Portal 206

Technical Assistance Consultant’s Report
Project Number: 38479

April 2010
Republic of Indonesia: Regional Roads Development

Project
(Financed by the Japan Special Fund)
Annex 11: Economic Analysis
Prepared by
MMM Group Ltd, Canada
In association with
Pt Guteg Harindo &
Pt Bina Karya (Persero), Indonesia
This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB
and the Government cannot be held liable for its contents.
All the views expressed herein may not be incorporated into the proposed project’s design. The contents of this
report reflect the project design from early 2010, under a multitranche finance facility lending modality. The
project design has been subsequently amended in 2011 and converted to a single project loan lending
modality. Therefore the reader should be aware that the report contents and the final design of the Regional
Roads Development Project do not directly correlate.
Annex 11 Economic Analysis
Annex 11: Economic Analysis
TABLE OF CONTENTS
1! Introduction .............................................................................................................................. 2!
1.1! Overview – the northern Kalimantan and southern Java Road Corridors ........................ 2!
1.1.1! Southern Java Corridor .............................................................................................. 2!
1.1.2! Kalimantan ................................................................................................................. 3!
1.2! Economic Methodology and Economic Evaluation Tools................................................ 3!
1.2.1! Diverted Traffic Benefits ........................................................................................... 6!
1.3! Evaluation Tools ............................................................................................................... 8!
1.3.1! Indonesian Integrated Road Management System (IIRMS) .................................... 10!
1.3.2! The HDM-4 Model .................................................................................................. 11!
1.3.3! Updating Road User Costs for IIRMS and HDM-4................................................. 12!
2! The Road Network – Definition of Sections and Alternatives .............................................. 14!
2.1! Suggested Intervention Criteria....................................................................................... 15!
2.2! Examples of Improvement Standard Alternatives .......................................................... 15!
2.3! Suggested Road Maintenance Standard Alternatives ..................................................... 16!
2.4! ‘Without Project’ Maintenance – ‘Do Minimum’ Base Case ......................................... 16!
2.5! ‘With Project Case’ Maintenance ................................................................................... 17!
2.6! Evaluation Period ............................................................................................................ 18!
2.7! Vehicle Operating Cost Inputs ........................................................................................ 18!
2.8! Vehicle Types and Characteristics .................................................................................. 19!
2.9! Fuel Costs........................................................................................................................ 23!
2.10! Tyre Costs ..................................................................................................................... 29!
2.11! Maintenance Labour Costs............................................................................................ 30!
2.12! Crew Costs .................................................................................................................... 30!
2.13! Value of Travel Time (VOTT) - ‘Working’ and ‘Non-Working’................................ 33!
3! Construction Costs ................................................................................................................. 36!
3.1! Construction Cost Build-up Methodology ...................................................................... 36!
3.2! HDM-4 Runs and Results ............................................................................................... 45!
3.3! Sensitivity Testing and ‘Switching Values’.................................................................... 50!
4! Multi-Criteria Analysis (MCA).............................................................................................. 52!
4.1! MCA and Cost-Benefit Analysis .................................................................................... 52!
4.2! Suggested Framework for MCA ..................................................................................... 53!
APPENDICES
Appendix A – HDM-4 Cost and Benefit Cashflows

Appendix B – HDM-4 Sensitivity Tests
Preparing the Regional Roads Development Project – Final Report 1

1 Introduction
1.1 Overview – the northern Kalimantan and southern Java Road Corridors
Indonesia has been improving and rehabilitating its road network over a number of years. From
time to time as development proceeds, further new road links are identified in order to complete
the network and provide development opportunities for areas of Indonesia that are lagging in
terms of economic growth.
Several road ‘networks’ may be said to exist depending on the function such as the (i) local
‘feeder’ road network, (ii) provincial or ‘Kabupaten’ network and the (iii) national or strategic
highways network.
The present PPTA is part of an overall policy that addresses the need for the rehabilitation
and/or upgrading and /or construction of road links forming part of category (iii) in areas of the
archipelago that have been neglected. These links are situated: (a) near or along the Malaysian
border in West and East Kalimantan and (b) along the ‘Southern Trans-Java Highway’ in West,
Central, East Java and Yogyakarta Provinces. This latter route follows Java’s southern
coastline quite closely. Both study areas are much less densely populated than other adjacent
areas of the country and have received less road sector investment as more urgent and
pressing needs were addressed throughout the archipelago.
In the context of the policy to restore some regional ‘equity’ to road transport provision a
number of road links have been identified in both Kalimantan and South Java that require
urgent action in terms of rehabilitation or upgrading. In some instances these routes do not
follow the shorter distance between settlements and there are consequently (‘missing’) links
which due to earlier resource constraints were not constructed – so that the PPTA short-list
also includes some which are of entirely new construction.
Though these two primary categories i.e. (i) rehabilitation/upgrading and (ii) new construction
will have many study elements in common with regard to study methodology, they will
nevertheless require different emphasis when determining some of their economic, social and
environmental impacts. These differences will feed into both: (i) the ‘benefits’ that can be
expected in terms of reduced VOCs and (ii) final costs per kilometre (i.e. the social and
environmental impact mitigation costs).These costs will be greater for widening and new links
than for those usually associated with rehabilitation/upgrading.
1.1.1 Southern Java Corridor
The key concerns for the project will be the extent to which any particular sector or economic
activity will be encouraged as a result of project recommendations. In the case of southern
Java an extensive coastline and scenic beauty make it a natural candidate for the development
of tourism – albeit local tourism. The Indonesian tourist industry is a foreign currency earner but
mainly through Bali and Lombok. Other centres contribute only a fraction to foreign exchange
tourist revenues. South Java – being close to major urban areas such as Jakarta, Semarang,
Yogyakarta and Surabaya - is however ripe for tourism development particularly as an
alternative route to access Yogyakarta by road. Transport infrastructure throughout Java is
fairly good but development is constrained by a poor high-speed road network that can serve
the needs of both local populations and visitors alike.
It must be emphasised however that transport infrastructure always acts as a constraint to

growth – i.e. is not a growth sector per se. Roads are not an economic activity as such but do

constrain economic activity. The aim of transport policy is to remove those constraints. The
poor national road coverage along the south Java corridor is acting as a constraint to the
growth potential of the corridor. However road transport demand will materialise only if there
are complementary investments guided by a deliberate policy and plan for tourism. Ad-hoc
tourism provision, under private initiatives, may not necessarily result in a quality tourist product
and will not attract the volumes of traffic sufficient to justify investment in national roads.
1.1.2 Kalimantan
With respect to the Kalimantan component of the PPTA again it is expected that cross-border
trade flows will increase from their present very low levels. However a distinction needs to be
made between international trade and local cross border commerce which is on an entirely
different scale.
International trade may imply container carrying multi-axle vehicles, in which case both capacity
and pavement design would of very different design if only local light commercial traffic is
expected. The overall geographic context and information on existing or planned port and other
infrastructure will play a role in the forecast traffic volumes and composition.
1.2 Economic Methodology and Economic Evaluation Tools
Economic analysis can help answer questions such as: “Which road links should be included in
the funding assistance programme?” i.e. it can help in prioritising and selecting road links,
and/or it can address a slightly different set of questions, such as: “Given the need to improve
these particular road links, what is the optimum engineering solution for them?” i.e. what
cost/km, in terms of vertical and horizontal alignment and pavement design, should be applied
given the potential benefits to be expected from each alternative design? The current PPTA will
concentrate more on providing and answer to the latter question.
Optimisation is required since resources are scarce and the cost of applying the highest and
best engineering options will always exceed available resources, some form of selection and
prioritisation will always need to be undertaken. Prioritisation involves the concept of
‘optimisation’. This refers to the fact that engineering alternatives have different initial cost
implications but also yield different subsequent streams of benefits. This relationship is not
always a simple linear one and there are unequal ‘trade-offs’ between higher and lower initial
investment costs and corresponding benefits so that the objective of economic analysis
becomes one of identifying the investment that will yield the highest net benefits - i.e. the
‘optimum’ solution. The costliest engineering alternative may not yield the highest benefits. The
least costly option may also yield minimal benefits. Careful consideration of these ‘trade-offs’ is
required and this is the primary objective of the economic analysis.
If the list of candidate links is not pre-determined then the economic analysis has a two-stage
function;
(i) to prioritise and select a list of links from a much larger list that will constitute the
road improvement programme,
and the proceed to
(ii) determine the ‘optimum’ engineering solution for each link in the short-list in terms of
alignment, width and pavement design.

If the list of links is pre-determined (based presumably on some objectively verifiable ranking
methodology) then the economic analysis reduces itself to item (ii) above i.e. determining the
‘optimum’ engineering solution in terms of alignment, width and pavement design.
An essential element in the analysis is defining: (a) the ‘Base Case’ and (b) the ‘Alternatives’
that will be compared to the ‘Base Case’ and, crucially, to each other.
The ‘Base Case’: Crucial to any economic evaluation is the definition of the ‘Base Case’ or
‘Without Project’ (WOP) situation. This is the situation against which project
interventions/improvements will be compared. In the case of road projects the ‘base case’
usually involves specifying road maintenance interventions that will apply in the ‘without project’
case (the ‘without project’ case is rarely the same as a ‘do nothing’ case). The HDM-4 model
uses these maintenance interventions to predict pavement roughness in the WOP case. The
better the future condition of the road pavement in the WOP case the less benefits will be
attributed to the WP case. Unrealistically optimistic maintenance interventions in the WOP case
therefore may minimise the returns of any improvements. On the other hand if the base case
WOP is a ‘do nothing’ then the WP benefits will be correspondingly much higher. Most often the
‘base case’ WOP is defined as a ‘Do Minimum’ in which some maintenance activities are
carried out on the existing road but the frequency and quality of these activities should not
exceed those of historically executed maintenance – which often occurs within severely
constrained provincial road maintenance budgets.
Since there can be an infinite number of options and alternatives these have to be reduced to a
manageable number. A useful starting point, prior to embarking on any complex modelling and
analysis, is to define the objectives of the study. That is, whether there are any specific
developmental goals that are being maximised, or any sectors that are being specifically
targeted such as agriculture, tourism, fishing etc. This will help focus the search for engineering
alternatives and alignments.
Consequently a realistic economic evaluation requires the definition of alternatives, although

such an exercise is iterative and involves a ‘search’ from an extensive theoretical list that is
rapidly narrowed down.
The economic evaluation therefore needs to select links and once selected compare different
alignments and pavement designs to the ‘Base Case’ or ‘Do Minimum’ network. In the case of
the PPTA, road links are being selected either in northern Kalimantan or southern Java. In both
cases there is an existing road network (much denser in the case of south Java), but
insufficiently developed with respect to other contiguous areas.
The approach follows standard evaluation methodology for road improvement schemes. That
is, the situation forecast to occur with improvements to the roads, referred to as the ‘with
project’ (WP) case is compared to the situation expected if the roads are maintained at their
present standard – the ‘base case’ (in fact an agreed definition of the ‘base case’ is crucial in
determining the final outcome of the economic evaluation) or ‘without project’ case (WOP).
The approach takes into account factors which can be quantified, such as road construction
and maintenance costs, forecast volumes of traffic, vehicle operating costs and passenger
travel time (i.e. the potential level of benefit per vehicle-km). The result of the comparison is a
set of indicators of overall efficiency and worth (NPV, EIRR etc.), for each alternative
investment, which can then be compared to the results obtained from: (i) alternatives of the
same road project, (ii) other candidate road projects and, ultimately, (iii) investments from other
sectors. The present report will limit itself to a type (i) comparison.
In the case of Java transport routes have been influenced by both long-term historical and more
recent market forces. Development and population is more concentrated on the north coast
from Jakarta to Surabaya which faces the markets of south-east Asia. Subsequently as well as

in successive ‘waves’ southwards new roads and links have been added forming additional
alternative east-west routes along the entire length of Java.
The improvement of southern coastal east-west corridor would complete this process. It has
received much less development investment since population and economic activity are much
lower. To some extent however the absence of an east-west corridor to national standard is
now acting as ‘constraint’ to further growth. The road network is mainly to provincial standard or
there are missing links obliging road users to make short, though numerous local diversions
along the entire route. There are a number of east-west alternatives along the southern coast
but characterised by a multitude of junctions and ‘dog-legs’ so that continuous and
uninterrupted journeys are impossible. This adds considerably to travel times and vehicle
operating costs and hence constrains development due to higher, than would otherwise be the
case, transport costs.
The objective of the economic analysis is therefore to investigate the case for improvements in:
(i) width, (ii) alignment and: (iii) construction of new links in order to establish a southern coastal
highway running the entire length of Java. Whether such a route can shorten travel times
compared to using existing more ‘northern’ east-west routes is not clear at this stage. The
northern Java corridor may still be a better option though some limited diversion may occur to a
southern highway.
The level of benefits will be established when comparing the suggested improvements to
existing alternatives so that benefits will accrue mainly to existing road users. Additionally some
developmental (i.e. ‘generated’) traffic may materialise in which case there would be additional
benefits (though subject to the ‘rule of half’ – see below). ‘Diverted’ traffic though unlikely to
occur from the northernmost Jakarta - Surabaya corridor may be derived from traffic using
existing Kabupaten roads over shorter distances. Even of this is the case ‘diverted’ traffic
benefits could be considerable. (This requires data on alternative routes in close proximity to
short-listed project links).
The process of arriving at realistic number of HDM-4 road sections and improvement
alternatives is an iterative process and is often revised once the modelling is underway. The
whole process must be driven by the need to keep the number of Options within realistic limits
given the nature of the complexity or otherwise of the project’s objectives.
With regard to the allocation of VOC savings the following categories of road traffic are the
principal beneficiaries:
• lower VOCs and other operating costs for traffic that was using the road system prior to the
road improvements that will be introduced by the project and which will continue to use the
existing road system after – these gains relate to existing traffic.
• lower VOCs and other operating costs for traffic that was using the existing road system
and which now diverts to using the new improvements introduced by the project – these
gains relate to diverted traffic.
• net gains in output carried by road traffic, whose production and distribution was
constrained by the unavailability of transport facilities so that in the absence of the project it
would not have been produced and which the road improvements introduced by the project
will now induce – these gains relate to generated traffic.
It should be made clear that not all these benefits will be of equal importance to the appraisal.
Categories (i) and (ii) are clearly relevant whilst category (iii) will depend on the relative
importance of transport costs to the productive processes using the improved roads – i.e.
generated traffic along the south Java Coastal Highway and generated cross-border traffic

using the Kalimantan roads. In each case generated traffic refers to either productivity gains
from agriculture or cross-border trade flows translated into additional vehicle trips.
The ‘with project’ improvement will result in increased traffic on the project road composed of
both ‘diverted’ and ‘generated’ traffic.
The developmental objectives of the road improvement will dictate the benefits that can
be expected. If for example the road is intended as a collector road or scenic tourist road
mainly improving only the existing formation - then the geometric characteristics will be such
that there would be limited traffic diversion or generation. However better and better road
standards will necessarily generate corresponding benefits. Limited objectives will lead to
limited benefits.
More ambitious standards will generate additional benefits but costs per km will rise leading to
a less favourable return.
1.2.1 Diverted Traffic Benefits
Diverted traffic refers to traffic using alternative routes prior to the project. Their vehicle
operating costs on those alternative routes will be compared to the VOCs that can be expected
on the project road. In addition because diversion is never 100% some traffic remains on the
alternative routes. However since these routes are partially de-congested due to the diversion
there are benefits from faster traveling times and lower RUCs.
To properly estimate diverted traffic O-D surveys are required. This is because any particular
volume count may contain local traffic as well as through traffic. Obviously local traffic traveling
only short distances is unlikely to divert to the improved links. Through traffic on the other hand
may divert but this depends on the relative costs of travel on the alternatives. Even if the
improved link is shorter and faster, not all through traffic will divert. Diversion is rarely 100%
unless the improved link has lower RUCs by a factor of 4 or 5. Most improvements are marginal
and diversion may be 20% or 30%.
A comprehensive programme of O-D surveys along the southern Java coastal highway would
require several O-D surveys located at major junctions with other portions of the arterial as well
as collector road network. The cost of such an exercise is prohibitive, the data collected would
voluminous and the time required for analysis insufficient within the time frame of this PPTA.
It is proposed therefore that classified volume counts and some turning counts will carried out
to determine traffic on alternative routes. The diversion would be handled by assuming a
proportion of through traffic of which a further proportion would divert (but only if the improved
link can be demonstrated to have faster travel times compared to the alternatives). A number of
diversion ‘scenarios’ will be modeled for example: 10%, 20%, 40% and 60% diversion.
The diversion scenarios will yield different EIRRs and the lowest scenario that can realistically
be tolerated would be selected.
Naturally the proposed improvements must have a horizontal and vertical alignment superior to
the existing alternatives if there is going to be any realistic chance of diversion. Strategic routes
need to have moderately high design speeds (e.g. 80 km/hr). To do so the design may need to
have minimum access and improved alignment throughout and avoid where possible built-up
areas that slow traffic down. Topography and terrain may initially be unfavourable in which case
extensive ‘cut and fill’ may be required – increasing construction costs per km. Low cost
strategic roads is a contradiction and the optimum design in terms of alignment may not be
possible given budget constraints.

Note on Generated Traffic Benefits – ‘Rule-of-half’
In justifying road improvement frequent call is made to the benefits from ‘generated’ traffic.
Generated traffic benefits however are not estimated in the same manner as base-case
‘normal’ traffic or ‘diverted’ traffic. Figure 1 below shows that given a hypothetical linear
downward sloping transport demand curve, the total benefit from generated traffic trips is half
that of ‘normal’ ( i.e. ‘existing’) traffic (area ‘A’).
Figure 1 Schematic Representations of ‘Generated’ Traffic Benefits
Source: Consultant
With a hypothetical demand curve T-T’ and transport costs C1 (on the vertical axis), existing
(‘normal’) road transport demand is 300 vehicles per day (D1). With road improvement
transport costs fall to C2 and demand expands along T-T’ from D1 to D2. D1 – D2 additional
traffic is generated traffic (i.e. 600 minus 300 = 300). Benefits to the 300 vpd of normal
(existing) traffic are made up the area adef i.e. Area (0,300,d,e) minus area (0,300,a,f) = (adef)
marked as ‘B’.
Generated traffic benefits consist of the area abcd divided by two. This is shown as triangle abd
and marked ‘A’ – hence it is commonly known as the ‘rule-of-half’. This is because the 301st
road user is willing to pay Rp.700/veh.-km but his costs are now Rp. 400/veh.-km. His
consumer surplus is, therefore, equal to the full amount (a-d). But thereafter every additional
user is willing to undertake his/her journey only if the cost is less than Rp 700/v-km.
Consequently subsequent users have a consumer surplus that is progressively less and less

than (a-d). So the next road user (i.e. 302nd) is prepared to pay slightly less than Rp. 700/veh.-
km but will still benefit - though not as much as the previous user.
With a downward sloping demand curve one arrives at the ‘marginal’ (i.e. 600th) road user who
is prepared to pay Rp. 400/v-km and he faces costs of Rp. 400/v-km. So he is, the last marginal
user, just about prepared to make the trip (unless further improvements reduce costs and the
whole process begins again this time starting with the 601st user). The total benefit is the sum of
all the ‘consumer surpluses’ enjoyed from the 301st through to the 600th road user. This is
clearly the triangle ‘abd’. Had these users been ‘existing’ users their benefit would have been
the whole rectangle ‘abcd’. Clearly ‘abd’ is half of ‘abcd’ and hence the effect is known by
convention as the ‘rule-of-half’.
This is no ‘by-way’ of consumer theory. If new traffic on the road is classified as either ‘diverted’
or ‘generated’ then clearly the level of benefit that can be attributed to each will differ and so will
the final level of benefit that can be directly compared against agency, social and environmental
costs.
1.3 Evaluation Tools
(i) IIRMS and HDM-4
Economic analysis for the purposes of selection and prioritisation of PPTA treatments and
engineering solutions requires the comparison of costs and benefits. These consist, principally,
of road agency costs (construction costs and subsequent maintenance costs) and road user
costs (RUCs). Savings in these two principal items constitute the bulk of benefits from most
road maintenance or improvement projects (accident cost savings and developmental benefits
are the other principal categories). A comparison of ‘Without Project’ costs is made to ‘With
Project’ costs and the resultant net benefit stream is used in the calculation of economic
indicators of worth such as Net Present Value and IRR enabling selection and ranking of
projects.
The extent of the Indonesian road network and the consequent large amount of data that need
processing inevitably led to the development of several models and their associated software.
These models are regularly employed in the planning of the road network and evaluation of
specific road development proposals.
Calibration of Models
It is important that both IIRMS and HDM-4 are similarly calibrated using current up-to-date road
user costs, construction costs and agency costs (maintenance activities). It is important, firstly,
because when both models use the same set of data meaningful comparison of their respective
results is possible. Secondly, because road user cost data must be up-to-date to match up-to-
date road construction costs. If there was a mismatch between road user cost and agency cost
inputs the relative economic ranking of road links would not change. But with older RUC data
there would lower benefits than would otherwise be the case and the economic indicators of
some suggested engineering improvements would be below the ADB’s IRR ‘cut-off’ rate.
IIRMS uses a standardised data-set. It is important that it be updated (every 2-3 years) and that
this data set can be adapted for use by HDM-4.
Though not strictly speaking a calibration issue, there is the further matter of model ‘set-up’.
That is both models need to be ‘set-up’ with regard to their maintenance and other interventions
so that they react in similar fashion to proposed treatments. This is particularly important where
maintenance is specified as either: condition triggered or scheduled. Whatever type is selected

- both models should have the same ‘set-up’. The principle also extends to roughness (IRI) re-
set values i.e. in both models identical engineering activities must generate identical
improvements. In both tools these are known as the ‘Works Effects’ sub-models.
Speed Parameters
Similar preparation needs to be done with regard to speed-flow types, traffic flow patterns and
vehicle calibration speed parameters.
In both models the average speed of each vehicle type is required for calculating vehicle
operating costs and travel time both under ‘free-flow’ and congested conditions such as in
urban areas. Vehicle speeds are influenced by a number of factors, including:
• Vehicle characteristics and loading

• Road characteristics, including condition, width and alignment,
• Speed limits and behavioural factors,
• Side friction in the form of non-motorised traffic (NMT) and roadside activities (for
example, bus stops, stalls, access, parked vehicles)
• Total traffic volume relative to road width and capacity
Experience suggests that use of default values will tend to overestimate average driving
speeds compared to actual speeds on typical road conditions such as those found in Indonesia.
Several parameters in both models need configuration or calibration to ensure that predicted
average vehicle speeds are closer to typical, locally observed speeds.
In this instance HDM-4 would be calibrated to reflect those values found in IIRMS. These
parameters are located in several different set-up locations in the HDM model that will be
verified for compatibility. These include:
(a) Configuration Data;
• Speed Flow Types, defining road capacity assumptions and related mainly to road
width or the number of lanes.
• Traffic Flow Patterns, defining peak hour traffic assumptions used in road capacity
assessment.
A speed flow type and a traffic flow pattern must be specified for each road section in the Road
Network/Definition data and for each Improvement Standard.
(b) Road Network/Geometry data for each road section (and road improvements):
• Posted Speed Limit and Enforcement Factor (the extent to which speed limits are
observed)...
• Speed Reduction Factors or side friction due to roadside activity (XFRI) and non-
motorised transport (XNMT).
• Sigma adral: a measure of ‘acceleration noise’ or the severity of speed changes in
congested conditions which increase vehicle operating costs.
(c) Vehicle Fleet/Calibration Data:
• Desired Speed parameters (Vdes2): a measure of practical, behavioural speed by

vehicle type under optimum local conditions.

1.3.1 Indonesian Integrated Road Management System (IIRMS)
Within IIRMS, the principal modelling tool is known as the ‘Economic Review Model’ (ERM).
ERM does not work in isolation. Below following a brief description of ERM and the associated
models of which it forms a part.
The overall modelling framework is provided by IIRMS. This consists of large road and traffic
databases which are interrogated by subsidiary analytical modules that calculate road
deterioration, traffic, agency costs, road user costs, works effects and so on. The road
database consists of information on all Indonesian National and Provincial roads such as
length, width, pavement condition with data regularly updated by field surveys. The traffic
database consists of classified traffic counts regularly updated by traffic surveys – the objective
being to achieve 100% coverage of the network. The bulk of the analytical work is carried out
by the ‘Network Analysis Module’. If some data sets are not up-to-date then these will be
updated wherever possible.
1.3.1.1 Network Analysis Module (NAM)
NAM forms the core of the IIRMS Planning Module. NAM has gone through numerous versions
and improvements so that the current version of NAM incorporates a road deterioration model
based on HDM-4 and a Road User Cost model based on the Indonesian Highway Capacity
Manual (IHCM is a manual describing formalised relationships that predict the speed of
vehicles as a function of road capacity and motorised traffic. Speeds vary as vehicles interact
with other motorised and non-motorised traffic under a variety of road conditions such as road
width, shoulders, road geometry, urban development, side-friction and so on. The predictive
models were calibrated following extensive observations and measurement of actual
Indonesian driving conditions).
The purpose of NAM (within IIRMS) is to provide:
(i) Potential treatment options which include associated works costs, road user costs and varied
timings. Both maintenance and betterment treatments are considered. Appropriate models of
deterioration, works effects are also considered. Separate models for paved and unpaved
roads coexist in the NAM. The reference or base case is user selectable between various
periodic maintenance interventions and a reconstruction option.
NAM performs the analysis over a 30-year economic lifecycle.
(ii) Four models are called up for each analysis year:
(a) Road Deterioration Model,

(b) Works Intervention and Costs Model,
(c) Works Effects Model – resets pavement parameters following major treatments, and
(d) Road User Costs Model.
1.3.1.2 Strategic Expenditure Planning Model (SEPM)
At the end of the analysis economic indicators are calculated against the the reference (‘Base
Case’). SEPM then chooses the most cost effective treatment selection for the network for a
nominated budget availability.

1.3.1.3 Economic Review Model (ERM)
ERM is a subsidiary model to NAM that provides for user-defined analytical flexibility. ERM
permits users to select specific links and define their own project along the link. Each project
may have one or more associated road design alternatives with regard to pavement width,
shoulders, pavement thickness and so on. These design alternatives are then compared to
reference cases which consist of alternative paved or unpaved road maintenance profiles, such
as (for paved roads) 40 mm, 60 mm or 80 mm overlays, their timing i.e. the first year in which
the overlay can be performed such as “apply from year 0, year 2, 5 etc” , and condition
triggering values such as “apply PM only when IRI > 10”.
The calculation of benefits uses the same principles and models established within IIRMS i.e.
agency costs and road user costs are derived for the ‘Without’ and ‘With’ project cases.
Exogenous benefits can be added such as accident cost savings and/or developmental
benefits. The analysis period can be varied to 15, 20, 25 years etc and may differ form the NAM
default period of 30 years.
ERM provides a more flexible interface to work with than NAM and enables more ‘fine tuning’
and tailoring of the analysis towards specific policy-driven objectives. NAM is still used to do the
background number crunching but the timing, cost, and actual design is defined by the user.
1.3.2 The HDM-4 Model
Calibration and Configuration
A distinction needs to be drawn between data provision and calibration. HDM-4 has minimum
data requirements (such as traffic, network data, unit prices) to run the model and provide the
right orders of magnitude of costs and effects; the quality of data will influence the level of
reliability of model output. Calibration of output is concerned with adjusting model parameters
to improve predictions of how costs will change under different influences and interventions to
reflect local conditions.
The HDM4 documentation distinguishes between three possible levels of calibration, as

follows:
Level 1 – Basic Application

This determines the values of required basic input parameters, adopts many default values and
calibrates the most sensitive parameters with best estimates, desk studies or minimal field
surveys.
Level 2 – Calibration
This requires measurement of additional input parameters and moderate field surveys to
calibrate key predictive relationships to local conditions.
Level 3 – Adaptation
This requires major field surveys and controlled experiments to enhance the existing predictive
relationships or to develop new and locally specific relationships for substitution in the source
code of the model.
In terms of effort, the three levels can be viewed as requiring, respectively, ‘weeks’, ‘months’
and ‘years’. The appropriate level is determined by the time and resources available. For the
PPTA a level 1 calibration was considered the appropriate objective.

In HDM-4 the term ‘configuration’ relates mainly to the specification of selected classes of road
attributes, such as those relating to traffic flow, speed flow and accidents. Other configuration
and set-up parameters, related more directly with the engineering aspects of HDM-4, such as
climate configuration, calibration of the road deterioration model, works standards and unit
costs, are discussed subsequently.
The HDM-4 model simulates road condition for each section, year-by-year using a set of three
sub-models:
• Road Deterioration: which predicts pavement deterioration and surface roughness,

• Works Effects: which simulates the effects of road works on pavement condition and
determines the corresponding costs and re-sets,
• Road User Effects: which determines costs of vehicle operations and travel time.
The three sub-models analyse the costs (road agency costs, road user costs, accident costs)
from alternative improvement and maintenance strategies. The changes (savings) in these
costs are compared and benefits derived. The size of the investment is determined by the costs
of construction and annual road maintenance. The economic returns are mainly in the form of
savings in road user costs due to the provision of an improved road facility: e.g. improved road
pavement, wider formation, shorter length and so on. These three costs (construction,
maintenance, road user costs) incurred over the economic life of the project (analysis period)
are known as whole life cycle costs. Economic indicators are then derived. These commonly
include: (i) Net Present Value (NPV) and (ii) Economic Internal Rate of Return (EIRR).
1.3.3 Updating Road User Costs for IIRMS and HDM-4
The main steps in preparation or updating of an RUC dataset are as follows (details are given
in later sections of the report as shown in brackets):
• Selection of representative vehicle types,

• Identification of basic physical vehicle characteristics, including loading,
• Estimation of vehicle utilisation patterns and depreciation parameters,
• Economic pricing of vehicles and tyres,
• Economic pricing of fuel,
• Economic pricing of crew wages and maintenance labour,
• Valuation of overheads,
• Determination of interest rate and other economic parameters,
• Valuation of passenger and cargo delay time,
• Configuration of speed parameters,
• Review of accident valuation options,
• Specification of traffic growth and related parameters.
The basic model involves comparing existing links with improved links and comparing user
costs on the alternative improvements to arrive at net benefits. The basic VOC relationships are
those derived from HDM-4.
The model is not a network model but it is a systematic way of comparing costs on improved
links with costs without any improvements. The model uses data that relates to:
• Construction Costs,
• Vehicle Operating Costs,
• Maintenance Costs,

• Passenger time costs (working time and non-working time), and

• Accident costs,
All these are the results of to the following:
• Road Condition(including Roughness),

• Road Capacity,
• Geometric characteristics,
• Pavement Characteristics and
• Traffic Volume.
HDM-4 considers savings in Road User Costs as benefits:
(i) Road-User Costs (RUCs): These are the reduction in Vehicle Operating Costs and
passenger travel-time costs as a consequence of road improvements in one or more of the
following variables:
(i) Roughness (IRI/km),

(ii) increases in road capacity (pcu/hr); and
(iii) shorter distances.
Project roads have been evaluated in the light of these factors. There are well established
relationships between roughness, capacity and VOCs which enable the calculation of user cost
reductions (i.e. benefits). Well defined traffic flows are essential for this method.
Diverted traffic benefits are calculated as for normal traffic i.e. a comparison of RUCs with and
without the project (not subject to ‘rule-of-half’ as with generated traffic).
HDM-4 makes provision for the input of generated traffic. The amount of generated traffic can
be determined by estimating induced agricultural output and converting that into vehicle trips
and vehicles. The road user costs for the generated traffic are calculated as for normal traffic
but their final benefits are subject to the ‘rule-of-half’ (see below for brief explanation)
(ii) Components of Road User Costs (RUCs)
Road User Costs (RUCs) consist of Vehicle Operating Costs (VOCs) and passenger working
and non-working travel time (VOTT).
As far as vehicle operations are concerned, physical quantities of inputs consumed are related
to the quality of the road surface as well as to the geometric (horizontal and vertical alignment
i.e. width, gradients, curvature etc.) and traffic characteristics of the road. Thus all of a road’s
characteristics are used to calculate the consumption of resources during vehicle operation. A
vehicle moving over a badly deteriorated road (i.e. with a high roughness) will consume more
resources and thus have higher vehicle operating costs than the same vehicle using a
smoother, better maintained, road. High road roughness has a ‘double’ impact. It causes higher
VOCs: (i) directly in the form of a higher consumption of tyres, spare parts and maintenance
labour as well as: (ii) indirectly in the form higher fuel consumption and passenger time costs
due to the fact that roughness also decreases vehicle speeds to sub-optimal levels.
• Any road investment that improves the speed at which vehicles can operate may be
expected to generate significant benefits.
• Road improvements generate benefits through reductions in road roughness and
through improvements in vehicle running speeds due to road widening.

Both IIRMS and HDM-4 calculate VOC and VOTT from the following components:
• Fuel,
• Lubricants,
• Tyres
• Spare Parts,
• Maintenance Labour
• Crew Costs,
• Passenger Working and Non-working travel time costs,
• Depreciation and
• Overheads.
Exogenous developmental benefits can be most easily represented by means of ‘generated’

traffic. That is, additional traffic representing economic activity that was induced by lower
transport costs. In the analysis so far such generated traffic has not been estimated but its
expected to be not more that 10% of normal traffic in the absence of complimentary
investments in agriculture. Normal traffic growth may be sufficient to justify the improvements
without recourse to generated traffic or exogenous benefits. This will be ascertained following
the analysis and is also dependent to a large extent on the costs/km of the engineering
designs.
(iii) Principal Beneficiaries: south Java and Kalimantan Improvement Projects
Road User and Road Agency Costs will be compared for normal, diverted and generated traffic
over the entire existing route plus a comparison of the existing route with alternative alignments
identified during field surveys.
Diverted traffic benefits will be included in the analysis and these will be derived by comparing
estimates of RUCs over short-listed routes with the RUCs that will be realised (by the existing
and ‘diverted’ traffic) over the improved pavement or width designs. Normal i.e. existing ‘local’
traffic using just portions of the project road will also experience reductions on VOCs as a result
of reductions in roughness, and to a some extent lower travel time costs as a consequence of
capacity (widening) improvements. The extent of capacity improvements that will form part of
the comparative analysis of Options will be finalised with the Client but provisionally it is
suggested that these will consist of 6.0 m. + 1.5 metre shoulders and 7.0 m. + 2.0 metre
shoulder alternatives.
2 The Road Network – Definition of Sections and Alternatives
In order to carry out the evaluation data pertaining to the short-listed road links are required.
These include general information on the speed-flow pattern, climatic zone, as well as more
specific data on existing geometry and condition of the existing road i.e. the length, width,
number of shoulders, curvature, rise and fall, existing pavement type and thickness, roughness
and traffic levels. These input data are being assembled from available information as well as
project surveys. Roughness was will be ascertained using a bump integrator mounted on a
moving vehicle.
Following analysis and classification of the road data, the short-listed links may be further sub-
divided into a reasonable number of homogeneous sections based on physical characteristics
and/or traffic flow characteristics such as width, pavement type, roughness, Structural Number,
AADT and so on. The number of homogeneous links however will be kept to within a
reasonable limit. A large number of links will complicate the analysis. Any perceptible gains in
accuracy would be spurious.

Once the homogeneous road sections have been defined engineering interventions will be
defined. These will consist of both improvement interventions and maintenance interventions.
Interventions specify the type, extent, timing and/or frequency of works.
HDM-4 sections need not conform to engineering sections and in fact they are usually more
numerous since they have to be homogeneous with respect to any number of factors which
may influence Road User or Road Agency Costs. These factors include such as items traffic,
roughness, surface type, pavement material, carriageway width etc. In addition to the existing
inks, new sections may be defined wherever appropriate. In such a case a corresponding
existing link needs to be defined to enable comparison of RUCs in the ‘WOP’ and ‘WP’
scenarios.
For each section, section data, either descriptive or numerical, will be entered in the HDM-4
user interface – examples of which are shown in Annex B of this report. The data requirements
are self-explanatory and have been obtained either directly from analysis of study surveys or
from desktop analysis of previously published work.
2.1 Suggested Intervention Criteria
For each works activity user-specified intervention criteria are used to determine the timing and
limits on the works to be carried out. The intervention criteria can be defined through one of the
following methods:
(i) Scheduled: By scheduling at fixed intervals of time (e.g. ‘resurface at four year intervals’
or ‘overlay when pavement age reaches 7 years), or at a fixed time (e.g. widen in 2010’).
(ii) Responsive: In response to critical ‘threshold’ levels specified by the user in terms of
any of the following broad categories:
! Pavement condition,
! Pavement structure and strength,
! Drainage condition,
! Vehicle speeds, and
! Traffic volumes, loading and flows.
2.2 Examples of Improvement Standard Alternatives
Improvement standards may include widening, surface standards, pavement thickness

standards and so on. Quite a number can be specified. However these must be limited
otherwise the total number of possible alternatives will grow exponentially (for example with two
pavement standards, two widening standards and two alignment options there would be a total
eight project Alternatives per section).
Two improvement alternatives (or standards) may be compared against the ‘base case’ the
latter reflecting the ‘Do Minimum’ or ‘Without Project’ (WOP) alternative. The proposed
improvement of the project road considers upgrading of the existing poor gravel road to:
! Option 1: paved surface, Double Bituminous Surface Dressing or Treatment

(DBST) and
!
! Option 2: Asphalt Concrete Surfacing (AC).
Major features of Option 1 – DBST – will include the following:
(i) the improvement of the horizontal and vertical alignment,

(ii) construction of a granular sub-base to a thickness of 225 to 250 mm and a 200 to

225 mm thick crushed aggregate base course,
(iii) the widening of the existing narrow carriage-way to a minimum 6.0 m. with 1.5 m.
shoulders or 7.0 m. with 2.0 m. shoulders wherever hilly or mountainous topography
or sensitive adjacent land-uses do not constrain this requirements and
(iv) a surface course of DBST.
The second alternative (Option 2) involves the substitution of the DBST by a 50, 80, 100 mm
thick hot mix asphalt concrete, laid by using mechanical paving machine. The pavement
thickness will be determined by estimation of axle loads based traffic survey data.
Costs will be expressed in mid-2008 prices. The economic costs are derived by converting
financial prices using a factor of 0.85.
2.3 Suggested Road Maintenance Standard Alternatives
In addition to specifying improvement options the choice of road maintenance strategy that will
apply to the ‘base case’ is an important component of HDM-4 modelling and evaluation.
Definition and specification of maintenance strategies and standards will influence the outcome
of the evaluation. Its specification is governed to a large extent by the present condition of the
road and an assessment of historic maintenance practices. ‘Best practice’ is not the optimum
choice for representing the ‘Do Minimum’ maintenance as it does not represent the actual use
of Provincial maintenance resources.
Maintenance items and interventions can be either scheduled or responsive. HDM-4 allows for
either of these to be specified based on a variety of criteria depending on the maintenance item
in question. HDM-4 also re-sets roughness and other road condition values and these can be
set so as to reflect the current quality levels being achieved. Nevertheless whatever the ‘Do
Minimum’ maintenance standards specified, the maintenance standards following the
improvements must follow ‘best practice’.
2.4 ‘Without Project’ Maintenance – ‘Do Minimum’ Base Case
This is the road maintenance standard that will be applied to the ‘base case’. That is the
maintenance that is assumed to continue in the ‘Without Project’ case. It is a ‘Do Minimum’
standard.
For existing paved roads high ranking intervention work items such as ‘pot-hole’ filling will be
performed with the aim to sustain the accessibility of the corridor although at a higher level of
RUCs relative to the improvements/upgrading of the WP case.
For existing gravel roads (e.g. in Kalimantan) high ranking intervention work items such as
gravel resurfacing (re-gravelling) will be performed with the aim to sustain the accessibility of
the corridor although at a higher level of RUCs relative to the improvements/upgrading of the
WP case. (With IRMS maintenance often merges into imperceptibly into development i.e.
paving or widening. This function will be disabled since these are precisely the interventions
that need to be evaluated against a ‘Do minimum’).
Apart from recurrent type items (routine maintenance) performed on an annual basis, pot-hole
filling of the paved carriageway will be based on responsive criteria.
For paved roads maintenance will consist of;

• Routine Maintenance: This will be carried out in accordance with current practice
(annually) using current prices.
• Pothole Patching: This will be condition responsive. It is assumed that 100% of

potholes per year will be patched. The maximum applicable area to patch each year will
be about 5% of the road surface area/km/year (25 to 35 m2/km/year equivalent to 20 to
30 potholes/km/year).
• Resealing: This maintenance activity will be condition responsive. The criterion for this
activity will be triggered when the maximum total damaged area attains a value of 50%.
No minimum or maximum interval between resealing interventions will be assumed. The
resealing activity will consist of a single bituminous surface treatment (SBST) with
shape correction of a 25 mm thickness. Roughness will be re-set to IRI = 4.0 following
the treatment. Preparatory work prior to the resealing will be specified. This consists
again pothole patching, edge repair and crack sealing.
For gravel roads the maintenance standards and scheduled and/or responsive criteria that will
be specified in the HDM-4 model are as follows:
• Routine maintenance carried out according to current practices, using current unit
rates,
• Grading will be specified as being carried out on a scheduled basis, to be done once a
year i.e. HDM-4 interval between recurrent grading is set at 365 days,
• Spot re-gravelling will not be included,
• Resurfacing or re-gravelling will be defined with responsive criteria. A minimum

allowable thickness of 100mm is assumed to initiate re-gravelling. No minimum or
maximum intervals between re-gravelling will be assumed as the road will continue as
unpaved throughout the evaluation period for the ‘Do Minimum’ case. Upon completion
of the re-gravelling intervention, it is assumed that the gravel thickness will increase to
150 mm whilst the roughness re-set value will be 12 IRI (m/km). The method of
compaction will be mechanical.
2.5 ‘With Project Case’ Maintenance
This is the maintenance standard that will apply following the completion of the improvement
standards. Again there are maintenance items such as drainage repair, vegetation control
which will be scheduled to occur as soon as the improvement works are completed. Other
items of road maintenance such as patching of potholes, resealing and overlay work items are
condition responsive. The maintenance applicable to the two pavement improvement options
i.e. DBST and AC are the following:
• Routine Maintenance: This will be carried out in accordance with current practice
(annually) using current prices. (See Table 4 below.)
• Pothole Patching: This will be condition responsive. It is assumed that 100% of potholes
per year will be patched. The maximum applicable area to patch each year will be about 5%
of the road surface area/km/year (25 to 35 m2/km/year equivalent to 20 to 30
potholes/km/year).

• Resealing: This maintenance activity will be condition responsive. The criterion for this
activity will be triggered when the maximum total damaged area attains a value of 50%. No
minimum or maximum interval between resealing interventions will be assumed. The
resealing activity will consist of a single bituminous surface treatment (SBST) with shape
correction of a 25 mm thickness. Roughness will be re-set to IRI = 4.0 following the
treatment. Preparatory work prior to the resealing will be specified. This consists again
pothole patching, edge repair and crack sealing.
• Overlay: This maintenance activity is also condition responsive. The activity will be
triggered when IRI = 8.5 m/km. No minimum or maximum interval between overlays will be
assumed. An overlay type of hot-mix asphalt concrete and a 50 mm thickness will be
assumed. Following completion there will be a user specified re-set for roughness at IRI =
2.5 m/km. As with resealing some overlay preparatory works will also be carried out in order
to achieve the target re-set value.
Unit rate maintenance costs, corresponding to the items listed above were obtained from recent
studies and Bina Marga sources and appropriately updated. The financial costs were split into
component costs. Social Conversion Factors are those suggested by the ADB. Derivation of
SCFs requires detailed analysis of the import and export penetration of economic sectors and
is best carried out centrally so that there is commonality throughout.
2.6 Evaluation Period
The evaluation period is set at two years of construction plus 20 years i.e. from 2009 to 2030.
The improvement works are assumed to start in 2009 and construction will be completed in two
years i.e. beginning of 2010. Following completion the period from 2010 to 2030 i.e. 20 years
will constitute the road’s service period for the purposes of the economic analysis. The twenty
years convention with regard to road project feasibility studies is widely used. The reason is
that this guards against economic obsolescence. Physically infrastructure facilities may last for
40 or 50 years or more. However though it may have a long physical life a road’s economic
usefulness may be much less due to shifting patterns of demand, population etc. To avoid this
a 20-year analysis period is commonly adopted.
During the construction phase there is often disruption and hence higher costs of operation to
traffic using the road. On the other hand when sections of road have been completed within the
2-year construction period there may be benefits to traffic using the ‘unofficially’ opened
improved sections. The convention is ignore these since these costs and benefits cancel each
other out and the overall effect on project returns is deemed neutral.
2.7 Vehicle Operating Cost Inputs
The cost categories used by both IIRMS and HDM are as follows:
• Fuel,
• Lubricants,
• Tyres
• Spare Parts,
• Maintenance Labour
• Crew Costs,
• Passenger Working and Non-working travel time costs,
• Depreciation and
• Overheads.
Spare parts, maintenance labour and depreciation are a function of new vehicle prices.
Economic vehicle prices have been derived from financial (show-room) prices.

2.8 Vehicle Types and Characteristics
The cost data is related to representative vehicle types in current use. The modelling process
uses 11 vehicle categories (10 vehicle categories plus 1 motorcycle category). Numerous
studies carried out over the last ten years are in broad agreement regarding the vehicle
categories required. In HDM-4 vehicle operating parameters are defined in the vehicle fleet
folder which has been calibrated to reflect the type of traffic observed on Indonesian roads. The
range of vehicle types defined may be much wider than the range observed along study roads.
However since the modelling requires the inclusion of potential diversion from other Java routes
or international traffic from Malaysia the range is representative of the wider range to be found
on Indonesian roads.
Several HDM-4 vehicle data files will be defined. These will be identical in all respects except
that each one will be based on a different long-term fuel price for oil of, say: $60/bbl, $80/bbl
and $100/bbl. Since fuel consumption typically represents 20% of total VOCs a range of long-
term prices needs to be evaluated. So rather than modify a single vehicle data file each time a
different crude oil price needs to be modelled several vehicle data files can be defined and then
used as and when needed.
Along the project road in addition to conventional motorised vehicles, there maybe a
respectable volume of non-motorised vehicle (NMV) traffic such a pedestrians, bicycles, pack
animals and animal drawn transport – more so in Kalimantan. These NMVs will not be dealt
with explicitly in the calculation of benefits. Rather they represent a component of ‘side-friction’
that restricts the design capacity of roads and hence reduces speeds and increases costs for
other vehicles.
The 11 motorised vehicle categories include:
1. Sedan Car,
2. Utility - Freight
3. Utility – Passenger (8-12 seats)
4. Medium Bus (25-30 seats),
5. Large Bus (45 – 55 seats),
6. Light Truck,
7. Medium Truck,
8. Heavy Truck,
9. Truck-Trailer
10. Tractor –Trailer and
11. Motorcycle.
Vehicle categories are presented in “Vehicle Categories and Operating Characteristics”.
In terms of vehicle technical characteristics such as un-laden weight, weight carried, number of
axles and tyres there is only gradual change over the years. Most smaller passenger vehicles
appear to be of Japanese or Korean origin with larger vehicles in the ‘car’ category being of
European origin. But as is the case elsewhere with growing economies the age of the
Indonesian vehicle fleet is changing as older models are being replaced by newer models. The
vehicle categories and operating characteristics used in IRMS and HDM-4 calibration are
shown in Table 1 below:

Table 1 Vehicle Characteristics - HDM-4 and IRMS Calibration - PPTA Indonesia December 2008
Source: Consultant

Key characteristics for most vehicles are based on pre-specified default values in the HDM-4
model with some adjustment for Indonesian conditions. The more important characteristics are
shown below. HDM-4 requires a number of input values relating to vehicle age and annual
utilization that are used to calculate depreciation and interest – i.e. the capital cost component
of VOCs.
Vehicle age expressed as ‘average service life’ is also used in the calculation of vehicle
maintenance costs. These inputs are difficult to determine. Estimates have been made from
information obtained from other studies in Indonesia. Vehicle registration and import statistics
were considered but are not detailed enough to give more than a general impression of the age
structure of the vehicle fleet.
Apart from the economic costs of vehicle and tyres and other variable costs such as fuel, HDM-
4 requires information on vehicle characteristics, based on in-country observations. These
vehicle characteristics help to define the relationship between vehicle operating costs, road
condition and speed.
The derivation of economic vehicle prices used in the HDM-4 analysis and for IIRMS is shown
in Table 2 below.

Table 2 Derivation of Economic Vehicle Prices – Indonesia PPTA December 2008
Source: Consultant’s calculations, IRMS, HDM-4

2.9 Fuel Costs
Fuel costs are a major element of VOCs - and by implication of project benefits. Improved
roads result in fuel savings and the higher the resource cost of the fuel saved the higher the
value of those benefits. In HDM-4 calibration the vehicle unit costs page explicitly requires the
user to input the price of petrol or diesel in some appropriate currency unit (e.g. $/litre). The
price/bbl selected for will have a significant impact on the results of the analysis. Sensitivity
analysis will partly off-set the uncertainty but a median price will nevertheless have to be set.
Due to the importance of this topic the section below examines some of the issues relating to
the derivation of a fuel price median price derived from an assessment of actual time series
data as well forecasts made by the US Department of Energy.
The on-going seemingly relentless rise in world oil prices implies that use of the true ‘resource
cost’ of fuel is more important than ever. If short-term oil prices are used, the economic
analysis runs the risk of over-estimating benefits. This in turn would lead to the over-provision
of road space and the wasteful use of scarce resources. It is widely accepted that a large
component of current (June 2008) oil prices is speculative - i.e. the market has been caught up
in a speculative ‘bubble’ where price rise expectations lead to further orders for oil, in turn
leading to a further round of price rises in a ‘self-fulfilling’ upward spiral. The 250% increase in
prices from $55/bbl in March 2007 to $135/bbl in June 2008 (14 months later) is a clear
indication of this. No economy has grown so rapidly (i.e. 6.5% per month) so as to account for
the demand that would normally be the cause of such a price increase (assuming fairly fixed
supply).
In addition the weakening dollar has further ‘disguised’ the real price for oil so that, in nominal
and constant dollars, prices have diverged even further. Consequently price increases over the
last 3-4 years are not a good indicator of future price behaviour. So although recent price
increases reflect strong economic growth in major consuming nations,
political instability in oil producing areas and temporarily fixed supply, it is a widely held position
that current nominal prices are misleading indicator of true scarcity.
The graph below (Figure 2) shows the price for crude in nominal dollars per barrel. It shows a
fairly constant price level until December 2003 at which point a gentle continuous increase up
to September 2008. A more erratic price period then begins culminating in a dramatic drop
January 2007. Thereafter there is a relentless increase beyond any previous high in which the
symbolic $100/bbl barrier was crossed in February 2008.

Figure 2 Monthly Average Variations in Crude oil prices (nominal US$/bbl)

(Dec. 1999 to June 2008).
Source: http://www.oilandgasconfidential.com/Historical_Crude_Prices.html
When one examines the same series with the corresponding euro/bbl series superimposed
(Figure 3 below ) the same volatility is evident but the values are much lower than the dollar
series. This is clearly the result of the dollar’ devaluation against most major currencies – and
particularly the euro. Up to early 2003 both the dollar and euro series are completely
overlapping but from September 2003 onwards the two series begin to diverge more and more.

Figure 3 Monthly Average Variations in Crude oil prices (nominal US$ and !/bbl)
(Dec. 1999 to June 2008).
Nonetheless, some of the oil-price increase is based on more solid long-term fundamentals i.e.
increasing demand due to growth in the world economy coupled with a gradual long-term
dwindling of supply (less elastic supply curve). The demand from North America and OECD
countries though rising is fairly predictable. The new element in the demand for oil, in the last
decade, is the persistent growth of both the Chinese and, to a marginally lesser extent, Indian
economies. This growth is finally being translated into rising household incomes and growing
life-cycle consumption activities fuelled by such ‘needs’ as motorization, house purchase,
domestic consumption, travel and so on.
Until relatively recently most studies adopted a crude oil price in the region of $20-$30/barrel,
which appears quite unrealistic when prices are in July 2008 exceeded, albeit temporarily,
$140/bbl. To arrive at a crude oil median price both the dollar and euro time series price data
was represented by trend-lines which in effect ‘iron out’ the price volatility. The forward
projection of these trend-lines offers the opportunity for adopting a more realistic oil price. Since
the euro has held its value, it provides a useful ‘check’ on where the dollar price may have been
in the absence of its devaluation. The current (July 2008) exchange rate is ! 1.0 = $1.57
however the average exchange rate over the series period is closer to !1.0 = US $1.21. The
price in euro/bbl therefore defines a lower limit in a range of possible values for the price of
crude. When trend lines for both the dollar and euro series are drawn the result looks like the
graph shown in Figure 4 below:

Figure 4 Adjusted Oil price based on US$ and Euro/bbl Trend-lines and long-term US$ : !
exchange rate.
Source: Consultant’s estimates & http://www.oilandgasconfidential.com/Historical_Crude_Prices.html
When the trend lines are extended to, say 2020, a series of future oil prices/bbl were obtained
in both dollars and euros. The average value of both the dollar and euro series from 2002 to
2020 was $105/bbl and !70/bbl respectively. The euro prices which it was felt ‘represent’ in
effect dollar prices when there is parity between the dollar and euro. However it is obvious
since 2002 that this is no longer the case so that the average future euro price to 2020 was
adjusted by the implied long-term dollar:euro exchange rate to obtain a long term price of
$83/bbl.
In order to ‘corroborate’ the study analysis, the US Department of Energy price forecasts were
consulted as well. These were made in early 2007 and expressed in ‘constant’ 2006 dollars.
These forecasts predict a 2020 crude oil price of $59.7/bbl. These prices are based on a
number of assumptions but essentially that the 2005-6 ‘nominal’ prices would prove to be
sufficient incentive for a prolonged oil exploration effort that would increase supply sufficiently
to hold long-term prices steady below $60/bbl. The forecast prices are shown in Table 3 below.
Table 3 Long term forecast of crude oil prices in US$ per bbl
However since then the forecast oil prices have continued to rise beyond $100/bbl and the
dollar has lost further value against major currencies implying the need for some adjustment of
the series. The average 2005-2020 US$/bbl price for the unadjusted series above is $65.3/bbl.

This average was multiplied by a factor of 1.21 in order to adjust it in the light of the further
devaluation of the dollar, beyond 2006, and thus bring it in-line with the dollar-euro exchange
rate prevailing in June 2008 (1.21 is the ratio of mid-year 2006 and mid-year 2008 exchange
rate). The resulting ‘long-term exchange-rate-adjusted’ oil price is $79.3/bbl. This compares
with the $83/bbl obtained from the trend-line analysis above.
As a consequence of these two convergent prices, long-term economic fuel prices for vehicle
operation (and HDM-4 calibration) will be derived from a long-term crude-oil price of $80/bbl.
Recent Developments in World Oil Prices
Recent volatility means that several prices may have to be considered. As a consequence the
PPTA will use a ‘low’, ‘central’ and ‘high’ price scenario. Towards the end of 2008 the world
economy is going into recession. Problems with sub-prime mortgages in the USA has exposed
numerous banks and financial instititions and by extension individual consumers and their
savings. Industrial orders are declining as demand for consumer goods is shrinking. Excess
supply of goods has resulted in lower demand for oil as well as oil futures so that oil price/bbl
has fallen considerably and in January 2009 is averaging $45/bbl. The primary demand for oil is
the US economy and Chinese industry. Lower orders are thus having an immediate effect on oil
prices. The Baltic Dry Index has sunk to all time lows reflecting the extremely low shipping and
container prices available. This is because demand for containerized cargo has dropped
especially from China and India and previous long queues of container trucks at Los Angeles
port authority have all but disappeared.
The result of the above is that it is expected that oil prices will remain at current levels at least
into 2009. However despite the lower demand for oil there will be cuts in production since the
excess supply is not being consumed. The Saudi Arabian government’s long-term planning
price for oil is $75/bbl. In view of this the estimated long-term price for oil of $80/bbl though it
might seem high in the longer term is a more realistic price. Despite the fact that the US,
European, Japanese and Korean economies are into recession (and to a lesser extent China’s)
the planning horizon of 20 years dictates that a more cautious approach be adopted.
Study
When calculating the unit cost of fuel the requirements of economic (as opposed to financial)
analysis dictate that it is international border price which is used plus the internal transport and
distribution costs adjusted for border parities (not the cost of extraction in S. Arabia nor the
pump price prevailing in, say, Jakarta). Inefficient transport networks mean that road traffic
consumes more fuel than it otherwise should.
Therefore the values used in the economic analysis of capital projects must, as far as possible,
be a reflection of the actual use of national resources expressed in border prices. Certain
adjustments are required to express costs and benefits in economic rather than financial prices.
These usually involve deduction of import duties, consumption taxes, VAT and other transfer
payments which do not represent the real cost of resources but are simply transfers within the
economy or multiplication by a social conversion factor (SCF) for non-traded goods.
Fuel costs are a key component of VOC variable costs. About three-quarters of automotive fuel
sales in Indonesia now comprise diesel; the rest comprise mainly ‘premium’ (91 octane) petrol,
as ‘regular’ (87 octane) petrol is being phased out. Fuel price projections used in economic
analysis needs to take account of likely trends in world market prices for crude oil and
petroleum products. Retail prices of fuel in Indonesia have increased steadily, though not as
fast as recent increases in world market spot prices for crude oil and fuel products, as
illustrated below.

The price of fuel is regulated by the Government due to the strategic nature of the product.
There are two types of fuel used by vehicles in Indonesia (i) petrol (i.e. motor gasoline regular -
premium) and (ii) diesel (automotive diesel oil – solar). Pump prices vary with the international
price for oil as well as the with costs associated with transportation to various parts of the
country – some of which are quite remote and inaccessible in which case local transport costs
must be added adjusted by a social conversion factor reflecting the real border prices of the
cost of internal transport.
Fuel costs were calculated for two types of fuel. Petrol and Diesel (solar). The economic costs
of fuel are based on an assumed long-term cost for fuel of US$ 80.00 per bbl. Premium is
8.478 bbl per tonne and solar 7.435 bbl per tonne. The Specific Gravities of petrol and diesel
are 0.76 and 0.83 respectively. This is equivalent to 1,315.8 litres per tonne for petrol and
1,204.8 litres per tonne for diesel.
The calculation is shown in Tables 4, 4a and 4b below.
Table 4 Economic Price of Fuel (US$80/bbl) – July 2008
Source: Consultant’s Calculations

Table 4a Economic Price of Fuel (US$100/bbl) – July 2008
Table 4b Economic Price of Fuel (US$60/bbl) – July 2008
2.10 Tyre Costs
Tyre prices were obtained by the project from and represent standard sizes. Tyres are
manufactured in Indonesia so adjustment to economic values involves deduction of 10% Value
Added Tax (PPN) from retail prices. Table 5 ‘Financial and Economic Tyre Prices - 2008’

shows the breakdown into tyre and tube. The set includes a spare tyre hence 5 not 4 etc except
for motorcycles where no spares are carried on-board.
Table 5 Financial and Economic Tyre Prices – PPTA July 2008
Source: Consultant, WINRIP, EINRIP, IIRMS
2.11 Maintenance Labour Costs
For vehicle maintenance labour the requirement is to value the total workshop costs (other than
parts) which will be incurred for a typical vehicle maintenance or repair job. This is likely to
include the cost of a workshop team, comprising skilled, semi-skilled and unskilled labour,
working together on a vehicle. A typical weighting has been assumed for different skills
representative Indonesian workshops. Based on experience elsewhere and a widespread
convention, a mark-up of 100% of the labour rate is added to take account of workshop tools,
equipment, overheads and margins. Again, an allowance is made for rising real wage rates
during the analysis period. The resulting estimates are in the range of Rp. 20,000/hour
($2.1)/hour. The method for deriving vehicle Maintenance Costs per Hour is shown in Table 6
below.
Table 6 Derivation of Vehicle Maintenance Labour Costs - PPTA
2.12 Crew Costs

The term ‘Crew costs’ refers to drivers and drivers’ assistants distinct from ‘vehicle time costs’
which refers to passengers. Crew costs are considered as part of the VOC calculation similar to
fuel, tyres and so on. Costs consist of a basic monthly salary for driver and assistant.
All vehicle types have a driver. For sedan cars there is 0.2 driver i.e. one in every five has a
salaried driver (‘chauffeur’). For the other 80% of sedans the driver is considered a passenger
who may be travelling either on working or non-working time (see below). Motorcycles do not
have crew costs since motorcycle riders are considered under the ‘passenger travel time’
calculation.
It was assumed that saloon cars do not have a driver’s assistant. To this was added an
average allowance (5%) and an annual bonus divided pro-rata per month. This gives a
combined cost figure (driver plus assistant) made up of the basic monthly salary plus allowance
plus bonus. Crews were assumed to work 47 hours per week for 50 weeks or an annual total of
2,350 hours. This is equivalent to 195.8 hours per month but was rounded down to 191
hours/month as with other wage calculations. Total monthly equivalent remuneration was
derived and this latter figure was used to calculate the crew (driver plus assistant) cost per
hour. It must also be noticed that crews of larger more complex vehicles, requiring additional
driving skills are remunerated more than those of saloon cars and utility vehicles requiring only
a standard driving licence. Table 7 Monthly Remuneration and Equivalent Crew Costs per
Hour – PPTA 2008 below shows the crew cost calculation used for 2008.

Table 7 Monthly Remuneration and Equivalent Crew Costs per Hour – PPTA 2008

2.13 Value of Travel Time (VOTT) - ‘Working’ and ‘Non-Working’
VOTT is as important a quantity as VOCs and in fact the two together constitute Road User
Costs (RUCs). When transport infrastructure in general, and roads in particular, are improved
one of the first effects observed is higher speeds i.e. less travel time. Travel time savings are a
benefit that is included with other benefits accruing to road users. Its measurement is based on
whether the travel time saved occurred during working or non-working hours. The separation is
necessary since all benefits are based on the concept of ‘opportunity cost’ i.e. the alternative
use that can be made of any combination of resources. So if travel occurs during productive
(i.e. ‘working’) time then the cost of travel time is the opportunity cost of working time - usually
approximated to that of the general prevailing wage rate net of taxes and subsidies. This is the
simplest and most straightforward method and it assumes that there is a fairly efficient labour
market in existence so that wage rates approximate the marginal productivity of labour.
In practice this is not always the case and where there is unemployed labour that, due to labour
market fragmentation and rigidities, plays no role in exerting a downward pressure on the
market wage rate so that the market wage rate is often higher than it would be otherwise (i.e.
labour is more abundant than would appear to be the case). To correct for this a ‘Shadow
Wage Rate’ adjustment factor (SWR) is used that ‘corrects’ the wage rate to reflect the true
scarcity of labour. For the present study a SWR of 0.85 was used – an average considered
representative for the whole economy.
There are numerous methodologies for arriving at a satisfactory approximation to travel time.
Some values can be imputed or inferred from observed or stated human behaviour using
methods such as ‘revealed preference’, ‘hedonic pricing’, ‘travel cost method’ or ‘stated
preference’ surveys. In the context of a developing country a method that relied on these would
perhaps overestimate the worth of some income groups and hence of some road users at the
expense of others. These methods also require a massive survey effort and are clearly more
appropriate for more specialised studies of travel behavior.
On grounds of practicality and equity an average after-tax income of all Indonesian income
earners was chosen as the basis for values of travel time. This uses annual income converted
into an hourly rate and then factored according to trip purposes using the convention that non-
working time is valued at 30% of the time spent at work. Using the average a simple factor was
used to distinguish the average earnings of bus passengers from car and 4WD passengers.
Since no alternative productive activity would be occurring during non-working time e.g. on a
Sunday or whilst travelling to work then the cost of non-working travel time should be zero. In
practice most road users would prefer to minimise travel time so that non-working time is
conventionally accepted to have a value – albeit less that working time. In most studies this is
taken to be 30% of working time. Though the resultant values for Indonesia are very low – the
principle of valuing non-working travel time is still valid and has been adopted.
As the basis of the calculation the proportion of Gross Domestic Product (GDP) at factor cost
accounted for by the remuneration of employees and the earnings of the self-employed may be
obtained and divided by the gainfully employed population.
Annual working hours were assumed at 2058 (i.e. 49 weeks @ 42 hrs per week) or 172 hours
per month. This approach also avoids the use of detailed disaggregated income data. Using a
single time value also avoids the problem of valuing the time of dependents. This measure
often produces a very low figure and will somewhat reduce the importance of time-saving
benefits. However it would address objections to using any value whatsoever. Saloon and 4WD

passengers were allocated a higher value of time than passengers in the other vehicle
categories even though saloon cars are completely absent form the project road.
It should be no surprise that in Indonesia where wages are generally low, by developed country
standards, and where there is much disguised unemployment the corresponding VOTT would
be quite low compared to most economies. In other words the value of the additional output
that can be realised through travel time savings will itself be quite low. Nevertheless VOTT
applies equally to both official and non-official wage earners.
VOTT has been calculated in terms of Rp./hour as well as Rupiah per vehicle-hour depending
on whether IIRMS or HDM-4 is used. Some studies use total vehicle time in which case the
average number of passengers per vehicle needs to be determined to obtain the ‘vehicle
passenger time’.
Data and method for deriving VOTT used in the RRDP studies is shown in Table 8 below.

Table 8 Value of Travel Time (VOTT) - ‘Working’ and ‘Non-Working’

3 Construction Costs
Economic analysis requires not only Road User Costs (RUCs) but also Construction Costs for
the alignment and/or engineering alternatives.
Each alignment or engineering alternative has its own unique cost which depends on its length,
carriageway width, shoulder width, associated structures (culverts, retaining walls etc.) as well
as pavement design.
Each pavement design has different combination of layer thicknesses and will therefore have a
slightly different cost per metre or kilometre of road depending on the depth of each constituent
layer, the material specification for the layer and any method of compaction, construction or
disposal that needs to be carried out for it.
In addition there are complexities involved with partially widening an existing road compared to
building an entirely new facility or performing a full depth reconstruction. These activities have
different construction costs associated with them and different pavement performance over the
analysis period. The pavement performance such as roughness progression has an impact on
vehicle operating costs.
It is necessary therefore to estimate as many unique costs as possible for each alignment and
pavement option otherwise the economic analysis will be unable to differentiate one design
from another on the basis of its costs and expected benefits.
It is clear that quite a large number of different costs are possible. To approach this
systematically a spreadsheet was developed which would enable the calculation of a number
combinations based on common unit costs for materials. These estimates should not be
confused with “as built” costs. They are so-called ‘budgetary’ costs or pre-construction
estimates based on recent studies or provincial estimates.
3.1 Construction Cost Build-up Methodology
The approach was to assemble costs for basic pavement design components which already
include all the relevant labour, material and equipment. These were then combined or
assembled into overall costs per kilometre as required by alternative pavement and shoulder
design multiplied by carriageway and shoulder width.
So in effect the carriageway pavement design may differ slightly form the shoulder pavement
design. This then results in distinct costs per kilometre.
Such a cost calculation is shown in Table 9 below for a Yogyakarta pavement design.
Table 9 shows at the top three alternative carriageway pavement designs: A, B and C.
Adjacent to these are the corresponding shoulder pavement designs (again A, B and C). The
principal pavement design elements are:
(i) Wearing Course

(ii) Base Course
(iii) Sub-base and
(iv) Selected Fill
Preparing the Regional Roads Development Project – Final Report

The values in the appropriate lines represent depth in millimetres. Thus Pavement Design ‘A’
consists of 100, 150, 200 and 250 mm respectively of items (i) to (iv) above. Similarly for the
shoulder design.
Together these values represent the pavement design for planning purposes. The next element
for deriving a cost/km is the carriageway width and shoulder width. In the example below
carriageway width is 7000 (mm) and the total shoulder width 4000 mm (i.e. 2.0 m shoulder per
lane).
The primary cost items were as follows:
(i) Cost of Disposal (cubic metres)

(ii) Selected Fill (cubic metres)
(iii) Aggregate base Type 1 (cubic metres)
(iv) Aggregate base Type 2 (cubic metres)
(v) Prime Coat (litres)
(vi) AC/HRS wearing course in units of 50mm (square metres)
(vii) AC/HRS base course (cubic metres)
(viii) Road Markings (square metres)
(ix) Road Signs (number).
Unit rates in rupiah were obtained from recently completed studies and multiplied by the
quantities implied by the designs. Allowance was made for 25% for preparatory and minor
works.
Table 9 below shows the costs for Design A and Table 10 the costs for Design C.
Table 9 Full Depth Reconstruction for Alternative Pavement Thickness and Carriageway
and Shoulder Width Design A
Source: Consultant’s Estimates

Table 10 Full Depth Reconstruction for Alternative Pavement Thickness and Carriageway
and Shoulder Width Design C
Source: Consultant’s Estimates
Another set of costs were estimated based on the need in many cases for Partial Widening.
This consisted of retaining some of the structure of the road and additional widening of 1.0, 1.5,
2.0, 2.5 metres depending on the width of the existing section. Thus for a an existing 5.5 metre
road a 7.0 metre road design would require 1.5 metres
The costs per kilometer developed were then assembled by Province since pavement design
was tailored to soil and conditions prevailing in each Province.
Table 11 below shows the costs per kilometer as developed from the cost calculation above.
There are three sets of costs - one for each pavement design alternative (A, B and C).
For each cost a financial and economic cost is shown. The economic costs of construction are
used in the economic evaluation whilst the financial costs are used in the estimation budgetary
requirements.
Table 11 Construction Costs per kilometer per Province (7 m. + 2 m. shldrs)
Source: Consultant
The construction costs per kilometer were applied to the Sub-component 2 road candidates.
The link length was multiplied by the construction cost/km to obtain a estimated cost for the
road works. To this cost was added the cost of structures and bridges. The overall cost of the
road link was then summed and divided by the length to obtain a per kilometer cost which
included road costs and structures. The spreadsheet enabled the estimation of construction

costs for a variety of carriageway and shoulder widths (e.g. 6, 7, 8 m. and 1, 1.5, 2 m. for
shoulders). The majority of the links however are being proposed for widening to 6m only.
Construction costs for Java and Kalimantan sub-component 2 roads are shown in Tables 12,
13, 14, 15, 16 and 17 below. These unit costs were worked up carefully based on existing
contracts and design thicknesses. More recently in later revisions of this proposal, unit costs
have been changed to be simply Rp/km for widening to 6m based on indicative contracts and
current designs currently prepared by the relative Bina Marga branch offices.

Table 12 Cost Calculation West Java based on Construction costs per kilometer + bridge costs ) land acquisition
Source: Consultant
Table 13 Cost Calculation Central Java based on Construction costs per kilometer + bridge costs ) land acquisition

Table 14 Cost Calculation Yogyakarta based on Construction costs per kilometer + bridge costs ) land acquisition
Source: Consultant

Table 15 Cost Calculation East Java based on Construction costs per kilometer + bridge costs ) land acquisition
Source: Consultant

Table 16 Cost Calculation East Kalimantan based on Construction costs per kilometer + bridge costs ) land acquisition
Source: Consultant

Table 17 Cost Calculation West Kalimantan based on Construction costs per kilometer + bridge costs ) land acquisition
Source: Consultant

3.2 HDM-4 Runs and Results
An HDM-4 workspace was set-up to analyse the sub-component 2 roads. The input data as
described earlier consist of:
(i) road characteristics.

(ii) vehicle fleet characteristics,
(iii) works items i.e. maintenance and road improvements,
(iv) base year traffic and growth rates
The analysis was carried out using economic (as opposed to financial) costs obtained in the
last quarter of 2008.
The analysis applied to all sub-component 2 roads involved defining a ‘Base Case’. In this
instance the ‘Base Case’ involved basic periodic maintenance of paved roads or re-gravelling
for gravel road sections, sufficient to maintain the roads in their current condition. In the long
run such maintenance results in further road deterioration since there is a cumulative
weakening of the road structure. This is considered a realistic enough ‘Without Project’ scenario
since it ‘explains’ the current condition of many of the project roads.
This was compared to a ‘With Project’ Improvement option which involves widening, new
pavement, much lower roughness i.e. full depth reconstruction. The analysis was carried out
using the costs derived above as well as base year traffic.
The HDM-4 model calculates both Road Agency and Road User Costs for each link over a 20
year period. Table 18 below shows an HDM-4 result exported into excel for link 001, 002, 003
and 004 for (i) Pameungpek – Bts Garut/Taksimalaya and (ii) Bts Garut/Taksimalaya –
Cipatujah in West Java.
Table 20 shows the undiscounted net benefits per link sub-section. The IRR and NPV were
calculated using excel and agree with the HDM-4 results. The IRR always occurs where the
curve plotting Net Present Value cuts the x-axis. In the case below this occurs where IRR =
11.4% at which point the NPV is also equal to zero (Table 20 below).
When the results for sub-sections 001, 002, 003 and 004 are summed vertically the
undiscounted benefits for the entire link can be derived (Table 19). The resultant Table 19 can
then be used for calculation of the Poverty Impact Ratio (PIR) for that Link. However the
corresponding Tables for all links can be summed to derive an overall Project Undiscounted
Benefit Table which is then used for calculation of the overall Project PIR (see relevant Section
on Social Impact).

Table 18 Example of Undiscounted Economic Cost Streams - Link 001 West Java: (i)
Pameungpek – Bts Garut/Taksimalaya and (ii) Bts Garut/Taksimalaya – Cipatujah
Section 001
Source: Consultant
Section 002
Source: Consultant

Section 003
Source: Consultant
Section 004
Source: Consultant
Table 19 Overall Link Undiscounted Benefit Streams Link 001 West Java

(i) Pameungpek – Bts Garut/Taksimalaya and

(ii) Bts Garut/Taksimalaya – Cipatujah
Source: Consultant
Table 20 Undiscounted Net Benefits per Link sub-Section showing IRR, B/C Ratio, FYRR
and NPV and NPV graph.

The cost and benefit flows calculated for all Java roads are shown in Appendix A.

3.3 Sensitivity Testing and ‘Switching Values’
Sensitivity testing covered the following tests:
Construction costs were increased by 10% and 20%. Benefits were reduced by 20% with costs
unchanged but also lowered by 20% combined with a 20% increase in construction costs.
Additional testing was carried out using Vehicle Operating Cost benefits only. As expected
results were not very influenced by this since the Value of Travel Time benefits are still quite
low due to the low incomes prevailing in the area. Sensitivity analysis was carried out and the
results for all Java corridor roads are shown in Appendix B at the end of this report.
Table 21 show sensitivity testing results for Links 001, 002 from West Java and 004 and 005
from Central Java. The sensitivity test results for all Java links are shown in Appendix B.

Table 21 Sensitivity Test Results (examples for Links 001, 002, 004 and 005) - Java
Source: Consultant

4 Multi-Criteria Analysis (MCA)
A Feasibility Study entails appraisal and in this context appraisal in the widest sense includes
the analysis and assessment of social, economic, financial, institutional and environmental
issues related to a planned intervention. This section has been added to provide an indicative
basis, as requested by the Client, for the evaluation of projects on the target corridors where
the current or predicted traffic volumes did not achieve the minimum IRR of 12%. The vast
majority of the corridor links are economic, especially those that are ‘ready’ to proceed. Some
links have poor condition and low traffic and could have benefited from an MCA approach to
consider their justification, however due to environmental or resettlement issues they did not
enter Tranche 1.
It is probable that in the course of further investigations into each of the candidate corridors, or
portions thereof, there may be insufficient traffic or that other factors that are not easily
quantifiable in monetary terms become evident to the analyst. The quantifiable costs and
benefits can be easily incorporated into economic analysis. But in order to account objectively
for those policy impacts that canot, Multi-Criteria Analysis (MCA), is often employed.
MCA takes into account both the effects that are valued in monetary terms and other effects
considered to be of interest to the analysis. Since the effects of a policy cannot be added
together directly because of a lack of a common unit, MCA places a weighting factor on the
individual effects. If, for example, such a list were to include ‘reductions in accidents’ and
‘scenic beauty’ and if the former were deemed more important than the latter, then they would
be weighted with a higher factor so that the allocated ‘score’ would count for more in the final
summing up. Thus the various benefits/effects are summed up in their ‘weighted’ form. The
aggregate number of points that each intervention receives is computed by simply adding the
‘weighted’ points allocated per indicator. The result of the process leads to a ranking of options.
The weights are in fact ‘prices’ since they reflect the relative importance of each of the
objectives. They are however derived in a number of ways: by asking experts, individuals or
decision-makers and arriving at some sort of workable consensus. The main advantage of
MCA is that it incorporates the multiple objectives that decision-makers generally have, and if
the weighting factors can be derived, diverse objectives can be integrated. So, when compared
to CBA, the fundamental difference is that MCA recognises that economic efficiency is not the
sole objective of a policy – although it is frequently the most important and receives a high
weighting.
4.1 MCA and Cost-Benefit Analysis
Cost-benefit analysis, MCA or a combination of the two are the most frequently used methods
for assessing the impacts of road projects. The distinction between the two approaches is
sometimes vague and in many instances may be a matter of semantics rather than substance.
One definition is that with CBA the analyst allocates weights and sums them up, whilst with
MCA the analyst does so in conjunction with decision-makers and other concerned users in a
more ‘participatory’ approach.
Both techniques assess the effects of investment in relation to a base situation and both are
applied to a wide range of projects but they differ in the treatment of impacts. Both techniques
are applicable to most types of projects. The appropriateness of each technique depends,
however, on the relative availability of data on value indicators i.e. whether or not impacts can
be monetised. In cases where agreed monetary values are available for the majority of impacts,
CBA may have a relative advantage over MCA – and vice-versa in cases where monetary

values are not available. In most instances a hybrid of the two techniques is employed that
overcomes the inherent disadvantages of either technique.
4.2 Suggested Framework for MCA
In view of the above comments an MCA scheme has been suggested below that incorporates
other diverse objectives in addition to those of ‘economic efficiency’. Policy objectives must of
course be immediately relevant, otherwise the list may run to hundreds. For a road project in
eastern Indonesia specific objectives such as ‘impact on fisheries’ may not applicable but more
general environmental impacts would be.
Each criterion needs to be assigned a weight (%) so that the sum of all weights equals 100%.
The impact of the project on the policy objective is measured by a score assigned to the
criterion. The point system reflects how positively (or adversely) the criterion influences the
outcome of policy.
From a review of current concerns expressed by the donor and the Executing Agency (EA)
some of the criteria to be included in the MCA balance sheet are listed below together with their
assigned weight.
(i) Economic efficiency – 40%,

(ii) Social and environmental mitigation costs – 12%,
(iii) Impact on Agricultural Production – 12%,
(iv) Connectivity to Kabupatens – 12%,
(v) Connectivity to Provinces – 12%,
(vi) Length of sub-standard width – 12%.
TOTAL 100%
Assuming the above suggested list of criteria meets policy objectives and is compatible with the
project area’s geographical characteristics, then one possible scoring framework could be as
follows:
(i) Social and Environmental Mitigation Costs:
Weight: 15%
Road projects often involve widening or realignments that necessitate the resettlement of local
populations – if no other alternative alignments are available – and this may be quite costly to
the extent that it may represent a substantial proportion of construction costs. Works that
require resettlement are best avoided and a useful proxy for this is the cost involved. Hence the
inclusion of ‘Social and Environmental Mitigation Costs’ in the MCA framework.
Similar observations apply to environmental impacts and their associated mitigation costs.
Costing environmental impacts is possible but it pre-supposes the existence ofbase-line data –
unless costly surveys have been specifically ‘built-in’ to the project design this may not be
available. The environment in general and ecosystems in particular may be thought of as
having a ‘Total Economic Value’ (TEV) which is made up of (i) ‘Use Value’ and (ii) ‘Non-use
Value’. The former (i) refers to the value of products and services extracted directly from the
ecosystem as well as indirect use values such as natural water filtration, storm protection,
coastal erosion protection etc and the latter (ii) refers to ‘Existence Value’ which is the
enjoyment people experience simply from knowing that a resource exists even if they never

expect to use that resource directly themselves (Existence value has also been referred to as
‘passive use value’).
To some extent the cost of resettlement is already included in the CBA exercise in the form of
land acquisition or an IOL (Inventory of Losses). However there may be additional intangibles
relating to the loss of social networks and ‘community’ effects that are not captured by the cost
of resettlement alone. So though the costs of LA and IOL have been included in the CBA
balance sheet, the non-quantifiable effects such as ‘community severance’, displacement of
communities, loss of ecosystems or bio-diversity are captured by this criterion.
It may be more appropriate to separate social effects from environmental effects since road
schemes often involve no land acquisition yet have impacts on the environment in the form of
the loss of ecosystem resources, bio-diversity etc thus lowering TEV. The number of categories
can be quite numerous but this must be balanced by the need for rapid evaluation.
In Table 22 below a scheme whose resettlement costs represented 20% of construction costs
would score 8 whilst a project whose LA costs were 80% would score 2 points. Thus the lower
the LA costs within the total cost the higher the score assigned. The formula allows the score to
be calculated directly. Thus social and environmental mitigation costs of USD2 million and total
costs of USD8 million will be: 2/8 = 0.25 and (1 – 0.25) x 10 = 7.5.
Table 22 Social and Environmental Criteria for MCA
Social and Environmental Mitigation Costs

Mitigation Costs SCORE
80% + 1
60%-80% 3
40%-60% 5
20%-40% 7
0%-20% 9
10x[1-(Resttlmn Costs/Constr.Costs)]
Source: Consultant
(ii) Economic Efficiency:
Weight: 40%
Economic efficiency refers to the best use of resources. These are resources that can be
valued (hence the need for MCA to account for the use of resources that cannot be quantified
in monetary terms). Standard CBA is the best understood and applied evaluation technique that
incorporates measurable benefits (‘savings’) under a wide range of headings such as: agency
cost savings, vehicle operating cost savings, passenger working and non-working travel time
savings, and accident costs savings.
The standard economic indicators generated by CBA include Net Present Value (NPV), Internal
Rate of Return (IRR) and Benefit/Cost (B/C) ratio. However with most multi-lateral or bi-lateral
lending agencies there is a strong desire to avoid costly ‘white elephant’ type projects so that
the internal efficiency of a project is usually preferred as indicated by IRR. NPV biases selection
towards ‘bigger is better’ projects which may not always be the best use of resources.
‘Economic Efficiency’ is therefore scored on the results of IRR. A suggested scoring framework
for the IRR indicators could be as follows in Table 23 below:

Table 23 Economic Efficiency Criteria for MCA
Economic Efficiency - IRR%

From To SCORE
0% 5% 1
5% 10% 2
10% 15% 3
15% 20% 4
20% 25% 5
25% 30% 6
30% 35% 7
35% 40% 8
40% 45% 9
50% + 10
Source: Consultant
(iii) Impact on Agricultural Production:
Weight: 15%
In a densely populated country such as Indonesia, land allocated to food production is severely
constrained so that there is a national policy to minimise loss of rice and other food production
areas. Loss of such food production may cause local shortages and economic and social
repercussions that may go beyond the value of lost output. This indicator recognises the ‘non-
monetised’ but nevertheless real nature of these wider effects. Not all roads would have the
same effect so each case needs to be individually assessed. Removing land from, say, rice
cultivation may reduce food production only temporarily as the initial loss is compensated from
less productive land to come into cultivation due to more efficient transport - thus balancing out
the initial loss. Since markets do not always operate efficiently, however, lower transport costs
may not translate entirely into higher food production.
Road improvements and associated works involve widening and realignments that may
encroach on land used for food production – particularly rice cultivation. A road alignment that
permanently reduces food production thus scores -2. If food production is compromised
temporarily (but then resumes as before) then a road option scores -1. If there is a loss in one
location but marginal land is brought into cultivation at another location as a result of road
investment then the effect is neutral. If a road contributes to a permanent net gain then it
scores a maximum of 2. The scoring framework is shown in Table 24 below.
Table 24 Agricultural Production Criteria for MCA
Impact on Agricultural Production

Food Production Effect SCORE
Food Production - Reduced -2
Food Production – Disrupted (Temporary) -1
Food Production – Neutral 0
Food Production – Increased 2
Source: Consultant
(iv) Connectivity (I) to Kabupatens:

Weight: 5%
Roads are important links between administrative units. This criterion attempts to incorporate
the effects of providing road links between Kabupatens. Thus if a scheme is part of a series of
schemes that are located in adjacent Kabupatens it receives a higher score. It is thus a proxy
for improved intra-provincial transport integration and thus access to social and other services.
The suggested scoring for this criterion is shown in Table 25 below.
Table 25 Connectivity (I) Criteria for MCA
Connectivity - Kabupatens
Number of Kapupatens Traversed SCORE
0 0
1 1
2 2
3 3
4 4
5 5
Source: Consultant
(v) Connectivity(II) to Provinces:
Weight: 10%
As with the Kabupaten criterion above roads which manage to link Provinces to each other
score more than roads that are confined within one Province only. This criterion would satisfy
regional and ‘island-wide’ development objectives (Table 26 below).
Table 26 Connectivity(II) Criteria for MCA
Connectivity - Provinces
Number of Provinces Traversed SCORE
1 1
2 4
3 6
>3 8
Source: Consultant
(vi) Length of Scheme with widths below 4.5 metres:
Weight: 15%
A frequently heard criticism is that the unimaginative use of IRMS leads to investment and
improvements in numerous short-length and isolated road links or ‘hot-spots’. These it is felt
‘dissipate’ the benefits since road users frequently operate with ‘mental maps’ that incorporate
entire routes so that the uncertainty of using a particular route of erratic width or riding quality
and geometric standard results in less traffic diverting to it than would be expected when
normal perceived costs of travel are taken into account. In addition driving through alternating
‘good’ and ‘poor’ sections may generate ‘fatigue’ and loss of concentration leading to higher

accident rates. This criterion is being proposed to account for these real, though not easily
quantifiable, effects. The scoring is shown in Table 27 below.
Table 27 Road Length Criteria for MCA
Length (kms) of Proposed Scheme with width below 4.5 m.

From To SCORE
0 5 1
5 10 2
10 15 3
15 20 4
20 25 5
25 30 6
30 + 7
Source: Consultant
Schemes that promote longer uninterrupted ‘routes’ are thus rewarded with a higher score. The
suggested scoring is shown in Table 28
Criteria can be added or subtracted provided the appropriate modifications are made to
the weighting so that they always sum to 100%.

Table 28 Example of Scoring using MCA criteria
Source: Consultant

Appendix A
HDM-4
Cost and Benefit Cash-flows
RRDP Java Sub-Component 2 Roads

001 JABAR (i) Pameungpek – Bts Garut/Taksimalaya and (ii) Bts Garut/Taksimalaya -
Cipatujah
Source: Consultant

002 JABAR (i) Cipatujah – Kalapa Genep
Source: Consultant

004 JATENG (i) Adipala - Ayah
Source: Consultant

005 JATENG (i) Ayah - Karangbolong
Source: Consultant
006a JATENG (i) Jalur Diponegoro

Source: Consultant

006b JATENG (i) Wawar - Congot
Source: Consultant

007 JATENG (i) Girowoyo - Duwet

Source: Consultant
008 YOGYAKARTA (i) Srandakan – Kretek and (ii) Galur - Congot
Source: Consultant

009 YOGYAKARTA (i) Yogya – Parangritis, (ii) Parangritis – Bts Kab. Gn Gidul and (iii)
Girijati – SPG 020.1
Source: Consultant

010 YOGYAKARTA (i) Baron – Tepus, (ii)Tepus – Jepitu, Jeruk Wudel and (iii) Jeruk
Wudel – Baran(Rongkop)
Source: Consultant
011 JATIM (i) Pacitan - Glonggong

Source: Consultant
012 JATIM (i) Jarakan – Bts Trenggalek, (ii) Bts Trenggalek – Pacitan and (iii) Pacitan -
SPG 160.1

Source: Consultant
013 JATIM (i) Panggul - Prigi

Source: Consultant
014 JATIM Prigi – (i)Ngalarap Bridge, (ii) Ngalarap Bridge – Temp. Connection Road, (iii)
Temp. Connection Road – Paritrayah Br. – Popoh, (iv) Temp. Conn. – Collapsed Culvert,

(v) STA 4.3 Blitar – STA 15.1, (vi) STA 46.75 – STA 55.45, (vii) STA 57.8 – STA 62.5 Bts
Malang, (viii) Bts Malang – Sendang Biru, (ix) Sendang Biru – Bts Malang (STA 60)
Source: Consultant
015 JATIM (i) Talok – Druju – Sendang Biru, (ii) Turen – Bts Kab. Lumajang, (iii) Bts Kab.
Malang - Lumajang

Source: Consultant

Appendix B
HDM-4
Sensitivity Tests
for
RRDP Java Sub-Component 2 Roads

Sensitivity Test Results Java Links 001, 002 and 004
Source: Consultant

Sensitivity Test Results Java Links 005, 006a and 006b
Source: Consultant

Source: Consultant

Source: Consultant

Source: Consultant

Sensitivity Test Results Kalimantan Links 016, 017 and 018
Source: Consultant

Sensitivity Test Results Kalimantan Links 019, 020, 021 and 022
Source: Consultant

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Technical Assistance Consultant’s Report

Project Number: 38479

Republic of Indonesia: Regional Roads Development

Annex 11: Economic Analysis

Annex 11: Economic Analysis

Appendix A – HDM-4 Cost and Benefit Cashflows

Preparing the Regional Roads Development Project – Final Report 1

1.1.1 Southern Java Corridor

It must be emphasised however that transport infrastructure always acts as a constraint to

Preparing the Regional Roads Development Project – Final Report 2

1.2 Economic Methodology and Economic Evaluation Tools

and the proceed to

Preparing the Regional Roads Development Project – Final Report 3

Consequently a realistic economic evaluation requires the definition of alternatives, although

Preparing the Regional Roads Development Project – Final Report 4

Preparing the Regional Roads Development Project – Final Report 5

1.2.1 Diverted Traffic Benefits

Preparing the Regional Roads Development Project – Final Report 6

Note on Generated Traffic Benefits – ‘Rule-of-half’

Figure 1 Schematic Representations of ‘Generated’ Traffic Benefits

Preparing the Regional Roads Development Project – Final Report 7

1.3 Evaluation Tools

(i) IIRMS and HDM-4

Preparing the Regional Roads Development Project – Final Report 8

• Vehicle characteristics and loading

(a) Configuration Data;

(c) Vehicle Fleet/Calibration Data:

• Desired Speed parameters (Vdes2): a measure of practical, behavioural speed by

Preparing the Regional Roads Development Project – Final Report 9

1.3.1 Indonesian Integrated Road Management System (IIRMS)

1.3.1.1 Network Analysis Module (NAM)

The purpose of NAM (within IIRMS) is to provide:

NAM performs the analysis over a 30-year economic lifecycle.

(ii) Four models are called up for each analysis year:

(a) Road Deterioration Model,

1.3.1.2 Strategic Expenditure Planning Model (SEPM)

Preparing the Regional Roads Development Project – Final Report 10

1.3.1.3 Economic Review Model (ERM)

1.3.2 The HDM-4 Model

Calibration and Configuration

The HDM4 documentation distinguishes between three possible levels of calibration, as

Level 1 – Basic Application

Preparing the Regional Roads Development Project – Final Report 11

• Road Deterioration: which predicts pavement deterioration and surface roughness,

1.3.3 Updating Road User Costs for IIRMS and HDM-4

• Selection of representative vehicle types,

Preparing the Regional Roads Development Project – Final Report 12

• Passenger time costs (working time and non-working time), and

All these are the results of to the following:

• Road Condition(including Roughness),

HDM-4 considers savings in Road User Costs as benefits:

(i) Roughness (IRI/km),

(ii) Components of Road User Costs (RUCs)

Preparing the Regional Roads Development Project – Final Report 13

Exogenous developmental benefits can be most easily represented by means of ‘generated’

(iii) Principal Beneficiaries: south Java and Kalimantan Improvement Projects

2 The Road Network – Definition of Sections and Alternatives

Preparing the Regional Roads Development Project – Final Report 14

2.1 Suggested Intervention Criteria

2.2 Examples of Improvement Standard Alternatives

Improvement standards may include widening, surface standards, pavement thickness

! Option 1: paved surface, Double Bituminous Surface Dressing or Treatment

Major features of Option 1 – DBST – will include the following:

(i) the improvement of the horizontal and vertical alignment,