Cost-Benefit Analysis for Investment Decisions: Chapter 16 (Cost-Benefit Analysis of Transportation Projects)

This chapter will focus on the problems of evaluating transportation projects in the context of the less-developed countries. Emphasis will be placed on highway projects, because these account for the bulk of transport investments in the developing parts of the world. If a project passes a straight financial test, based on the present value of its cash inflows and outflows, projects would only come if this financial NPV were outweighed by the present value of the project’s various externalities. Road projects, however, carry a special interest as compared to other types of transport investments, because of the fact that they only rarely can be justified on strictly commercial considerations. Rail and air fares and port and landing charges constitute direct devices, by which the costs of the relevant facilities can, over time, are recouped from the beneficiaries. To a first approximation, therefore, the worthwhileness of such projects can be judged by the strictly commercial criterion of prospective profitability. Except for toll roads, road investments never present the luxury of such a positive financial NPV. This chapter presents a framework for the appraisal of both road improvements as well as the evaluation of new roads and new modes of travel.