Economics - Upgrading a Gravel Road - Project Analysis - Case Study Assessment Answer

Economics - Upgrading a Gravel Road - Project Analysis - Case Study Assessment Answer

Task:

This case study presents the economic analysis of a project to upgrade an existing gravel road to a paved standard. The existing road is 50 km long and passes through varying topography. For this analysis the road has been split into three sections based on geometry, pavement condition and traffic volume. Traffic and condition data are available from surveys undertaken in 2005.
The purpose of the analysis is to assess the economic benefits resulting from the proposed investment. (This differs from a financial appraisal that is concerned with the means of financing a project and the financial profitability of the project). The economic feasibility of the project is assessed by comparison against a base-line project alternative (maintaining the existing gravel road). The timing of the upgrading is examined in the case study, as this is considered vital to its feasibility.
Define Project Details

•  General
•  Study Sections

Specify Alternatives
A total of five project alternatives are considered in this case study for each section. The first alternative, Base Alternative, represents a continuation of current maintenance practice. The 2 nd to 5 th alternatives represent the implementation of the project to upgrade the existing gravel road to paved standard. The duration of the upgrade is two years for road sections B001-01 and B001-03, and one year for section B001-02. The upgrade alternatives include upgrading the road starting in the year 2006, 2008, 2010 or 2012.
The maintenance and improvement (upgrading) standards for the project alternatives are summarised in Table E1.2. The maintenance standards are stored in the Works Standards / Maintenance Standards folder and the improvement standards are stored in the Works Standards / Improvement Standards folder.
For the Base Alternative the Gravel Road Maintenance standard is applied to the three sections from the start of the analysis period (i.e. from 2006). For the Upgrading alternatives,
the Upgrading improvement standard is applied in either year 2006, 2008, 2010, or 2012, with the Maintenance before Upgrading standard applied for the years prior to the start of the upgrading, followed by the Maintenance after Upgrading standard applied once the Upgrading has been completed.

Sensitivity Analysis
Sensitivity analysis is carried out to examine the robustness of a project, in economic or financial terms, to changes in the magnitude of important variables. It may be undertaken as part of a broader scenario or risk analysis because the results of an appraisal are subject to uncertainty. However, for the latter to be done comprehensively, ideally a probability based approach should be used. This is usually only appropriate where risks (and associated probabilities) are well defined.
The ‘sensitivity analysis’ functionality within HDM-4 allows a relatively simplified examination of uncertainty by allowing the user to employ higher and lower figures than those expected, and to determine how sensitive the economic decision criteria are to such changes. The variables chosen are a matter of judgement, but for most ‘capital’ road projects, project viability should be tested for variations in traffic, project costs and timing. Depending on the project other factors may be examined, including generated traffic, time and accident savings, shadow prices, maintenance and special factors, such as the effects of complementary investments, or the effect of management or regulatory actions.

Comparison with Analysis by Section
As a more general comment, whilst the NPV is positive in all Alternatives in the above case study, the relatively low NPV/C and EIRR suggest certain aspects of the overall project are marginal. This has been investigated further using the Analysis by Section method of analysis. 
Results from this analysis are shown in Table E1.6. These results confirm that each section is viable to a greater or lesser degree, with the section with the lowest AADT of 250 being the non-viable for all of the the alternatives investigated, and that with the highest AADT of 750 being the most viable. Such analysis confirms the concept of ‘Breakeven Traffic Volume’ associated with improvement standards.

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