OMGT1058 TRANSPORT ECONOMICS 1
ASSIGNMENT 2: Transport cost benefit analysis and investment evaluation
Section A: Introduction
This assignment assesses your understanding of transport investment evaluation principles and practices. The specific assignment problems are detailed in Section B.
This assignment is worth 30% of the entire assessment in this course. This assignment is a group assignment. The recommended group size for this assignment is three students, with a minimum of two and a maximum of four students per group.
This assignment is due by end of day October 10 2014. Each group’s report is to be submitted through the OMGT1058 Blackboard Assignments section. Any requests for maximum one week extension must be made in writing (via email) before the due date.
Section B: Specific assignment tasks.
Based on the data in the attached Extending a Port or Building a New One Case Study prepare a transport investment evaluation report with the following report structure.
1. Project’s Objective(s)
2. Description of options (alternatives) evaluated
3. Identification of direct quantifiable impacts (i.e. direct Costs and direct
Benefits of each option) 1
Identification of all quantifiable indirect costs and benefits of each
Forecasting of monetary values of all direct and indirect quantifiable
Costs and benefits for each option for each year / period of the project
6. Calculation of Net Present Value for each option 1
Identifying non quantifiable costs and benefits and discussion of impact
on each option
8. Risk assessment and sensitivity analysis
9. Selection of preferred option and rationale for selection
10. Conclusion and Recommendations (if appropriate)
1. Need to clearly state key assumptions on which calculations have been based
The main quantitative results of the evaluation should be presented either in a tabular or graphical format (whichever is more appropriate for the type of quantitative data being presented) and specifically discussed in the body of the detailed report. As noted clearly state and briefly justify any assumptions you are making.
As a broad guideline the report should be around 2000-2500 words in length (excluding the executive summary and any appendices). The marking sheet overleaf should provide further guidance.
Extending a Port or Building a New One: Case Study
Authored by Shanta Hallock, August 2006; updated by John Odgers February 2014
Port Phoenix is an ancient port which has evolved over time to serve modern needs, and it is the primary port of the developing nation of Aquitania. It is a natural deep water port which has been neglected and has silted up over years. Its approaches are open to the monsoons and are also environmentally sensitive because of a coral reef area through which ships must travel. Several rare marine species including turtles and the pink snouted whale breed in these waters. An aerial view of the port and its immediate hinterland is given in figure 1.
Figure 1: Port Phoenix and surrounds
Table 1 presents a selection of macro-economic data for Aquitania over the fifteen years 1998-9 to 2012-13. As table 1 indicates, Aquitania’s GDP has recovered from a drop in 2009-10 and 2010-11 to reach $US101.8 billion in 2012-13.
International tourism has been an important economic and social element of Aquitania’s recent history as Table 1 illustrates. Since 2004-05 tourism has grown at an average annual rate of 3.7 % and is expected to continue to grow at around this same annual rate for the foreseeable future. By 2012-13 total tourism spending represented 4.2% of GDP. However, should the mountainous hinterland around Port Phoenix be declared a World Heritage Area then the government expects tourism to expand more rapidly at 6 to 8% annually from as early as 2014-15 through to 2019-20 before reverting to a lower annual growth rate of around 4% -5% per year. Economic research by staff of the Economics Department, University of Aquitania, estimates that in 2011-2012 each international tourist to Aquitania spent on average a total of AQ$1340 per visit.
Table 1: Selected Economic statistics: Aquitania
GDP $US billions
Motor vehicles thousands
Tourist Arrivals (000s)
Aquitania‘s population of just over 10.8 million people is mostly located in small cities and town ships around the island nation’s coast. However, 40% of the population lives either in or immediately around the capital, San Ignacio, and along the corridor to Port Phoenix. Figure 2 shows some relevant aspects of Aquitania.
The Port of Phoenix is on a river estuary and has an operating draught of 11 metres, and a mid-stream draught 10 metres at high tide. The maximum depth alongside the berths is 9.75 metres. The only other operating port is on the east side of the country, some 500 kms away. This secondary port serves exclusively the within-country coastal trade sector. There are several other minor fishing ports around the island nation’s coast line.
The area around Port Phoenix is populated by a socially disadvantaged group whose prime occupations are fishing and the brewing of alcohol. They also provide a regular and cheap source of labour in peak times. The wage of an average port worker is AQ$40 / day though with gratuities this increases to AQ$110 /day. Industrial workers in the city earn an average of AQ$ 50/day.
As shown in Figure 2 Port Phoenix is some 140 kms to the south-west of the capital. Figure 2 indicates that there is a 2 lane highway which connects Port Phoenix to the capital city, San Ignacio. As Port Phoenix to capital city road traffic continues to increase, the highway is experiencing growing congestion. In 1997/98 an average one way trip between port Phoenix and San Ignacio took around 2 hours. By 2012-13 this had risen to an average of 2.75 hours per one way trip. However during the peak traffic periods a specific road journey can often take 3.5 hours or more. Heavy vehicles are damaging the pavement necessitating constant repairs to the surface. These repairs further slow traffic and add to congestion. A recent report commissioned by the Aquitanian government estimated that this growing traffic congestion between Port Phoenix and San Ignacio was costing the Aquitanian economy around AQ$10 million per year; and unless some remedial action was taken the report estimated this cost to grow to AQ$15 million per year by 2015-16.
There is also a rail system that follows the road between Phoenix and the capital, San Ignacio, and is double track most of the way. This was built with funding by the World Bank and substantial development grants from Sinotopia, the country’s most favoured trading partner. There are two trains a day between the capital and port and these take 2.5 hours on average. Trains however can attain speeds of up to 75 km/hr. This rail system provides passenger transport and non-bulk freight transport services. All containerized cargo is transported to and from Port Phoenix to the capital and beyond using road transport.
Sea traffic through Port Phoenix comprises both bulk carriers and break bulk ships. Table 2 shows statistics for Port Phoenix detailing container cargo volumes covering the years 1998-99 to 2012-13.
Table 2: Key Port Statistics for Port Phoenix
Total Container cargo exchanged
Total Containerised throughput to / from Bharat & Dragon
Total Container cargo exchanged Other
Notes: TEU = twenty foot equivalent units
Port Phoenix sits at the cross roads between two larger nations (Bharat and Dragon) which are fast becoming industrial powerhouses in the region. By 2012-13, containerized cargo being imported from or exported to these two countries represent some 35% of all containerized cargo handled at Port Phoenix as indicated in Table 2. This compares to the figure of 24.5% in 1998-99. Traveling time by ship at present averages 12 hours one way.
The volume of containerized traffic between Bharat and Dragon and Aquitania is projected by the Department of Transport to most probably maintain its historical average annual growth rate of around 6% per year from the start of 2013-14 and to maintain that growth rate over the following decade. Growth is then forecast to slow to 4.5% and to maintain that annual rate over the next fifteen years. However the Department of Transport forecast does indicate that there is a low-medium probability (around 0.2) that annual growth in containerized traffic between Bharat and Dragon and Aquitania will be an annual average of 2.75% over the years to 2022-23 then stabilize to 3% per year thereafter. The Department of Transport also indicates a low-medium probability that containerized traffic volume will grow at an average of 7.5% per year over the period 2013-14 to 2022-23, but slow to 5% annually from then to 2037-38.
Growth of containerized cargo to ports other than those in Bharat and Dragon between 2002-03 to 2012-13 has been 2.5 % per year and is expected to maintain that average annual compound rate of growth until 2022-23. After that growth per year is expected to level at 3% for the next fifteen years.
Currently, Port Phoenix has 4 container ship berths and 3 bulk berths. Table 3 shows the percentage capacity utilization at the four container berths at Port Phoenix from 1998-99 to its projected level at 2016-17. Capacity utilization of each of the four container ship berths has averaged between 85-90% over the years 2005-6 to 2009-10, and was 90% in 2010-11. This equates to a maximum annual capacity of 2,137,905 containers assuming the same port turnaround times and container berth productivity level. Expert advice indicates that operating much above the current capacity level at Port Phoenix’s container ship berths would most probably lead to a reduction in total container berth productivity. Based on the historical rate of compound annual growth in total containers exchanged at Port Phoenix predictions are that the container berths will reach full capacity during fiscal year 2015-16 assuming no change in ship turnaround times or container berth productivity. After full capacity is reached no additional container cargo can be exchanged.
Table 3: Containers exchanged and Capacity utilization Port Phoenix container terminals: actuals and forecast
Total containers exchanged
% installed capacity
Note: 2013-14 to 2016-17 containers exchanged and % capacity utilization are best estimates based on historical performance
Table 4 shows the estimated number of one way containerized road vehicle trips and the estimated total one way road trip hours between the capital and Port Phoenix.
Table 4: Annual number of Containerized vehicle one way trips between Phoenix and the Capital
Number of one way trips 1
Av hours per one-way trip
Estimated Total trip hours 2
Number one way trips based on Table 2 total cargo exchanged * 0.5
2 .Estimated total travel hours is the product of number of one way trips and average one-way trip average hours per one-way trip.
The Aquitanian government recently commissioned the highly reputable international transport engineering consulting firm Synergy Global Inc. (SGI)to prepare a report on a Port Strategy for Phoenix. SGI advised that in order for Phoenix to retain its position as a key port for trade with Dragon and Bharat, the port will require a substantial container terminal expansion. SGI specifically recommended the construction of an extra four container shipping berths at Port Phoenix, bringing the total to eight —the four existing container berths plus the four new berths. SGI recommended that these four new container shipping berths should be of the same size and have the same container handling capacity as the existing four berths.
SGI also strongly recommended that as part of this container facility extension the Aquitanian government invests at the same time in modernizing and widening the existing highway between Port Phoenix and the capital. SGI estimated this highway updating would cost AQ$50 million but would result in an estimated fifty percentage of future one way trips to and from Port Phoenix to the capital achieving 2.25 hoursper one way trip, as opposed to the current average of 2.75 hours. Assuming the highway updating is complete by the end of Year 3 of the expansion project, these travel time savings are projected to start from the beginning of Year 4 of the construction phase, when the expanded container facility should commence operating at normal activity levels.
However, several senior governmental transport economists have advised the Minister for Transport that in addition to analyzing the economic costs and benefits of constructing four new containerized shipping berths at the existing port, the government should carefully consider the development of a completely new container terminal at an alternative site. The site proposed by the Department of Transport’s economists for the new container terminal is 120 km to the south east of the capital (see Figure 1). The site is at the head of a drowned river valley with a natural deep water channel. At present it is connected to San Ignacio, the capital, by a sealed two lane road. There is no rail access. There is a small coastal fishing village at the mouth of the river.
These senior transport economists suggests that there may be significant benefits to constructing a completely new container terminal, despite the considerably larger up front capital costs compared with the expansion of the existing container facility at Port Phoenix. Both estimated capital costs are detailed in Table 5. These capital costs estimates are for a four berth facility of the same individual berth capacity as the existing container berths at Port Phoenix. Their support is also mindful of the fact that the economic benefits from a completely new container facility would occur some two years later than for an expansion of the existing one, as noted in Table 6.
Table 5: Comparison of capital cost of Extension and Construction Options
Option 1: Existing container terminal at Port Phoenix
Option 2: Completely new container terminal at new location
Foreign Exchange Component
Year of cost incurment
Year of cost incurment
Construction of 4 berths
Road connection to new wharfs
4, 5, 6
Highway / existing road widening
4, 5, 6
Because of state intervention the currency has a “dirty float” so the exchange rate to the $US is artificially low. The shadow price for foreign exchange is 1.1 times the official rate. The Foreign exchange economic costs of the project should be thus estimated by adjusting the value of the costs shown in Table 5 and table 6 to take account of this discrepancy wherever there is a foreign exchange component in the port component.
Table 6: Estimated amount and timing of unadjusted capital costs by year for two options
Option 1 Adding 3 container berths at Port Phoenix ($A000)
Option 2 Building a New three berth Container terminal ($A000)
One of the location specific economic benefits is that a new deep water container terminal / port would not require the annual dredging (at a cost of AQ$2.5 million per year) that is, and will continue to be, required at Port Phoenix.
The economists also indicate given that the alternative site is twenty kilometers closer to the capital city, there should be travel time savings for container road freight movement given the proposed construction of a new dual carriage two lane freeway and considerably lower traffic volumes on it than are encountered on the highway to and from Port Phoenix to San Ignacio. Preliminary traffic studies indicate that a one way trip from the proposed new container terminal to the capital is likely to take on average 1.75 hours, once the freeway is complete and fully operational. The new freeway’s capacity should be sufficient to enable this average one way speed to be maintained over the next two decades.
There is also the question of turnaround in the port. Whilst there have been substantial improvements in turnaround times at Phoenix, it is not expected that this can be improved much further. However, with a completely new terminal and equipment, it is reasonable to expect turnaround times to be as low as 24 hours as opposed to the current average of 32 hours once the new facility reaches optimal operating conditions. Such turnaround time gains would apply to both the four new berths comprising the expansion of the existing container facility at Port Phoenix and the completely new four berth container terminal at the alternative location. These gains could enable an extra twenty per cent of containers to be handled annually without any major capital investment in additional container berths.
It is also estimated that constructing a new port to the north of Phoenix would save travel time for Aquitanian ships sailing to or from the new port and Dragon and Bharat by about 1 hour per one way trip. On average each boat arriving from either nation contains 500 fully loaded twenty foot containers.
Table 7 provides estimates of travel time economic costs per hour for road and international freight ships.
Table 7: Estimated Travel Time Economic Costs
Travel Time Costs AQ$/ hour
Road (Containerized vehicles)
Finally credible expert advice received by the Port Authority in early 2011-12 indicates that the net revenue per container (i.e. the difference between the charge per container received by the port and the total of all direct costs associated with providing container related services and facilities) is $AQ5 per container. The aforementioned transport economist for the government has attained advice from colleagues that this figure would apply equally to the new container facility should it be approved and built.
The Aquitanian government is now seeking a second evaluation of the alternatives open to it. It has decided that the Base Case Option is to undertake some remedial action to reduce congestion on the existing two lane highway between Port Phoenix and San Ignacio. Treasury officials have estimated that such action would require additional annual spending of $AQ10 million to maintain and in some sections improve the road surface.
The government instructs that the Cost-Benefit analysis should assume that work on construction of either option would commence at the start of fiscal year 2014-15, and that the analyses of costs and benefits should cover a twenty five (25) year time span from the start of 2014-15.
The government wants the discount rate to be based on Aquitania’s ten year government bond rate. The yield on ten year government bonds for Aquitania is projected to settle around 4.5-5% over the next five (5) to ten (10) years. Currently it is at an historic low of 3.75%. In the decade 1986-1995, the yield on ten year government bonds was between 6.5% and 8.5%. Finally the government’s long term policy objectives are to retain its position as a key trading partner with Dragon and Bharat, and to further advance the nation along the road to sustainable economic and social well-being for all of its people.
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