Highway Economics and Finance - part 3( Economic analysis)

Hi,
This is the 3rd part of our topic 'Highway Economics and Finance', in first part we talked about the need of highway economics and the some of the road user benefits with the vehicle operation cost. In second part we talked about the Highway costs which includes the capital cost and the maintenance cost. If you want to go again through the previous articles please visit the links below:

Highway Economics and Finance -part 1.


Economic analysis of a highway improvement aims at determining the monetary benefit due to the additional expenditure. The analysis also helps to decide the most economical proposal among various alternatives.

  • Methods of Analysis:

Methods of analysis of the economic justification of a highway project has same principle, that benefits must qualify for the expenditure on the improvement by comparing them with some appropriate method.
There are various methods of analysis but the most common are as given below:

  • Annual Cost Method:
In this method the annual cost of each component of the highway improvement project is calculated by multiplying the capital value with some appropriate capital recovery which is calculated for the given life span.  Annual cost may be found by the following relation:
Cr = P[ {i(1+ i)^n}/{(1+ i)^n - 1}] = P (CRF)
Total annual cost of an improvement is sum of all annual costs of capital recovery(Cr) plus annual maintenance and road user costs. 
  • Rate of return Method:
There are number of variations for the determination of rate of return of a highway improvement. In the rate of return method, the interest rate at which two alternative solutions have equal annual cost is found. If the rate of return of all projects are known, the priority for the improvement could be established. 
Road Research Laboratory(London) has recommended a simplified procedure of rate of return method. The percentage rate of return R is given by
R = [(O+A-M)/P ]*100
Where, O = Savings in annual road user costs
    A = Annual savings in accident costs
    M = Additional maintenance cost per anum
    P = Capital cost of improvement.
  • Benefit Cost Ratio Method
The principle of this method is to assess the merit of a particular scheme by comparing the annual benefits with the increase in annual cost.

Benefit cost ratio   = Annual benefits from improvement / Annual cost of the improvement
                                   = (R-R1)/(H1-H)
Where, R = Total annual road user cost for existing highway
               R1 = Total annual road user cost for proposed highway improvement
              H = Total annual cost of existing road
               H1 = Total annual cost of proposed highway improvement.
The benefit-cost ratios are determined between alternate proposals and those plans which are not attractive are discarded. Then the benefit cost ratios for various increments of added investment are computed to arrive at the best proposal. In order to justify the investment, the ratio should be greater than 1.0. 

  • Highway Finance:

Basic principle in highway financing is that the funds spent on highways are recovered from the road users. The recovery may be both direct and indirect.
Two general methods of highway financing are:
  1. Pay us as you go method
  2. Credit financing method
In pay as you go method, the payment for the highway improvements, maintenance and operation is made from the central revenue. In credit financing method, the payment for highway improvement is made from borrowed money and this amount and the interests are re-paid from the future income.
  • Distribution of the highway cost:
The distribution of highway cost among the Government, road user and other has been a disputed task in several countries. Many economists are of the view that the financial responsibility for roads should be assigned only among the beneficiaries on the basis of the benefits each one receives. 
There are several theories suggesting the method of distribution of highway taxes between passenger cars and other commercial vehicles like the trucks. However in India the annual revenue from transport has been much higher than the expenditure on road development and maintenance. Therefore there is no problem of distributing the highway cost among other agency. Also the taxation on vehicles is being considered separately by the states and there seems to be no theory followed for the distribution of taxes between various classes of vehicles.
  • Sources of Revenue:
The various sources from which the funds necessary for highway development and maintenance may be made available, are listed below:
  1. Taxes on motor fuel and lubrication
  2. Duties and taxes on new vehicles and spare parts including tyres
  3. Vehicles registration tax
  4. Special taxes on commercial vehicles
  5. Other road user taxes
  6. Property taxes
  7. Toll taxes
  8. Other funds set apart for highways,
  • Highway financing in India:
The responsibility of financing different roads lies with the Central Government, State Governments and local bodies including Corporations, Municipalities, District boards and Panchayats.
Taxes levied by Central Govt. for Highway financing are:
  • Duties and taxes on motor fuel
  • Excise duty on vehicles and spare parts, tyre etc.
  • Excise duty on oils, grease, etc.
Taxes levied by the State Govt. include:
  • Registration fees for vehicles and road tax
  • Permits for transport vehicles
  • Passenger tax on buses
  • Sales tax on vehicle parts tyres etc.
  • Fees on driving licenses.
Taxes levied by the local bodies are mainly the toll taxes.

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