Cost Benefit Analysis of Infrastructures


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Cost Benefit Analysis of Infrastructures

  1. 1. Life-Cycle Cost-Benefit Analysis of Infrastructures Wali MemonWali Memon 1
  2. 2. OUTLINE• Motivation• Three founders of LC-CB analysis• Social return on Investment• Traditional formulations• The Future Transport Infrastructure inDenmark Wali Memon 2
  4. 4. • The flow of goods to and from California ports and alongassociated inland transportation corridors must berecognized for the huge economic benefit it brings to theproducers, manufacturers, transporters and consumers ofthose goods throughout the entire nation.• Given the magnitude of this flow of goods, Congress mustestablish viable funding sources that will allow the goodsmovement infrastructure to keep pace with the steadilyincreasing growth of this sector. This may entail thecreation of new sources of funds given that existing fundingprograms are already oversubscribed and/or dedicated.• The funding needs of the MTS in California are great andcover a broad range of modes and facilities. The totalfunding need for the recommended MTS projects inCalifornia is $23.7 billion ($7.2 billion in NorthernCalifornia and $16.5 billion in Southern California.) Wali Memon 4
  5. 5. Cost-benefit analysis is a term that refers both to:• to help appraise, or assess, the case for a project orproposal• an informal approach to making decisions of any kind.Under both definitions the process involves, whether explicitlyor implicitly, weighing the total expected costs against thetotal expected benefits of one or more actions in order tochoose the best or most profitable option.Benefits and costs are often expressed in money terms, andare adjusted for the time value of money, so that all flows ofbenefits and flows of project costs over time (which tend tooccur at different points in time) are expressed on a commonbasis in terms of their “present value.” Wali Memon 5
  6. 6. What is needed to perform a Life-Cycle Cost-Benefit Analysis of Infrastructures? • Engineering knowledge • Economic understanding • Mathematical experience Wali Memon 6
  7. 7. Jules Dupuit (1804-1866) • He was born in Fossano, Italy then under the rule of Napoleon Bonaparte. • At the age of ten he emigrated to France with his family where he studied in Versailles - winning a Physics prize at graduation. • He then studied in the Ecole Polytechnic as a civil engineer. • He gradually took on more responsibility in various regional posts. • He received a Légion dhonneur in 1843 for his work on the French road system, and shortly after moved to Paris. • He also studied flood management in 1848 and supervised the construction of the Paris sewer system. •Engineering knowledge •Economic understanding •Mathematical experience Wali Memon 7
  8. 8. •Assume that the consumer is originally in equilibrium when the price ofwater is at p1 and the quantity taken is q1.• Now assume with Dupuit that the price of water falls to p2. At the lowerprice for water the individual is in disequilibrium at point c.•The marginal utility of the last unit of the consumers existing stock isgreater than the now-lower marginal utility of water represented by thelower price. • In terms of price, what the consumer would pay for q1 of Dupuit constructed this demand curve in 1844. water is greater than the price he or she must pay for quantity q1 • The same quantity of water (q1) could be bought at a lower total expenditure, but Dupuit assumed that Wali Memon the consumer would not do this. 8
  9. 9. Alfred Marshall • Alfred Marshall was born in London.(1842-1924) • Professor of Political Economy at the University of Cambridge from 1885 to 1908. • He was the founder of the Cambridge School of Economics which rose to great eminence in the 1920s and 1930s: • Arthur Cecil Pigou and John Maynard Keynes, the most important figures in this development, were among his pupils. •Alfred Marshalls magnum opus, the Principles of Economics (Marshall, 1890a) was published in 1890 and went through eight editions in his lifetime. •It was the most influential treatise of its era and was for many years the Bible of British economics, introducing many still-familiar concepts. •Engineering knowledge •Economic understanding Wali Memon •Mathematical experience 9
  10. 10. • His specialty was MICROECONOMICS—the study ofindividual markets and industries, as opposed to thestudy of the whole economy.• In his most important book, Principles of Economics,Marshall emphasized that the price and output of agood are determined by both SUPPLY and demand: thetwo curves are like scissor blades that intersect atequilibrium.• Modern economists trying to understand why theprice of a good changes still start by looking forfactors that may have shifted demand or supply, anapproach they owe to Marshall. Wali Memon 10
  11. 11. Vilfredo Pareto •Vilfredo Pareto (1848 – 1923) was an Italian industrialist, sociologist, economist, and philosopher. • He made several important particularly in the study of income distribution contributions to economics, and in the analysis of individuals choices. • His legacy as an economist was profound. •Partly because of him, the field evolved from a branch of social philosophy as practiced by Adam Smith into a data intensive field of scientific research and•Engineering knowledge mathematical equations.•Economic Wali Memon understanding 11 1919•Mathematical experience
  12. 12. Pareto optimality.A Pareto-optimal allocation of resources is achieved when it is not possible tomake anyone better off without making someone else worse off. Given a setof choices and a way of valuing them, the Pareto frontier or Pareto set isthe set of choices that are Pareto efficient. The Pareto frontier is particularlyuseful in engineering: by restricting attention to the set of choices that arePareto-efficient, a designer can make tradeoffs within this set, rather thanconsidering the full range of every parameter. Example of a Pareto frontier. The boxed points represent feasible choices, and smaller values are preferred to larger ones. Point C is not on the Pareto Frontier because it is dominated by both point A and point B. Points A and B are not strictly dominated by any other, and hence do lie on the frontier Wali Memon 12
  13. 13. Traditional FormulationsExpected Advantage = Expected Benefits - Expected CostsE[ A] =E[ B] − ( E[Cinitial ] + E[Cmanagement ] + E[C failure ] + E[Cuser ]) User costs are in most cases the dominating factor. E[ A] = E[ B] − E[Cuser ] General Formulations More general formulations include also factors which are not easy or impossible to include such as environmental and social costs. Wali Memon 13
  14. 14. The traditional formulation may be used in cases like:• Comparing a small number of bridges proposals,• Deciding whether e.g. a bridge should be repaired orreplaced,• Planning a maintenance strategy for a group of bridges,• Reliable data are not available. The limitations are: • A number important factors are left out, • Cannot be used for a major infrastructure. In this presentation problems and data related to a complicated major infrastructure net consisting of roads structures, harbours, air ports, etc is discussed. Wali Memon 14
  15. 15. Social Return on Investment (SROI)• SROI is an approach to understanding and managing theimpacts of a project, an organization or a policy.• It is based on stakeholders and puts financial values on theimportant impacts identified by stakeholders which do not havemarket values.• The aim is to include the that are often excluded from markets inthe same terms as used in markets, that is money, in order to givepeople a voice in resource allocation decisions.• SROI analysis refers not to one single ratio but more to a way ofreporting on value creation.• It bases the assessment of value in part on the perception andexperience of stakeholders, finds indicators of what has changedand tells the story of this change and, where possible, usesmonetary values for these indicators. Wali Memon 15
  16. 16. The Future Transport Infrastructure inDenmark Wali Memon 16
  17. 17. The Danish Infrastructure Commission was appointed in2006: "the overall objective is for Denmark to maintain and developits position as one of the countries in the world with the besttransport systems”•To analyze and assess the key challenges and developmentpotential for the infrastructure and national traffic investmentsuntil 2030.• To identify and assess the strategic options and priorities andto put forward suggestions to strengthen the basis for thenational investment decisions in the transport area.Systematic and economic prioritization of the governmentalinvestments in the transport infrastructure. Wali Memon 17
  18. 18. BackgroundThe opportunities and the welfare of the individualcitizen depends of a modern and efficient infrastructure.The growing globalization and development in EU willresult in an significant increase in international goodstransport.The overall objectives are for Denmark to develop itsposition as one of the leading countries regardingtransport systems.This will require profitable investments in a new andmodern infrastructure to establish the best settings forhigh mobility and effective logistics.However, it is at the same time important to take intoaccount the consequences, the increasing traffic mayresult in, for the environment, the noise, and safety. Wali Memon 18
  19. 19. • Mobility is important to us as individuals to be able to do thethings we want – and the individual has mobility as a highpriority.• Almost everybody is in contact with the transport system ona daily basis – in our way to work, to visit family, to leisureactivities or to travel to the countryside.• The average Dane spends more time on transport than oncompleting their primary education.• Danish households spend an average 15 pr. Of their incomeon transport. That is more than we spend on food. Wali Memon
  20. 20. The Existing Road Infrastructure Major RoadsMotorways 1022 kmMotor traffic roads 316 kmMain roads 2460 km 2 2Area 44000 kmPopulation 6.5 million Wali Memon 20
  21. 21. Railway NetWali Memon 21
  22. 22. Harbours120 harbours100 mio. tons of goods• 70% international• 30% domestic Wali Memon 22
  23. 23. Air ports More than 100 international destinations Copenhagen Wali Memon 23
  24. 24. 2004 Person Percent Traffic 1984-2004 km. Mill. Car 61,198 81.5 In average 15,000 km per year Buss 7,301 9.7 Train 6,074 8.1 Airpla 308 0.4 ne 2% increase per year180 Ferry 247 0.3 Total 75,128 100 Cars140 Railways Busses100 Airplanes Ferries80 1984 Wali Memon 1990 1995 2000 2004 24
  25. 25. Transport of Goods Ships Trains Trucks Wali Memon 25
  26. 26. Consequences of Infrastructure Changes• Environmental – climate• Noise•Traffic safety• Landscape• Fauna•• Wali Memon 26
  27. 27. Environmental Consequences - Emissions Traffic CO 2 CO Wali Memon 27
  28. 28. 1000 tons Road Traffic Railways Air Planes Ships Total Wali Memon
  29. 29. Traffic Safety Car km Number of persons in billions killed in the trafficWali Memon 29
  30. 30. 0-10,000 per 24 hoursEstimated Road Traffic in 2030 40,000 - 60,000 Increased traffic is 70 %. > 100,000 2005 2030 Wali Memon 30
  31. 31. Estimated Crowded Road Traffic in 2030 0 – 20 hours per 24 hours Hotpoints 500 – 800 hours > 2,000 hours 2005 2030 Wali Memon
  32. 32. Cost-Benefit AnalysisThree different methods are used to present the results of a cost-benefit analysis.Net Present Value The total value for the society of the advantages and disadvantages in the expected life-time discounted back to the present.Benefit-Cost Relation The present value for the society of 1 $ invested by the society.The Internal Rate The internal rate is the corresponding to a project net present value equal to zero. Wali Memon 32
  33. 33. Example Cost-Benefit AnalysisEnlarge the existing motorway or build a new? Wali Memon
  34. 34. 2005 DKR Millions Enlarge New motorway motorwayFinancial expenses - 1,376 - 2,009Construction, maintenanceTraffic advances 2,108 1,978Time reduction, driving exp., inconveniencesExternal expenses 305 101Accidents, noise , air pollution, CO2Other consequences -235 -190Net present time value 877 -120Internal rate of interest 7.8 % 5.8%Net profit per public invested 1 DKR 0.64 -0.06Quantitative consequences may be important, but are treated otherwise. Wali Memon 34
  35. 35. Effects included in LCCB analysis in Denmark Construction costs Inconveniences during the construction Working expenses Travel time reductions Traffic safety Noise Local and global air pollution Polluted soil and ground water Area application Indirect effects Wali Memon 35
  36. 36. •Effects not included in LCCB analysis in DenmarkInfluence on the surroundingsVibrationsLoss of landscape valuesLoss of cultural artifacts values Wali Memon
  37. 37. To ensure the appropriate use of resources six concretefocus areas are recommended until 2030:• The ring connections must be completed in the Copenhagen area on roads and rail• A complete plan for the development of the infrastructure in the urban region of East Jutland must be prepared• Effective linking of the individual regions to the overall transport corridors and hubs must be ensured• The Danish gateways to the rest of the world must form a central part of an effective transport network• Intelligent technological solutions must ensure optimal utilization of the infrastructure• The effort to limit the impact of transport on the environment and the climate must be intensified. Wali Memon 37
  38. 38. Governmental Infrastructure Budget 2010 -1020 Bus, bycicles, Safery & env., 6 0 Roads, 24 New railways, 35Investment inbillions DKR Ext. Railways, 15 Wali Memon