11.10 - Cost benefit evaluation
- 11.1 - Evaluation of private sector financing and road tolling
- 11.2 - Method of evaluation
- 11.3 - Stages of analysis
- 11.4 - Do minimum
- 11.5 - Travel impacts
- 11.6 - Costs
- 11.7 - Benefits
- 11.8 - Period of analysis
- 11.9 - Financial evaluation
- 11.10 - Cost benefit evaluation
- 11.11 - Alternatives and options
- 11.12 - Sensitivity and risk analysis
- 11.13 - References
11.10 - Cost benefit evaluation
Introduction
As noted in section 11.2, while the basic principles of economic evaluation apply to the evaluation of toll road projects and projects involving private sector financing, some adjustment is required to the composition and application of benefit cost ratios.
Present value of tolls
In present value calculations, all government costs and user costs and benefits are presumed to increase with inflation. When this is the case, the discount rate is used to determine the present value of un-escalated costs and benefits in economic analysis, and no adjustment is made for inflation.
With private sector financed projects, a rise and fall clause relating to tolls is likely to be included in the conditions. The gross toll collections for each vehicle category for each year of the project will need to be estimated. If tolls are regularly changed in line with general inflation in the economy, then the normal inflation free discount rate can be used to determine present values only if the escalating effects of the clauses are first removed from the cash flow estimates.
If tolls are not linked to the general economy inflation rate, some other analysis of the present value of toll revenues may be required.
National BCR for a toll road
From the national economic point of view tolls are transfer payments and therefore not taken into account in the national benefit cost ratio (BCRN), which is the same irrespective of whether the toll road is private sector funded or not.
where:
national economic benefits = net direct and indirect benefits and disbenefits to all affected transport users plus all other monetised impacts.
present value of costs = project capital costs + project operating costs + changes in road maintenance costs - deferred capital cost on other roads.
Government BCR for a toll road
The form of the government benefit cost ratio (BCRG) is the same irrespective of whether the toll road is private sector funded or not. However, the value of BCRG for the private sector financing case will depend on the size of the required government contribution.
where:
national economic benefits = net direct and indirect benefits and disbenefits to all affected transport users plus all other monetised impacts.
tolls = gross toll collections
net government costs = net costs to Land Transport NZ and approved organisations.
First year rate of return for a toll road
The first year rate of return (FYRR) for a road tolled project is:
1 In the first year of operation.
2 To the end of the first year.
Evaluation criteria for projects with private sector involvement
The option with the highest national economic NPV/capital outlay is the best option, other things being equal. However, technical capacity, financial backing, business acumen, project life, level of government contribution, non-monetised impacts and other aspects of the different offers and options will all influence the final decision.
