Module 5: HIGHWAY ECONOMICS & FINANCE

INTRODUCTION

Better highway system provides varied benefits to the society. Improvements in

highway results in several benefits to the road users such as :

Reduction in vehicle operational cost per unit length of road.

saving travel time and resultant benefits in terms of time cost of vehicles and the passengers
Reduction in accident rates.

Improved level of service and ease of driving.

Increased comfort to passengers.

Therefore he level of service of a road system may be assessed from the benefits to the
users

The improvement in road net work also benefits the land owner by providing better access
and consequently enhancing the land value. The cost of improvements in the highway of
land, materials, construction work and for the other facilities should be worked out. From the
point of view of economic justification for the improvements, the cost reductions to the
highway users and other beneficiaries of the improvements during the estimated period
should be higher than the investments made for the improvement. In the planning and design
of highways there is increasing need for analysis to indicate justification of the expenditure
required and the comparative worth of proposed improvements, particularly when various
alternatives are being compared.

The government or any other agency finances highway developments. The funds for
these are generally recovered 1ins the road users in the form of direct and indirect taxations.
Highway Finance deals with various methods of raising and or providing money for the
highway projects.

Dept of Civil Engineering, MITE

HIGHWAY USER BENEFITS

General Benefits

Several benefits are brought to highway users and others due to the construction of a
new highway or by improving a highway. Road user benefits are the advantages, privileges or
savings that accrue to drivers or owners through the use of one highway facility as compared
with the use of another. The various benefits due to highway improvement may be classified
into two categories: (i) quantifiable or tangible benefits in terms of market values and (ii) non
quantifiable or intangible benefits.

Quantifilab1e Benefits

Various benefits which can be quantified include benefits to road user such as
reduction in vehicle operation cost, time cost and accident cost. The other benefits include
enhancement in land value. These are briefly explained below:

Saving in vehicle operation cost is due to reduction in fuel and oil consumption and
reduction in wear and tear of tyres and other maintenance costs. A road with sharp curves
and steep grades require frequent speed changes; presence of intersections require stopping
idling and accelerating; vehicle operation on road stretches with high traffic volume or
congestion necessitates speed changes and stopping and increased travel time.

Non-quantable Benefits

The non-quantifiable benefits due to improvements in highway facilities include

reduction in fatigue and discomfort during travel, increase in comfort and conveniences and
improvement in general amenities, social and educational aspects, development of
recreational and medical services, improved mobility of essential services and defence forces,
aesthetic values, etc..

Motor Vehicle Operation Cost

Dept of Civil Engineering, MITE

 The factors to be considered for evaluating motor vehicle operation cost would differ
depending on the purpose of the analysis. The vehicle may be classified in different groups
such as passenger cars, buses, light commercial vehicles, single unit trucks combination
vehicles etc., for the purpose of cost analysis. The motor vehicle operation costs depend on
several factors which may be grouped .as given below:

Cost dependent on time expressed as cost per year such as interest on capita depreciation
cost, registration fee, insurance charges, garage rent, driver’s license salaries etc. as
applicable.
Cost depending on distance driven expressed as cost per vehicle-kilometer. The items
which may be included here are fuel, oil, tyres, maintenance and repairs etc.
Cost dependent on speed include cost of fuel, oil and tyre per vehicle-km-time-cost of
vehicles, travel time value of passengers, etc.
Cost dependent on type of vehicle and its condition. Operation costs of larger vehicles are
comparatively higher. The operation cost of old vehicles maintained in poor condition is
also higher.
Accident costs.
The costs of vehicle operation and time for unit distance may be taken as:

T = a+ (b+c) (14.1)

Speed

Where

a = running cost per unit distance, independent of journey time

b = a fixed hourly cost, dependent on speeds

c = the portion of the running cost which is dependent on speed

Therefore the operation costs may be considered to consist various components like motor
fuel cost, lubricating oil consumption, tyre costs, vehicle repair and maintenance,
depreciation, cost due to slowing, stopping, idling and standing delays, costs related to

Dept of Civil Engineering, MITE

pavement surface and its condition, grades, curves and traffic volumes. Also the time costs
and accident costs are taken into consideration.

Example 14.1

Calculate the operating cost of a passenger car for 100 km length of a rural highway
with no sharp curves for most economical speed of vehicles operation using the following

HIGHWAY COSTS

General

The total Highway Cost for road user benefit analysis is the sum of the capital costs
expressed on an annual basis and the annual cost of maintenance. The total cost for highway
improvement is obtained from the estimate prepared from the preliminary plans. The total
cost of each highway engineering improvement proposal is calculated from the following five
components

(i) Right of way

(ii) Grading drainage, minor structures

(iii) Major structures like bridges

(iv) Pavement and appurtenances

(v) Annual cost of maintenance and operation

Computation of total annual highway cost based on summation of the annual cost of
individual items of improvements and their average useful lives is considered to be a proper
and accurate approach.It is difficult to estimate the service lives of highway elements as there
are several variables such as soil, climate topography and traffic. Road life studies enable
estimation of lives of pavements, bridges and other roadway facilities.

Annual Highway Cost

The items to be included while computing annual highway cost are

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(i) Administration (a portion) Personal service, building, equipment operation, office,
insurance etc.

(ii) Highway operation Equipment. building vehicle operation including capital costs of
vehicle.

(iii) Highway maintenance

(iv) Highway capital cost : Cost of highway components such as right of way, damage,
earthwork, drainage system. pavement bridges and traffic services depreciation cost
and interest on investment.

(v) Probable life and salvage value at the end of this period.

The average annual highway cost for a road system may be summed up by the
formula.

Ca – H + T + M + Cr

where

Ca = average annual cost of ownership and operation

H = average cost for administration and management at head quarters

T = average annual highway operation cost.

M = average annual highway maintenance cost.

Cr = average annual capital cost of depreciation of investment

capital or the capital recovery with return on capital

The annual cost is considered in the economic assessment of highway projects. Instead of
considering the overall cost of a project the annual repayment of a capital loan plus the
interest over a specified period of time of the annual capital cost is considered in the analysis.
The first cost of a capital improvement is converted into equivalent uniform annual cost by
the formula:
 i(1 - i)n
Cr = P
(1+i)n-1

= P (CRF)

Where

Cr = receipt in a uniform series for n periods to cover P at a rate of

interest i

P = first cost of improvement of an element of a highway

i = rate of interest per unit period

n = period of time in number of interest periods

i(1 - i)n

CRF = Capital recovery factor = (1+i)n-1

At the end of the service life of road pavement, some of the items could be assigned
some salvage value. However the salvage value of some other items may be negligible.

The average annual capital cost Cr for a project considering salvage value may be
estimated by the use of the formula (for the capital-recovery with salvage value):

i(1 - i)n

Cr = (C-Vs) (1+i) n-1 + I Vs

= (C- Vs) CRF + i Vs (14.4)

Where C = total investment on construction

Vs = salvage value at the end of n years

i = interest rate applicable

 n = number of years of expected use of the facility

The compound amount accumulated sum S on the principal sum of proposed

improvement cost or single payment P, including interest rate, i in n years is given by:

s = P ( 1 + i)n (14.5)

economical proposal among various alternatives, in the analysis for economic justification of
the proposed improvement, it is required to use judgment such as quantitative selection of the
factors in which annual highway cost depends and the estimation of AADT of each class of
vehicle considering the normal increase in traffic and the generated traffic.

Methods of Analysis

The procedure for the economic evaluation of highway projects consists of

qualification for cost component and the benefits arising out of the project and to evaluate by
one of the methods of analysis.

There are several methods of economic analysis. Some of the common methods are.
Annual-cost Method, Rate-of-Return Method and Benefit-Cost Method.

Annual-Cost Method

The annual cost of each element of capital improvement is found by multiplying by

the appropriate CRF value calculated for the assume life span. The annual cost Cr may be
found using the relation (Eq. 14.3).

C1 = P. i(1+i)n = P(CRF)

(1+i)n-1

Rate-of-Return Method
 There are number of variations for the determination of raw of return of a highway
improvement. In the rate of return method, die interest rate at which two alternative solutions
have equal annual cost is found, If the rate of return of all proposed projects are known, the
priority for the improvement could be established.

Benefit Cost ratio Method

Principle of this method is to assess the merit of a particular scheme by comparing the
annual benefits with the increase in annual cost

Benefit cost ration = Annual benefits from improvement

Annual cost of the improvement

= R – R1

H1 - H

Where R = total annual road user cost for axisting highway

R1 = total annual road user cost for proposed highway

improvement

H = total annual cost of existing road

H1 = total annual cost of proposed highway improvement

The benefit-cost ratios are determined between alternate proposals and those plans
dub are not attractive are discarded. Then the benefit cost ratios for various increments of
added investment are computed to arrive at the best proposal. hi order to justify the proposed
improvement, the ratio should be greater than 1.0. However, the choice of interest rate would
affect the results of the benefit-cost solutions.

Total annual road user cost for proposal B = RB = Rs. 2491,125

Benefit-cost ratio,

B = RA-RB = 3081,330 - 2491.125 = 590,205 = 2.874

A HB-HA 381,900 - 176,527 205, 373

Total annual highway cost of proposal C = HC = Rs.3,75,100

Total annual highway cost of proposal C= HC = Rs.2377,245

Benefit – cost ratio,

C = RA-RB = 3081,330 - 2377.245 = 704,085 = 3.546

A HC-HA 375,100 - 176,527 198, 573

Therefore, alternative C is the best one with higher benefit-cost ratio.

HIGHWAY FINANCE

Basic principle in highway financing is that the funds spent on highways are
recovered from the road users. The recovery may be both direct and indirect.

Two general methods of highway financing are:

Pay-as-you-go method

Credit financing method

In pay-as-you-go method, the payment for highway improvements, maintenance and

operation is made from the central revenue. In credit financing method, the payment for
highway improvement is made from borrowed money and this amount and the interests are
re-paid from the future income.
Distribution of highway cost

The question of distributing highway cost among the Government, road-user and
other has been a disputed task in several countries. Many economists are of the view that the
financial responsibility for roads should be assigned only among the beneficiaries on the
basis of the benefit each one receives.

There are several theories suggesting the method of distribution of highway taxes
between passenger cars and other commercial vehicles like the trucks. However in India the
annual revenue from transport has been much higher than the expenditure on road
development and maintenance. Therefore there is no problem of distributing the highway cost
among other agencies. Also the taxation on vehicles is being considered separately by the
states and there seems to be no theory followed for the distribution of taxes between various
classes of vehicles.

Sources of Revenue

The various sources from which funds necessary for highway development and
maintenance may be made available, are listed below:

Taxes on motor fuel and lubricants.

Duties and taxes on new vehicles and spare part including tyres

Vehicles registration tax.

Special taxes on commercial vehicles

Other road user taxes

Property taxes

Toll taxes

Other funds set apart for highways

There should be an equitable distribution of revenues available for highways.

Highway financing in India

The responsibility of financing different roads lies with the Central Government, State
Governments and local bodies including Corporations, Municipalities, District Boards and
Panchayats.

Taxes levied by Central Government for highway financing are:

Duties arid taxes on motor fuel

.Excise duty on vehicles and spare parts, tyre etc.

Excise duty on oils, grease, etc

Taxes levied by the State Governments include:

Registration fees for vehicles and road tax

Permits for transport vehicles

Passenger tax on buses

Sales tax on vehicle parts tyre etc.

Fees on driving licenses

Taxes levied by local bodies are mainly the toll tax.

Ever since the introduction of Central Road Fund (CRF) in the year 1929 by taxing motor
fuel, this has been the main source of finance for the State Government to meet the road
development needs, without having to go through the time consuming process of special
sanctions each time. However of late the CRF is also being merged with the general revenue,
in March 1976 the Lok Sabha has passed the resolution Of the Ministry of Transport ensuring
the existence of the CRF separately with the specified objectives. An Amount of not less
than 3.5 paise per litre out of the duty of customs and excise on motor spirit would be set
apart towards the CRF for the road development. While utilizing this fund, greater attention
would be given to schemes of all-India importance. Twenty percent of the fund would be
retained by the central Government as reserve. The fund will also be used for road research
schemes, traffic studies, economics surveys and training arrangements for young engineers.
The gross revenue from road transport in India during the sixth plan period 1978-83, 1980-85
was about Rupees l2,000 Crores