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Economic evaluation manual

(volume 1)

NZ Transport Agency

www.nzta.govt.nz

First edition, Amendment 0

Effective from January 2010

ISBN 978-0-478-35257-3 (print)

ISBN 978-0-478-35256-6 (online)

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Copyright informationThis publication is copyright NZ Transport Agency.

Material in it may be reproduced for personal or in-house

use without formal permission or charge, provided suitable

acknowledgement is made to this publication and the

NZ Transport Agency (NZTA) as the source. Requests andenquiries about the reproduction of material in this

publication for any other purpose should be made to:

NZ Transport Agency

Private Bag 6995

Wellington 6141

The permission to reproduce material in this publication

does not extend to any material for which the copyright is

identified as being held by a third party. Authorisation to

reproduce material belonging to a third party must be

obtained from the copyright holder(s) concerned.

DisclaimerThis manual is intended to provide guidance and processes

to assist approved organisations under the Land Transport

Management Act 2003 (LTMA) obtain the best value for

money spent and to provide procedures for the economic

evaluation of land transport activities. Accordingly, the

NZTA disclaims any responsibility when these procedures

are used for applications in other sectors. All reasonable

measures have been taken to ensure the quality and

accuracy of that information.

However, the NZTA may change, delete, add to or otherwiseamend information contained in this manual. While the

NZTA has taken care to provide accurate information, this

manual is a general guide and is not a substitute for expert

advice applicable to specific situations. Where there is a

specific query concerning any of the processes or

obligations contained in the LTMA, independent

professional advice should be sought. This manual has been

prepared carefully and in good faith, but the NZTA is not

liable for any errors, costs or losses arising from use of this

manual or the information contained within this manual.

More informationPublished 2010

ISBN 978-0-478-35257-3 (print)

ISBN 978-0-478-35256-6 (online)

If you have further queries, call our contact centre

on 0800 699 000 or write to us:

NZ Transport Agency

Private Bag 6995

Wellington 6141

This document is available on the NZTAs website at

www.nzta.govt.nz

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Page i

The NZ Transport Agencys Economic evaluation manual (volume 1)



Document management plan1) Purpose

This management plan outlines the updating procedures and contact points for the document.2) Document informationDocument name The NZ Transport Agencys Economic evaluation manual(volume 1).Document number Print: 978-0-478-35257-3

Online: 978-0-478-35256-6

Document availability This document is located in electronic form on the NZ Transport Agencys website atwww.nzta.govt.nz.

Document owner Investment & Revenue StrategyDocument sponsor National Manager, Investment & Revenue Strategy

3) Amendments and review strategyAll corrective action/improvement requests (CAIRs) suggesting changes will be acknowledged by the

document owner.

Comments FrequencyAmendments (minor

revisions)

Updates incorporated immediately they occur. As required.

Review(major revisions)

Amendments fundamentally changing the content or structure of the document will beincorporated as soon as practicable. They may require coordinating with the review

team timetable.

At least annually.

Notification All users that have registered their interest by email to [email protected] will be

advised by email of amendments and updates.

Immediately.

4) Other information (at document owners discretion)There will be occasions, depending on the subject matter, when amendments will need to be worked

through by the review team before the amendment is actioned. This may cause some variations to the

above noted time frames.

5) Distribution of this management planCopies of this manual management plan are to be included in the NZ Transport Agency intranet at the

next opportunity and sent to: [email protected].

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Page ii




Record of amendmentAmendmentnumber

Description of change Effective date Updated by

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ForewordA significant function for the NZ Transport Agency (NZTA) is the investment of

resources from the National Land Transport Fund to activities proposed byapproved organisations, eg regional councils or territorial authorities, and the

agency itself. These activities are assessed and prioritised through the NZTA

investment and revenue strategy for inclusion in the National Land Transport

Programme.

The procedures described in this manual have been developed to assist approved

organisations evaluate the economic efficiency of activities for which they seek

funding from the NZTA, within the value for money framework of the NZTAs

overall investment and revenue strategy.

The development of evaluation procedures is an ongoing process. The NZTA will

revise the economic evaluation procedures in this manual in the light of research

and information from across the sector in order to continually improve theprocedures to meet the above objectives. The NZTA welcomes suggestions from

approved organisations and others for further improvements.

The procedures in this manual have been developed pursuant to the Land

Transport Management Act 2003. The NZTAs primary objective is to undertake

its functions in a way that contributes to an affordable, integrated, safe, responsive

and sustainable land transport system. In meeting this objective, the NZTA must

exhibit a sense of social and environmental responsibility in a manner that seeks

value for money.

The NZTA would like to thank all those who have contributed to the development

of the procedures in this manual

Geoff Dangerfield

Chief Executive

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ContentsDocument management plan i

Record of amendment ii

Foreword iii

1.0 Introduction 11

1.1 Description 11

1.2 Purpose 12

1.3 Contents 13

2.0 Basic concepts 21

2.1 Overview 21

2.2 Social cost benefit analysis and financial analysis 22

2.3 Benefits 23

2.4 External impacts 29

2.5 Costs 210

2.6 Present value and discounting 211

2.7 Time frame 213

2.8 Do-minimum and benefit and cost differentials 214

2.9 Benefit cost ratios 215

2.10 Incremental cost benefit analysis 217

2.11 First year rate of return 220

2.12 Uncertainty and risk 221

2.13 Alternatives and options 223

2.14 Packages 224

2.15

Transport models 226

2.16 Other inputs to funding assessment 228

2.17 References 231

3.0 Evaluation of road activities 31

3.1 Overview 31

3.2 Stages of analysis 32

3.3 The do-minimum 34

3.4 Road and traffic data 35

continued

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3.5 Benefits of road activities 37

3.6 Costs of road activities 311

3.7 Period of analysis 314

3.8 Uncertainty and risk for road activities 315

3.9 Roading packages 316

3.10 References 317

4.0 Simplified procedures for road activities 41

4.1 Overview 41

4.2 Selecting the procedure 42

SP1 Road renewals SP11

SP2 Structural bridge renewals SP21

SP3 General road improvements SP31

SP4 Seal extensions SP41

SP5 Isolated intersection improvements SP51

5.0 Full procedures for activity evaluation 5-1

5.1 Overview 5-1

5.2 Application of full procedures 5-2

5.3 Stages of analysis 5-3

5.4 Feasibility report 5-5

Worksheet 1 Evaluation summary 5-10

Worksheet 2 Summary of benefits and costs 5-12

Worksheet 3 Benefit cost analysis 5-14

Worksheet 4 Incremental analysis 5-16

Worksheet 5 First year rate of return 5-18

Worksheet 6 Sensitivity analysis 5-20

Worksheet 7 Checklist for activity evaluations 5-22Worksheet 8 Transport modelling checks 5-24

Worksheets A1 Discounting and present worth factors 5-42

Worksheets A2 Traffic data 5-46

Worksheets A3 Travel time estimation 5-66

Worksheet A4 Travel time cost savings 5-86

Worksheet A5 Vehicle operating cost savings 5-88

Worksheets A6 Accident cost savings 5-92

continued

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Worksheet A7 Vehicle passing options 5-118Worksheets A8 External impacts 5-124Worksheets A9 Vehicle emissions 5-130Worksheets A10 National strategic factors 5-134Worksheets A13 Risk analysis 5-136

Appendices 1A1 Discounting and present worth factors A11

A1.3 Single payment present worth factor A13A1.4 Uniform series present worth factor A15A1.5 Arithmetic growth present worth factor A16A1.6 Annual present worth factors A17A1.7 Quarterly present worth factors A110

A2 Traffic data A21A2.1 Introduction A21A2.2 Traffic composition A22A2.3 Separating the activity into its component sections A24A2.4 Dividing the year into time periods A25A2.5 Vehicle occupancy and travel purpose A26A2.6 Traffic volumes A28A2.7 Traffic growth rates A210A2.8 Future traffic volumes A212A2.9 Travel times and speed A213A2.10 References A214

A3 Travel time estimation procedures A31A3.1 Use of travel time estimation procedures A31A3.2 The stages for estimating travel time A33A3.3 Determining traffic volumes A34A3.4 Calculating free speed travel time A35A3.5 Determining the free speed of multi-lane roads A36A3.6 Determining the free speed of two-lane rural roads A38A3.7 Determining the free speed of other urban A310A3.8 Determining the capacity of road sections A312A3.9 Determining the capacity of motorways A313

continued

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A3.10 Determining the capacity of multi-lane roads A315

A3.11 Determining the capacity of two-lane rural roads A316

A3.12 Determining whether vehicle interactions are

significant A318

A3.13 Types of delay A319

A3.14 Average peak interval traffic intensity A320

A3.15 Determining the peak interval A321

A3.16 Calculating the average peak interval traffic intensity A323

A3.17 Calculating the volume to capacity A324

A3.18 Calculating the additional travel time A325

A3.19 Calculating bottleneck delay A328

A3.20

Determining whether to consider peak spreading A331

A3.21 Determining the additional travel time resulting from

speed change A332

A3.22 Calculating the time period total average travel time A334

A3.23 Traffic signals A335

A3.24 Priority intersections A340

A3.25 Roundabouts A343

A3.26 References A344

A4 Travel time values A41

A4.1 Introduction A41

A4.2 Base values for travel time A42

A4.3 Composite values of travel time and congestion A43

A4.4 Traffic congestion values A44

A4.5 Benefits from improved trip time reliability A413

A4.6 Worked examples of trip reliability procedure A419

A5 Vehicle operating costs A51


A5.2 Base VOC and VOC by speed and gradient A53

A5.3 Additional VOC due to road surface conditions A55

A5.4 Additional VOC due to congestion A57

A5.5 Additional VOC due to bottleneck delay A58

A5.6 Additional VOC due to speed change cycles A59

A5.7

Vehicle operating cost tables A510continued

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A6 Accident costs A61


A6.2 Choosing to undertake an accident analysis A62

A6.3 Choosing the type of analysis A66

A6.4 Applying the analysis methods A610

A6.5 Accident trends A616

A6.6 Typical injury accident rates and prediction models A618

A6.7 Typical accident reduction factors A641

A6.8 Adjusting accident costs to reflect mean speeds A645

A6.9 Worked example of accident procedures A646

A6.10 Tables A649


A7 Passing lanes A71


A7.2 Background A74

A7.3 Passing lane strategies A79

A7.4 Assessment of individual passing lanes A717

A7.5 Rural simulation for assessing passing lanes A726

A7.6 Definitions A728


A8 External impacts A81


A8.2 Road traffic noise A84

A8.3 Vibration A88

A8.4 Water quality A811

A8.5 Special areas A813A8.6 Ecological impact A815

A8.7 Visual impacts A818

A8.8 Community severance A820

A8.9 Overshadowing A821

A8.10 Isolation A822


continued

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A9 Vehicle emissions A91


A9.2 Vehicle emissions A92

A9.3 Vehicle emissions procedure A94

A9.4 Valuation of emissions A96

A9.5 Emissions reporting A97

A9.6 Carbon dioxide emissions A98

A9.7 Assessment of carbon dioxide emissions A99


A10 National strategic factors A101


A10.2 Agglomeration economies and transport investment A102

A10.3 Measurement and estimation of agglomeration in New

Zealand A103

A10.4 Agglomeration benefits A104

A10.5 Defining national strategic factors A1010

A10.6 Security of access A1011

A10.7 Investment option values A1012

A10.8 Procedures for national strategic factors A1013


A11 Congested networks and induced traffic A111


A11.2 Applying growth constraint techniques A112

A11.3 Applying peak spreading A113

A11.4 Applying the matrix scaling method A114

A11.5 Applying the incremental matrix capping method A115

A11.6 Applying the shadow network method A116

A11.7 Applying elasticity methods (FTM) A117

A11.8 Applying demand models (FTM) A1110

A11.9 Applying variable trip matrix techniques A1111

A11.10 Applying elasticity methods (VTM) A1113

A11.11 Applying activity demand models (VTM) A1115

A11.12 Conducting cost benefit analyses using variable matrix

methods A1116continued

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A11.13 Checking growth constraint or variable matrix methods A1121

A12 Update factors and incremental BCR A121


A12.2 Update factors for construction and maintenance costs A122A12.3 Update factors for benefits A123

A12.4 Target incremental benefit cost ratio A124

A13 Risk analysis A131


A13.2 Risk A132

A13.3 Risk management A133

A13.4 Risk analysis A134

A13.5 Benefit risks A137

A13.6 Costs risks A1310

A13.7 High risks A1312

A13.8 Relative risk A1313

A13.9 Contingencies A1316

A13.10 Example of risk analysis A1317

A14 Blank worksheets A141

Feasibility report A142

Worksheet 1 Evaluation summary A144

Worksheet 2 Summary of benefits and costs A145

Worksheet 3 Benefit cost analysis A146

Worksheet 4 Incremental analysis A147

Worksheet 5 First year rate of return A148

Worksheet 6 Sensitivity analysis A149

Worksheet 7 Checklist for activity evaluation A1410

Worksheet 8 Transporting modelling checks A1411

Worksheet A1 Discounting and present worth factors A1421

Worksheet A2 Traffic data A1423

Worksheet A3 Travel time estimation A1433

Worksheet A4 Travel time cost savings A1443

Worksheet A5 Vehicle operating cost savings A1444

Worksheet A6 Accident cost savings A1446

continued

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Worksheet A7 Vehicle passing options A1459

Worksheet A8 External impacts A1462

Worksheet A9 Vehicle emissions A1465

Worksheet A10 National strategic factors A1467

Worksheet A13 Risk analysis A1468

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1.0 Introduction1.1 Description

1.1 Description 11

1.2 Purpose 12

1.3 Contents 13

This manual presents the procedures to be used in the economic efficiency

evaluation of activities submitted to the NZ Transport Agency (NZTA) for

funding. Economic efficiency is one of the three assessment factors considered in

the NZTAs funding assessment, which is described in part G1.3 of the NZTAs

Planning, programming and funding manual. Economic efficiency analysis is also

used when selecting between alternatives and options to ensure the best possible

use is made of the available resources. The economic analysis procedures

contained in this manual include both simplified and full procedures.

The emphasis throughout this manual is on the practical use of techniques for

evaluating typical transport activities. No attempt has been made to provide full

coverage of the theoretical or philosophical basis of the methods presented.

In this chapter Section Page

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1.2 PurposeBy using the procedures in this manual it is intended that:

the economic evaluations will be presented in a consistent format

the costs and benefits, and their relative magnitude, of alternatives and options

will be clear

any assumptions made will, as far as possible, be standardised between

activities

the appropriate level of data collection and analysis will be undertaken for

economic efficiency evaluations.

Economic evaluationas a input into thefunding assessment

This manual provides the procedures to determine the economic efficiency of an

activity as part of the NZTA funding assessment. The economic efficiency is

typically assessed by the benefit cost ratio (BCR).

For activities that are based on generic assessment profiles, the economicefficiency is generally the distinguishing factor between activities.

Refer to part G1.3 of the NZTAs Planning, programming and funding manual for

more information on the funding assessment.

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1.3 ContentsEvaluationprocedures in twovolumes

The NZTA economic efficiency evaluation procedures are contained in two

volumes Economic evaluation manual volumes 1 and 2. Volume 1 (EEM1) contains

the basic concepts of economic efficiency evaluation and specific evaluationprocedures for road activities.

Volume 2 includes procedures to be used for evaluating transport demand

management proposals, travel behaviour change proposals, walking and cycling,

transport services, private sector financing, toll road activities and parking

measures.

Basic concepts Chapter 2 of this volume describes the basic concepts underlying the economicefficiency evaluation procedures for activities and packages of activities.

Evaluation of roadactivities

Chapter 3 describes the specific procedures to be used for economic efficiency

evaluation of road activities.

Simplified proceduresfor road activities

Chapter 4 contains simplified procedures (SPs) for evaluating road maintenance

activities and seal extension works, plus lower capital cost road activities, such as

general road improvement, structural bridge renewal and intersection

improvement activities. These SPs condense economic efficiency evaluation into a

few worksheets.

Full procedures Chapter 5 describes procedures and provides sample worksheets for fulleconomic efficiency evaluation of land transport activities. The full procedures are

to be used when either more detailed analysis is required than is provided in the

SPs, or the limits specified for the SPs are exceeded.

Guidance on inputvalues

Appendices A1 to A13 describe the methodology for valuing the various benefits

and disbenefits considered in economic efficiency evaluation and provide standard

unit values and other guidance on estimation of input values.

Blank worksheets Appendix A14 contains blank worksheets that can be copied and used forevaluations.

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2.0 Basic concepts2.1 Overview

2.1 Overview 21

2.2 Social cost benefit analysis and financial analysis 22

2.3 Benefits 23

2.4 External impacts 29

2.5 Costs 210

2.6 Present value and discounting 211

2.7 Time frame 213

2.8 Do-minimum and benefit and cost differentials 214

2.9 Benefit cost ratios 215

2.10 Incremental cost benefit analysis 217

2.11 First year rate of return 220

2.12 Uncertainty and risk 221

2.13 Alternatives and options 223

2.14 Packages 224

2.15 Transport models 226

2.16 Other inputs to funding assessment 228

2.17 References 231

Introduction This chapter describes the basic concepts underlying the economic efficiencyevaluation procedures for activities and packages of activities submitted to the

NZ Transport Agency (NZTA) for funding.


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2.2 Social cost benefit analysis and financial analysisSocial cost benefitanalysis and financialanalysis

For conventional business investment, an analysis is made of the initial investment

costs against the revenue from sales, less operating expenses. If the returns on the

investment justify the investment costs, and cash flow forecasts are satisfactory,then the venture is considered worthwhile from a business viewpoint. This is

termed financial analysis.

Social cost benefit analysis (generally abbreviated to cost benefit analysis) is

similar to financial analysis except that a national viewpoint is adopted in which

the benefits and costs are those to the nation as a whole. This viewpoint is

appropriate in the case of transport activities, which are undertaken on behalf of

the nation and are publicly funded.

The analysis involves determining the various benefits and costs associated with

each activity alternative and option over a certain analysis period, to determine

the relative economic efficiency of these alternatives and options. The results for

the chosen alternative and option indicate whether the activity is worthwhile from

an economic efficiency viewpoint.

Economic costs andshadow pricing

A financial analysis considers the monetary costs and revenues to the business

contemplating the investment. These monetary costs are the prices of goods and

services in the marketplace.

In many instances the market prices for goods and services do not equate to their

economic costs (also termed national resource costs). This difference may occur

from transfer payments, such as taxes, duties and subsidies, or of market

imperfections such as monopolistic pricing or other factors.

It is necessary, when performing a cost benefit analysis, to substitute the marketprice of items with a value that takes account of these differences. This technique

is termed shadow pricing.

The benefit values provided in this manual take account of the differences

between market prices and national resource costs, and therefore do not require

any adjustment.

All construction and maintenance cost estimates used in economic evaluations

must exclude good and services tax (GST), so that they are national resource

costs.

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2.3 BenefitsTypes of benefit Three types of benefit (or disbenefit) are considered in economic evaluations of

transport activities:

Benefits with monetary values derived from the marketplace, eg vehicle

operating costs (VOC) and the value of work travel time.

Benefits that have been given a standard monetary value include:

the statistical value of human life

the value of non-work travel time

the comfort value gained from sealing unsealed roads

the frustration reduction benefit from passing opportunities

the carbon dioxide reduction benefit.

Benefits that have not been given a standard monetary value, either because it

is inappropriate or it has not been possible to establish a standard value, egcultural, visual or ecological impact.

Benefits of transport activities may accrue to both transport users and other

parties. Disbenefits are treated as negative benefits.

Assignment of benefitvalue

Market-based monetary values for the major land transport benefits are provided

in this manual. Appendix A8 provides standard monetary values for several

external impacts.

There are various techniques that allow economic values to be assigned to

benefits, eg willingness to pay, avoidance or mitigation costs. Where benefits that

do not have monetary values in this manual are considered likely to be significant,

it may be desirable to undertake such an analysis.

Where no monetary value is available, the benefits should be described and where

possible quantified, and also reported as an input into the NZTAs funding

assessment (refer to part G of the NZTAs Planning, programming and funding

manual).

Level of datacollection andanalysis

Generally, all activity benefits should be included in the economic analysis. In

some cases there are practical limits to the amount of time and energy that can or

should be spent in gathering information and calculating total activity benefits. If a

particular parameter is likely to contribute only a small amount of the total

benefits, it is unwise to spend significant effort in obtaining this information and

the use of the default values contained in appendices may be appropriate.

Activities should be considered on a case-by-case basis to determine the

appropriate level of data collection and analysis to apply.

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2.3 Benefits continuedPrimary benefits The primary benefits used in economic efficiency evaluation of activities are listed

below showing the type of activity in which they are normally taken account of.

Transport

Primary benefit

R Dm m

m

Svc

Waknacn

E

opomo

amkn

Pkna

lauPvesonn

aroton

Travel time costsavings

Vehicle operating costsavings

Accident cost

savings

Seal extensionbenefits

Driver frustrationreduction benefits

Risk reductionbenefits

Vehicle emission

reduction benefits

Other externalbenefits

Mode changebenefits

Walking and cyclinghealth benefits

Walking and cyclingcost savings

Transport service user

benefits

Parking user costsavings

National strategicfactors

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2.3 Benefits continuedSecondary benefits The benefits of traffic congestion reduction and improved trip reliability are

accounted for by adjusting the primary benefits:

travel time cost savings

VOC savings

carbon dioxide reduction benefits

accident cost savings.

Combined benefitvalues

In some simplified procedures (SPs), benefit values consisting of combinations of

benefits are used to simplify the calculations.

National strategicfactors

When evaluating activities it is expected that most, and in many cases all, of the

benefits will relate to the monetised and non-monetised impacts described in this

section and section 2.5. However, despite the wide range of factors currentlytaken into account, there may also be certain national strategic factors that should

be included in the analysis, particularly for large activities.

National strategic factors are defined as national benefits that are valued by

transport users or communities, but are not included elsewhere in the procedures

in this manual. National strategic factors may be incorporated as benefits in the

evaluation of an activity where they:

will have a material impact on an activitys importance

comprise national economic benefits

have not already been counted in the core analysis

would likely be valued in a normal market.

The criteria for assessing national strategic factors and their valuation are

discussed in more detail in appendix A10.

National strategic factors currently recognised by the NZTA for road activities are

described in section 3.5 of this volume. National strategic factors for transport

demand management activities are identified in section 3.8 of volume 2 and for

transport services proposals in section 7.6 of volume 2.

Other national strategic factor categories may be added to the list over time

(particularly where activity promoters can show that transport users are willing to

pay for a benefit not included in the current procedures), as long as they can be

shown to meet the criteria above. The NZTA will consider other potentialinstances of national strategic factors on a case-by-case basis.

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2.3 Benefits continuedEconomies of scale In some rare situations, it is possible that increased economic activity within an

area resulting from a transport improvement may give rise to economies of scale

and, therefore, additional economic efficiency improvements. If these efficiencyimprovements can be clearly identified, they can also be included as benefits in

the analysis.

If economies of scale are considered, care must be taken to ensure that:

only the efficiency gain as a result of the economies of scale is included as an

additional benefit

there are no diseconomies of scale created in other areas as a result of

transferred economic activity

there is a clear connection between the efficiency gain and the activity being

evaluated.

Business benefits Benefits to businesses are economic transfers rather than national economicbenefits and are therefore not included in the economic efficiency calculation.

However, they may be quantified and reported as part of the funding assessment

where appropriate (refer to part G of the NZTAs Planning, programming and

funding manual). This is particularly relevant to transport demand management

(TDM) activities.

Double counting ofbenefits

The standard benefits listed in this manual generally constitute the total economic

impact of improved levels of service, accessibility or safety. Certain external

impacts of activities, such as increased land values, may arise because of the

improved level of service and accessibility to nearby areas. These impacts shall be

excluded from the evaluation because including them would be double counting.

For example, it would be double counting to claim increased land values as

additional benefits if these benefits are merely a capitalisation of road user

benefits. In the case of a TDM activity, it would be double counting to include

saved energy benefits, VOC savings and travel time savings in the same

evaluation.

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2.3 Benefits continuedDisbenefits duringimplementation/construction

Disbenefits considered in the economic evaluation should in most cases be

restricted to travel time delays only, and do not need to include vehicle operating

costs, accident cost, noise, dust, etc.

Where the activity/option results in minimal disruption, eg a tie in that does not

require reduction in capacity during construction, there is no need to incorporate

the disbenefits in the economic evaluation. Where the impact of disruption is

material then the disbenefits of the activity/option shall be included in the

evaluation.

The impact should be determined through sensitivity analysis, eg a preliminary

estimate of the disbenefits to adjust the benefit cost ratio (BCR). If the adjusted

BCR remains within its funding profile level (low, medium or high), then there is no

need to undertake a detailed evaluation of the disbenefits, provided the difference

between the BCRs is less than 10 percent. However, if the adjusted BCR falls to a

lower profile level, which could impact the activity's priority or funding source,

then a detailed evaluation of the disbenefits shall be undertaken. If the adjusted

BCR falls more than 10 percent, regardless of the funding profile level, then a

detailed evaluation should be undertaken.

Seek guidance from the NZTA if there is any doubt whether or not disbenefits

should be taken into account for a particular activity.

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2.3 Benefits continuedEquity impacts The cost benefit analysis methods described in this manual do not directly deal

with the incidence of benefits and costs on different sections of the public. Cost

benefit analysis only indicates those activities with the largest resource gains perdollars of expenditure, irrespective of whether benefits and costs are evenly

distributed or whether costs fall more heavily on some sections of society while

benefits accrue mainly to others.

Equity refers to how the benefits and costs of transport activities are distributed

across population groups. There are four types of equity related to transport:

Egalitarianism treating everybody the same, regardless of who they are.

Horizontal equity whether benefits, disbenefits, (including externalities) and

costs are applied equally to people and groups in comparable condition.

Vertical equity with respect to income whether lower income people bear a

larger portion of the impacts. Vertical equity with regard to mobility needs and abilities whether transport

systems adequately serve people who are transport disadvantaged.

Methods to disaggregate impacts among socio-economic groups or geographical

areas include:

spatially based analysis that uses spatial units, such as traffic-analysis zones or

census tracts that can be classified by characteristic (income, predominate

minority, etc)

spatial disaggregation, where a geographical information system raster module

is used to disaggregate socio-economic data and impact data to grid cells

micro-simulation that uses a set of actual or synthetic individuals orhouseholds that represent the population.

An analysis of the distribution of benefits and costs among different groups of

people is not required for the economic efficiency evaluation of the activity.

However, reporting of the distribution of benefits and costs, particularly where

they relate to the needs of the transport disadvantaged, is part of the funding

assessment.

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2.4 External impactsIntroduction External impacts are benefits or disbenefits stemming from an activity that do not

reside with the responsible government agencies, approved organisations or

transport users. Because cost benefit analysis takes the national viewpoint,external impacts must also be considered.

Environmentalimpacts

Environmental impacts are an important subset of external impacts. The

New Zealand Transport Strategy, the Land Transport Management Act 2003 and

the Resource Management Act 1991 impose a duty when preparing activities to

assess the effect of the activity on the environment and environmental

sustainability. The emphasis is on avoiding to the extent reasonable in the

circumstances, adverse effects on the environment1. This can be achieved by:

reducing the negative impacts of the transport system on land, air, water,

communities and ecosystems

the transport system actively moving towards reducing the use of non-renewable resources and their replacement with renewable resources.

2

Quantifying andvaluing externalimpacts

Most of the potential external impacts are discussed in appendix A8, which

contains techniques for quantifying and, in some cases, valuing the impact.

Benefits from sealing roads are addressed in SP4.

Where impacts are valued, they should be included as benefits or disbenefits in

the economic efficiency evaluation. Non-monetised impacts should be quantified,

where possible, and reported as part of the funding assessment.

Mitigation of externalimpacts

Where a design feature to avoid, remedy or mitigate adverse external impacts is

included in an activity and the feature significantly increases the activity cost, itshall be treated in the following way. If the feature is:

required by the consenting authority in order to conform with the Resource

Management Act 1991 or other legislation, then the cost of the feature shall be

treated as an integral part of the activity cost

not required by the consenting authority in order to conform with the Resource

Management Act 1991 or other legislation, then the feature shall be described

and evaluated in terms of benefits and costs, and the results reported in

worksheet A8.2.

The costs of the preferred mitigation measure shall be included in the activity cost.

Transferred externalimpacts

External impacts are not included in the economic evaluation when these merely

represent a transfer of impact from one person to another, eg a change of traffic

flow may benefit one service station at the expense of another. Although this may

be a significant impact locally, from a national economic viewpoint the two

impacts are likely to cancel each other out.

Also refer to the page on equity in section 2.3.

1 Land Transport Management Act 2003, part 4, section 96(1)(a)(i).

2 The New Zealand Transport Strategy, page 85.

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2.5 CostsActivity costs The costs taken into account in an economic efficiency evaluation depend on the

type of activity being evaluated.

Costs for road activities are identified in section 3.6 of this volume. Costs to be

taken into account for TDM and transport services are listed in volume 2.Sunk costs Where expenditure on an activity has already been incurred, it shall still be

included in the evaluation if the item has a market value and this value can still be

realised, eg land.

Costs irrevocably committed which have no salvage or realisable value are termed

sunk costs and shall not be included in the evaluation, eg investigation, research

and design costs already incurred.

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2.6 Present value and discountingIntroduction 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.Example A present amount may be invested and is worth more than the same amount at

some future time by its return on investment. For example, if it is known that $1.00

invested today will return $1.08 in a years time (based on an eight percent

discount rate), then we can say that $1.08 in a years time has a present value

(PV) of $1.00.Treatment in costbenefit analysis

The time value of money is treated in cost benefit analysis by discounting benefits

and costs to PVs to provide a common unit of measurement. The discount rate

represents the rate at which present benefits and costs can be exchanged for

future benefits and costs.

Benefits and costs may occur at various times over the duration of an activity and

beyond.

Benefits and costs are discounted to take this timing into account using

appropriate present-worth factors from appendix A1.Present value The PV or present worth of a future benefit or cost is its discounted value at the

present day. For a series of annual benefits or costs, the discounted values for

each future year are summed to give the PVs of the series.

Discount rate The discount rate shall be eight percent per annum. This is the rate recommendedby The Treasury (2008) for public sector transport evaluation and subject toongoing review.

Lower discount ratesensitivity test

While the base evaluation uses the standard eight percent discount rate.

Sensitivity testing at a lower discount rate of four and six percent can be used for

evaluations of activities that have long term future benefits that can not be

adequately captured with the standard discount rate. Discounting at these lower

rates can be applied and reported as a standard sensitivity test for full procedures

using the procedures in appendix A1.

For the simplified procedures the time profile of costs and benefits allows a simple

multiplier of 1.5 for four percent or 1.2 for six percent to be applied to the BCR

calculated from an eight percent discount rate to produce a sensitivity test BCR atlower discount rates.

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2.6 Present value and discounting continuedUse of discountfactors

The discount factors for single payments, uniform series payments and arithmetic

growth series payments in appendix A1 shall be used to calculate the PV of future

costs and benefits. Appendix A1 also gives a detailed explanation of how thediscount factors shall be applied. The single-payment discount factors in table A1.1

are in time steps of one year, and therefore part-year benefit and cost flows must

be assigned to either the start or end of the financial year in which they occur,

whichever is the nearer.

Particular care shall be taken with amounts occurring in the first five years of the

analysis period to allocate them to the correct time. Table A1.2 provides single-

payment discount factors in time steps of one quarter of a year, which allows

improved accuracy. It is important to accurately define the start timing of the

benefit flow after completion of construction/implementation.

Inflation Price inflation is a different concept from discounting. In general, all benefits andcosts should be calculated in present-day (constant) dollars.

The discounting of future values reduces the significance of any future inflation

that might be expected to occur between various categories of benefits and costs,

and therefore no adjustment for inflation is required in the evaluation.

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2.7 Time frameTime zero Time zero (the date all benefits and costs shall be discounted to) is 1 July of the

financial year in which the activity is submitted for a commitment to funding. For

example, if an activity is submitted for a commitment to funding in the 2010/11financial year, time zero is 1 July 2010. All activity options shall use the same time

zero for evaluation, irrespective of whether construction for all options would

commence at that time.

In the case of activities being resubmitted in subsequent years, the evaluation

shall be revised to the time zero appropriate to the year for which the activity is

being submitted for a commitment to funding.

Analysis period The time period used in economic evaluation shall be sufficient to cover all costsand benefits that are significant in PV terms.

The analysis period for road activities is described in section 3.7 of this volume

and for TDM, transport services and other activities in volume 2.

Base date for costsand benefits

The base date for dollar values of activity benefits and costs shall be 1 July of the

financial year in which the evaluation is prepared. In the case of an activity being

resubmitted in subsequent years, all dollar values of benefits and costs shall be

adjusted to the same base date.

Factors for updating construction, maintenance and user benefits are given in

appendix A12. Where land costs are significant, the most recent possible estimate

shall be used.

The base date for activity benefits and costs need not coincide with time zero.

Generally, the base date for dollar values will be one year earlier than time zero.

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2.8 Do-minimum and benefit and cost differentialsThe do-minimum Most forms of activity evaluation involve choices between different options or

courses of action. In theory, every option should be compared with the option of

doing nothing at all, ie the do-nothing.

For many transport activities, it is often not practical to do nothing. A certain

minimum level of expenditure may be required to maintain a minimum level of

service. This minimum level of expenditure is known as the do-minimum and shall

be used as the basis for evaluation, rather than the do-nothing.

It is important not to overstate the scope of the do-minimum, ie it shall only

include that work which is absolutely essential to preserve a minimum level of

service.

Particular attention is required if the cost of the do-minimum is comparable to the

cost of the options being considered. In such cases, the do-minimum should be re-

examined to see if it is being overstated.

Future costs in thedo-minimum

Estimated future costs of the do-minimum need to be robustly justified and this

will typically be based upon historic costs.

In cases where the do-minimum involves a large future expenditure, the option of

undertaking the activity now should be compared to the option of deferring the

activity until this expenditure is due. Similarly, if the capital cost of the activity is

expected to increase for some reason other than normal inflation, again the option

of undertaking the activity now should be compared with the option of deferring

construction and incurring the higher cost.

Benefit and costdifferentials The activity costs required for determining BCRs (section 2.9), incremental BCRs(section 2.10) and first year rate of return (FYRR) (section 2.11) are the differencesbetween the costs of the activity option and the costs of the do-minimum. The

activity benefits are similarly the differences between the benefit values calculated

for the activity option and those of the do-minimum.

It follows that where a particular benefit or cost is unchanged among all the

activity options and the do-minimum, it does not require valuation or inclusion in

the economic analysis.

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2.9 Benefit cost ratiosIntroduction The BCR of an activity is the PV of net benefits divided by the PV of net costs. An

activity is regarded as economic or worthy of execution if the PV of its benefits is

greater than the PV of its costs, ie an activity is economic if the BCR is greater than1.0.

National benefit costratio

The NZTA uses the national benefit cost ratio (BCRN) as a measure of economic

efficiency from a national perspective.

In its basic form, the BCRN is defined as:

PV of national economic benefitsBCRN =

PV of national economic costs

National economic benefits = net direct and indirect benefits and disbenefits to

all affected transport users plus all other monetised

impacts.

net costs to the NZTA and approved organisations

(where there is no service provider or non-

government contribution)

National economic costs =

net service provider costs plus net costs to

the NZTA and approved organisations (where there

is a service provider).

Note: Where an external service provider is involved, the net costs to governmentinclude the funding gap that is paid by local and central government to the

service provider so that the service is financially viable to the service provider.

The BCRN applies equally to TDM activities, transport services and road

infrastructure activities. It indicates whether it is in the national interest to do the

activity from an economic efficiency perspective.

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2.10 Incremental cost benefit analysisIntroduction Where activity alternatives and options are mutually exclusive (section 2.13),

incremental cost benefit analysis of the alternatives and options shall be used to

identify the optimal economic solution.

The incremental BCR indicates whether the incremental cost of higher-cost

activity alternatives and options is justified by the incremental benefits gained (all

other factors being equal). Conversely, incremental analysis will identify whether

a lower cost alternative or option that realises proportionally more benefits is a

more optimal solution.

Incremental BCR is defined as the incremental benefits per dollar of incremental

cost.

Incremental benefits

Incremental BCR =

Incremental costs

Example The concept of incremental cost benefit analysis is illustrated in the figure below,which considers two options A and B.

The BCR for option B is 4.0 (4000/1000). Such a value would usually result in the

activity receiving a high rating for the economic efficiency criteria considered

under the NZTAs funding assessment. The less-costly option A, with a BCR of 7.5

(3000/400), would receive the same high rating. However, incremental cost

benefit analysis demonstrates that the incremental benefits gained by supporting

option B ahead of option.

Option A represent only a small return on the additional cost, as the incrementalBCR is 1.7 ((40003000)/(1000400)).

PVb

ts

Do-minimum0 200 400 600 800 1000 1200

1000

2000

3000

4000

PV costs

Benefits =(option B) (do-minimum)

Costs=

(option A) (do-minimum)

Benefits = (option A) (do-minimum)

Incremental costs = (option B) (option A)

Option A

Option BCosts = (option B) (do-minimum)Incremental

benefits =(option B)

(option A)

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2.10 Incremental cost benefit analysis continuedProcedure forcalculating theincremental benefitcost ratio

The following procedure shall be used to calculate the incremental BCR of

mutually exclusive options:

a) Rank the options in order of increasing cost.

b) Starting at the lowest cost option, consider the next higher cost option and

calculate the incremental BCR of the PV of the incremental benefits to the

PV of the incremental costs.

c) If the incremental BCR is equal to or greater than the target incremental

BCR, discard the lower cost option and use the higher cost option as the

comparison basis with the next higher cost option.

d) If the incremental BCR is less than the target incremental BCR, discard the

higher cost option and use the lower cost option as the basis for

comparison with the next higher cost option.

e) Repeat the procedure in b, c and d until all options have been analysed.

f) Select the option with the highest cost which has an incremental BCR equal

to or greater than the target incremental BCR.

Target incrementalbenefit cost ratio

The method for choosing a target incremental BCR for testing activity options is

provided in appendix A12.4.

Sensitivity testing ofincremental analysis

The results of the incremental BCR analysis should be sensitivity tested using a

target incremental BCR that is 1.0 higher than the chosen target incremental BCR.

If this affects the choice of preferred activity alternative or option, the results of

this sensitivity test must be described and included in the activity report. For

example, if the target incremental ratio is 3.0, the choice of activity alternative or

option should also be tested by using a target incremental ratio of 4.0 and report

how this affects the choice of option.

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2.10 Incremental cost benefit analysis continuedTo analyse five mutually exclusive activity options against a target incremental

BCR of 3.0, first rank the options in order of increasing cost as follows:

Options Benefits Costs BCRA 110 15 7.3

B 140 30 4.7

C 260 45 5.8

D 345 65 5.3

E 420 100 4.2

Next, calculate the incremental BCR of each higher cost option, discarding those

below the target incremental BCR as follows:

Base option forcomparison

Next highercost option

Calculation IncrementalBCR

Above/belowthe targetincrementalBCR

A B (140110) / (3015) 2.0 Below

A C (260110) / (4515) 5.0 Above

C D (345260) / (6545) 4.3 Above

D E (420345) / (10065) 2.1 Below

Finally select the option that has the highest cost and an incremental BCR greaterthan the target incremental BCR, which in this example is option D.

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2.11 First year rate of returnThe first year rate of return (FYRR) is used to indicate the best start date for

activities. The correct theoretical basis for determining the optimal start time

would be to calculate the incremental BCR of starting an activity in year 1compared to deferring the activity to year 2 or a later year. However, this is a

relatively complex calculation. For most activities, the FYRR provides an

equivalent basis for determining the best start date. Part C9.7 of the NZTAs

Planning, programming and funding manual provides further guidance on the use of

the FYRR for activity assessment.

For all activities, the FYRR shall be calculated for the preferred option.

The FYRR, expressed as a percentage, is defined as the activity benefits in the first

full year following completion of construction divided by the activity costs over the

analysis period:

PV of the activity benefits in first full year following completion 100

Introduction

FYRR =

PV of the activity costs over the analysis period

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2.12 Uncertainty and riskIntroduction 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 predictionsinherent in the analysis.

Two types of uncertainty may occur in a transport activity:

1. The size or extent of inputs to an analysis, such as the variation in

construction, maintenance or operating costs; future traffic volumes,

particularly due to model results, growth rates, and the assessment of

diverted and induced traffic; travel speeds; road roughness; or accident

reductions.

2. The timing and scale of unpredictable events, either from natural causes

(such as earthquakes, flooding and landslips) or from man-made causes

(such as accidental damage and injury from vehicle collisions).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 the NZTAs funding assessment, which focuses on the

confidence in the proposed activity (or package) delivering the desired outcomes.Sensitivity analysis Sensitivity analysis involves defining a range of values for an uncertain variable in

evaluating and assessing the effects on the economic evaluation of the

assumptions or estimates within the defined range. This will highlight those

variables for which a change in the input value has a significant effect on theeconomic evaluation, particularly the BCR and the FYRR.

Risk analysis Risk analysis is a more detailed type of sensitivity analysis involving describing theprobability distributions of the input variables and those of the resulting estimates

of benefits and costs. For a risk analysis to be possible, both the costs arising from

each of the possible outcomes and their probability of occurrence have to be

estimated.

The purpose of a risk analysis is to develop ways of minimising, mitigating and

managing uncertainties.

Choosing theappropriate analysis

Sensitivity analysis for most activities the completion of a sensitivity analysis willbe considered an adequate assessment of uncertainty.

Risk assessment must be undertaken for activities which have any of the following

characteristics:

The principal objective of the activity is reduction or elimination of an

unpredictable event (eg a landslip or accident).

There is a significant element of uncertainty.

The activity capital value exceeds $4.5 million.

Part C of the NZTAs Planning, programming and funding manual provides addition

guidance on risk analysis.

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2.12 Uncertainty and risk continuedMethods forsensitivity and riskanalyses

Guidance on completing a sensitivity analysis for road activities is given in

section 3.8 of this volume. Sensitivity analysis for other types of activity is

described in volume 2.

Appendix A13 outlines the methodology for a risk assessment of road activities.

Chapter 12 of volume 2 describes how these risk assessment procedures can be

applied to other types of activity.

The general procedure for evaluating risk by an analysis of probabilities and

expected values comprises the following steps:

1. Identify the uncertain elements in the activity and the chain of

consequences for any unpredictable events.

2. Determine the benefits or disbenefits to transport users and the costs to

the activity for each possible outcome.

3. Identify an annual probability of occurrence and the period of years over

which this probability applies for each uncertain element.

4. Compute the expected values of benefits and costs for the uncertain

elements in each year as the product of the costs and the annual probability

of occurrence. Include these in the activity benefit and cost streams when

discounting the cash flows.

A numerical-simulation approach may be required in cases where the number and

interaction of uncertain variables makes an analytical approach impractical.

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2.13 Alternatives and optionsNeed to consideralternatives andoptions

Early and full consideration must be given to alternatives and options.3

Alternatives are different means of achieving the same objective as the proposal,

either totally or partially replacing the proposal. For example, TDM programmes

are generally alternatives to the provision of road capacity.

Options are variations on the proposal, including scale and scope of components.

It is common for economic evaluations to concentrate on one preferred activity

option. Narrowing the scope of the analyses too early can cause serious errors,

such as:

neglecting options that differ in type or scale, eg a road realignment that may

eliminate a bridge renewal

neglecting significant externalities, eg the impacts of change in traffic flow

upon adjoining properties

inconsistencies with wider strategic policies and plans, eg the impacts of

improvements to a major urban arterial on downtown congestion.

All realistic activity options shall be evaluated to identify the optimal economic

solution. Rigorous consideration of alternatives and options is also a key

component of the NZTAs funding assessment.Mutually exclusivealternatives andoptions

Mutually exclusive alternatives and options (and package options) occur when

acceptance of one alternative or option precludes the acceptance of others, eg

when a new road is proposed and there is a choice between two different

alignments. The choice of one alignment obviously precludes the choice of the

other alignment and therefore the two options are mutually exclusive.Mutually exclusive options shall be evaluated in accordance with the incremental

cost benefit analysis procedure in section 2.10.Independent stages Activity stages shall be treated as independent activities if the different stages

could be executed separately, and if their benefits are independent of other

activities or stages.Features to mitigateexternal impacts

Where alternatives or options include features to mitigate or otherwise address

external impacts or concerns and the features significantly increase the cost of the

options, the options with the features must be compared with the activity option

without these features. This analysis shall be undertaken irrespective of whetherthe features are independent of the activity or mutually exclusive.

3Land Transport Management Act 2003, sections 20(2)(e) and 76(e).

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2.14 PackagesIntroduction The NZTA seeks to encourage, where appropriate, approved organisations to

develop packages of interrelated and complementary activities, either individually

or in association with other approved organisations.

Packages are by definition multiple activities, which seek to progress an integrated

approach to transport. Packages are intended to realise the synergy between

complementary activities.

Packages may involve different activities, organisations and time periods.

Packages should be:

clearly meet the requirements from the Land Transport Management

Act 2003, as expressed through the relevant regional land transport strategies,

regional land transport programmes and long-term council community plans

optimised to make the most efficient and effective use of resources.

The extent to which particular packages, and where appropriate components

within such packages, are optimised to make the most efficient and effective use

of resources, will be determined using the applicable activity evaluation

procedures in this manual.

Types of packages In general, packages will fall into one of the following three categories:1. Packages for single agency with multiple activities

An example of such a package would be the development of integrated

urban traffic control systems and complementary pedestrian and public

transport priority measures.

2. Packages for multiple agencies with multiple activitiesAn example of such a package would be where a major state highway

improvement is to be combined with traffic calming on local roads to

improve the safety of the adjacent local road network. It is quite possible

that when considered individually, neither activity represents an efficient

use of resources. Travel time and capacity issues may reduce the benefits

of the traffic calming when considered as an isolated activity. Similarly,

main road traffic volumes may not be sufficient to warrant the highway

upgrading as an isolated activity. However, the combined activity will

benefit from the complementary nature of the two activities.

3. Packages for multiple agencies with a single activityAn example of such a package would be a proposal to seal a currentlyunsealed tourist route that passes through two local authorities. Such a

proposal would be submitted as a package by the two approved

organisations as a multiparty activity. There are benefits to existing traffic

in sealing each section of the route. However, to realise all the potential

benefits, the entire route needs to be sealed. Therefore, separate analyses

shall be undertaken for each section of the route and of the route as a

whole. In doing so, the evaluation should highlight the efficiencies of a

package approach.

Part G3 of the NZTAs Planning, programming and funding manual provides further

examples of the different types of packages.

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2.14 Packages continuedEvaluation ofpackages

Chapter 3 of this volume describes the procedures for evaluating packages

comprised of road activities only, while chapter 3 of volume 2 describes the

evaluation of packages comprised either of TDM strategies only or a combinationof TDM strategies and road activities.

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2.15 Transport modelsValidation oftransport models

When transportation models are used to generate demand forecasts and assign

traffic to transportation networks, documentation should be provided to

demonstrate the models have been correctly specified and produce realisticresults. The documentation is listed in the series of checklists in worksheet 8.3

and these should be completed for each analysis time period.

The aspects of the models covered by the validation checks are listed below:

Activity model specification including model type and parameters, data

sources, trip matrices, assignment methodology and forecasting checks.

A base-year assignment validation comprising checks on link and screen-line

flows, intersection flows, journey times and assignment convergence.

Strategic demand model checks incorporating validation of the models and

techniques used to produce trip matrices.

Model reviewers may also use these checklists to confirm that appropriatedocumentation has been provided for review purposes.

Checks on outputfrom traffic models

All activity benefits calculated using a traffic or transportation model shall be

checked to show the results are reasonable. The checks shall be done and

reported at two levels coarse checks and detailed checks.

Coarse checks The objective of these is to check if the travel-time benefits calculated are of theright order of magnitude. Travel-time savings per vehicle shall be calculated for

both the first year of benefits and a future year by dividing the daily travel time

savings by the average annual daily traffic (AADT) of traffic traversing the activity

(worksheet 8.1).

Detailed checks The objective of these is to ensure the travel times on individual road sections,through critical intersections and for selected journeys through the network, are

reasonable. This analysis shall be undertaken for the first year of benefits and for a

future year, and for both peak and off-peak periods if appropriate (worksheets

8.2).

These checks shall cover the following:

The road section speeds for both the do-minimum and the activity options.

The peak-period delays and volumes at critical intersections for both the do-

minimum and the activity options. Delays shall be based on the intersection

approach which incurs the greatest delay.

The travel times for both the do-minimum and the activity options for journeys

which review the major travel time benefits, based on the travel time savings

per vehicle for each journey route.

A comparison of the total travel time savings for journeys which receive the

major travel time benefits and the total travel time savings predicted by the

traffic model, in the first year of benefits and a future year.

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2.15 Transport models continuedEvaluating congestednetworks and inducedtraffic effects

Guidelines are provided in appendix A11 for modelling situations where very high

levels of congestion are anticipated over the economic life of the scheme.

Professional judgement should be used to determine the appropriate proceduresto adopt. In cases where there are excessive or unrealistic levels of congestion in

the do-minimum network, a number of techniques may be used to generate a

realistic and stable representation of the do-minimum context. These commonly

involve upgrading the capacity of the do-minimum network or using some form of

growth constraint on the trip matrix, such as matrix capping.

The matrix derived from this process remains the same in both the do-minimum

and activity option, and is then used in the standard fixed trip matrix (FTM)

evaluation procedure. Appendix A11 provides details of growth constraint

techniques.

In some situations, significant levels of congestion may be expected in the activity

option across important parts of the network (spatially) affecting a substantial

proportion of the activity life (temporally). The resulting induced travel may affect

benefits of the activity option as well as the choice of option. Where this is the

case, the evaluation should incorporate an analysis of induced traffic effects and

appendix A11 contains procedures for evaluating these effects.

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2.16 Other inputs to funding assessmentIntroduction As noted in chapter 1 economic efficiency is only one of three assessment factors

considered in the NZTAs funding assessment. This section provides some advice

on the New Zealand Transport Strategy objectives to minimise double counting ofbenefits.

Economicdevelopment

Impacts to be considered should relate to enhancement of the economic wellbeing

of New Zealanders both the level of wellbeing and economic growth, including

the potential for future growth. Impacts include:

wider economic impacts, eg facilitating transport

impacts on land use

travel time between economic centres

congestion

travel time reliability effect on freight

energy efficiency.

In a limited number of circumstances, transport activities may have benefits to the

economy over and above those included in the economic efficiency calculation.

Such benefits might result from:

increased competition in imperfect markets, either for final products or factors

of production (particularly labour and land)

economies of scale in production leading to reductions in production costs.

Public transport improvements are likely to impact most on labour markets andland use activities.

Safety and personalsecurity

Road safety activities, some modifications to the road network and activities that

reduce vehicle travel can contribute significantly to road safety improvements.

Passenger transport, cycling and walking improvements should specifically

address safety and personal security issues, as well as effects on vulnerable users.

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2.16 Other inputs to funding assessment continuedAccessibility andmobility

Accessibility for personal activities refers to the ability to reach desired goods,

services and activities. For goods movement, accessibility can be defined as the

ability to reach suppliers or buyers of products.

Mobility refers to the ease of travel. Mobility improvements can result in

additional travel that would not otherwise occur, particularly by people who are

transport disadvantaged. However, mobility is not the only means of improving

accessibility.

The TDM programmes can significantly improve access and mobility by

increasing transport availability options and coordinating travel alternatives, eg

improved transport interchange.

Key determinants of accessibility include the following:

The performance of the transport system for a given land-use pattern,

quicker, more reliable and/or lower cost transport alternatives provide greateraccessibility.

The land-use patterns, including the density and mix of development for a

given level of transport performance, a more dense arrangement of land uses

means greater accessibility because more activities can be reached within a

given distance/time (the mix of land uses also influences accessibility).

Various measures of accessibility are:

the number of jobs (or other opportunities accessible within X minutes of the

average person in a region)

the number of residents accessible within X minutes of a typical employment

site.

Accessibility can also be distinguished by travel mode, income or other factors.

Potential benefits of improved accessibility could be presented as the following

factors:

A goal in itselfProviding individual or community accessibility to desired activities is often a

fundamental objective for the transportation system.

A greater economic activityBusinesses benefit from easier access to suppliers, a larger labour pool and

expanded consumer markets. These factors can reduce transport costs both

for business-related passenger travel and the movement of goods. Access tolarger worker numbers, consumers and suppliers also provides greater choice

and allows greater specialisation, thus increasing business efficiencies.

An improved land-use patternInteraction between accessibility and land use means the relationship between

transport improvements and accessibility gains is complicated. For example,

the construction of a new road immediately improves accessibility and may

lead to significant land development in its proximity. Eventually, the traffic

generated by new developments can cause significant congestion, reducing

the original accessibility benefits provided by the road.

While making the transport system more efficient, road tolling and other price-

based TDM strategies may have a negative impact on mobility.

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2.16 Other inputs to funding assessment continuedPublic health Improvements to public health can occur through increased physical activity and

fitness, and through reducing exposure to pollutants or injury-causing activities.

Walking and cycling can have significant health benefits through increased

exercise levels. However, this could be offset by an increased exposure to

pollutants if the activity involves sharing road space (the NZTAs Economic

evaluation manual volume 2 (EEM2), section 8.4).

Environmentalsustainability

Environmental sustainability can be defined as development that meets the needs

of the present without compromising the ability of future generations to meet

their own needs. Activities that contribute directly to environmental sustainability

are those that reduce noise and other pollutants, eg measures that manage or

reduce vehicle use. Evaluation of environmental effects (monetised and non-

monetised) is described in appendices A8 and A9.

Sustainability ofactivity performance

Sustainability of activity performance describes how activity benefits are

maintained over time. Some activities have immediate impacts, while others may

take years to have significant effects.

In particular, the effects of TDM activities tend to change over time. In general,

programmes that incorporate financial incentives, improve transport choice or

involve land use management may become more effective over time as

consumers incorporate them into long-term decisions. Conversely, the effects of

travel behaviour change programmes, which appeal to peoples good intentions,

tend to decline over time if promoters and participants lose interest.

Integration Proposals should endeavour to improve the arrangement of land use, walking andcycling networks, public transport, and local and strategic roads.

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2.17 References1. Bone I, Butcher G and Nicholson A (1997) Incorporation of risk analysis in

activity evaluation Stage I (draft). Report to Transit New Zealand.

2. Sinclair Knight Merz Pty Ltd (1998) Recommended procedures for evaluating

congested networks. Report to Transfund New Zealand.

3. The New Zealand Treasury (2005) Cost benefit analysis primer.

4. The New Zealand Treasury (2008) Public sector discount rates for cost

benefit analysis.

5. Travers Morgan (NZ) Ltd (1993) Sensitivity analysis. Transit New Zealand

research report 13.

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3.0 Evaluation of road activities3.1 Overview

3.1 Overview 31

3.2 Stages of analysis 32

3.3 The do-minimum 34

3.4 Road and traffic data 35

3.5 Benefits of road activities 37

3.6 Costs of road activities 311

3.7 Period of analysis 314

3.8 Uncertainty and risk for road activities 315

3.9 Roading packages 316

3.10 References 317

Introduction This chapter describes the specific procedures to be used for economic efficiencyevaluation of road activities submitted to the NZ Transport Agency (NZTA) for

funding.


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3.2 Stages of analysisIntroduction At every stage of the economic evaluation of road activities, the analysis is carried

out for the do-minimum and any other options as outlined in the table below with

references to the relevant section. A similar table referring to the specificprocedures and worksheets is provided in chapter 5. The final stages of the

economic evaluation involve a check on the quality and completeness of the

evaluation.

Stage Description Section1 Where appropriate, complete a feasibility report. Chapter 5

2 Describe the do-minimum, alternatives and options and consider packages. 2.8, 2.13, 2.14,3.3 and 3.9

3 Assemble road and traffic data. 3.4

4 Undertake transport model checks as required. 2.15

5 Calculate travel times for the do-minimum and options. 3.4

6 Quantify and calculate the appropriate monetised benefits and disbenefits forthe do-minimum and options, including:

travel time cost savings

vehicle operating cost (VOC) savings

accident cost savings

seal extension comfort and productivity benefits

driver frustration reduction benefits

risk reduction benefits

vehicle emission reduction benefits

disbenefits during construction

other external benefits.

3.5

7 Describe and quantify where possible any significant nonmonetised externalimpacts.

3.5

8 Describe and quantify any national strategic factors relevant to the activity andif possible determine the monetary value(s).

3.5

Stages

9 Estimate the appropriate activity costs, including:

investigation and design

property

construction, including preconstruction and supervision

maintenance, renewal and operating

risk management

mitigation of external impacts.

3.6

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3.2 Stages of analysiscontinuedStage Description Section10 Summarise the benefits and costs of the do-minimum and activity options,

including their:

type

timing

estimated value

year in which estimate was made

growth rate over activity evaluation period.

2.6, 2.7, 3.7,chapters4 and 5

11 Where appropriate, describe and evaluate the benefits and costs of mitigationmeasures.

2.13 and 3.6

12 Discount the benefits, disbenefits and costs for the do-minimum and activity

options over the period of analysis and sum them to obtain the presentvalue (PV) of net national economic benefits and costs.

Apply update factors as necessary.

2.6, 2.7 and 3.7

13 Calculate the national benefit cost ratio (BCRN) and if appropriate, thegovernment benefit cost ratio (BCRG).

2.9

14 Where there is more than one mutually exclusive option, use incrementalanalysis to select the preferred option.

2.10

15 Calculate the first year rate of return for the preferred activity option. 2.11

16 When the full procedures for activity evaluation are used, conduct a sensitivityanalysis on the uncertain elements of the preferred activity option.

2.12

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