ECONOMIC ANALYSIS A. Background
1. The Government of Cambodia requested Asian Development Bank (ADB) assistance for the Road Network Improvement Project (Phase 2). The project supports the government’s transport sector priorities to enhance connectivity and efficient movement in Cambodia and within the Greater Mekong Subregion through national and provincial road rehabilitation and development, as well as improving axle load control and strengthening awareness of road safety and potential social problems.
B. Macroeconomic and Sector Context
2. Cambodia’s economy was one of the fastest growing in the world during 1999–2018, with an average growth rate of 8% per annum, which was driven by garment exports, agriculture, and tourism. A new government, elected in 2018, has emphasized social stability and aims to make Cambodia a technology driven, upper middle-income country by 2030. The objective of the country partnership strategy is to support the country to become competitive and ensure inclusive development for the long term through stronger institutions that promote strategic investments including in human capital, natural resources, infrastructure, and technology.1
C. Project Definition
3. The project roads that are currently considered comprise rehabilitation and widening of national road (NR) 23 in Kandal province and provincial road (PR) 312 in Prey Veng province.
The current document is concerned with economic analysis at appraisal of these project roads.
4. NR23 is a newly nominated national road and was formally a provincial road in the districts of Koh Thom and Leuk Daek in Kandal province. NR23 starts from the intersection of PR110 with the approach road connecting to Koh Thom Bridge over the Bassac River in Chrouy Takaev commune. It ends at the intersection with PR118 in Peam Reang commune near the Mekong River. The road traverses a typical wet plains area, covering rice fields and other agricultural plantations. PR312, in the Preah Sdach district in Prey Veng province, is 28.8 km long. It starts from the intersection of NR1 and ends at the bridge that crosses a river that forms the border between Cambodia and Viet Nam. The road traverses a typical wet plains area, covering rice fields and other agricultural plantations.
D. Economic Analysis at Appraisal
5. The economic analysis at appraisal has been carried out using the Highway Development and Management (HDM-4) Model (Version 2.11). The HDM model computes road users' economic costs for each section of road for each year of analysis. The inputs to the HDM model were adapted and calibrated to enable vehicle speeds and operating costs to be estimated as accurately as possible in the context of the project roads in Cambodia.
6. The with-project scenario involved improvement of the two project roads, NR23 and PR312. The without-project scenario assumed that the roads would remain largely unchanged, with the same cross-section and deteriorating road conditions over time.
1 ADB. 2019. Country Partnership Strategy: Cambodia, 2019–2023—Inclusive Pathways to a Competitive Economy. Manila.
7. The following economic benefits for existing traffic were identified and monetized: vehicle operating cost (VOC) savings, time savings, accident cost savings, and benefits from reduced vehicle emissions. To calculate changes in VOCs, the initial International Roughness Index values were based on previous road condition surveys and site observations by the consultants in 2019, with values recalculated annually by the HDM-4 model.
8. The project costs and benefits have been calculated over a 24-year appraisal period (2020–2043), after which a residual value2—designed to capture the benefits of the project in the post-appraisal period—is considered. The economic appraisal was based on a 2-year construction period (2022–2023) followed by the application of a further asphalt wearing course in 2030. Project opening is in 2024, followed by 20 years of economic life. The methodology involved a standard incremental discounted analysis of project cost–benefit streams and a discount rate of 9%.
9. In economic analysis, project benefits and costs are measured in constant prices of a base year (in this case 2020) and, therefore, the effect of general inflation is eliminated. However, relative price changes for important project cost or benefit items should be allowed in instances where there is sufficient information to do this.3 In the present analysis, a 2% real annual growth is considered for the value of emissions savings.
10. Benefits were calculated for normal traffic and for generated traffic where a large change in road condition, as in the case of NR23, are included. Road crash savings were estimated by analyzing crash and casualty data on project roads and based on national data and project road classification and traffic. The estimated annual average casualties are (i) on NR23 (currently operating as a rural road), 0.006 annual fatalities per km and 0.017 annual serious injuries per km; and (ii) on PR312, 1.89 annual fatalities per km and 5.13 annual serious injuries per km.
Combining traffic with the number of fatalities and injury casualties, it was possible to develop casualty rates expressed in terms of casualties per 100 million vehicle-km. Based on research carried out by the Transport Research Laboratory4 into the effects of road improvements to a higher standard, a mid-range 25% reduction in the calculated fatality and injury casualty rates was assumed after improvement. However, in the case of NR23 which currently operates like a rural road, the crash rate considered is low and upgrading to a two-lane standard paved road is likely to increase the casualty rate to that of a standard two-lane road and thus there will be a negative benefit.
11. There are no relevant estimates of casualty costs in Cambodia and to derive the cost of road casualties for inclusion in the analysis, reference was made to research in Viet Nam.5The research paper reviewed different accident-costing methodologies to attempt to define an appropriate method for valuing accident casualties in Viet Nam. The costs from Viet Nam were adjusted to Cambodia values based on a gross domestic product (GDP) ratio in 2005 of 0.69 and
2 Based on the 20-year reference life after completion, estimated economic lives by infrastructure component, and the average works percentages by infrastructure component, the consultants applied an average residual value of 39%
of the investment cost for NR23 and 23% of the investment cost for PR312.
3 Asian Development Bank. 2017. Guidelines for the Economic Analysis of Projects, Manila. para. 46.
4 Overseas Road Note 5 – A Guide to Road Project Appraisal was produced by the Transport Research Laboratory with funding by the Department for International Development of the United Kingdom in 2005.
5 Trinh Thuy Anh and Nguyen Xuan Dao. 2005. The Cost of Road Traffic Accidents in Vietnam. Ha Noi. University of Transport and Communication. Department of Transport – Economics Address, Proceedings of the Eastern Asia Society for Transportation Studies, Vol. 5, pp. 1923 – 1933.
then updated to 2019 values in line with GDP growth in Cambodia, and the suggested average casualty costs were $23,770 for a fatality and $7,100 for an injury casualty.
12. Road projects also generate environmental impacts, and these were considered in the economic analysis. Benefits of reduced carbon dioxide (CO2) emissions were calculated by HDM- 4 and net benefits were calculated by comparing emissions for without-project and with-project scenarios. A value of $39.3 per ton of CO2 for 2020 emissions was applied, increasing by 2%
annually in real terms to allow for the potential of increasing marginal damage of global warming over time.6 Reductions in other emissions were also considered by converting them to equivalent CO2 emission values using factors recommended by the International Energy Agency.7
E. Demand Estimation
13. The demand analysis at appraisal was based on estimates of annual average daily traffic based on traffic counts carried out by the consultants in November 2019 and compared with previous counts in 2016 and 2017. Traffic was forecast to grow in line with historical traffic growth rates taking account of GDP growth rates and elasticity of demand by vehicle type. Cambodia experienced a high economic growth rate of more than 7% during 2010–2019. However, with the impact of the coronavirus disease, the economy contracted by 3.1% in 2020. Cambodia’s economy is expected to grow by 4.0% in 2021 and 5.5% in 2022,8 and is likely to reach the pre- pandemic growth level by 2024. There has been very high growth in vehicle registrations of more than 14% per annum during 2010–2018, and this high growth rate is likely because of the low base of total vehicles. For traffic projections, economic growth and transport demand elasticity from past feasibility studies (1.7 for motorcycles, 1.2 for passenger vehicles, and 1.1 for freight vehicles) were used with no traffic growth considered for 2020–2021 because of the economic impact of the coronavirus disease.
14. Only a nominal 4% traffic growth rate is considered until project completion in 2024, with no growth considered for 2020–2021 as stated in para. 13. With the large vehicle operating cost and travel time savings estimated (about 50%) with the proposed road improvement for NR23, generated traffic of 25% is anticipated in the with-project case for all vehicle types except motorcycles, which are already being extensively used because of poor road conditions. In the case of PR312, no generated traffic is considered as the road has been serving the area with a paved road, though it is in fair to poor condition. Beyond 2024, traffic growth rates are estimated based on economic growth of 7% per annum up to 2030 and 5% per annum beyond 2030. The normal annual traffic growth rates used in the analysis are set in Table 1.
Table 1: Normal Annual Traffic Growth Rates (%)
Mode of Traffic Up to 2024 2025–2030 2030 Onwards
Motorcycle 4.0 8.4 6.0
Passenger 4.0 8.4 6.0
Freight 4.0 7.7 5.5
Source: Asian Development Bank estimates and technical assistance consultant’s report.
15. Table 2 shows forecast traffic demands on the project roads at appraisal.
6 CO2 emissions valued at the 2016 price given in ADB’s Guidelines for the Economic Analysis of Projects (footnote 3) and escalated at 2% annually to the project’s base year.
7 International Energy Agency, Emission Factors 2020: Database Documentation
8 Asian Development Bank. 2021. Asian Development Outlook 2021, Financing a Green and Inclusive Recovery, Manila.
Table 2: Forecast Demand on the Project Roads (vehicle numbers)
Project Road 2024 2029 2034
National road 23 6,507 9,915 13,449
Provincial road 312 4,342 6,453 8,592
Source: Asian Development Bank estimates.
F. Economic Costs
16. Updated construction cost estimates were produced in April 2021. The total civil works cost estimated based on detailed bills of quantities is $31.07 million for NR23 and $34.44 million for PR312. The total financial cost including physical contingencies, land acquisition and resettlement, and implementation cost, but excluding price contingency and financing charges, was estimated at $80.5 million. The total cost including financing charges during construction is approximately $90 million.
17. For the economic appraisal, costs and benefits were converted from financial to economic prices in line with ADB guidelines.9 The economic analysis was conducted using the domestic price numeraire. Financial costs were converted into economic costs by (i) excluding financial charges, taxes, and price contingencies; (ii) applying a shadow exchange rate factor of 1.02 for imported inputs; and (iii) using a shadow wage rate factor of 0.70 for unskilled labor consistent with the previous feasibility studies.10 Land acquired for the project includes residential and agricultural land which is valued at lost agricultural production of an equivalent area of agricultural land and discounted to the base year. All resettlement costs are valued at resource cost in accordance with ADB guidelines by removing land transfer taxes, compensation for lost production, and value-added tax on replacement structures. The estimated economic construction costs are $33.97 million ($1,712,823/km) for NR23 and $36.84 million ($1,298,114/km) for PR312.
18. Maintenance costs with and without the project were adopted based on the maintenance practices adopted by the Ministry of Public Works and Transport using unit rates for maintenance operations of both sealed and unsealed pavements provided by the Road Infrastructure Technical Office of the MPWT.
G. Economic Benefits
19. The benefits considered in the economic reassessment are savings in VOCs, improvements in travel time, reductions in accidents, and benefits from reduced vehicle emissions. With rehabilitation and widening of the existing alignment, speed increases and time savings are expected from the improved pavement surface and increased capacity of the road after improvement. The calculation of time savings benefits did not include crew costs, because they form part of the VOC calculations. The benefit accrued to generated traffic is reduced by half as is standard practice to avoid overstating benefits. Savings in VOCs derive from improvements to the surface conditions and roughness on the upgraded sections relative to the existing substandard sections. Average speeds used in the economic analysis were also calculated within the HDM model based on posted speed limits, road conditions, geometry, and traffic intensity.
The large improvement in road condition will also benefit the nonmotorized traffic (bicycles) and is included in the analysis in terms of time-related cost savings.
9 Asian Development Bank. 2017. Guidelines for the Economic Analysis of Projects. Manila.
10 The shadow exchange rate factor is estimated based on trade data for Cambodia for 2015–2019, and the shadow wage rate factor is adopted from the Economic Analysis of ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Kingdom of Cambodia for Road Network Improvement Project. Manila.
20. The economic analysis used hourly values of time for bicycle users of $0.25, motorcycle users of $0.50 for working time, and $1.00 was used for other motorized vehicle users except for cars and four-wheel-drive vehicles. An average working time income of $2.0 per hour has been assumed for cars and four-wheel-drive vehicles because passengers in these two vehicle types have incomes above the national average. Nonwork travel time is valued at $0.30 per hour for car and four-wheel-drive passengers and $0.15 for other passengers.
21. For the calculation of savings from reductions in the number of road casualties, fatalities and injuries were valued as per the recommended estimate of $23,770 for a fatal casualty and
$7,100 for personal injury casualties in 2019. The International Road Assessment Program suggest valuing fatalities at 70 times per capita income, which would be $115,000.11 The rates established as per the Viet Nam study were used in the analysis.
H. Results of the Economic Appraisal
22. The results of the economic appraisal covering the full analysis period are shown in Table 3. The economic indicators provided are net present value, benefit–cost ratio, and economic internal rate of return.
Table 3: Project Economic Indicators
Road NPV
(2020, $ million) EIRR
(%)
National road 23 37.0 19.8
Provincial road 312 11.5 12.7
Both roads 48.4 16.4
NPV = net present value; EIRR = economic internal rate of return.
Source: Asian Development Bank estimates
23. Sensitivity tests and calculations of switching values were carried out to determine the effect of variations in key input parameters on the key economic indicators. Table 4 shows the results of the sensitivity analysis for the project roads. The sensitivity analysis demonstrates that the economic appraisal results are robust across the range of variations in the main parameters considered, though large negative variation in costs and benefits may result in the economic internal rate of return falling below 9% in the case of PR312. In summary, the economic appraisal indicates that the project return exceeds the 9% threshold, and the project is therefore considered to be economically viable.
Table 4: Result of the Sensitivity Analysis (%)
Scenario
NR23 PR312
EIRR Switching Value EIRR Switching Value
Base 19.8 N/A 12.7 N/A
Construction costs +20% 16.9 249 9.9 31
Vehicle operating costs –20% 18.2 N/A 10.7 51
Value of time –20% 18.1 N/A 10.6 44
Exclude NMT, crash, and emission benefits 17.4 N/A 11.7 N/A
Two-year implementation delay 18.3 N/A 12.1 N/A
Construction costs increased by 15% and benefits
reduced by 15% 15.4 42 8.7 13.5
EIRR = economic internal rate of return, N/A = not applicable, NMT = , NPV = net present value, NR = national road, PR = provincial road.
Source: Asian Development Bank estimates.
11 The unit value of fatalities and injuries was based on International Road Assessment Programme. 2016. Star Ratings and Investment Plans: Data Analysis and Reporting Specification. London.
