Basic concepts

Benefits

Section 2.3 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) discusses the basic concepts underlying the evaluation of benefits, including:

Types of benefits
Assignment of benefit value
Level of data collection and analysis
Primary benefits
Secondary benefits
Combined benefit values
National strategic factors
Economies of scale
Business benefits
Double counting of benefits
Dis-benefits during implementation/construction
Equity impacts

External impacts are benefits or dis-benefits stemming from a project that do not reside with the government agencies, approved organisation or transport users. Because cost benefit analysis takes the national viewpoint, external impacts must also be considered. Section 2.4 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) discusses external impacts.

Environmental impacts
Quantifying and valuing external impacts
Mitigation of external impacts
Transferred external impacts

Costs

Project costs

The costs taken into account in an economic efficiency evaluation depend on the type of project being evaluated.

Costs of road projects (EEM1, 3.6)
Costs of demand management projects (EEM2, 3.7)
Costs of transport services
- to the service provider (EEM2, 6.2)
- to the government (EEM2, 7.7)

Sunk costs

When expenditure has already been incurred a decision needs to be made as to whether to include it in the economic efficiency evaluation or not. (EEM1, 2.5)

Present value and discounting

The community places a higher value on benefits and costs that occur in the near future, compared with those that occur at a later date. Thus it is not possible to directly combine amounts occurring at different times.

Section 2.6 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) discusses present value and discounting, covering:

Related information

Discounting and present worth factors (A1.5 + A1.6)
How to apply discount factors (A1.1 to A1.4)

Time frame

Section 2.7 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) discusses time frame, covering:

Time zero (2.7)
Base date for costs and benefits (2.7)
Analysis period (2.7)
- Road projects (EEM1, 3.7)
- Transport demand management (EEM2 3.9)
- Transport services (EEM2 5.8)
- Education, promotion and marketing (EEM2 9.5)
- Private sector financing and road tolling (EEM2 11.8)

Related information

Update factors for construction and maintenance costs (A12.2)
Update factors for benefits (A12.3)
Target incremental BCR (A12.4)

Do minimum and benefit and cost differentials

Section 2.8 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) covers:

The do minimum
Future costs in the do minimum
Benefit and cost differentials

Benefit cost ratios

The benefit cost ratio (BCR) of a project is the present value (PV) of net benefits divided by the PV of net costs. A project is regarded as economic or worthy of execution if the PV of its benefits is greater than the PV of its costs, i.e., a project is economic if the BCR is greater than 1.0.

Section 2.8 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) covers:

National benefit cost ratio
Government benefit cost ratio
BCR rounding

Incremental cost benefit analysis

Where project alternatives and options are mutually exclusive, incremental cost benefit analysis of the alternatives and options shall be used to identify the optimal economic solution.

Section 2.10 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) discusses incremental cost benefit analysis, covering:

Definition
An example that illustrates the concepts
Procedure for calculating incremental BCR
Target incremental BCR
Sensitivity testing of incremental analysis
An example of incremental analysis

Uncertainty and risk

The forecasting of future costs and benefits always involves some degree of uncertainty, and in some situations the resulting measures of economic efficiency (the BCR and FYRR) may be particularly sensitive to assumptions or predictions inherent in the analysis.

Assessing the sensitivity of evaluations to critical assumptions or estimates shall be undertaken using either a sensitivity analysis or risk analysis, or both, as appropriate.

The uncertainty described here is not directly comparable to assessing the uncertainty as part of Land Transport NZs funding allocation process, which focuses on the confidence in the proposed project (or package) delivering the desired outcomes.

Section 2.12 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) covers:

Types of uncertainty
Sensitivity analysis
Risk analysis
Choosing the appropriate analysis
Methods for sensitivity and risk analyses

Alternatives and options

Section 2.13 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) discusses alternatives and options, covering:

Need to consider alternatives and options
Mutually exclusive alternatives and options
Independent stages
Features to mitigate external impacts

Related information

Incremental cost benefit analysis

Packages

Packages are groups of interrelated and complementary activities that may be proposed by one or more approved organisation(s). The purpose of packaging is to achieve the synergy possible from integrating complementary transport projects.

Section 2.43 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) covers:

Introduction
Types of packages
Evaluation of packages

Related information

Transport models

Transportation models are sometimes used to generate demand forecasts and assign traffic to transportation networks. When models are used for this purpose, documentation should be provided to demonstrate that the models have been correctly specified and produce realistic results.

Section 2.15 of the Economic evaluation manual - Volume 1 2008 (PDF 263 KB) covers:

Validation of transport models
Checks on output from traffic models
- Coarse checks
- Detailed checks
Evaluating congested networks and induced traffic effects

Related information

Worksheet 8.1 (75 KB) - Coarse check on transportation model outputs
Worksheet 8.2 (298 KB) - Detailed check on transportation model outputs
Worksheet 8.3 (92 KB) - Project model specification checklist
Appendix 11 (266 KB) - Congested networks and induced traffic

Other inputs to funding allocation process

Economic efficiency is only one of 3 assessment factors considered in Land Transport NZ's funding allocation process.

Section 2.16 of the Economic evaluation manual - Volume 1 - 2008 (PDF 263 KB) provides some advice on the New Zealand Transport Strategy objectives to minimise double counting of benefits.

Various topics

Basic concepts