Ensuring that forest roads are safe and have a low environmental impact is paramount to the concept of fit for purpose roads. However, infrastructure construction is both expensive and resource intensive. As such, carrying out an economic evaluation is important to assess the viability of the construction programme. It answers the financial implications of the what, when, where, why and how questions. As part of a robust environmental and economic analysis process, alternative construction scenarios should be compared to help decide the best use of resources.
Comprehensive economic analysis of a planned road option on anything other than the easiest of country is more complex than simply combining costs associated with road construction, maintenance and haulage. In reality, the situation is often more complicated and includes the need to evaluate and incorporate safety and environmental risk.
Cost vs roading standard
Road location and construction techniques need to be justifiable in a much broader sense than the lowest combined cost. If forest roads or landings are found to be non-compliant, then fines, legal fees, business interruption and mitigation costs can add up to hundreds of thousands of dollars. Consider a broad view of costs – actual and opportunity costs – when determining the optimum infrastructure standard.
Technical evaluation of anticipated road usage and function is a core part of determining appropriate road and construction standards, in terms of geometrics and pavement materials. For example, low wood flow volumes would typically require a lower road geometry and pavement standard than a high-volume road.
Economic evaluations are not straightforward. They often require specialist skills such as those of a management accountant, engineer, and environmental and cartage representatives. A common approach includes using the principles of Discounted Cash Flow analysis (DCF). Discounting considers the effects of interest and inflation, and compensates for costs or benefits that arise in the near future rather than on those that arise at a later date. For example, initial construction costs require no adjustment since these are costs at time zero. However, maintenance costs in the future need to be adjusted to calculate an estimate of their present worth or present value (PV). This takes into account the changing value of money over time due to interest rates and inflation.
DCF is useful because it evaluates a project back into present day values, but it has strengths and weaknesses. DCF is very sensitive to changes in discount rates and costs and this may lead to poor decisions, especially if costs between scenarios are spread over different time horizons. As such, sensitivity analysis should be part of the appraisal. Also, DCF may not fully factor in environmental or social risk because they are hard to account for in dollar terms. For example, a high erosion risk site, where road failure could lead to substantial off-site impacts, may result in a large mitigation cost.
The following are factors that should be considered when undertaking an economic analysis:
- Decide on the design period for the analysis. The structural design period is the time during which the pavement will perform to a certain standard or serviceability without major repairs
- Calculate the initial capital cost. This includes the cost of in-place materials in a pavement structure, and the equipment and labour necessary to prepare, place and finish the pavement structure
- Choose an appropriate discount rate. This is a critical requirement as it heavily impacts the time value of money. Determine the rehabilitation costs when the road quality reaches the limits of acceptability. Rehabilitation costs are dependent on accurate predictions of the time it takes a pavement structure to reach terminal serviceability after an initial construction
- Identify the salvage return or residual value of a pavement at the end of the analysis period. Computation of this cost allows for comparison of designs with different serviceability at the end of the analysis period
- Estimate traffic delay costs. Maintenance operations disrupt traffic flow and cause vehicle speed fluctuations, stops and starts, and time losses. The user cost incurred is often a significant portion of the total cost and should be included in the economic analysis
- Determine user costs or how the pavement design affects the user. User costs are related to the serviceability and deterioration history of the pavement. For example, vehicle operating costs such as fuel use, vehicle maintenance, travel time, accident and discomfort costs
- Identify community and environmental costs. These costs can be significant especially where risks are high. The formulae associated with economic analysis is not covered in this Manual. There are numerous specialist books on the subject.