SP8 - Freight transport services

Introduction

These procedures provide a simplified method for evaluating the costs and benefits of freight transport services with or without capital infrastructure.

The calculation of the benefit cost ratio (BCR) in this simplified procedure assumes that:

1. Cost savings from reduced road maintenance and road infrastructure improvements are the primary reasons for undertaking the project.
2. The users of the freight service are indifferent to the mode used to transport the freight. Hence, no freight user benefits are included in this simplified procedure. If, however, the proposal will generate significant freight user benefits (primarily travel time savings or improved service quality), then these benefits should be included in the BCR calculation.
3. The road network affected by the proposal is largely rural. If, however, the freight traffic spends a significant time traversing urban areas, the evaluator should use the procedures described in appendix A14 of this volume to evaluate accident cost savings.
4. Other forms of benefits are usually not significant. The evaluator can indicate on worksheet 1 whether other benefits are important. If they are, then these other benefits should either be included in the BCR or described on a separate sheet and attached to the evaluation.
5. Freight transport proposals that are approved for funding will be established/ constructed in the first year and will operate by the start of Year 2.
6. A 10 percent discount rate and 25 year evaluation period are used.
7. A 12 percent rate of return is used for analysis of the funding gap.
8. All costs are exclusive of GST.

Note: In cases where the above assumptions are not appropriate, either the simplified procedure should be modified or full procedures used.

The simplified procedure is designed to consider one option at a time. Where it is logical to do so, the analyst should consider other suitable options in order to select the optimal solution. In some cases (eg where pavements are weak), it may be necessary to compare the freight transport option with a pavement rehabilitation option for the affected road network. If there is more than one option, the evaluation will involve incremental analysis of the costs and benefits of the different options.

For projects with a funding gap up to $1 million, only the worksheets for the chosen option need be submitted. For projects with a funding gap over $1 million, worksheets for all options should be provided.

Summary of analysis of chosen option

Worksheet 1

Worksheet 1 provides a summary of the economic and project data for the preferred option. Provide a brief description of the problem that the proposal is intended to address. For the do minimum, describe the existing road network affected by the proposal, referring to worksheet 2. Other information on the worksheet is filled in based on the calculations in worksheets 3 through 7.

Worksheet 1 - Summary of analysis of chosen option

Proposal map

Worksheet 2

On a separate page supply a map that clearly identifies the roads currently used for the freight transport as well as the proposed freight transport route and mode.

Funding gap analysis

Explanation sheet for worksheet 3

The service provider costs are compared to the projected revenue stream using a net present value (NPV) calculation to determine whether or not the proposal is commercially viable. The NPV is the discounted value of the net cash flow.

Funding gap

1. The deficit between the total revenue (for a new service) or the change in revenue (for an existing service) and the service provider costs is the funding gap. The funding gap is the amount that needs to be funded by local and central government if the proposal is to proceed.

2. Where the funding gap is zero or negative, the proposal is commercially viable and no financial assistance is required from government.

Service provider costs

3. Service provider costs may be calculated either from industry standard unit costs or based on cost estimates from the service providers. The proposal costs include capital costs (for physical infrastructure and/or vehicles, vessels or rolling-stock costs), disruption costs during construction, operating and maintenance costs, and costs of decommissioning. In some cases, costs may be offset by the salvage value of capital assets. Indicative quotes may be considered when the project proposal costs cannot be calculated.

Service provider revenue

4. Where the proposed freight service generates revenue (generally through a user charge for the freight services), the financial analysis must take this into account.

5. The proposed user charge should be based on the willingness to pay of the potential users of the freight service. The maximum user charge may be determined in discussion with the company and should take into account the current user charges for transporting the freight by road. It is generally expected that the user charge will be on a per tonne basis, though other bases for setting the charge are acceptable.

6. In the case of an expansion of, or improvement to, an existing freight service, the increase or change in revenue shall be included in the calculation of the funding gap. In this case the funding request to Land Transport NZ will be to facilitate an improved service rather than funding for an existing service.

Service provider required rate of return

7. The weighted average cost of capital (WACC) can be used to estimate the service providers required rate of return. The WACC is the weighted average of the required return on equity and the (interest) cost of any debt financing.

8. It is generally expected that the required rate of return will reflect the industry norm of 12 percent. If an alternative rate of return is used, then this needs to be explained and justified.

Calculating the funding gap

9. The use of a computer spreadsheet function, such as the Goal Seek function in the Excel programme, is the simplest method of assessing the financial viability of a proposal and determining the value of the funding gap. Refer to chapter 6 of this volume.

Worksheet 3 - Funding gap analysis

Do minimum

Explanation sheet for worksheet 4

The do minimum is the minimum level of expenditure necessary to keep road(s) open that are used to transport the freight in question. The do minimum generally consists of maintenance costs, although in a few instances, it may include future planned road construction.

Note: Where costs are common to both the do minimum and the option under consideration, they do not need to be included in the analysis.

1. The annual (a) and periodic (b) maintenance costs should be obtained from maintenance and resealing records.
2. The sum of (a) plus (b) is the present value of annual and periodic maintenance costs. It is important that these costs are accurate.
3. In exceptional cases the do minimum may involve capital expenditure such as planned road construction. In such cases the costs will include investigation, design and construction, in order to be consistent with the costs of the option. These costs should then be discounted to present value by multiplying by the single payment present worth factor (SPPWF) for year 1 = 0.91.
4. Present worth factors for 10 percent discount rate

Worksheet 4 - Do minimum

Net costs savings to government

Explanation sheet for worksheet 5

Worksheet 5 is used for calculating the net government cost savings (road maintenance and improvement savings) associated with the freight transport service proposal. The net government cost savings are calculated by estimating the total annual amount of freight traffic, measured in terms of equivalent design axles (EDA), removed from the road network.

Use worksheet 5 to describe the road sections affected by implementing the freight transport proposal and calculate the road maintenance cost savings per road section. Tables 1 and 2 below provide information on EDA and $/EDA/km for completing the table.

The road user charges (RUC) foregone are estimated, so that the net savings to government can be calculated. This assumes that cost savings begin in year 2, when the service is implemented.

If the amount of freight traffic removed from the road network will vary from year to year, separate calculations are required for each year.

Table 1 Heavy vehicle types and EDA equivalents

If the HCV traffic moves freight from its origin (freight source) to destination (distribution point) and returns empty to the origin, then use the return trip EDA. If the HCV traffic carries a load on its return trip and the freight transport proposal will also carry the return load, then double the laden trip value.

Table 2 Value of EDA per km by road type

* Local road undesigned pavement refers to roads that were previously unsealed and were sealed by simply adding more aggregate and then a seal coat. The value of the $/EDA/km for local road undesigned requires judgement on the part of the local authority and evaluator to assess the EDA value.

Caveat on using the above data.

Where the values in tables 1 and 2 above do not accurately represent local conditions, the analyst should provide additional information that shows what values have been used and whether these have been calibrated to local conditions.

Worksheet 5 - Calculation of net cost savings to government

Accident costs savings

Explanation sheet for worksheet 6

The calculation of accident cost savings for the freight transport service is based on accident rate analysis. The analysis assumes that the road network affected by the freight transport service proposal is primarily rural, with a minimal number of intersections. If the freight traffic would spend a significant amount of time traversing urban areas, the evaluator should use the procedures described in section 7.3 of this volume.

The accident cost savings are assumed to start from the beginning of year 2, when the freight transport service proposal is implemented.

Table 3 provides the equation coefficients by terrain type for rural mid-block sections. These coefficients only include truck crash rates (Transit vehicle classes III to XIV).

Table 3 Rural mid-block equation coefficients (b₀) for heavy vehicle crashes

The terrain type can be selected by route gradient. The gradient ranges shown should generally be maintained throughout the mid-blocks. Sections of road that are less steep can occur in rolling or mountainous sections for short lengths. Provided that the lower gradient length is followed by another rolling or mountainous gradient, then the entire section can be classified as rolling or mountainous.

Table 4 below gives the costs per reported injury accident for rural areas.

Table 4 Costs per reported injury accident (July 2002)

100 km/h remote rural roads are defined as carrying less than 1,000 vehicles/day and being more than 20 km from a town of 3,000 population or more.

Caveat on using the above data.

Where the values in tables 3 and 4 above do not accurately represent local conditions, the analyst should provide additional information that shows what values have been used and whether these have been calibrated to local conditions.

Worksheet 6 - Accident cost savings

Benefit cost ratio and incremental analysis

Explanation sheet for worksheet 7

Benefit-cost analysis

1. Under benefits, enter the discounted values for the accident cost savings and any other benefits, for each option.
2. Under costs, enter the discounted value of the funding gap and the discounted value for the net government cost savings for each option. Subtract the net government cost savings from the funding gap to obtain the total cost to government for each option.
3. Calculate the BCR for each option by dividing the total benefits by the total cost to government.

Incremental analysis

1. Rank the options in order of increasing cost to government.
2. Compare the lowest cost option with the next higher cost option to calculate the incremental BCR.
3. If the incremental BCR is less than the target incremental BCR specified in appendix A12 of volume 1, discard the second (higher cost) option in favour of the first. Compare the first option with the next higher cost option.
4. If the incremental BCR is greater than the target incremental BCR, the second (higher cost) option becomes the basis for comparison against the next higher cost option.
5. Repeat the procedure until no higher cost options are available that have an incremental BCR greater than the target incremental BCR.

Note: If a pavement rehabilitation option is being considered in the analysis, the analyst should consult Land Transport NZ on how to evaluate the choice of the preferred option.

Worksheet 7 - Benefit cost ratio and incremental analysis