NATIONAL ROADS AUTHORITY

Project Appraisal Guidelines

Appendix 5 - Guidance on conducting CBA

March 2008

Version 1.0

Guidance on conducting CBA Changes made to document since previous version -

Date issued 01.03.2008

St Martins House, Waterloo Road, Dublin 4 Tel:+353 1 660 2511 Fax +353 1 668 0009 Email: info@nra.ie Web: www.nra.ie

Table of Contents

1 2

Introduction ..................................................................................................................... 2 Introduction........................................................................................................................ 2 Theory and principles..................................................................................................... 4 Why use Cost Benefit Analysis ......................................................................................... 4 Option generation.............................................................................................................. 4 Consumer surplus ............................................................................................................. 4 Discounting and the price base......................................................................................... 7 Valuation principles ........................................................................................................... 8 Definitions.......................................................................................................................... 8 Application of CBA to road schemes.......................................................................... 12 When is CBA applied ...................................................................................................... 12 Who undertakes CBA...................................................................................................... 13 Project management ....................................................................................................... 13 Appraisal deliverables ..................................................................................................... 13 The appraisal process..................................................................................................... 13 Staff requirements........................................................................................................... 16 Team approval ................................................................................................................ 16 Audit process .................................................................................................................. 16 CBA report....................................................................................................................... 16 When is a CBA report required? ..................................................................................... 17 Report contents............................................................................................................... 17 Auditing processes.......................................................................................................... 20 Key audit areas ............................................................................................................... 20 Costs and benefits .......................................................................................................... 21 Procurement model......................................................................................................... 24 Treatment of parameter values ....................................................................................... 24 The Do-Minimum and Do-Something options................................................................. 25 Fixed and variable trip matrices ...................................................................................... 26 The CBA method............................................................................................................. 26 Appraisal period .............................................................................................................. 28 Methods for comparing costs and benefits ..................................................................... 28 Interpretation of CBA Output........................................................................................... 29 Enquiries ........................................................................................................................ 34

Introduction

Guidance on conducting CBA

Introduction

Introduction 1.1 1.2 This document serves as an Appendix to the NRAs Appraisal Guidelines. In particular, it expands upon several of the issues raised in Chapter 5, on undertaking cost benefit analysis. Cost Benefit Analysis (CBA) forms one element of the appraisal process for road infrastructure projects. CBA serves a number of functions at both the individual scheme level and when comparing different projects: At the individual scheme level, the results of the CBA indicate whether a road scheme is economically viable; i.e. whether economic benefits resulting from the provision of a scheme outweigh the costs to construct and maintain it. Secondly, they can provide a comparison of alternative options. At the national level, the Government has finite resources to commit to road infrastructure improvements. The outputs from economic assessments allow different schemes to be compared and enable the schemes that provide best value to be identified. If the results of the CBA are to be used to prioritise schemes, then the assessments need to be carried out in a consistent manner. The UK computer program COBA has been adapted for use in Ireland for fixed trip matrix CBA. For variable trip matrix (VTM) CBA, the UK TUBA program is the recommended software, though, with agreement from the NRA, alternative software may be used for VTM appraisals provided they can be altered to accommodate recommended Department for Transport / Finance parameter values. The NRA must be consulted prior to embarking on a VTM appraisal. Guidance on selecting the most appropriate method for undertaking the appraisal is provided within this appendix. Following this introduction the document is split into three further Sections: Section 2 deals with the theory and principles of CBA; Section 3 considers the application of CBA to road schemes, and Section 4 provides contact details for dealing with enquiries. 1.7 A series of Appendices are referred to in this document, all of which are available for download from the NRAs website.

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1.4

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Theory and principles

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Theory and principles

Why use Cost Benefit Analysis 2.1 Resources, particularly public sector investment resources, are scarce. All Governments are therefore concerned with securing value for money from investment expenditure and with finding tools that measure value for money objectively in areas of public sector expenditure. Governments need to be able to understand the value for money of different expenditure programmes (e.g. comparing road schemes with investment in other transport projects), to identify priorities within a single programme (e.g. comparing different road schemes) and to understand if individual projects provide value for money. Financial profitability yardsticks cannot generally be applied to road investments, so CBA was developed as a technique for assessing value for money in such circumstances. It is, however, a partial technique; economic appraisal of the sort embodied in the COBA and TUBA programs do not purport to measure value for money over the whole range of costs and benefits, as presented in the Project Appraisal Balance Sheet, including those broadly classified as environmental. Option generation 2.4 Transport proposals designed to meet specific objectives are grouped under the term DoSomething and their appraisal involves measuring their performance over a period of time against either a Do-Nothing or Do-Minimum scenario. Do-Nothing The Do-Nothing, as the name implies, relates to the situation when the future case is unchanged from that at present. Do-Minimum The Do-Minimum applies to all proposals and comprises all schemes and proposals under construction or where there is a firm commitment to provide improvements. Options for the future transport proposal will be appraised by reference to their performance against the DoMinimum scenario. Do-Something The Do-Something scheme is the road proposal under consideration. There may be more than one Do-Something option. The number and nature of the Do-Something scheme options will change as the planning of the road scheme proceeds. Consumer surplus 2.8 CBA was developed for sectors that do not have a marketable output. For this reason, the change in consumer surplus is used as an indicator of well being to measure the benefits of a particular road scheme. Consumer surplus is the difference between the price consumers are willing to pay for a good or service and the actual market price. If a consumer is willing to pay more than the actual price then the consumer surplus is defined as the difference in the two prices. On a standard demand and supply curve, as illustrated in Figure 2.1, consumer surplus is shown by the shaded area.

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Figure 2.1 Definition of consumer surplus

2.10

The cost a user of a transport facility is prepared to pay comprises of several elements, including any physical payments made (such as fares, tolls and vehicle running costs) and the value that the consumer places on his/her time. These elements are combined into an overall generalised cost of travel. Changes in generalised travel costs resulting from a transport scheme give rise to changes in consumer surplus, with positive movements representing a benefit to the consumer. For example, if an individual is willing to travel for up to 15 minutes to enjoy a particular activity and a transport scheme reduces this time to 10 minutes then the traveller enjoys a consumer surplus equivalent to the generalised cost of five minutes of travel time. Across all travellers making the same journey, the change in consumer surplus is the difference between the change in the total benefit enjoyed and the change in the costs. If travel demand remains unchanged (i.e. demand is perfectly inelastic, meaning totally unresponsive to changes in price), but travel costs change, the change in consumer surplus is represented by the shaded area in Figure 2.2, and defined by the following formula: Change in consumer surplus = (P0-P1)*T

2.11

2.12 2.13

2.14 2.15

Where P0 and P1 are the Do-Minimum and Do-Something travel costs respectively and T represents the number of travellers. This situation is analogous to the fixed trip matrix assumption, where there is no increase in trips as a result of building a scheme.

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Figure 2.2 Change in consumer surplus fixed demand

2.16

In the case where demand changes as result of changes in travel costs (i.e. demand is not perfectly inelastic), then the change in consumer surplus is as shown in Figure 2.3 and defined by: Change in consumer surplus = (P0-P1)T0 +(P0-P1)(T1-T0) = (T0+T1)(P0-P1)

2.17

This situation is analogous to the variable trip matrix assumption, where there is a change in trips as a result of building a scheme. Figure 2.3 Change in consumer surplus variable demand

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The convention in this case is to attribute half of the change in costs to the change in trips and is known as the rule of half. Discounting and the price base

2.19

Implementing a transport scheme usually results in a stream of costs followed by a stream of benefits, some of which have monetary values applied to them. These monetised costs and benefits occur over a number of years, and cannot simply be added together as if they all occurred simultaneously. In order to be able to add costs and benefits that occur over a period of time, two distinct issues must be dealt with: General changes in price levels over time (inflation), and Preferences for consumption now rather than later (time preferences).

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The effects of inflation are resolved by means of converting all costs / benefits to a common price base year (using a price index). To take into account time preferences, a discount rate is applied, discounting future costs/benefits back to a given year the present value year. The present value year is usually the same as the price base year. Present value year Costs and benefits arising in different years are expressed in terms of their value from the standpoint of a given year, known as the present value year. In principle, any year can be taken as the present value year; however reference should be made to the NRA National Parameter Sheet for the year currently used in appraisal. Summing the Present Values of Costs (PVC) and subtracting these from the Present Value of Benefits (PVB) gives the Net Present Value (NPV) of the scheme at the present value year. The Discount Rate Costs and benefits arising in different years are transformed to their present values by the process of discounting. This can be understood by considering the principle of compound interest. If 1 is invested at a real interest rate of r, at the end of one year it would be worth (1 2 + r) and after two years (1 + r) and so on. By the same logic, 1 received in n years time is n worth 1/(1 + r) now. Note that this illustration ignores the effect of inflation and assumes that 1 has the same real spending value in each year. Because discounting involves the notion of charging interest against a project, rather than paying interest to an investor, r is known as the discount rate. Any sum may be reduced to its Present Value (PV) by means of the following formula:

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2.23

PV =

(1 + r ) y p

Where: PV is the present value; S is the sum to be discounted; r is the discount rate, expressed as a decimal; y is the year in which the sum is received or incurred, and p is the present value year. 2.24 2.25 Net Present Values The Net Present Value (NPV) is the discounted sum of all future benefits less the discounted sum of all future costs over the appraisal period. The Present Value of a stream of Benefits (PVB) represents the value in the present value year of all the benefits that will accrue over the appraisal period. It is calculated according to the following formula:

PVB = y = year 0

y = year n

(1 + r ) y p

By

Guidance on conducting CBA

Where By is the benefit occurring in each year, from the first year in which benefits are accrued (Year 0) discounted as appropriate, up to the limit of the appraisal period (Year n). The Present Value of the stream of Costs (PVC) represents the value in the present value year of all the costs that will accrue over the appraisal period, comprising mainly construction and maintenance costs. It is calculated in a similar way to the approach for calculation of PVB. For some schemes, it is possible that construction costs may have been incurred prior to the present value year. In such cases, this would require an inflation of the scheme costs to the present value year using the discount rate. 2.26 The approach to calculating PVC is therefore:

PVC = y = year 0

y = year n

(1 + r ) y p

Cy

Where Cy is the cost incurred in year y, discounted as appropriate, up to the limit of the appraisal period (year n). Year 0 is the first year that costs are incurred, which may be prior to the present value year. 2.27 The NPV of the scheme can then be calculated according to the following formula: NPV = PVB PVC Valuation principles 2.28 In presenting the results of CBA two distinct issues arise: Are the results to be presented exclusive of VAT and indirect taxation (i.e. expressed as factor / resource costs) or inclusive of VAT (i.e. at market prices)?, and Do we present aggregated cost and benefits to society as a whole (social cost calculus) or do we disaggregate costs/benefits according to who bears them (the willingness-to-pay calculus)? 2.29 The basic approach of the willingness-to-pay calculus (WTP) is to establish a monetary measure for the net welfare change for each of the major stakeholders in the project and to sum these to arrive at an overall cost-benefit summary. The key advantage of the WTP method is that is allows a comprehensive picture of the impacts of a project to be presented. That is, the effects of a project on differing groups of society (taxpayers, private sector operators, car users, etc.) are identified separately. The impacts of financial aspects (toll revenue, fare revenue, tax revenue) over non-financial (time savings, accident savings) can also be identified. The inclusion of taxation is necessary to describe fully perceived costs to certain segments of society (e.g. car users) that do not differentiate between resource costs and tax in the payment for goods. It is important to note that the choice of unit of account (i.e. factor versus market prices) or calculus (social cost versus willingness to pay) is immaterial to the results. It is important, however, to present all results on a consistent basis and to state which unit of account/calculus is used. The NRA will provide instructions to consultants as to which unit of account / calculus is to be applied. Definitions 2.32 The definitions of key economic and other terms used in CBA are as follows: Appraisal period The period over which all costs and benefits are assessed. Base year The time period from which relative levels are measured and which is usually allocated the value of 100 in an index. Benefit / Cost Ratio (BCR) The BCR is given by the ratio of the discounted sum of all future benefits to the discounted sum of all future costs. Constant prices Constant prices allow figures to be represented so that the effects of inflation are removed. The values for each time period are expressed in terms of the prices

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in some base period. For example at the time of writing Gross National Product is presented in constant 1995 prices. Consumer Price Index (CPI) The Consumer Price Index is the main domestic measure of inflation. It measures the average change from month to month in the prices of goods and services purchased by most households. Consumer surplus The difference between what a consumer is willing to pay for a good or service and the price at which that good/service is available for. Current prices Current price figures show data where the value for each item is expressed in terms of the prices in that period. Deflator An index showing the price movements over a period of time. Constant price data are normally calculated by dividing current price data by the deflator. Discount rate The factor used to transform costs and benefits arising in different years to their present values. Factor costs Factor costs are those that are net of indirect taxation. Factor costs are referred to as resource costs throughout this document. Gross Domestic Product (GDP) GDP measures the total output of the economy in a period, i.e. the value of work done by employees, companies and self-employed persons. This work generates incomes but not all of the incomes earned in the economy remain the property of residents (and residents may earn some income abroad). The total income remaining with Irish residents is the Gross National Product (GNP) and it differs from GDP by the net amount of incomes sent to or received from abroad. Inelastic demand Demand remains constant, irrespective of price. Internal Rate of Return (IRR) The discount rate that makes the present value of the stream of benefits exactly equal to the present value of the stream of costs. Market prices Market price refers to the price paid by consumers for goods and services in the market and therefore includes all indirect taxation (indirect taxation refers to taxation levied on goods and services and therefore includes excises, duties and VAT). Net Present Value (NPV) The NPV is the discounted sum of all future benefits less the discounted sum of future costs over the appraisal period. In a world with no constraint on investment funds, there would be a strong case for taking forward all projects with a positive NPV. Perceived costs Perceived costs are those that are actually experienced by users. For example, perceived costs are different for work and non-work transactions because businesses can claim back VAT on purchases. Present Value of Benefits (PVB) The discounted sum of all future benefits. Present Value of Costs (PVC) The discounted sum of all future costs. Present value year The price base year in which the values of all costs and benefits are presented. Resource costs Resource costs are those that are net of indirect taxation. Resource costs can also be referred to as factor costs. Rule of half In the case where demand is elastic and where prices fall as a result of an overall increase in supply, the consumer surplus associated with the increase in demand is calculated as half the change in price multiplied by the increase in demand. Social cost calculus The social cost calculus seeks to measure the value of the resources used by, and the benefits created by, a project. The costs and benefits are those that fall on society as a whole, i.e. an aggregation of all individuals. Willingness to Pay (WTP) calculus The WTP calculus establishes a money measure of the net welfare change for each of the major stakeholders in the project and sums these to arrive at an overall cost-benefit.

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Application of CBA to road schemes

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Application of CBA to road schemes

When is CBA applied 3.1 During the overall project timescale, CBA will be required at the following four key phases: Route / Option Selection; Preliminary Design; Construction Documents Preparation and Tender Award, and Final Account / Closeout [for a sample of schemes at this phase]. 3.2 Route selection At this phase option comparison cost estimates, to be agreed with the NRA Cost Estimation Unit, will be used. The CBA must reflect the relative benefits of competing options. Default parameters for traffic composition and accident rates are therefore generally applicable. Reference should be made to the NRA National Parameter Values Sheet (Appendix 6). While at minimum two different scenarios should be analysed (and reported on): high and low traffic growth forecasts, a range of other scenarios can be studied, including: the impact of alternate road / junction standards and the impact that omitting nearby planned but not committed to schemes would have. Preliminary design The CBA at this phase is more detailed, using local parameter values for traffic composition and accident rates. More robust scheme cost estimates will be available. It is particularly important that the CBA for this phase uses the latest parameter values supplied by the NRA, in order to ensure a consistent and robust reporting process. At this stage the CBA must be run (at least) four times, one for each combination of traffic growth scenario (high and low) and cost estimate (Total Scheme Budget and Target Cost 1). The results of each of the four scenarios (2 traffic growth scenarios X 2 cost estimates) should be presented separately. For possible PPP schemes separate tolled and untolled scenarios should be presented. In addition, a range of other scenarios can be studied, including: the impact of alternate road / junction standards and the impact that omitting nearby planned but not committed to schemes would have. Construction document preparation and tender award A revised CBA is to be carried out at construction documents phase if the tender price is different from that envisaged (i.e. if the Target Cost 2 differs from the Target Cost 1 figure, see the NRA Cost Management Manual), or if the project scope has changed on foot of changes in planning agreements. At this stage the CBA must also be run (at least) four times, one for each combination of traffic growth (high and low) and cost estimate (Total Scheme Budget and Target Cost 2). The results of each of the four scenarios (two traffic growth scenarios with two cost estimates) should be presented separately. PPP schemes should focus on the tolled scenario, including all relevant costs such as the operation costs of the toll plaza / toll collection system. Final Account / Closeout The purpose of the final account / closeout phase CBA is to determine how the outturn costs and actual post-opening traffic flows compare with forecasts, and how these affect the overall economics of the scheme. Analysis of a final account CBA can help identify issues relating to the assessment and provide useful information to feed into future assessments. The Final Account / Closeout CBA should use actual scheme costs and traffic values and is carried out after the road has opened to traffic. The CBA at this phase should use, insofar as possible, the same parameters used in the construction documents CBA. The results of high and low traffic growth scenarios should be presented. Other possible scenarios for analysis include: the impact of adjacent not-committed-

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to schemes may have and the impact of different value of time and accident cost assumptions has on the scheme. Who undertakes CBA 3.9 CBA is undertaken by members of the approved Appraisal Team. This may be a team within the Design Office, the Local Authority Road Design Team or an external consultant. Project management Key organisations / roles The key organisations and people in the appraisal process are: National Roads Authority (NRA) the overseeing organisation for all National Road schemes. The NRA is generally the Sanctioning Authority although in select cases (for example PPP schemes) the NRA may function as both the Sponsoring Agency and the Sanctioning Authority. Design Office (DO) the organisation managing the various phases of the scheme preparation and supervision of construction generally a Regional Design Office. The Design Office is the Sponsoring Agency and will comprise of the following: Design Office Project Manager (DOPM) the person within the Design Office responsible for ensuring the progression of a scheme in accordance with policy and procedures. Design Team (DT) the group undertaking the various phases of scheme preparation on behalf of the Design Office, including any traffic modelling. This may be a team within the Design Office / Local Authority or an external consultant. Design Team Leader (DTL) the person in the design team responsible for managing the scheme design. Appraisal Team (AT) the group undertaking the project appraisal. This may be a team within the Design Office / Local Authority or an external consultant. Within this team there will be persons with specific responsibilities for undertaking Cost Benefit Analysis (CBA). Appraisal Team Leader (ATL) person leading the appraisal team and responsible for managing the appraisal process. Project Steering Group (PSG) responsible for overseeing the project and containing representatives of the NRA and the Design Office. Appraisal deliverables 3.11 The Department of Finance has set out the requirements for timing of appraisal for all capital expenditure proposals in the public sector. Within the context of transportation projects, for which the NRA is the Sanctioning Authority, the appraisal process includes a number of defined deliverables which are required at various stages, and to varying levels of detail, as the scheme progresses. The deliverables are: Project Brief; Traffic Modelling Report; Cost Benefit Analysis; Project Appraisal Balance Sheet; Business Case, and Post Project Review. 3.12 The flow chart provided in the main guidelines (Figure 2.1) illustrates when the various deliverables (indicated by underlining) are required in relation to the scheme stage. The chart also distinguishes between those which are existing requirements, in green, and those which are new as a consequence of this guidance, highlighted in gold. The appraisal process The role of CBA within the overall appraisal process can be seen in the following.

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3.13

Overall Project Planning The Design Team (DT) prepares the Project Brief (PB) and submits to the NRA for approval (after DT internal review). The NRA reviews the PB and decides whether to ask for revisions to same or to accept / reject the PB. If the brief is rejected, the project will not be given approval to go to the next phase. Route / Option Selection The DT reviews the AT CVs and approves or otherwise. The approved AT provides the NRA with a Traffic Modelling Scoping Note that outlines the proposed modelling methodology and any data collection that will be undertaken. A proforma that should be used for this purpose can be found in Appendix 1, which is available for download from the NRA website. This pro-forma should be completed for all models. The NRA approves or otherwise the modelling methodology. If approved the AT can progress with developing the base year and forecast year traffic models. After an internal review by the DT, the AT submits a Traffic Modelling Report (TMR) to the NRA for approval. The contents of the TMR are discussed in Chapter 4. The NRA reviews the TMR and either accepts it or requests changes. The AT reviews the PB and updates it if necessary and undertakes the CBA using the outputs of the approved TMR. At route selection, the option comparison cost estimate, agreed with the NRA Cost Estimation Unit, should be used in the derivation of the scheme costs (refer to Appendix 12 for further guidance). The AT prepares the Project Appraisal Balance Sheet (PABS) for each option to use in the selection of the preferred option. The content of the PABS is set out in Chapter 6. The AT incorporates the PB, PABS and the CBA Report into a Preliminary Business Case for the preferred option and submits it to the NRA for approval (after DT internal review) prior to seeking NRA acceptance of the preferred option. The NRA then requests changes, accepts or rejects the Preliminary Business Case (in which case project is not approved to go to next stage). Preliminary Design The DT reviews the AT CVs and approves or otherwise. The AT provides the NRA with a modelling scoping note that outlines the proposed methodology and any data collection that will be undertaken if different from the previous phase. The NRA approves (or otherwise) the modelling methodology. If approved, the AT can progress with developing the base year and the forecast year traffic models. After an internal review by the DT, the AT submits a Traffic Modelling Report (TMR) to the NRA for approval. The NRA reviews the TMR and either accepts it or requests changes. The AT reviews the Project Brief (PB) and updates it if necessary, prepares the Project Appraisal Balance Sheet (PABS) and then undertakes the CBA using the outputs of the approved TMR. At preliminary design stage the CBA should be run both on the basis of Target Cost 1 figures and again on the basis of Total Scheme Budget figures (agreed with the NRAs Cost Estimation Unit, see Appendix 12 for further instructions). At minimum, each cost figure (Target Cost 1 and Total Scheme Budget) should be run against both high and low traffic growth projections, yielding a minimum of four scenarios. The AT incorporates the PB, the PABS and the CBA Report into a Business Case (BC) for the scheme and submits it to NRA for approval (after DT internal review) prior to seeking NRA approval to purchase any land required for the scheme (e.g. go to CPO). The NRA then either requests changes, accepts the BC or rejects the BC (in which case project is not approved to go to next stage). Construction Documents Preparation and Tender Award The DT reviews the schemes cost, design and scope. If the project's cost, scope and design are unaltered from preliminary design phase, no further appraisal is required at this project phase.

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If the cost, scope or design of the scheme has changed since the preliminary design CBA was completed, the approved AT contacts the NRA and agrees upon a modelling methodology, based upon the submission of model pro forma. If appropriate, the AT submits the revised Traffic Modelling Report (TMR) to the NRA for approval (after internal DT review). The NRA reviews the TMR and either accepts it or requests changes. The AT reviews the Project Brief (PB) and updates it if necessary, prepares the Project Appraisal Balance Sheet (PABS) and undertakes the CBA using outputs of the approved TMR. The CBA should be run at least four times (combining high and low traffic growth scenarios with Target Cost 2 and Total Scheme Budget cost estimates, refer to Appendix 12 for more details). The AT incorporates the PB, the PABS and the CBA Report into a final Business Case for scheme and submits it to the NRA for approval (after internal DT review) prior to seeking NRA permission to award the main construction contract. The NRA then requests changes, accepts or rejects the final Business Case (in which case permission to go to construction is not given). Final Account / Closeout The DT liaises with the NRA to see whether a full CBA is required. The approved AT undertakes the Post Project Review (PPR) - and CBA if required - and submits it to NRA for approval after an internal review by the DT. The final outturn cost to be used in the derivation of scheme costs (refer to Appendix 12). The NRA reviews the (CBA and the) PPR and either requests changes or approves the evaluation. The NRA applies lessons learned from PPR to the evaluation / management of future projects. Responsibilities A good understanding of the key responsibilities of each organisation with regards the appraisal of national road schemes is important for all involved. The key responsibilities of each organisation in the appraisal process are defined below: National Roads Authority (NRA) The provision and maintenance of the Appraisal Guidelines and updating of associated documentation, for example the technical appendices; Approval of the Project Brief; Approval of the Traffic Modelling Scoping Note (refer to the above); Approval of the Traffic Modelling Report; Approval of the Business Case (including CBA Report, Project Appraisal Balance Sheet and Project Brief); Advises the DT on the need to undertake a CBA at Final Account/Closeout; Approval of Post Project Review, and External audit of appraisal deliverables. Design Office Project Manager Overall management of appraisal process; Approval of Appraisal Team, and Overseeing the internal audit of all appraisal deliverables. Design Team Provision of all inputs/information as required by the Appraisal Team; Preparation and internal review of the Project Brief at Overall Project Planning Phase; Internal review of the Traffic Modelling Scoping Note; Internal review of the Traffic Modelling Report; Internal review of the Business Case, CBA Report and Project Appraisal Balance Sheet; Review of scheme cost, design and scope at Construction Documents Preparation and Tender Award phase, and Liaison with NRA at Final Account/Closeout to establish whether full CBA is required.

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Appraisal Team Updating of the Project Brief; Preparation of the Traffic Modelling Scoping Note; Preparation of the Traffic Modelling Report; Preparation of the CBA Report; Preparation of the Project Appraisal Balance Sheet; Preparation of the Business Case, and Undertakes Post Project Review. Staff requirements 3.15 Persons involved in the appraisal process must have had some prior experience or have attended an approved formal training course on either project appraisal or CBA. This holds true for both members of the Appraisal Team and for the person responsible for reviewing the appraisal work in the Design Offices. For major projects, the Appraisal Team comprises an Appraisal Team Leader and Appraisal Team Members. The required experience within the Appraisal Team and the Design Office is defined below. Note that the requirements for the Appraisal Team are relevant regardless of whether the team is drawn from the Design Office, or employed as an external consultant. Appraisal Team Leader: The Appraisal Team Leader must be able to demonstrate knowledge of the appraisal process, including the use of standard computer programmes used in traffic modelling and economic assessment. The Team Leader must have been on an approved training course and have detailed experience of appraisal on at least three highway projects. Appraisal Team Member: The Appraisal Team member must have been on an approved training course or seminar and/or have practical experience in undertaking appraisal. At least one Appraisal Team member should be included on each Appraisal Team. Team approval 3.19 The Appraisal Team is to be approved by the DOPM in advance of any phase of the appraisal work commencing. The NRA is not involved in the approval of the Appraisal Team. Audit process 3.20 During the overall project process there are two levels of audit: internal and external. Both internal and external audits takes place at all phases of the appraisal work relating to traffic modelling, CBA, Project Appraisal Balance Sheet, Business Case and Post Project Reviews. Specific auditing requirements relating to these can be found in the relevant chapters. Internal audits are undertaken by the DOPM and supported by the Appraisal Team. They comprise reviews of the approach and methodology, or any assumptions made in the appraisal work, including any relevant deviations from the appraisal guidelines. The external audit consists of a detailed review and is to be undertaken by either the NRA or an NRA appointed consultant. Note that is all cases it is the responsibility of the DOPM to ensure that all appraisal deliverable prepared for the scheme are robust and reflect the scheme in the most appropriate manner. It is for this reason that internal reviews are required at all Phases by the DOPM. CBA report 3.24 Having carried out a Cost Benefit Analysis, the CBA Team is responsible for producing a formal CBA Report for submission to the DOPM. The purpose of the report is to detail and justify the methodology, provide detailed information on the data inputs and to present the results of the economic appraisal. The CBA Report is the primary output from the CBA process, and will contain all the information required by both the NRA and the DOPM. This includes: the validation checklist; node-link

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diagrams; maps; COBA *.dat and *.prn files for high and low growth scenarios (or equivalent TUBA files for variable trip matrix appraisals), and any other information requested by the NRA or DOPM. When is a CBA report required? 3.26 3.27 A CBA Report will normally be required at route selection, preliminary design, construction documents / tender award and final account / closeout phases. The level of detail included in the report may reflect the phase at which it is prepared. For example, if default parameter values have been used during route selection, the report will only need to state that default values have been used, in line with the values in the National Parameter Values sheet. Conversely, a report produced at preliminary design, will have to contain full documentation on the derivation of local parameter values. At final account / closeout the report should compare the results with the construction documents CBA results. Report contents 3.28 The CBA Appraisal Report shall contain a main report detailing the methodology and assumptions of the CBA process, and a set of Appendices containing supporting information. The main report shall be structured as follows: Section 1 Introduction 3.29 An introductory section should set the scene for the report, identifying at what stage the assessment is being undertaken (route selection, preliminary design or final account / closeout) and broadly describing the nature of the scheme(s) being appraised. Section 2 Software specification 3.30 The report should confirm the version of the CBA software that has been used in the assessment, and the version of the NRA National Parameter Values Sheet. Section 3 Network 3.31 The rationale behind the extent of the area modelled will be set out. The schematic diagram of the node-link diagram should also be presented. The node-link diagram will clearly illustrate the following data: Network layout and road names; Node numbers: nodes should be numbered starting with node number 101 and increasing in increments of 1, e.g. 101, 102, 103 etc. Where schemes are separated into specific sections or regions the first digit can be changed to distinguish each region clearly within the COBA output file, e.g. 201, 202, 203, 301, 302, 303; Link numbers: link numbers should be four digits in length and broadly relate to each node number into which they run, i.e. links 2011, 2012, 2013, and 2014 will run into node 201. Where 2-way links are coded, link numbers can be defined by running into either node at the end of the link. For example, a link joining nodes 201 and 202 can be defined by either 2011 or 2021; Do-Minimum and Do-Something traffic flows; and Road type of each link. 3.32 The required format for the network diagrams is provided as an example in Figure 3.2. The justification for a standard coding methodology is to facilitate easier interpretation of COBA output data files by the Design Office and the NRA. Where software other COBA has been used to undertake the CBA, a figure illustrating the extent of the modelled area considered within the traffic model should be provided. Section 4 Data collection 3.34 Details on the level of data collection that was undertaken should be outlined. This would cover traffic flow information and journey time surveys. The compilation, checking and interpretation of this data should also be described.

3.33

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Section 5 CBA input assumptions 3.35 All data input assumptions should be described, with specific reference to the treatment of the CBA parameters. Significantly, where NRA default values have not been used in the assessment, details documenting the derivation of these values should be provided. Information relating to the calculation of the scheme costs is also required, describing the approach taken in the derivation of the costs. Completed spreadsheets as provided in Appendices 13, 14, 15 and 16 should be included. Section 6 CBA validation 3.37 The process of validation of the COBA model should be presented, which examines in particular the base year journey times. Any significant deviation from journey times between modelled and surveyed data sets should be explained and justified. Section 7 CBA results 3.38 The results section will contain the summary of results of the assessment. This will provide a brief overview of the economic case for the road scheme. This section should also include reports of any sensitivity tests that may be necessary and an incremental analysis of link and junction standards if required. The results should include the Impact on the Public Accounts summary table (shown in Table 3.4), which fulfils the requirements of the exchequer cash flow analysis. For a final account / closeout CBA, should also contain a discussion of how the results compare with the construction documents CBA. Appendices 3.41 The Appendices provide all the supporting documentation that accompanies the CBA Appraisal Report. The Appendices should include: Cost estimate breakdown; The COBA (or TUBA) input files; The COBA (or TUBA) output summaries; A copy of the COBA schematic network diagrams; A summary of any relevant data collected to validate the COBA model, and A CD containing all the above information in digital form, including a full copy of the COBA / TUBA output file and the scheme drawings used to derive the geometrical data. Information on traffic flow inputs 3.42 Given the importance of traffic flow input to CBA, the basis of this input should normally be documented. This information is contained within the Traffic Modelling Report.

3.36

3.39 3.40

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Figure 3.2 Example COBA network diagram

KEY
1011 101 102 1021 103 1031 104 1041 113 1131 105 1052 106 1051 101 1011 Single Carriageway 2+1 Road Dual Carriageway Motorway Node Node Number Link Number

1061

107 1072 1083 117 1082 1141 1144 122 114 108 1081 116

1071 115

120

1142 121 109 1091 118

1143 1093 119

1092 1121 110 124 1103 1102 1101 123

111

1122

112

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Auditing processes 3.43 During the overall project process there are two levels of audit at each project phase: internal and external. Internal audit Internal audits are undertaken by the DOPM and supported by the Appraisal Team. They comprise reviews of the approach and methodology, of any assumptions made in the CBA work, of parameter values and of any relevant deviations from the current guidance. An audit checklist is available for download from the NRA website (see Appendix 2). External audit The external audit is to be undertaken by either the NRA or an NRA appointed consultant. This is a detailed audit check, and includes an assessment of local parameter values and comparison against other data sources. Note that in all cases it is the responsibility of the DOPM to ensure that the CBA supplied to the NRA is robust and reflects the scheme in the most appropriate manner. It is for this reason that an internal review of the CBA Report is required at all Phases by the DOPM. Key audit areas 3.47 DMRB Volume 13, Section 1, Part 3, Chapter 11 provides guidance on what to check when validating a COBA printout; reference should be made to this document when undertaking the validation. In the first instance, there is a requirement for the CBA Team to provide several key pieces of information, including scaled scheme plans, node and link diagrams, cost estimates and COBA printouts. The COBA printouts can be lengthy, so electronic copies of the input and output files are required enabling all data to be viewed on screen. The key areas that require checking are described below. Where modelled networks are large, a sampling approach to the checking may be adopted. For example, for networks consisting of over 100 links, it would be appropriate to check in detail the coding of 10% of the links and junctions. Basic variables 3.50 If local rather than default values have been used for parameters such as traffic growth, traffic proportions, seasonality index, E- and M-factors, flow groups and accidents, then the basis for the derivation of these values should be examined and any calculations confirmed. Coded network structure 3.51 There should be a direct correspondence between the coded network, the node link diagram and scheme plans for both the Do-Minimum and Do-Something schemes. Link data 3.52 A check should be made on the data pertaining to each link, such as the link length and other geometric characteristics, speed and accident rates, with those values falling outside the range of typical values for the link type being investigated further. Junction data 3.53 The audit should check that flow patterns and turning matrices are reasonable. Maximum delay coding can be compared against timed runs. Traffic flows 3.54 Flows entered for non-neutral months should be queried and the flows should be crossreferenced against those contained in any Local Model Validation Report. There should be no links with zero flow. Scheme costs

3.44

3.45

3.46

3.48

3.49

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3.55

The scheme costs input into COBA should be checked carefully. The audit should confirm that all items (construction, land, preparation and supervision costs) have been included. It is likely that a period of time will have elapsed since local cost estimates were collated and it will be necessary to verify that these estimates are still valid. Any indices used to take historical costs to the price base year, such as the CPI and RPF should be reviewed for appropriateness. The Auditor should also consider whether the assumed timing of the scheme costs is correct. Costs and benefits

3.56 3.57

3.58

The items listed above all relate to data input by the user and are relatively straightforward to check. A more complex task is the interpretation of the costs (and thereby benefits) that these data give rise to in the context of travel time, vehicle operating costs and accidents, and the changes thereof over the appraisal period. The process should seek to confirm that the cost and benefit stream relating to each is realistic and also in line with the aims of the proposed scheme. For example: Travel time the audit should investigate links and junctions going over capacity and when this occurs during the appraisal period. The audit should also confirm whether changes in total vehicle kilometres accord with expectation, and should examine the resulting changes to time spent on each link and at each junction. Vehicle Operating Costs fuel and non-fuel related Vehicle Operating Costs (VOC) will change as a result of the general increase in vehicle kilometres aggregated over the entire network over time. The auditor should confirm that the changes in vehicle operating costs accord with expectation. Accidents are large accident reductions realistic? Can they be reconciled with the problems for which the scheme is designed to address? Audit checklist

3.59

3.60

A checklist that summarises the key elements to be considered during the audit process is included in Appendix 2 for COBA based appraisals. This list is based on the information contained in DMRB Volume 13, Part 1, Chapter 11, and includes the more important items in each output phase that should be reviewed and commented upon if necessary. It is recommended that auditors use this list, or similar, to ensure that all costs and benefits attributed to a scheme have been checked. Appendix 10 contains advice on how to audit a TUBA appraisal. If the audit is being undertaken by an independent consultant, any findings, comments and recommendations may be expanded upon in a separate audit report, with the summary checklist. Costs and benefits

3.61 3.62

3.63

The analysis of monetised costs and benefits is currently limited to the assessment of the following core impacts: Changes in travel time; Changes in vehicle operating costs; Changes in tolls; Changes in scheme costs and maintenance expenditure; Delays during construction and maintenance; Changes in accident costs, and Changes in greenhouse gases.

3.64

Table 3.1 sets out those impacts of a road scheme that are not monetised; instead these are to be assessed qualitatively according to guidance provided in Chapter 6 and scored in the Project Appraisal Balance Sheet (PABS).

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Table 3.1 Non-monetised impacts in the appraisal of road scheme Criterion Element

Environment

Air quality Noise and vibration Landscape and visual quality Biodiversity Cultural heritage Land use Water resources

Safety

Security

Economy

Other economic impacts

Accessibility and Social Inclusion

Impact on vulnerable groups Impact on deprived geographic areas

Integration

Transport integration Land use integration Geographical integration Integration with other Government policies

3.65 3.66

Values of time Travel timesavings are the major items of the calculated benefit resulting from a typical highway scheme. For most schemes the aggregate time saving is positive, with the change in travel time directly or indirectly associated with the proposal, for example: Direct changes in travel time are incurred by transport users using the new facility, such as a bypass, rather than the next best alternative, and Indirect changes result from changes in travel times along other routes that may be affected by the scheme.

3.67

Three distinct purposes of travel are distinguished: travel in the course of work, commuting (travel to and from normal place of work) and other (travel for other non-work purposes). A different value of time can be applicable depending on the journey purpose, vehicle mode and whether the occupant is the driver or passenger. The latest values of time recommended by the NRA for use in CBA of road infrastructure projects are provided in the National Parameters Value Sheet. Vehicle Operating Costs The use of the road system by private cars and lorries gives rise to operating costs for the user. These costs are split into two groups: fuel costs and non-fuel costs; the latter comprising items such as fuel, oil and tyres, and an element of vehicle maintenance. Highway schemes can give rise to changes in operating costs. Differences in the Vehicle Operating Costs (VOC) are recorded among the benefits resulting from a road improvement.

3.68

3.69

3.70

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3.71

The change in total VOC over all links depends on changes in the distance travelled by vehicles and on average link speeds. Whilst for most schemes the aggregate time saving is positive the change in overall VOC can be either negative or positive depending on the balance of changes in distance travelled and speeds. The latest VOC parameter values recommended by the NRA for use in CBA of road infrastructure projects are provided in the National Parameters Value Sheet. Tolls Any additional charges resulting from tolls should be treated as a cost (disbenefit) to travellers and a reduction in charges should be treated as a benefit. Further advice on CBA of schemes involving tolling is provided in Paragraph 3.88. Scheme costs The total costs of the scheme are considered in terms of: Investment costs (including construction, land, labour, preparation and supervision costs), and Operating costs, relating to changes in the cost of maintaining the network.

3.72

3.73

3.74

3.75 3.76

In the majority of cases, scheme costs will be borne entirely by National or Local Government. However, in some instances contributions may be sought from private developers. The overall net costs incurred by Government will take into account: Contributions from developers; Revenue raised by indirect taxation (as a result of changes in vehicle operating costs), contributions from developers, and Income received from tolled highways procured under Public Private Partnership (PPP) agreements.

3.77

Detailed guidance on converting scheme cost estimates into a format compatible with COBA is provided in Appendix 12. Delays during construction and maintenance Delays during construction and changes in delays due to routine maintenance are generally only considered for complex schemes, or when they are likely to represent a significant element of the costs or benefits. In such instances the NRA should be contacted to agree a method for assessing such implications. Accidents For road accidents, standard methodologies exist for calculating the projected number of accidents, the types of accidents and associated casualties in the Do-Minimum and DoSomething scenarios. The methods relate the traffic on a road (measured by vehiclekilometres) to the number of accidents via the application of an accident rate. Accident rates (and casualty rates) for different road types are set out in the NRA Parameters Value Sheet and these should be adopted. Accident rates and accident severity rates are predicted to change over time irrespective of whether or not a specific intervention is being considered. Reduction factors for both accidents and casualty rates are provided in the NRA Parameter Value Sheet. Standard cost values are attributed to fatal, serious and slight casualties allowing the monetisation of accidents in the before and after scenarios, and hence the calculation of the benefits or otherwise of a proposal. The standard costs per accident, are given in the NRA Parameter Value Sheet. The Parameter Value Sheet also provides costs per accident for insurance administration, damage to property and Garda costs for different types of accidents on different types of roads. Local accident data can be used in place of national values for selected links where such data are considered to be reliable. Not all accidents involving road vehicles are reported, especially those where only minor damage to vehicles is incurred and Garda are not called out. The COBA programme automatically adjusts observed accident rates to account for the phenomenon of underreporting.

3.78

3.79

3.80

3.81

3.82 3.83

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3.84

Greenhouse gases Carbon emissions should be considered in terms of the change in the equivalent tonnes of carbon released as a result of implementing a highway scheme. Carbon emissions are estimated from fuel consumption in the Do-Minimum and the Do-Something options. Changes in carbon emissions for the opening year and over the whole appraisal period, as well as the monetary value for carbon emissions over the whole appraisal period should be recorded in the PABS. Procurement model

3.85

In the case of Public Private Partnership scheme that proposes a toll, a benchmark CBA should be undertaken for the untolled scenario. In such cases, the construction costs should be based on the anticipated tender cost, excluding VAT. Where required by the PPP Unit, a separate assessment should be undertaken for the tolled scenario. The methodology and the public sector costs required for this evaluation should be agreed with the PPP Unit. Treatment of parameter values

3.86

COBA and TUBA contain a series of default parameters relating to items such as economic values (for example time, accidents and vehicle operating costs), accidents (rates and severity), annual traffic flow patterns and vehicle composition. Default values for the parameters can be found in the NRA National Parameter Values Sheet. An Irish version of the COBA programme has been developed which contains default parameters values. This software will be made available by Transport Research Laboratory. Appendix 8 provides further details on the work undertaken by TRL, highlighting the differences between the UK and Irish versions of the program. When undertaking TUBA assessments, the standard economics file must be amended to overwrite values specific to the UK with those suitable for CBA assessments in Ireland. A default Irish-specific economics file is provided in Appendix 11. Economic input parameters do not change by project phase; however the treatment of other parameters is dependent on the phase of scheme development. Guidance on the source for each parameter and whether local or national default values should be used can be found in Appendix 7 a summary is shown in Table 3.2. Where local (i.e. non default) values are required, the user must update the relevant fields in the COBA input file. Table 3.2 Treatment of parameters Always Local Scheme costs Link geometric characteristics Junction geometric characteristics Link flows Junction turning proportions Local or National Seasonality index E-Factor M-Factor Traffic mix proportions Flow groups Accident rates and casualty proportions Speed-flow curves Vehicle occupancy Always National Values of time Accident costs Economic growth Vehicle operating cost parameters Taxation Traffic growth profiles Discount rate Consumer Price Index

3.87

3.88

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Relative Price Factor Carbon costs

The Do-Minimum and Do-Something options 3.89 The first stage in a CBA appraisal is to define the alternative options that are to be appraised. The minimum number of options is two, namely, a Do-Minimum option and a Do-Something option. In most cases, however, there will be several Do-Something options under consideration. While these terms may appear self explanatory, in fact they raise some issues of fundamental importance. Do-Minimum The Do-Minimum scheme (or option) is the base road and traffic network against which alternative improvements can be assessed. In many cases, the definition of the Do-Minimum is straightforward: it is simply the existing network without modification, that is, a Do-Nothing scenario. This corresponds to the general principle that all expenditure that is not historic (sunk) requires an economic justification. However, one or more of the following four cases may arise, in which the Do-Minimum differs from the Do-Nothing: The case where works will be carried out regardless of whether or not the Do-Something scheme is built. An example is where there is a firm commitment to improve a junction in the existing network, regardless of other road proposals. In this case, the improved (not the existing) junction should be coded in the COBA network in both the Do-Minimum and DoSomething schemes in the year it will be improved. The cost of the junction improvement may be regarded as committed and is irrelevant for the COBA appraisal of the road proposal; it should not, therefore, be included in the scheme costs; The case where the existing network may be improved to form a Do-Minimum scheme that can be tested as an alternative to carrying out major Do-Something improvements. An example is where the traffic demand at an existing junction or link is forecast to become heavily overcapacity in the near future and where relatively minor improvements can be undertaken to increase capacity, such as by adding a lane at a traffic signal; The case where traffic conditions can be improved without significant capital expenditure. An example is where traffic management measures can be undertaken to reduce existing traffic delays, in which case the assignments input to COBA will differ in the Do-Minimum from those in the Do-Nothing, and The case where the area covered by the COBA network includes road proposals other than the one under immediate consideration. The COBA Do-Minimum and Do-Something networks should be coded to include planned improvements elsewhere in the network in the year they will be open, for example as set out in the National Roads Programme or in Local Authority development plans. 3.91 However, it will often be desirable to exclude improvements which are scheduled for completion after the scheme being appraised and which therefore may be subject to some uncertainty. This would be undertaken in the form of sensitivity tests, supporting the main Do-Minimum scenario, which includes all committed schemes. It should be noted that even a literal Do-Nothing base case is not a no change one. With traffic growth in the future, Do-Nothing user costs will increase over time, reflecting increased congestion. Do-Something The Do-Something scheme is the road proposal under consideration. Usually there will be more than one feasible Do-Something option. The number and nature of the Do-Something options will change as the planning of the road scheme proceeds. At early stages in scheme planning, a wide range of different options may be considered. At later stages, the range will be narrower but Do-Something options may be refined to highlight more detailed differences such as junction design or link standards.

3.90

3.92

3.93

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Fixed and variable trip matrices 3.94 When a road improvement takes place, several changes in trip patterns are possible in principle: Reassignment: traffic travelling from A to B may transfer to the new route between A and B; Time of day: trips may be made at a different time of day; Redistribution: traffic may change its origin or destination; e.g. traffic may go to C instead of B; Modal shift: trips to the same destination may be made by a different mode of transport, and Generation: trips may be made when previously travel did not take place (including the release of suppressed demand). 3.95 The number of trips in the matrix is fixed between the Do-Minimum and Do-Something in situations when only the first reaction, reassignment, takes place. The change in consumer surplus in this instance is as illustrated in Figure 2.2. When it can be demonstrated that a scheme, or combination of schemes, is likely to cause a significant response other than reassignment, the fixed trip matrix assumption may be inappropriate, and the Do-Something and Do-Minimum matrices will differ in the number of trips. In such instances, the calculation of consumer surplus is based on Figure 2.3, with the rule of half used to calculate the net welfare gain. The method of CBA appraisal will depend whether the fixed trip or variable trip matrix assumption is applicable: Fixed trip matrix The COBA programme should be used. The computation of user cost savings in the context of a fixed trip matrix is the central principle of the COBA program. Taking a fixed trip matrix and assignments for the Do-Minimum and Do-Something it can estimate the effects of daily and seasonal flow variations on total user costs through the application of speed/flow, junction delay, accident and vehicle operating cost flow related formulae. Using the traffic forecasts it can repeat these calculations for each of the years in the evaluation period. This allows ready estimation of a stream of benefits, which can be discounted to give a base year Net Present Value (NPV). Variable trip matrix The TUBA program is specifically designed to address CBA in the case of variable trip matrices and is the recommended software for such appraisals. The use of alternative software titles will be subject to the agreement and approval of the NRA. TUBA requires time and distance skim matrices to be extracted from the traffic model. 3.98 3.99 3.100 In most cases, a fixed trip matrix assessment shall be carried out as a benchmark, accompanied by a full CBA Report. Whilst COBA is not suitable for the appraisal of user benefits when the trip matrix is variable, it can be used to calculate the change in accident costs, which are not dealt with in TUBA. Further guidance on undertaking a preliminary assessment as to whether the fixed trip matrix assumption is valid can be found in Chapter 4 of the Project Appraisal Guidelines and also in the more detailed advice on modelling located in Appendix 3. The NRAs approval must be sought prior to commencing a variable trip matrix appraisal. The CBA method 3.101 Traffic flows with and without the road scheme under appraisal are obtained from a traffic forecasting process that is carried out separate from CBA. The traffic forecasting process assigns trips to the road network with and without the proposed road scheme, and forms the basis of the traffic input to CBA. The technique appropriate for this assignment will vary according to the particular scheme and specific guidance on traffic modelling is provided in Chapter 4 of the Project Appraisal Guidelines. Depending on whether a COBA or a TUBA style assessment is appropriate, different outputs from the modelling are required. In the former case assigned flows on links and junctions are required, whereas the latter uses matrices of total trips, travel times and distance travelled.

3.96

3.97

3.102

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3.103

COBA The essence of COBA is that the travel cost for each component (link and junction) of the network is calculated separately according to the flows and turning movements assigned to it. These individual link and junction costs (that is, time, vehicle operating and accident costs) are summed to yield the total user costs over the network. The matrix of trips is assumed to be fixed in all cases when using the COBA programme. As such, a comparison can be made between total network costs before and after the road improvement in question. The reduction in costs is taken as a measure of the scheme benefits as they arise in each year of the appraisal period, and rests on the assumption that the improvement in question does not affect the number of trips made nor their origins and destinations. User benefits are calculated for all traffic on the whole road network affected, and include impacts on traffic both using and not using the new road. User costs consist of changes in travel time, vehicle operating costs (fuel and non-fuel) and the occurrence of accidents. COBA applies monetary values to each such that they can be set alongside capital and maintenance costs to provide total scheme costs as a single monetary value. The COBA program requires all costs to be input as resource costs (i.e. net of indirect taxation), although the output is provided in market prices. Guidance on using the COBA programme is provided in Appendix 7. TUBA The TUBA programme requires skim matrices relating to travel time and distances between each origin and destination in the highway model and is suited to instances where the fixed trip matrix assumption is not valid. User benefits in terms of changes in travel time and Vehicle Operating Costs are calculated for each journey as a whole, rather than on a link by link basis. The skim matrices may be disaggregated to represent different user groups and travel modes, depending on the complexity of the traffic model. Guidance on using the TUBA programme, including advice on how to undertake an audit of a TUBA-based appraisal, is provided in Appendix 10. Overview Figure 3.3 illustrates how the costs and benefits of a scheme are brought together in the overall appraisal of monetised benefits. Figure 3.3 Overview of the CBA appraisal process
Transport User and Provider Costs Accident Costs Greenhouse Gasses Costs on Do Minimum Network (discounted over evaluation period) A1 Transport User and Provider Costs Accident Costs Greenhouse Gasses Costs on Do Something Network (discounted over evaluation period) A2

3.104

3.105 3.106

3.107 3.108 3.109

3.110

Net Government Expenditure on Scheme PVC

Transport User and Provider Benefits Accident Benefits Greenhouse Gasses Benefits PVB = A1-A2

CRITERION FOR PROJECT APPRAISAL BCR, NPV, IRR

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Appraisal period 3.111 3.112 The appraisal period is the period over which costs and benefits are calculated. The appraisal period for National Road schemes is provided in the National Parameters Value Sheet. CBA considers the stream of benefits arising over the life of a road scheme allows a sounder basis for evaluation than is afforded by single year measures. Such measures can be particularly deceptive since two scheme options may yield similar returns for a given year but perform differently as traffic flows change over time. Residual value It is recognised that roads can have a useful life beyond the appraisal horizon and for this reason a spreadsheet that can be used for calculating the residual life in monetary terms at the Present Value Year is provided on the NRAs website. The Present Value of the residual life should be included within the calculation of the overall Net Present Value and Benefit:Cost ratio of the scheme. Changes to parameter values with time In the future the real value of a number of parameters will change. The NRA National Parameter Value Sheet provides information on the growth factors that are applied to the value of time and the value of accidents. These factors are derived from forecast growth in real gross nation product per person employed. Methods for comparing costs and benefits 3.115 If all impacts of a scheme could be monetised and included in the CBA, the overall economic worth of a scheme could be summarised using one or more of the following measures: Net Present Value (NPV); Benefit/Cost Ratio (BCR), and Internal Rate of Return (IRR). 3.116 Benefit to Cost Ratio The Benefit to Cost Ratio (BCR) is given by the ratio of the discounted sum of all future benefits to the discounted sum of all costs. Thus: BCR = PVB/PVC 3.117 Internal Rate of Return The Internal Rate of Return (IRR) is the rate of discount that makes the present value of the benefits exactly equal to the present value of the costs. Put another way, the IRR is the rate of discount that makes the NPV of the entire stream of benefits and costs exactly equal to zero. The IRR is that for which the sum:

3.113

3.114

3.118

(1 + )
y =n y =0

By

y p

=0

Where By is the net benefit (undiscounted) in year n. 3.119 To solve for an iterative approach should be taken whereby incremental changes are made to the discount rate entered by the user into the basic data section of the COBA file and re-running the program until a value is found that yields a NPV equal to zero. It should be noted that there may also be other significant costs and benefits, some of which cannot be presented in monetised form. In such cases, whilst a value for the NPV and BCR can be calculated the results may be misleading and will not necessarily provide a reliable measure of overall value for money. Under such circumstances, the analysis should not be used as the sole basis for decisions.

3.120

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Interpretation of CBA Output Transport Economic Efficiency The Transport Economic Efficiency (TEE) Table (Table 3.3) is a significant element of CBA and is an output from both the COBA and TUBA programs. The table presents the costs and benefits incurred by both users and operators of the transport system. A key aspect of the TEE analysis is the breakdown of the benefits into those experienced by particular groups (consumer users, business users, transport providers) and also by users of a specific mode. In this manner, TEE analysis provides an overall summary of the distributional impact of a scheme. It should be noted that financial costs (and benefits) to the Government (such as the scheme costs) are not included in the TEE assessment. The costs to Government should be compared with all of the monetised benefits (i.e. including safety and greenhouse gases) to assess the overall value for money. Impact on the Public Accounts In the Project Appraisal Balance Sheet, scheme costs are summarised under the entry for the Impact on the Public Accounts. In the majority of cases, scheme costs will be borne entirely by National or Local Government. However, in some instances contributions may be sought from private developers. Changes in vehicle operating costs give rise to changes in the level of revenue raised by the indirect taxation. Such changes with along with any contribution from developers, is also taken into account when calculating the net costs incurred by Government as demonstrated in Table 3.4. For tolled highways procured under a Public Private Partnership (PPP), income from toll revenue apportioned to the Government will also reduce the net scheme costs. Delays during construction and changes in delays due to routine maintenance are generally only considered for complex schemes, or when they are likely to represent a significant element of the costs or benefits. In such instances the NRA should be contacted to agree a method for assessing such implications. This table provides the information necessary to report the results of the exchequer cash flow analysis. Table 3.5 shows how the impacts of a highway scheme that can be are presented in monetised form are arranged to derive NPV and BCR. In most cases, the output is provided indirectly from COBA or TUBA, however for accidents, the present value of accident savings is only obtainable from COBA. The residual value of the scheme is not reported in either COBA or TUBA; instead this can be calculated by using the NRA spreadsheet found at Appendices 13 and 14. The values entered for each impact are the difference between the Do-Minimum and Do-Something cases. It should be noted that there may also be other significant costs and benefits, some of which cannot be presented in monetised form. In such cases, a value for the NPV and BCR can be calculated; however the results may be misleading and the analysis in Table 3.5 does not provide a good measure of overall value for money. Under such circumstances, the analysis should not be used as the sole basis for decisions.

3.121

3.122

3.123

3.124 3.125 3.126

3.127 3.128

3.129 3.130

3.131

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Table 3.3 TEE table entries M (Discounted) Consumers User Benefits Travel time Vehicle Operating Costs
(1)

Notes

(2)

User charges

(3)

Delays during construction & maintenance NET CONSUMER BENEFITS Business User benefits Travel time Vehicle Operating Costs

(4)

For drivers / occupants of private cars, light goods vehicles and buses undertaking nonwork trips For drivers of private cars, light goods vehicles undertaking non-work trips For drivers / occupants of private cars, light goods vehicles and buses undertaking nonwork trips. Applies only in the case of tolled roads. For drivers / occupants of private cars, light goods vehicles and buses undertaking nonwork related trips. Calculated outside of COBA and TUBA.

(5) = (1)+(2)+(3)+(4)

(6)

(7)

User charges

(8)

Delays during construction & maintenance Subtotal Private sector provider impacts Revenue Operating costs Investment costs Grant / subsidy Subtotal Other business impacts Developer contributions NET BUSINESS IMPACT TOTAL Present Value of Transport Economic Efficiency Benefits

(9)

Drivers / occupants of goods vehicles, private vehicles, LGV and buses undertaking trips in course of work. Drivers of goods vehicles, private vehicles and LGV undertaking trips in course of work. Drivers / occupants of goods vehicles, private vehicles, LGV and buses undertaking trips in course of work. Applies only in the case of tolled roads. For drivers / occupants of private cars, light goods vehicles and buses undertaking trips in the course of work. Calculated outside of COBA and TUBA.

(10) = (6)+(7)+(8)+(9)

(11) (12) (13) (14) (15) = (11)+(12)+(13)+(14)

For a private provider / operator of a highway this would include any revenues received from tolls and costs associated with building and maintaining the scheme.

(16) (17) = (5)+(10)+(16)

(18) = (5)+(17)

This value is taken forward in the overall assessment of monetised benefits, combined with monetary values for accident savings, greenhouse gas savings and residual value and then compared against the scheme costs

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Table 3.4 Impact on the public accounts Impact Local Government Funding Operating costs Investment costs Developer and other contributions NET IMPACT Central Government Funding Operating costs Investment costs Developer and other contributions Toll revenues Indirect tax revenues NET IMPACT M (Discounted)
(19) (20) (21) (22) = (19)+(20)+(21)

Notes Maintenance Construction, land, labour, preparation and supervision costs

(23) (24) (25) (26) (27) (28) (29) = (23)+(24)+(25)+(26)+(27) +(28)

Maintenance construction, land, labour, preparation and supervision costs Revenues received by Government when toll schemes are procured under PPP

Present Value of Costs (PVC)

(30) = (22)+(29)

Table 3.5 Analysis of monetised costs and benefits Impact TEE Benefits Consumer User Benefits Business Benefits Private Sector Provider Impacts Accidents Emissions Residual Value Present Value of Benefits (PVB) Government Funding Present Value of Costs Overall Impact Net Present Value (NPV) Benefit to Cost Ratio (BCR)
(35) = (34)-(30) (35) = (34)/(30)

M (Discounted)
(5) (10) (15) (31) (32) (33) (34) =(5)+(10)+(15)+(31)+(32) +(33) (30)

Notes As calculated in Table 3.3 As calculated in Table 3.3 As calculated in Table 3.3 Calculated in COBA Calculated in COBA or TUBA Calculated in NRA Spreadsheet found at Appendices 13 and 14

As calculated in Table 3.4

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Enquiries

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Enquiries
All enquiries should be directed to: Transport Economist National Roads Authority St Martins House Waterloo Road Dublin 4.