Chapter 4. Case study cost–benefit analysis
4.2.3. Costs estimation
Since the CBA in this dissertation is undertaken from a social perspective, costs of the different actions evaluated need to be considered in a broad sense, including not only the cost of their implementation for the concerned agencies but also costs for other stakeholders and opportunity costs for society at large. However, this conceptual requirement often meets the reality of a scarce evidence base to calculate such broad-based costs. Two main cost components are taken into account in each action: 1) The cost of implementation for the government, and 2) The private cost of the action. The governmental costs of implementation for each action were provided by the implementing agencies through the CGIAL, while the actions’ private costs were estimated following some assumptions. Below are the rationales and assumptions in each case.
6 Outpatient healthcare refers to patients that attend a healthcare facility without staying overnight. Inpatient healthcare is the care given to a patient who is admitted into a healthcare facility and stays for one or more nights.
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A1: Private vehicle fleet renewal (used vehicles import ban and additional measures)
The intended goal of this measure is for the private vehicle fleet of the MALC to become newer. In order to do so, the measures considered are: 1) A complete ban on the import of second hand cars into Peru; 2) A decrease in the import tax of new vehicles; 3) Diminish the tax on new car ownership and 4) A tax on vehicle age.Governmental implementation cost: the allocated implementation cost (excerpted from CGIAL from governmental budgets) for this activity is fifteen Million Soles for compliance enforcement and monitoring, to be spent uniformly across five years. The CGIAL insisted that the measures A1.2, A1.3 and A1.4 are meant to be revenue-neutral as a whole for the Peruvian government, but as long as there are variations in taxes and governmental revenues, it is clear that some of these costs are externalized either to individuals (taxes on ownership and age) or both to firms and individuals (variations in import taxes).
Private cost:the case of A1.1 is relevant from the social CBA private cost standpoint, since there is a clear cost to individuals in the decrease of availability of used cars. Assuming the same rate of motorization as in the BAU scenario, a forced substitution of incoming used cars by brand new cars would suppose a heavy increase in private cost for the brand new ones (see Figure 6). The costing of sub-actions A1.2, A1.3 and A1.4 is far less clear from the perspective of a social CBA. The relative decrease or increase of certain taxes would, all else being equal, not automatically imply net costs or benefits for society as a whole. It is clear, however, that different groups in society bear different costs and benefits from wealth redistribution, such as that promoted by tax variations. While CBA is notoriously ill-suited to analyze such distributional effects, various techniques exist to account for them. For instance, Yitzhaki (2003) proposes the use of inequality indicators to analyze the consequences of redistribution. This approach, however, requires far more and better information than what is available for the present analysis, and is anyway usually not included in CBAs. On the whole, aside from sub- action A1.1, it is unclear whether the other components represent a loss or a win for society.
The restrictions in the availability of second hand cars may certainly have a regressive component, with a net cost on the poorest. New taxes on age may represent for the government a net increase in revenue that will hopefully revert secondarily into the citizens, but for the citizens this represents a new cost in the short run, with a probably aggravated regressive effect. In this regard, Yitzhaki (2003) relates this judgment to the effect of a tax in economic growth and in redistribution. At face value, it is difficult to see redistribution resulting from this measure; rather, there could be a regressive effect since owners of older cars probably tend to have lower incomes. However, if the growth component of this measure can be proven in a magnitude large enough to offset possible negative re-distributional effects, it can still be argued that the measure is worthwhile for society as a whole. In conclusion, from all of action A1, only the governmental implementation cost and the private cost incurred by individuals due to sub-action 1.1 are clear, the former predefined in budgets and the latter consisting of a net increase in the expenditure on private fleet (see Chapter 3 – impact assessment). Lacking model-specific projections of purchases, we may assume an average model for pricing. According to the association of Peruvian car importers and retailers (ARAPER, 2011), the approximate weighted average cost of the most popular light private vehicles (Toyota Yaris and Chevy Astra) with taxes included in the MALC is slightly under 30,000 Soles. In this case, we use the full price of a best-selling car at the time (Chevrolet Spark), listed at 27,381 Soles, dealership price (Chevrolet, 2010).
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A2: Bonus for scrapping older public transportation vehicles
The intended goal of this action is to renew the fleet of public transportation vehicles by speeding the retirement of older vehicles through a scrapping bonus.
Governmental implementation cost:the budget that the different agencies intend to dedicate to this activity is of 54 Million Soles, distributed over five years (see Table 13).
Table 13. Governmental budget allocated to action A2, by year
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Budget allocation (M. Soles) 29.7 13.5 5.4 2.7 2.7 0 0 0 0 0
Source: CGIAL
Private cost: there is a clear element of private costs from the increased purchase of new buses, as the rate of retirement of older units increases under the A2 policy scenario but the fleet continues to grow, meeting the public demand (see Figure 11). As better performing (i.e. more passenger-km per year) and relatively larger buses replace smaller, older ones, the fleet is reduced somewhat; and after a spike in new bus purchases, the trend stabilizes over the ten years considered (see Figure 14).
Figure 14. New public transportation buses purchased
Source: author’s estimates, see Chapter 3, section 3.2.1.2
The average price of an omnibus, as estimated by the government for tax purposes, was in 2010 of 215,290 Soles (SUNAT, 2012). While the cost of A2 is greatly increased in comparison with BAU during the first years, it becomes negative (i.e. smaller than in BAU) towards the end of the period considered.
A3: Promotion of VNG use in public transportation vehicles
This action intends to promote the use of VNG (a cleaner fuel with virtually no PM emissions) in the fleet of public transportation vehicles.
Governmental implementation cost: the total budget allocated to this activity (excerpted from CGIAL from governmental budgets) is of around 80 Million Soles over ten years.
- 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bu se s p u rch ase d BAU A2
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Private cost:from the private perspective, there is also a clear cost attached to the VNG conversion, albeit one that can be recovered somewhat depending on prospective pricing of VNG versus diesel. As mentioned in Chapter 3 (impact assessment), the goal of this action is to reach a 15% of the buses working on VNG after five years and maintain at least that level afterwards. This penetration is achieved at a rate of 3% per year, staying at 15% for the whole considered timeframe thereafter (see Figure 12). It is assumed that under BAU, no VNG penetration occurs; therefore, under BAU, all buses are “normal”. Since there is no change in the relative number of units according to age (i.e. retirement rates), the resulting final fleet, or the purchase of new units, the only costs are those associated to the retrofitting of the buses. According to governmental data (CPGNV, 2014), the average price of such retrofitting is of 4,400 Soles per unit.
A4: Enforcement of better vehicle maintenance
The intended goal of this action is reducing emissions through the following interventions: 1) Enforcement of regulation compliance by vehicle inspection centers; and 2) Random emissions checks in the streets. The objective after five years is that 80% of the circulating fleet is inspected periodically or complies with the established emissions limits.
Governmental implementation cost:the allocated budget by the authorities is as follows:
Compliance enforcement budget (commissioned company) = 1,698,000 Soles
Audits to inspection centers = 141,500 Soles
Compliance enforcement (Ministry of Transport) = 2,099,294 Soles
Random checks = (73580 Soles/year) times 5 years = 367,900 Total budget is 4.3 Million Soles over five years.
Private cost:in this case too, a sizeable part of the cost is being externalized. That is, from the current situation, where 22.4% of the vehicles undergo inspection (INVERMET, 2009), to the goal of 80% of vehicles undergoing inspection, at least the private cost of the inspections needs to be added to the implementation costs of the measure. Increasing that proportion to 80% would mean a net 58% increase over five years, with yearly increase of 11.52% every year. The assumption is that inspection levels would remain at least at 80% thereafter. Regarding the cost of inspection, the current tariffs by Lidercon (the largest inspection agency in Lima) are in Table 14.
Table 14. Official vehicle inspection fees in the MALC, 2010
Type of vehicle Motorcycle Light vehicle Heavy vehicle
Cost in Soles 17.70 82.60 132.70
Source: http://www.liderconperu.com/tarifas.htm
Assuming that inspection costs stay the same, the increase in costs in concept of paid inspections would increase significantly, both for light vehicles and heavy vehicles. The difference between the new scenario (A4 – 80% of vehicles undergo inspection) and a BAU scenario (22.4% of vehicles undergo inspection) in terms of vehicles inspected is reflected in Table 15 and the increase in annual private expenditure in inspections in Figure 15.
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Table 15. Projection of additional vehicles inspected by year under A4 compared with BAU scenario
Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Light
vehicles 953,018 910,767 891,647 880,680 877,680 882,548 895,271 915,918 944,643 981,684 1,027,360 Heavy
vehicles 488,917 498,945 537,248 578,689 623,251 670,935 721,762 775,772 833,020 893,573 957,512
Source: author’s estimates, see Chapter 3, section 3.2.1.4
Figure 15. Annual expenditure in inspections
Source: author’s estimates, see subsection 3.2.1.4