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Evaluation of transport Projects : An Institutional Dimension

Antti Talvitie

The World Bank


Operations Evaluation Department

1. Introduction
Transport Projects are always evaluated. But it is rarely clear whose point
of view is taken in the evaluation and, especially, what factors are considered in
choosing the alternative and making the decision. Since late 1960s benefit-cost
analysis, grounded on microeconomic theory, and the broad national point of view
with compensation for harm have become the accepted academic norms. Many
textbooks and papers have been written on the topic of benefit-cost analysis of
mutually exclusive projects.1 The method has become mystified by complicated
mathematics, assumptions on human motivation, extent and prices of included
factor and externalities, data validity, and what rules should be used to
compensate those harmed by a project. These problems persist without resolution.
Transport modes, especially roads, posses some monopolistic attributes but
competition is possible. Just-on-time transport, footloose industries, competition
for productive labor markets, environmental awareness and concern for living and
working environments a customer oriented approach to transportation- mean that
a parallel road is not a necessity for competition. Roads in different areas, cities
and even countries offer the competition. Different modes also compete.
Transport organizations, both those providing the facilities and those
providing the services, have changed or are changing from self-serving technical
organizations to public-serving organizations. The geographic location of the
facility, its design features that influence travel time and cost, traffic safety, and
the cost of operation are just a few of important issues in project evaluation. The
issues of pricing and the method of paying for service, financing, regulating and
organizing the transport sector institutions are also relevant in order to maintain
fair competition. Citizens and other affected interests have viewpoints beyond
pricing and compensation of use or harm. These have a fundamental effect on
project evaluation and cannot be ignored. All project decisions are always made
1 Layard R. abd S, Glaister, eds. (1994) Cost-Benefit Analysis,
Cambridge University Press Cambridge, UK. : Small K. (1997) Project
Evaluation, Transportation Policy and Economics : A Handbook in Honor
of John R. Meyer (draft chapter); Wohl. M. and B. Martin, (1067)
Evaluation of Mutually Exclusive Design Projects, HRB Special Report
92, Washington DC; and references therein.
in program context. It is a rare project that has exclusive alternatives or is without
a budget constraint. There always are trade-offs that must be considered and
area considered- in making decisions.
This paper traces the origins of evaluation in the transport sector in the
second section, and briefly narrates its history in the U.S. because that example is
emulated in the rest of the world. In the third section the factor normally included
in benefit-cost analyses are reviewed by way of an example from the sixties. In
the fourth section the several frameworks for benefit-cost analyses are examined
very briefly. This section concludes with a proposal for the benefit-cost criterion
to evaluate and compare projects. It concludes that the key for evaluating
transport projects is to organize the transport sector as commercialized agencies
and run them like a business. The paper then proposes in the fifth section a
framework for commercializing the highway sector the enables the creation and a
fair comparison of alternatives, discusses how project and program evaluation
could be undertaken in that framework, and appraises its potential for bringing
forth intermodal competition and cooperation. The final section concludes.

2. Background, Authorization of Evaluation.2


The Federal-Aid Highway Act of 1962 was the first to require that highway
projects must be based on continuing, comprehensive transportation planning
process[3C-Process] carried out cooperatively by states and local communities
it also mandated urban transportation planning as a condition for receiving federal
funds in metropolitan areas and declared to be in the national interest to
encourage and promote the development of transportation systems embracing
various modes of transport in a manner that will serve the plates and local
communities efficiently and effectively This language was broadened in 1978
to include urban public transit projects.
The intermodal Surface Transportation Efficiency Act of 1991, extended
the planning requirements to statewide systems using the same language: It is in
the national interest to encourage and promote the development of transportation
systems embracing various modes of transportation in a manner that will give all
areas of a State efficiently and effectively There is no requirement for a
national transportation planning process but studies were undertaken evaluate the
national transport system covering specific or multiple modes. These studies
informed decision makers on resource allocation and other matters.
The first national transportation study was conducted in 1972 followed by
studies in 1974, 1979, 1990 and 1996. These studies shaped the issues to be

2 The review in this section is based on Weigner (1999)


addressed and associated data systems. In the 1972 study, the transport system
was described in terms of:
Supply of facilities, equipment, and services
Travel demand
System performance
Social and environmental impacts
Capital and operating costs
Information on low-capital and new technological systems was included
and, interestingly, there was financial constraint a feature revived in the ISTEA
legislation. These are the very variables and principles that are at heart of benefit-
cost analyses.
In late 1970s the U.S. DOT issued following guidance for transport
network development: Underlying comprehensive transportation policy is the
recognition that diversity and intermodal competition are essential to an effective
transportation system. Government policy must move in the direction of
increasing equal competitive opportunity among the transportation modes,
minimizing the inequitable distortions of government intervention and enabling
each mode to realize its inherent advantages.
About the same time, the U.S. Congress created and staffed The National
Transportation Policy Study Commission. It concluded, among other things, that:
National transportation policy should be uniform across modes.
Federal involvement should be substantially reduced (greater reliance on
the private sector and state and local government)
Federal actions should be subjected to economic analysis of benefits and
costs.
The use of the transportation system to pursue non-transportation goals
should be cost-effective.
Transportation research and safety required federal involvement and
financial assistance.
Users and those who benefit from federal actions should pay.
In 1990 the National Transportation Strategic Planning Study (NTSPS) led
to a statement of national transport policy. In preparing the policy, the U.S. DOT
engaged in an extensive outreach program through public hearings, focus group
sessions, seminars with transportation experts, informal discussions and
correspondence. In 1993 the National Highway System (NHS) was published and
work on a National Transportation System (NTS) initiative was started but later
shelved. The progress report on the NTS initiative 3 describes the development

3U.S. Department of Transportation (1996) A Progress Report on the


National Transportation System Initiative, Washington, DC.
and use of a set of national transportation performance measures and a national
transportation network analysis capability. These tools would be used in the
assessment of the nations transportation system, the identification and analysis of
key issues affecting transportation including policy, program management, and
regulatory options. The NTS embodies a number of complex ideas:
A concept that recognizes the interaction between national goals and
objectives and the components of the nations transportation system.
A method of looking at the total transportation system and focusing on the
social and economic outcomes that area ultimately what the customers use
transportation to accomplish.
An institutional framework for a cooperative partnership among the
federal government, state and local agencies, the private sector, and the
general public.
A technical process bringing user perspectives to the forefront with
analytical and measurement tools to build the capability to assess
performance, identify issues and problems, evaluate policy options, and
develop strategies.
A strategic planning structure for the future development of the nations
transportation system.
Weiner concludes, none of the studies managed to develop comparable
measures of supply, demand, and performance across all of the modes none of
the studies managed to conduct extensive tradeoff analyses between modes in the
development of needs estimates .. [and].. none of the studies were successful in
creating a permanent multimodal national transportation planning process ...[but]
the U.S. transportation system is multifaceted federal, state, and local
governments and private sector, with most of investment being private. Private-
sector plans and investments are driven by economic priorities. This situation is
also true for state and local governments
Thus, after decades of work, there still is much work to be done to gain
acceptance to new and complex ideas and to archive the early goals, including:
Uniformity of national transportation policy across modes
(Federal) actions should be subject to economic analysis of benefits and
costs.
Users and those who benefit from (federal) actions should pay.
Greater reliance should be placed on the private sector and state and local
government.
The use of the transportation system to pursue non-transportation goals in
a cost-effective manner.
In the next section the criteria and factor normally included in project or
program evaluation are examined.
3. An Early Application
The Chicago Area Transportation Study (CATS)4 was admittedly the first
to develop and use modern analytical techniques in transport planning and
evaluation. It contemplated the latter issue admirably (Volume I: 1958) and
concluded that observations of survey data and a whole series of contemporary
and historical actions permit one to distill a series of essential human values
The result is a list of six criteria which are presumed to be the popular ones
toward which transportation planning should strive The six are (Volume III:
1962, p.8):
1) Greater speed;
2) Increased safety;
3) Lower operating costs
4) Economy in new construction
5) Minimizing disruption
6) Promoting better land development
With the exception of the last two, but supplemented with (7) environmental
effects as the seventh criterion (reducing pollution and improving the
environment), these criteria constitute the most important quantified variables in
benefit-cost analysis. Of late, the last two criteria have again gained importance
and influence in transport project evaluation.
The quantification of the six criteria in CATS documents reveal a high
degree of sophistication that existed in the early sixties: the importance of the
value of time and the costliness of congestion; the pain and monetary losses of
crashes; the relationship between speed cycles and operating costs; the expense
and nuisance of new construction; direct and indirect effects of disruption, noise,
and separation of pedestrian and surface street traffic; and the need for
compromise between conflicting demands. The measurement techniques for
quantification of some effects have evolved over the years but, save the
environmental consequences, the variables have not changed. Learning has also
occurred of how to reach compromises among conflicting demands and
compensating harmful effects of projects to different market segments.
To aid discussions about such compromises, CATS proposed the single
objective of provid[ing] that transportation system for the region which will cost
least to build and use over a period of thirty years (Vol. III, p.15) in terms of the
six criteria for guiding the planning and decision-making. 5 Then the CATS
professionals stand back to see what kind of urban region is likely to emerge if a

4 Chicago Area Transportation Study, (1958, 1962) Final Report,


Volume I and Volume III, Chicago, II.
transportation plan based on preceding objectives is carried into being Are
plans based on such goals likely to produce a desirable Chicago region?. This
question is answered. The image of the future city does exist and that it is an
important part of every residents working and living equipment and must
influence the plan. This image of the future city was elaborated in two
dimensions: The City as Productive Society and The Appearance of the Future
City.
CATS is an important milestone in the evolution of transportation planning
process in the US and elsewhere. I contributed to the development of the 3C
Planning Process public participation, data collection and visualization, and
modeling in transport planning. Most importantly, CATS developed and used a
footloose network design model to optimize the (expressway) spacing as a
function of trip end density (demand), costs of construction and various other
variables that underpin the plan evaluation.

4. Frameworks for Benefit-Cost Analysis


Fundamental to benefit-const analyses is the concept of travel demand
curve. This curve portrays the consumers willingness to pay for making trips
under various (generalized) prices. According to consumer theory, he demand
curve not only indicates the quantity of the good or service bought under certain
prices but also its value to the consumer. For this reason, the area under the
demand curve represents the benefit to consumers and, when compared to costs,
the value of the investments. Two or three different criteria exist: consumer
surplus, benefit, and revenue. A short description of each follows.

Consumer Surplus and Related Criteria

5 The CATS planners also knew that plans were dynamic, the
transportation plan does not necessarily stay fixed but is subject to
periodic revision. The process of review and appraisal against
objectives (which may be modified from time to time by public
decisions) are as essential as the plan itself (Vol. I, p.2)
Change in consumer surplus is the most widely used criterion for benefit-
cost analysis in (road) transport projects. In figure 1, it is the area AXYB 6. This
is not, however, the only possible way to measure benefits.
The second way would be a change in total (perceived) user benefit, XYVn
Vo Figure 2. This attractive definition is rarely used for reasons that I do not
know-unless it is that in many practical cases the demand curve is totally inelastic,
vertical that is, and the change in user benefit would be zero regardless of
improvement.
These definitions of benefit are employed in theoretical writings and based
on the willingness to pay-as the area below the demand curve. This notion is
important. Rarely-and I suspect never in practice are the benefits calculated
from an estimated demand function. Rather, the economic evaluation is resource
based. Figure 1 is interpreted as showing the reduction in user costs. That is, it is
assumed that the users perceive the total (variable) costs in making their (short
term travel decisions-as in fact is implied in figure 1. This is rarely the case.
Thus, it is not only necessary that the distinctions between the price-volume
function is made explicit, but also that the demand curve is estimated using the
commensurate perceived prices. Only in this way it is possible to evaluate if a
project is a worthwhile undertaking.
The third way to look at the benefits is to exclude the consumer surplus
portion, fig. 3.
Figure 3 can be looked at in two different ways. If the vertical axis is the
generalized cost then the allowable benefit (Martin and Wohls
terminology)for the old road is OAXV o and for the new road OBYV n . When the
difference between these perceived benefits and costs, that is benefits and costs
not included in the demand and price curves, a statement of the value of the
project is obtained.
In disallowing the consumer surplus, as proposed by Martin and Wohl, that
private companies cannot capture, the investment in a public road project is made
commensurate with private investments and many of the early transport policy
goals of uniformity and competition across modes is achieved. There remains,
however, the problem of valuing the generalized costs of items travelers value
when making the trip-travel time, crashes, comfort, pollution ownership of cars
and so forth.
6 It is (incorrectly but for clarity) assumed here that the price-volume
curve (Martin and Wohl, 1967) coincides with the average variable
costs. For full treatment, Lee, D (1999) Transportation Planning and
policy Analysis: General theory of highway Project Evaluation, U.S.
Department of Transportation, Volpe National Transportation Systems
Center, Cambridge, MA, (draft).
But, it is possible to view the vertical axis as the price charged for trips,
fig. 4. The relationship of willingness to pay and travel volume is shown, holding
other attributes constant on other axes (not shown). The allowable monetary
benefits simply are the revenue stream from the users (of the road network). This
does not mean that other generalized benefits do not exist, or are ignored, only
that the demand curve truly represents the willingness to pay for the benefits
really offered-and not only imputed- in other dimensions.
This approach to evaluating transport projects would truly achieve the
goals of desirable transport policy:
Uniformity of national transportation policy across modes
Actions subject to economic analysis of benefits and costs
Users and those who benefit from actions would pay
Greater reliance on the private sector
Cost-effective use of the transportation system to pursue non-
transportation goals.
However, several new challenges emerge to implement this approach in
practice. Before outlining these challenges other reasons that make the use
of theoretical benefit-cost analysis unsatisfactory are discussed.

Critique of Consumer Surplus Analysis


It is futile to try to convince anyone of the shortcomings or merits of the
traditional consumer surplus benefit-costs analysis. Not unlike transport project
decisions, valuations of the method are made on other grounds than the
shortcomings or advantages of consumer surplus. Nonetheless, I tally some
reasons of why I think (consumer surplus) benefit-cost analysis has not gained
widespread acceptance for decision making.
The first set of reason has to do with the uncertainty in measurement.
There is large uncertainty at every step. Travel demand projections are often
grossly in error, especially for public transit, but also auto travel can be over or
under predicted. Estimation of the capital costs can be equally hazardous; costs
are normally underestimated. Valuing of the factors is uncertain with wide
variance. For example, studies show that, in the developed countries, travel time
benefits are valued between 200-100 percent of the wage rate; fatalities between
1,5 and $9 million; the range for environmental costs and benefits is equally wide
or wider, especially for noise and global warming. Predictions of travel times and
costs to which the unit rates of valuation are applied are also uncertain; errors
upward of 30 percent are a common experience.7 There also is uncertainty how
much the user in fact pays for the benefits he receives; such knowledge is
necessary in order to compensate for harm and to ensure that those who benefit
also pay. While study of all these issues is worthwhile and useful, it is not
surprising that benefit-cost analyses are not trusted a major role in project
decisions.
The second set of reasons is based on theory. Van der Graaf in his book on
Welfare Economics, after tracing the numerous assumptions that underlie the
welfare and utility functions, questions of whether any benefit-costs analyses
should be undertaken, a view challenged by Samuelson in the books introduction.
I argue on grounds of theories of human motivation and behavior that willingness
to pay does not imply benefit.8 A related line of reason is that the factors and the
alternatives that enter the benefit-cost analysis are normally decided a priori and
rarely on an analysis of factors or alternatives users consider important. Project
evaluation also normally excludes its relationship to the (road) program. The
theoretical nature of this last objection rests on the complexity of the relationship.
It is not analytically tractable.9
The third set of reasons concern the point of view and the time frame of that view.
This has multiple dimensions. First, paraphrasing Peter Jones, who are the
existing and new users?; that certainly is the case in all Greenfield projects.
The points of view and values of these new users cannot be consulted when

7 Pickrell R. (1989) Urban Rail Transit Projects: Forecasts Versus Actual


Ridership and Costs, U.S. Department of Transportation, Transportation
Systems Centre, Cambridge, USA: Talvitie A, and D. Kirshner (1979)
Specification, Transferability, and the Effect Of Data Outliers in
Modeling the Chice of Mode in Urban Travel, Transportation 7, pp. 311-
331; Evans A. (1975); Small K (1997) op.cit.: Skamris M. and B.
Flyvbjerg (1996) Accuracy of traffic forecasts and cost estimates on
large transportation Projects, Transportaton Research Record, No.
1518 pp. 65-69; Talvitie, A. (1979) Inaccurate or Incomplete Data as a
Source of Uncertainty in Economitrie or Attitudinal Models of Travel
Behavior. In New Horizons in Travel Behavior, Brog, W.A.H. Meyburg,
and P. Stopher, Eds. D.C. Heath, Lexington, MA.

8 Talvitie A/ (1977) Things Planners Believe In, and Ting They Deny,
Transportation Volme 24 No. 1, pp.1-31 Kluwer Academic Publishing,
the Netherlands.

9 Braybrooke D. and C. Lindblom (1963) A Strategy of Decision, Policy


Evaluation as a Social Process, Macmillan Co., Inc. New York.
making the decision. More likely, the project was built for certain new users, a
market segment, in mind. Should the benefits for these new users be assessed at
half-rate? The situation is not much different if the new road is parallel or
perpendicular. Are those shifting from the parallel road or from rads to competing
destinations new users? Second, valuations of time, life, environment and other
included factor are normally based on past experience. But there is no assurance
that such valuations will hold in the future, or normally based on past experience.
But there is no assurance that such valuations will hold in the future, or even at
present. In fact, to valuations based on past behavior imply an endorsement
against change when a change may be inevitable or desirable It is likely that the
time frame of the new and existing users alike and of the decision makers is
future-oriented: the image of the city as the CATS planners argued.
It is concluded that the benefit-costs analysis as practiced (viewing
benefits as reductions in user costs) or as a theoretical construct (based on
willingness to pay) need to be adapted to be useful an responsive to current and
emerging problems. It was proposed earlier that revenue (income and budget
constraint) from the users is a key factor in evaluating the benefits and costs
transport projects. This can be achieved if the transport sector is commercialized
and run like a business. Accomplishing such transformation of the sector is
difficult, but there is sufficient experience to know that it is possible. The
remainder of the paper discusses the key issue and experiences how
commercialization might be done, and its relation to project evaluation.

5. Commercialization of the Road Sector


Commercialization of the road sector is the subject of a forthcoming
special issue of the journal of Transportation : Management and Financing of
Roads. Its advantages are powerfully argued by Heggie 10 and there are positive
experiences in commercializing road administrations in New Zealand, United
Kingdom, China in African countries, and, partially, in the Scandinavian
countries.11 The issues that have to be addressed in restructuring the road sector
10 Higgie I, (1996) Recent Developments in Management and
Financing of Roads in Africa, Paper presented in the Annual Meeting of
the TRB, Washington D.C.; and Heggie (1999) Commercially
Manageged Road Funds, Manageing Roads Like a Business, not ike a
Bureaucracy, Transportation (in press)

11 Dunlop R. (1999) The New Zealand Experience in Restructuring


Road Administration, Transportation (in press): Haynes L. and N.
Roden (1999) Commercialising the Management and Maintenance of
Trunk Roads in the United Kingdom. Transportation (in press); Li Ping
are a multitude. Below I discuss just three of them; sector organization; planning;
and pricing and regulation. It is emphasized that the processes and principles of
how to go about implementing the necessary or desired changes are not discussed
now.12

Organization : Road Administration and Decentralization


Figure 5 shows a generic road sector organization. 13 The gist of the figure is that
intersectoral coordination, policy-making and resource allocation (or designation
of the income source) should occur politically at the highest level: country or
State. The road sector is managed vertically. Multi sector projects-presumably
reflecting non-transportation objectives-are voluntary activities coordinated
locally, not results from sector organization. With this broad principle there is a
rich array of institutional configurations. The emerging trend, implied by the
figure, is clear; decentralization, greater private sector and user participation, and
predictable income from user charges.

Road Sector Organization


In some federally organized countries, the federal government not only funds the
trunk roads but also is their owner, planner, and manager. This kind of sector
organization is disappearing rapidly. The (federal) ministry, as the representative

et al (1999) New Models for Financing and Managing Highways : Asset-


based Road Corporations in China Transportation (in press) : Chalcraft
H. (1999) Road Funds and Their Management : The Zambian
Experience, Paper presented in a World Bank seminar; and Heggie
(1996) op.cit.

12 Talvitie A. (1997) nternational Experiences in Restructuring the


Road Sector TRB Record No. pp. 99-116. National Academy Press.
Washingtyon D.C.

13 Figure 5 is a general model for a public sector organization to


emulate the private sector. The heneral model is flexible and the
specifics can be tailored to be systonic with the country. It can
accommodate the case of several road owners and several
(corporatized) road administrations. Because roads will remain quasi-
monopolies and governments may pursue some regional and equity
objectives through roads, there is a need for government oversight
(regulation) over the road user income and its allocation.
of the general-purpose government, is responsible for the mission, policies, goals,
funding mechanisms, and regulation, but has no road management functions. The
trunk road system is delegated to the states (provinces) so that there are two road
owners: the state (a federal state or unitary) and the local governments, the
municipalities. In some countries there is an intermediate level of (elected)
government (such as the county in the United States), but this is uncommon or is
declining in importance.
There will be, of course, federal (national) roads (NHS). For these roads
the federal government sets the standards and arranges the funding mechanism
(road fund, general fund, etc). The state is responsible for managing the NHS and
the state network, and may receive federal aid to do so. There is oversight. Part of
that oversight, and a condition for funding, could be maintaining the NHS in a
certain condition and the road information system, including road condition
surveys. There can be other conditions for federal funding, such as statewide
accident and traffic safety activities. Some unitary states have also organized their
road administrations (approximately) this way-China, and Bolivia to an extent-but
it is rare.

Road Ownership and Management


Principally, the state (province) is the owner of the public roads and the
municipalities the owners of the local roads. Private roads (community roads) are
increasingly owned and managed by the beneficiaries. These principal road
owners establish road administrations (RAs) that make the long range and short
range plans for the owners; road networks, ensure continuity with the NHS and
each other, and manage them. Within a state, road management functions can be
further decentralized this is the trend- to the district offices of the state RA,
Municipalities also have the8r RAs, which may only be departments of the public
works organization, or they contract these functions with the state RA or even a
private entity. In large metropolitan areas there can be multimodal and
multijurisdictional coordinating and planning agencies.
There must be competition in service delivery. Private sector producers
design, build and maintain the roads. Competition will take care of differences in
geology, geography, etc and makes the allocation of resources between states and
regions more transparent. For numerous reasons, many states and municipalities
maintain a direct labor force for some activities of road maintenance and
operations. Unmistakably, however, the trend is toward private sector delivery.
Road Administration
The principal RA responsibilities are the management of roads and
financing (given the source). As the agent of the road owner, RA must have the
skills to communicate with a large number people-people affected by roads-to
translate the road sector goals into a road plan, and the technical ability to
program and implement the plan. In order to do this satisfactorily, the RA should
be decentralized, figure 6. Regardless of degree of decentralization, it must
undertake numerous activities; track and learn form the past, gather intelligence to
understand the present, predict or project the future, coor4dinate, sponsor,
research and experiment with new technologies, and supervise the physical plan
implementation process. Each of these is a substantial task.
In financing, the principle of cost recovery enjoys broad acceptance.
Because of regional difference, past policies or future goals and, importantly, if
the gas tariff is the user charge mechanism, a representative body composed of the
road owners and the road users and non-users allocates the funds between the road
networks and regions. In the figure this is called Road Board/Road Fund
Board. Its functions are outlined in Higgie (1999). Suffices it to say here that it
is mandatory that the Road Board represents the private sector and the broad
interests of the people. A no small requirement, but doable if the RA serving the
Board has processes and skills to communicate with a large number of people to
obtain customer feedback. In many countries, there is no Road Board, but the
Ministry of Transport (or even several ministries) or the RA perform that function.
Commercialized road administration is driven by four key factors:
resource allocation and road asset management with budget constraint; ability to
plan and implement projects that have outcomes desired by the affected interests;
competition driven road management; and ability to communicate with a large
number of people and firms. It is emphasized that the road administration
management itself is a crucial factor. Skillful management is better that an
unskillful one. Therefore, indicators are mandatory to track performance, for
accountability and for changes.
The planning function of the RA is discussed below, but one further point
needs to be emphasized: the RA must value the assets it manages. A sketch how
the balance sheet would look like is in figure 7. 14 It includes the notion that there
can be non-transportation objectives that the road owners may pursue through the
RA, but these actions will find themselves in the balance sheet and cannot be
pursued too long if they are unsustainable. I will return in conclusions to the issue
whether the road administration (or the Road Board) should pay the owners
interest on the invested capital.

Scope of Evaluation in Transport Projects


A key activity in road program development is to evaluate and compare candidate
projects for deciding which projects should be funded. In addition to the benefit-
cost analyses, the methods in use include:
Setting priorities based on the judgment of elected officials and/or
engineers;
Ranking projects based on the severity of the problem or the estimated
benefit or impact of the project;
Cost-effectiveness analysis, and
Optimization methods, particularly for pavement and bridge preservation
(normally based on benefit-cost considerations such as CATS
minimization of total transport costs).

14 The Figure shows schematically the assets and liabilities. On the


liability side the road network has been divided into productive (road)
capital, and lazy or non0productive (road) capital. The distinction
derives, in the final analysis, from functional classification of roads.
The arterials and collectors serve traffic (primarily) and should be paid
for by the road users and also pay a return on the investment.
However, the expected rate of return for the collectors could be lower
than for the arterials. The local roads, which provide access to land,
serve a multiplicity of uses and users and cost recovery from road user
charges can only be partial. I have tentatively suggested that the
capital employed for this purpose could be lazy and pay no interest
on the capital. The Government can on its discretion infuse either
productive or lazy capital to achieve goals other than those directly
related to road transportation. The consequences of such actions will
have repercussions on road user charges, because the road
administration must cover its expenses from its income and cannot,
without consideration and publicity, absorb the new capital by
disinvesting on roads somewhere. For more details see Tavitie (1997).
To some extent all of these are used in making the final selection.
However, before the process has reached project evaluation, a number of activities
have preceded it. In order to understand the process, these activities are reviewed
as currently practiced, followed by new activities for commercialized RAs.

Program Development
Program development includes organizing projects and initiatives into
logical program categories from several perspectives, such as project type
(program area), policy objective, and scale. For example, a program structure
might organize projects by type: capacity expansion, maintenance, and operations.
It is desirable that the criterion, e.g. minimization of total transport costs, is the
same for trade-offs between project types. Projects might also be organized
according to policy objective, such as mobility, safety or environmental
preservation. This allows examination of competition for funds among alternative
service and system improvements while ensuring that the appropriate overall
focus of investments is maintained. Allocation of resources by policy objective,
often related to equity issues and keenly dependent on the views of the affected
interests, requires more sensitive indicators than benefit-cost analysis.

Priority Setting and Program Evaluation


The priority setting and program evaluation steps build on the established
program categories as well as analysis results for individual projects. The
objectives of this step are (1) to develop the most cost-effective mix of projects
within a specific category and (2) to examine the implications of shifting funds
between categories. Generally, given the policy objectives and the target budget,
the project priority-setting and program development and evaluation steps must
occur together to avoid the tendency to rank a set of predefined projects
independent of resource constraints and simply pick from the top of the list until
funds are used up.15 Such an approach usually does not result in the best mix of
projects. In other words, the appropriate level of investment in a particular
project-its engineering design-will depend on the merits of that project, the
alternative projects competing for funds, and the overall size of the budget.
Program (network) level, budget constrained benefit-cost optimization approaches
have been developed for some facility management and project applications.16
However, a network level planning system (for additional capacity) that would be
facility independent in the sense of CASTS expressway spacing model does not
15 Establishing target resource allocations by program category at the
beginning of the programming cycle can help guide the project
evaluation process and ensure that policy priorities will be emphasized
through the distribution of funds.
exist. Currently, in most cases, a multi criteria summary of program impacts
incorporating both quantitative and qualitative criteria is the employed approach.
The key objective for these methods is to summarize the impacts (both positive
and negative) of shifting funds from one program category to another. Benefit-
cost (optimization) techniques that can assess the revenues, benefits and costs of
such shifts or define the service level possible at different program funding levels
would be highly desirable.

Feasibility and Corridor Studies


Feasibility and corridor studies are often undertaken to develop and evaluate
alternative solutions to major transport improvement needs to advance the capital
programming activity. The results of feasibility and corridor studies may also
inform long-range planning, or they may identify specific projects for more
detailed evaluation in the capital programming process. While it is true that
benefit-cost analyses are particularly useful in analyzing major transport projects,
the project studies have an important relation to the network wide planning
process.17
A feasibility or corridor study process involves four types of activities: designing
the scope and issues of what is going to be studied to address a particular problem
or opportunity: exploring alternative ways of solving the problem or seizing the
opportunity; conducting a detailed analysis of each alternative and finally, making
a choice. These choices are the translated into specific road projects over time in
a program context.
Feasibility studies are scoping studies to determine order-of-magnitude
costs and benefits for a proposed action. A feasibility study may result in a more
detailed corridor or project study. The general steps in conducting a feasibility
study include:
Define the projects objectives;
Define the scope of the action to be analyzed;
16 Thompson. P. et.al. (1989) A Micro Computer Markov Model for
Optimal Pavement Rehabilitation Policy, Selected Proceedings of the
Fifth World Conference on Transport Research, Vol. I. Western
Periodicals Co., Ventura CA, USA; Watanatada, T. et.al (1987) the
Highway Design and Maintenance Standards Model, Vol. I. The World
Bank. The Johns Hopkins University Press. Baltimore and London : and
OECD (1994) Road Maintenance and Rehabilitation: Funding and
Allocation Strategies.

17 Finnish National Road Administration (1996) Road Planning and


Design
Develop order-of-magnitude costs and benefits associated with the action;
Identify other probable consequences of the action; and
Obtain viewpoints on the value of the project from those whom the project
would benefit or impact.
Corridor studies are detailed studies focusing on major local and intercity
travel markets. They develop and evaluate alternative design concepts and other
actions to solve transportation problems. At the planning stage, the alternatives
may include policies such as systems management, transit operations, pricing, and
institutional changes in addition to facility-based projects.
Preferred alternatives are included in the long-range plan and selected for
more detailed project development and analysis. In this stage, various design and
alignment options are considered within an established design concept and scope.
The result from the project development phase may then be included in the
implementation plan if found to be worthwhile and financially feasible. Oregon
DOT has good example of a corridor-based planning program.18

Need for Elastic (Site-Free) Planning Methods and Models


The extant network planning methods and models have responded to the transport
problem as seen by the road administration. These models are location bound and
often aimed at alleviating congestion on a specific link or interchange. But,
adding lanes to radial arterials leading to downtown or improving an isolated
intersection may or may not be the best way to relieve congestion on them; it may
have the opposite effect I addition to other effects. Instead, customer-serving
orientation begins in planning the product. Opportunities can be seized in new
ways. For example, in the commercially managed UK Highways Agency, the
objectives include risk sharing for new investments, and incentives to promote
innovation in technical, operational and financial arrangements through design-
build-finance-and operate projects.19 Just-on-time transport, footloose industries,
competition for productive labor markets, environmental awareness and concern
for living and working environments provide prospects for decentralized road
administrations to compete with ideas and find commercial and other
opportunities. The relevant question is not link-specific but elastic: what is the
optimal amount of road capacity by type of road in an area that the customers-
residents and firms- are willing to pay for and accept? 20 What are the risks for
success or regret? By posing the question strategically, issues that relate to travel
demand and facility design, all other factors that are important to the affected

18 Http://www.odot.state.or.us/tdb/planning/corridor/

19 Haynes, L. and N. Raden (1999) op.cit.


interests-growth, major capacity expansion, pricing, traffic management, public
transport, intermodal competition, utilities, access and land uses, traffic safety,
living environment, natural environment, air pollution, noise, neighborhood
disruption, facilities for pedestrians and bicyclists, and so forth- can be discussed,
enhanced mechanisms and skills to do so developed.

Financial Planning and Budgeting


Financial planning is important for a commercialized road administration. It
includes assessing future sources of revenue, assessing and monitoring costs of
identified projects, and making program tradeoffs so that costs match expected
resources. A key step in financial planning is revenue forecasting or projecting
future revenues by source and by year. Revenue forecasting depends critically on
network wide traffic forecasts and the pricing rules. Models and techniques are
emerging for revenue forecasting but it is fair to say that they are in infancy.
The influence of the Road Board and the road administration on future
revenue may vary. In some cases, the level of identified needs and the expressed
importance of meeting those needs may influence public policy funding decisions.
Also, the Road Board, assisted by the RA, may pursue initiatives to utilize flexible
or non-traditional funding sources such as private financing. The World Bank
web-site has useful information on alternative and innovative financing options. 21
Even when a budget is firmly established, there will always be some uncertainty
about future levels of funding. As a result, budgeting is an iterative process, and
the final budget is set only when program priorities and tradeoffs have been fully
evaluated.
Another important aspect of financial planning is cash management. The methods
used by the road administration to manage cash affect the number and total cost of
the projects that can be funded in a given time period. Fully funding projects at
the start of each project avoids the need for sophisticated cash management but
may not maximize the effective use of available resources in terms of the number
of projects and the delivery schedule. On the other hand, using cash management
to leverage available resources requires more sophisticated reporting and
management, and has risks if project schedules and costs are not well managed.

20 The CATS exspressway spacing model was an innovative design


tool. An elastic multimodal statewide transport planning model is
proposed in : Talvitie A.P. (1995) Management System for Transport
Infrastructure. TRB Record No. 1499, pp. 37-48. National Academy
Press, Washington D.C.

21 Http://www.worldbank.org/html/fpd/transport/road/rffnds/rf_all.html
Cash management is important for read administrations whose funds come from a
road fund or loans. Various software packages are available to assist with
financial planning revenue forecasting, and cash management. An overview of
financial planning methods and software is available.22

Program Implementation and Monitoring


System performance, costs and benefits, achievement of objectives and customer
satisfaction should be monitored as programs are implemented and program
results become available. This monitoring process provides an important
feedback loop into both the technical assumptions made in the process and the
policy decisions regarding priorities, strategies, and emphasis areas. Monitoring
can be conducted using the system and program performance measures
established in the planning process.23 To support monitoring as well as other
planning activities, it is critical to establish a regular program of data collection
along with a system for storing and managing the data (data bank). A
monitoring program will help determine whether capital projects and program are
meeting their desired goals. It will also provide an indication of the efficiency and
effectiveness of project and program delivery and help identify areas in which
delivery can be improved.
Summary. This section has tried to establish the large scope of project evaluation
in the road program development and in its implementation plan. Project analyses
in that process are important but not overriding. Furthermore, there is a complex
relationship between feasibility studies, corridor studies, the long range-plan,
financing, and the budget-constrained implementation plan. The length of this
section also underscores that todays road administrations have developed many
processes and techniques that are of immediate service for commercial
management of the road program. But, there is much room for innovation and
competition to improve the road system and create wealth. The changes from a
public administration to a commercially managed agency can evolve
incrementally in which existing and tried procedures are augmented by those
required by consumer and commercially oriented management of roads.

Pricing and Regulation

22 National Transit Institute (1995). Financial Planning and


Programming for Metropolitan Planning Organizations, To download:
http://www.policy.rutgers.edu/nti/downfplg.htm

23 OECD. (1997) Performance Indicators for the Road Sector, Paris,


France
There is a large literature on road and congestion pricing. 24 There is no
attempt made to summarize the discussion but rather to draw attention to the fact
that commercializing road administration requires a better charging mechanism
than a tariff on fuel and license fees. These instruments can only serve as interim
mechanisms to electronic ticketing. The concept of a two-part tariff consisting
of variable and fixed charges continues to be valid, the former dependent on the
level of congestion. Todays technology permits that users are charged for the
service provided and used, and payment deposited as income to the read
administration; there can be general taxes on fuel and vehicles as on any goods
and services. The establishment of this type of pricing0charging regime for
arterial and collector road ranks as one of the most important priorities for
transforming road administrations.
There are numerous questions relating to pricing that need to be resolved and I do
not pretend to have answers. First and foremost, what should be the objective of
the commercialized road administration? Should it be a profit maximizing entity,
or should the government regulate the prices charged (by rate-of-return regulation
or other criteria) given the quasi-monopoly nature of the road administration? Or,
should there be no profits? In some countries, highway tolls are used to subsidize
urban public transport; should that be an explicit option? Should the road
administration pay the government interest on the capital employed? How about
equity consideration? There can be areas that cannot support an adequate road
network. Should these areas be cross-subsidized? Or, would these types of
investments merely be viewed as risk ventures which may return profits later?
How would competition between the regional road administrations be arranged?
These are important questions, and there may be many more. Careful
experimentation is warranted. Governments experiences with regulating public
utilities, the railways, and public transport organizations are likely to yield useful
insights of how to proceed. There also are experiences in commercial
management of trunk roads in New Zealand, the UK and China, and in Africa.
Models for planning, building and managing local minor roads (private roads)

24 Keeler T. and K. Small (1977) Optimal Peak Load Pricing,


Investment and Service Levels in Urban Expressways Journal of
Political economy, Vol. 85; Sikow-Magny C, and E. Niskanen (1995) Two-
part Tariffs to Internalize External Effects and to Cover Infrastructure
Costs Paper in the PTRC Conference, UK: Hau T. (1992) Economic
Fundamentals of Road Pricing, World Bank Working Paper Series No.
1070: Nash C. at.al (1998) Towards Fair and efficient Pricing in
Transport-Issues and Prospects Paper in the 8th WCTR, Antwerp,
Belgium: and Dunlop R. (1999) op.cit.
commercially exist in the Scandinavian countries. These experiences are positive
and support the argument made in this paper.

6. Conclusions
Paraphrasing Heggie, manage roads like a business, not lie a
bureaucracy is the main idea is this paper; a far-reaching idea also championed
by Gabriel Roth.25 Organization, management, financing and mode of program
delivery do affect road system performance. Significant efficiency gains and
increases in level of service to the customers are possible by reorganizing the road
administration, soliciting customer input and by enganging the private sector in
many ways for finance and service delivery. A host of options are available.
Applied singly, they are an occasion of satisfaction; together they represent a
paradigm shift. Several important themes of this paradigm shift were focused in
this paper. They are recapped briefly.
The first set of issues dealt with the strategic management and organization of the
road administration. The leadership, the ability to communicate with a large
number of people and firms so that everyone feels heard and reflected in the plans,
the skills to re-engineer the organization to accomplish its goals and monitor
performance in order to improve and change, and the technical capacity to be
innovative in all aspects of roads and highways are the most important attributes
of the management.
The second set of issues dealt with money. Commercialized road
administrations receive income for the service they provide. This income
constitutes the budget constraint that the Road Board also can leverage to obtain
loans to implement productive road projects quickly. For the most part extant
Road Funds are sourced from the fuel tariff. In the future this must change.
Technological development to collect fees from road users on arterial and
collector streets has a high priority. Setting road user prices and the regulation of
the commercialized road administration are problems in which there is only
limited experience. Again, I do not pretend to have answers to these tough issues,
but by iterative process, grounded on good performance indicators and
participation satisfactory answers can surely be found. The most provocative
proposal may be to require the user charges to be large enough to also pay interest
on the capital employed. These interest payments are all the more appropriate
because in many countries the initial road capital was created by subsidies to road
users. Years ago, when road investments were made, road users did not have to

25 Roth G (1996) Roads in a Market Economy, Ashgate Publiching


Company, UK.
pay charges covering the full costs of roads. However, the return on investment
can differ by the road functional class.
The third set of issues dealt with the way and the purpose of enganging the
private sector the experience on restructuring road administrations to date,
especially in New Zealand, the U.K. and the Scandinavian countries, shows
unequivocally that private financing and private sector delivery complemented
with modern management yields significant value for the taxpayers. New issues
not on the agenda of the traditionally managed public road administrations have
become important. Among these are risk sharing, innovation in technical,
operational and financial matters, and soliciting design-build proposals for project
design to reduce costs, minimize negative externalities and enhance user
satisfaction.
Finally, if one were to describe the predominant objective for project
evaluation in the commercially managed road administration it would need to be
expressed holistically: creation of wealth, emotional, intellectual and material.

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