost savings through the movement of major crops grown in the roads zone of influence. The information required here would be the lost of the major crops grown, its yield level, hectares allotted to each crop, the proportion of the farm under cultivation in this area and the proportion of losses due to wastages and consumer surplus and the difference in cost of transportation prior to, and after the improvements was conducted. 5. This parameter takes into consideration the economic costs and benefits and calculates the economic internal rate of return (EIRR), the net present value (NPV) and the NPV-capital investment ration (NPV/K) which is the basis of prioritizing Results of the Study 1. The EIRR (Economic Rate of Return) for the road model over a period of 20 years is approximated at 38%. 2. NPV ( Net Present Value) is $347.8 M and NPV/K is 1.56M 3. Rate of Return would drop to 34% and 29% if benefits are cut by 10% and 20-% respectively 4. If there is a two year delay in the implementation of the project, then the EIRR would reduce from 38% to 22 % that is a major fall of 16% or 8% per year. 5. Even when the Average Daily Traffic (ADT) is reduced to just 5 vehicles a day, the EIRR is still a healthy 33% . 6. If only 30% of the cultivatable land is used the EIRR would be just 16% Final Evaluation of Feeder Road Improvement Plan First a Shortlist for all roads to be considered for evaluation is obtained from each of the Districts. 1. Based on the above model, each of the prescreened roads analysis was submitted by 8 of the total 10 districts. The datas were analyzed and ranking in lowering order and the Net Present Value per km was determined. The short-listing of the roads were made, considering their respective EIRR. Only roads having an EIRR of 12% or above were considered for rehabilitation since only they can be compare higher than the market rate or interest and the particular road rehabilitation can be considered economically viable. In this study, the EIRR of the individual roads varied between 14 % to 54%. 2. After the analysis as above were done, and the rankings according to the EIRR were done in the descending order. The Investments in each road was determined according to the pre-determined allocated length of each road and the investment outlays were established for each individual stretch of road, keeping the cost rationing in mind. This study has determined that the Vehicle Operating Costs method as applicable to roads having high traffic or both Vehicle Operating Costs and Travel Time Costs would not be able to produce a EIRR of 12 % or more since their traffic volume is high, nevertheless, another aspect, that is, the anticipated reduction in costs due to producer transportation surplus would definitely be applicable. However, the purpose of this research methodology is not required to justify the project in totality but only to depict the total projects incremental costs against incremental revenues and arrive at the correct decision depending upon the other circumstantial factors Conclusion It is necessary in a project analysis of infra structural nature to arrive at the valuation of both average infrastructual costs and revenue generation in order to arrive at the correct decisions. In the case under study, the transportation costs, which include weight dependent costs like freight charges and movement costs need to be correctly determined. The costs incurred after rehabilitation are compared with the costs before the rehabilitation takes place. Similarly, the revenues and savings in costs are also assessed under the pre-rehabilitation and post rehabilitation plans and the differences compared. The decision making would largely depend upon the significance of incremental revenues over additional costs. A rational decision in this case could be arrived only after all material and non-material variables and impinging constraints in terms of costs, environment, socio-economic status of people etc are fully considered and decided upon. It is only then that a rational determination of the project could be said to have been completed. Read More