COST BENEFIT ANALYSIS

1. Updated Economic Analysis

Given the importance of infrastructure investment to national development vis-à-vis the scarcity of
resources and competing demands from various sectors, it becomes extremely important to allocate
available resources in the most beneficial manner amongst various sectors and within a sector,
amongst various schemes. In view of the above, it is necessary to ensure that the projects selected for
investment are evaluated thoroughly to determine the economic and social benefits offered by the
project.
1.1 Evaluation Framework
The proposed evaluation framework is based on a cost-benefit analysis, which sets a monetary value
where possible on all financial, economic and social costs and benefits over the lifetime of the project.
The underlying principles for this analysis are as follows:
 The lifetime of a road project for the present analysis is considered as the period for which
reliable traffic forecasts can be made. A discount rate is then applied to future economic costs
and benefits to arrive at the Net Present Value (NPV) of the project. The Economic Internal Rate
of Return (EIRR) of the project is also computed.
 To analyze the cash flow at constant prices, an allowance is made for relative price inflation.
 The discount rate is expressed in real terms.
The standard methodology used for the economic evaluation for transport projects has been adopted.
The concept of economic feasibility is to maximize the returns on investments. This is accomplished by
determining the appropriate improvement proposal that leads to minimum total transport cost, which
comprises of two basic components shown below.
Table 1: Total Transport Cost
Road Agency Costs Road User Costs
 Vehicle Operating Costs
 Construction
 Other user costs (like travel time costs)
 Maintenance
 Accidents
The reduced costs are treated as benefits calculated over the project life. The results are expressed in
Economic Internal Rate of Return (EIRR) and Net Present Value (NPV). The economic analysis is
carried out using World Bank developed “Highway Development and Management Model” (HDM-4).
The model generates total transport costs (user plus agency cost) in “with” and “without” the project
situation. The differences in costs due to road improvement (with the project) are considered as the
benefit accruing from road improvement. In HDM-4, economic analysis is carried out using Project
Analysis Option, which is concerned mainly with evaluation of investment options. The economic
indicators such as the EIRR and NPV at the discount rate of 12 % are calculated.
In order to evaluate the pavement alternatives selected, analysis has been carried out using “present
value” method. This helps to compare the costs related to the development using a particular type of
pavement on present value terms. For carrying out the same, all costs are estimated at the anticipated
years and have been discounted to the present day worth using a pre-determined discount rate.
1.2 Basic Approach and Methodology
 Economic evaluation has been carried out based on incremental costs & benefits comparing the
total net benefits in “Without project” situation with “With Project” situation. The term “Without
project” is defined as the base strategy for economic analysis i.e. without project situation. The
term “With project” is defined as widening and strengthening of existing facility. Economic
analysis has been carried out for with time and accident benefits.
Sensitivity analysis has been carried out for the four cases mentioned below, with both the Alternatives.
 Scenario - I Base Costs and Base Benefits
 Scenario - II Base Costs plus 1 5% and Base Benefits
 Scenario - III Base Costs and Base Benefits minus 15%
 Scenario - IV Base Costs plus 15% and Base Benefits minus 15%

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1.3 Input to the Model
The HDM-4 working methodology requires specifying the traffic, road and environment procedure for
the following:
 Characteristics of the road sections using road network manager
 Characteristics of the vehicles that use the road sections
 Traffic growth rates
 The proposed maintenance and road improvement works with their improvement cost
The values of input data that has been used in HDM Model for the present project are as follows: -
1.4 General Assumptions
The following assumptions were used for the analysis using the HDM Model.
Table 2: General Assumptions for HDM Model
Analysis period 20years
Discount rate 12 %
Construction Period 30 months
Commercial Date of Operation 1 April 2011
Standard Conversion factor used for converting financial cost to economic cost 0.9
Salvage Value 15 %
1.5 Road Characteristics
Existing Road
Some basic road characteristic that have been used as inputs to the model are: -
 Road Length, road width, shoulder width, Altitude, Rainfall in m/month, pavement subgrade, BBD
deflection value, roughness of existing pavement etc.
Proposed Road
The road length of 25.23 kms between Balachera and Harangajo has been considered for the proposed
road
Road deterioration factors
The results obtained from the analysis of Roughness survey and Condition Survey of Pavement has
been used as an input to the model. Road deterioration factors that have been used for analysis as
inputs to HDM model are given as under: -
 Cracking initiation 1.50
 Cracking Progression 1.50
 Ravelling initiation 1.00
 Pothole progression 1.50
 Rut depth progression 1.50
1.6 Traffic Forecast & Growth Rates
The Traffic Forecast figures have been considered from DPR Prepared for the Project in 2005.
1.7 Project Cost
Capital Cost
The financial capital cost of Rs.315.45 crores at current prices inclusive of Civil and Non Civil works.
The construction cost includes cost of strengthening and upgrading existing 2-lane facility to 4-lane
facility. Economic cost has been worked out by converting the financial cost using standard conversion
factor of 0.9 as suggested by World Bank for highway projects in India.
Routine and Periodic Maintenance

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The various maintenance costs has been divided into two parts: routine and periodic maintenance. The
salient features and construction policy for both types are mentioned below.
Routine and Periodic maintenance has been taken as given in the table below.
Table 3: Cost of Routine and Periodic Maintenance
Annual Operation and Maintenance Costs (year 2006-07)
Routine Maintenance for four Lane section Rs 255000 / km
Periodic Maintenance for four Lane main carriageway Rs 8124000/km
Periodic Maintenance for two lane service road Rs.1174880/km
1.8 Vehicle Characteristics
Basic Characteristics
The data as given in the table below have been obtained from manufacturer’s literature and value of the
average number of passengers for passenger vehicles are intercepted from origin and destination
survey.
Table 4: Base Vehicle Characteristics
Characteristics Car Bus LCV MCV HCV Artic Truck 2-wheelers
Gross Vehicle Weight (t) 1.0 14.86 5.30 17.2 26.0 40.0 -
PCSE 1.0 3.00 1.5 3.00 3.00 4.50 0.50
ESAL factor 0 0.9 0.10 4.0 3.5 3.5
Number of axles 2 2 2 2 3 5 -
Number of Tyres 4 6 6 6 10 18 2
Number of Passenger 4.52 40.2 - - - - 1.53
Vehicle Utilisation
These data have been worked out on the basis of RUC and local enquires made in the area: -
Table 5: Vehicle Utilisation Data
Artic
Description Car Bus LCV MCV HCV 2-wheelers
Truck
Service Life (Yrs) 15 10 10 10 10 10 10
Hours Driven per year 600 3000 2200 2900 2900 2900 600
Km. Driven per Year 32000 100000 65000 85000 85000 85000 32000
Annual interest rate (%) 14 15 15 15 15 15 14
Economic Unit Costs
The data tabulated below has been collected from respective dealers, net of taxes and duties. For value
of passenger time as in Rs per hr and value of commodity in transit as Rs per day, recommended
values as per IRC SP-30 is expanded with WPI index and used in model.
Table 6: Unit Cost of Vehicles
Artic. 2-
Description Car Bus LCV MCV HCV
Truck wheelers
New Vehicle Price (Rs) 250000 780000 590000 640000 870000 1330000 34000
New Tyre Price (Rs) 1500 17300 4900 20350 20350 20350 886
Maintenance Labour (Rs
15.0 12.0 12.0 24.0 20.0 25.0 10.0
per hr)
Crew Wages (Rs Per hr) 0.0 50.0 15.0 24.0 20.0 25.0 0.0
Annual overheads cost (Rs) - 102,800 45,000 1,05,000 97,000 1,05,000 -
Passenger Time (Rs per
47.38 38.45 - - - - 47.38
passenger per day)
Cargo Time
- - 7.0 18.0 11.0 14.0 -
(Rs per veh hr)
Fuel Prices

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The fuel costs which are converted to economic cost and adopted for economic Analysis is tabulated
below.
Table 7: Fuel Cost
Item Price (Rs/liter)
Petrol 40.98
Diesel 31.68
Lubricants 1080.00
Values of Model Related Other Inputs
 Pavement Condition: Roughness in IRI from Roughness Survey.
 History: Construction Age > 4 years.
 Last Surfacing Age: 1 year.
Results of Economic Appraisal
Using the data input to the Model HDM the annual stream of cost savings (VOC + journey Time cost
saving) derived from analysis “Without” Project (base case) and “With” project is developed.
The economic analysis has been carried out for two alternatives, namely, with time & accident benefits,
and without time and accident benefits are mentioned in the table. The Sensitivity analysis has been
carried out as per the requirements of TOR.
The relevant EIRR and corresponding NPV are presented below for each option.
Table 8: Summary of EIRR and NPV
With Time and accident benefits
Scenario
EIRR (%) NPV (in million)
Scenario 1:Base Costs and Base Benefits 14.3% 725.9
Scenario 2:Base Costs Plus 15% and Base Benefits 12.12% 651.1
Scenario 3:Base Costs and Base Benefits Minus 15% 12.32% 519.4
Scenario 4:Base Costs Plus 15% and Base Benefits Minus 15% 12.00% 434.6
1.9 Conclusions
EIRR for current project proposal give a higher value as compared with the cut-off rate (12 %). Also the
sensitivity analysis also shows that for current project proposal, considering the worst case, EIRR
remains at cut-off rate. It is, therefore, concluded that the project is economically viable for current
project.
2. Updated Financial Analysis
2.1 Introduction
The financial feasibility of the proposed project options is based on the Project Cost and uses toll
revenues as the key parameter to assess the Internal Rate of Return (IRR), which is a preferred
Discounted Cash Flow technique for financial analysis.
2.2 Cost of the Project
The basic project cost for financial analysis is Rs.302.24 crores including contingency and escalation.
2.3 Means of Finance
A simple mix of bank loan and promoters’ equity is assumed for analysis in 70%: 30% proportion of
debt equity. In realistic situation it may be a mix of equity/ IPO, preference capital, debt, debentures,
etc. However, it will not alter our analysis and hence simple capital structure is assumed.
2.4 Inflation and Rate of Interest
Observing current trend, GDP growth, domestic and forex markets, it may be reasonable to assume
that average inflation may remain in the range of 5% on year to year basis. All the direct costs are
inflated at this rate. Rate of interest on term loan is taken at 11% per annum. This is realistic to
conservative estimate. Tenure of loan is 12 to 14 years and interest is on reducing balance.

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2.5 Toll Revenue
The vehicle wise yearly toll revenue has been calculated in Rs. and tabulated below.
Table 9: Toll Revenue (All values are in Rs.)

Year Car / Tax i/ Jeep Auto Rickshaw Mini Bus Govt Bus Pvt. Bus LCV HCV 2 Axle HCV 3 Axle Multi Axle Total Revenue

2010 2682020 1742510 332,880 277,400 2,857,220 2,413,380 18,225,180 17,812,000 667,950 47,010,540
2011 2935715 1907336 370,590 308,825 3,180,898 2,682,662 20,258,726 19,734,528 740,045 52,119,325
2012 3207332 2083806 411,541 342,951 3,532,390 2,974,536 22,462,876 21,897,926 824,225 57,737,582
2013 3497997 2272650 455,980 379,983 3,913,828 3,290,687 24,850,359 24,327,700 909,065 63,898,249
2014 3808899 2474644 504,174 420,145 4,327,495 3,632,918 27,434,796 26,960,937 1,007,631 70,571,638
2015 4294680 2790256 556,408 468,504 4,825,586 4,003,160 30,545,663 29,908,666 1,121,575 78,514,498
2016 4657120 3025734 625,248 521,040 5,366,711 4,491,545 33,918,912 33,101,991 1,245,121 86,953,422
2017 5212281 3386422 687,207 578,075 5,954,173 4,929,075 37,574,174 36,772,972 1,378,986 96,473,365
2018 5633298 3659957 767,944 639,953 6,591,517 5,499,731 41,532,455 40,751,294 1,523,940 106,600,090
2019 6266692 4071474 855,703 713,086 7,344,783 6,118,844 46,207,823 45,179,075 1,689,745 118,447,225
2020 6754204 4388211 951,026 792,522 8,162,972 6,790,050 51,276,586 50,100,852 1,878,782 131,095,205
2021 7475746 4856997 1,054,493 878,744 9,051,064 7,517,243 56,768,143 55,565,118 2,083,692 145,251,240
2022 8250193 5360155 1,166,726 972,272 10,014,398 8,304,587 62,713,951 61,624,640 2,305,660 160,712,583
2023 9080924 5899882 1,306,538 1,081,221 11,136,575 9,285,505 69,634,620 68,336,813 2,557,072 178,319,150
2024 9971519 6478502 1,439,397 1,199,497 12,354,823 10,214,056 77,133,733 75,764,032 2,841,151 197,396,709
2025 10925770 7098480 1,603,526 1,336,272 13,763,599 11,361,299 85,797,393 83,974,098 3,149,029 219,009,465
2026 11947694 7762424 1,781,791 1,484,826 15,293,703 12,605,001 95,189,493 93,040,655 3,495,571 242,601,158
2027 13307698 8646019 1,975,275 1,646,062 16,954,441 13,952,370 105,364,447 103,227,996 3,871,050 268,945,357
2028 14490486 9414477 2,185,140 1,830,955 18,858,840 15,411,114 117,019,935 114,459,202 4,292,220 297,962,369
2029 16046820 10425628 2,438,029 2,031,690 20,926,411 17,168,320 129,650,414 126,830,139 4,763,839 330,281,290
2030 17717439 11511031 2,712,805 2,260,671 23,284,910 19,074,003 144,041,610 140,661,819 5,274,818 366,539,107

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2.6 Other Factors
Income statement nets out expenses towards collection of toll and also, administration at the
suggested rates by engineers. Routine maintenance and Periodic maintenance are envisaged as per
standard norms of maintenance.
2.7 Corporate Tax Rate:
30% Tax + 10% surcharge + 3% educational cess = (30% x (1.10)) x 1.03 = 33.99%
2.8 Applicable sections considered in Tax Calculations:
Section 80 I A
Deduction of an amount equal to 100% of the profits and gains for ten consecutive assessment years.
It may at the option of the assesses, claim the deduction for any 10 consecutive assessment years
out of 15 years beginning from the year in which the undertaking or the enterprise develops and
begins to operate the infrastructure facility.
Section 115 j B
Minimum Alternative Tax
Deductions under 80 HHB and 80 HHC are explicitly admissible under MAT provisions. However, 80 I
A benefit is apparently not admissible for deduction under MAT.
2.9 MAT rate:
10% MAT + 10% surcharge + 3% Educational Cess = (10% x (1.10)) x 1.03 = 11.33%
2.10 Logic Design of Tax Calculation:
For Corporate Tax:
 80 I A benefit is to be availed of, within first 15 years of operation. Hence latest years in which
we start availing of tax benefit is 6th year of operation.
 Project is likely to make losses in first few years of operation. Hence tax payable may be NIL. In
such year(s), till we start making book profit, tax benefit of 80 I A is not availed of. This is
subject to (a) above.
 Loss is carried forward for the purpose of tax calculation as permissible.
For MAT:
 80 I A benefits not admissible under provisions of MAT.
 Unabsorbed depreciation is not carried forward for tax deduction.
 Loss other than unabsorbed depreciation is carried forward.
The undertaking / Enterprise would pay corporate tax / MAT whichever is higher.
The working of the BOT analysis is explained in Tables below. The Tables represent figures for
40% Grant:
Table 10: Financial Cost
Cost Component Cost (in Rs. Crore)
Civil Cost 302..24
IDCP 30.24
Total Basic Cost to Developer 332.48
2.11 Results:
It is concluded that the project is not viable on commercial format. The traffic on the project stretch is
considerably low. At 70% grant component, the Project IRR and Equity IRR are coming at 3.34% and
2.03%. The Analysis has been carried out by taking improvement option of Upgrading the Project
facility into 2-lane with structures as 4-lane. The Cost arrived for this option is Rs.211.11 Crores. The
Project is not viable even for the 2-laning option with 40% Grant.
The Project may be implemented on differed payment system, which is Annuity based or else on EPC
contract basis with Government fund.

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