Economic management of road transport

Lecture 1

Economic Management of Road Transport (11 hours) Introduction. Importance of Road Transport. Scope. Economic Function.

Government involvement. Future development in Transport Classification of hydropower and end uses

Demand on Road Transport: Factors affecting demand: Land use pattern, Quality of service, Price, Time value, Demand Analysis, Introduction of Hydropower plant in Nepal

Costing of Road Transport: Concept of Fixed and Variable costs, Direct and Indirect Costs, Joint and Common Costs. Excapability and opportunity costs. Policy of Nepal Government

Pricing of Road Transport: Cost-Plus Pricing, Pricing policy in imperfect market condition, Marginal Cost Pricing, Subsidy in Transport

Investment Appraisal: Introduction. Conventional investment appraisal, Average rate of return, Payback Period, Discounted Cash Flow, Net Present Valve, Benefit-Cost Ratio, Internal Rate of Return

Cost Benefit Analysis: Social cost benefit analysis, hidden Cost, Benefit in transport

Valuation of Cost and Benefits: Shadow Pricing of Market items, Valuation of Time, accidents, environmental costs

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Contents Introduction. Importance of Road Transport. Scope.

Economic Function. Government involvement. Future development in Transport

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Introduction Today, a world without roads, cars, motorcycles and bicycles is almost

unimaginable. The entire road infrastructure with its diversity of transport concepts now has a prominent almost dominant position in our society.

Development is related at improving the welfare of a society through appropriate social, political and economic conditions.

The transport sector is an important component of the economy and a common tool used for development.

When transport systems are efficient, they provide economic and social opportunities and benefits that result in positive multipliers effects such as better accessibility to markets, employment and additional investments.

When transport systems are deficient in terms of capacity or reliability, they can have an economic cost such as reduced or missed opportunities and lower quality of life. 4

What is economics? Definition: How individuals, firms, governments and other organizations within our society make choices, and how those choices determine the way the resources of society are used. Choices are unavoidable because desired goods, services and resources are inevitably scarce. Choices have to be made by the economy as a whole as well as

by each individual. How do all the choices interact to determine the use of scares

resources available to society? OR Due to scarcity we have to make choices, weighing the benefits

and costs of each choice. This is economics. So Mick Jagger was quite the economist when he sang, "You can't always get what you want. (http://www.oswego.edu/~edunne/200ch1.html )

5 Source: www.bonissen.de/ib/summaries/Economics%20(1-3).PDF

Four basic questions how economics functions

1. What is produced and in what quantities? 2. How are these goods produced? 3. For whom are these goods produced? 4. Who makes economic decisions, and by what

process?

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Source: www.bonissen.de/ib/summaries/Economics%20(1-3).PDF

Buyers and sellers in the marketplace answer these questions

For example, consider the decision to produce a Lexus. What to produce? Toyota designs a luxury car that it believes buyers will want.

Toyota decides how many it is willing to make given the price and their own costs, and U.S. buyers decide how many they will buy, based on the price, their preferences for the luxury car, among other factors.

How to produce? Toyota designs a factory and machines and hires workers to make the Lexus at a low cost, but high quality. The government (of Japan and the United States) restricts Toyota's production techniques: there are pollution and safety regulations that Toyota must follow. There are minimum wage and overtime laws that Toyota must follow in compensating workers.

Who gets a Lexus? If you've got $50,000 and your willing to give it to Toyota, then you get a Lexus. If not, too bad. In other words, in the marketplace, the PRICE of the Lexus rations out the car. If everyone could just go pick one up for free, we would very quickly run out of Lexuses, and Toyota would not be able to make them fast enough. The price determines who will get scarce resources.

Who decided 1-3? For the most part, Toyota and potential car buyers determine the design, quantity and price of the Lexus. However the government also had a say in how a Lexus is produced through certain regulations.

7 Source: http://www.oswego.edu/~edunne/200ch1.html

What is transportation economics? Transport Economics is the study of the

movement of people and goods over space and time. It is a branch of economics that deals with the allocation of resources within the transport sector.

Topics traditionally associated with Transport Economics include Privatization, Nationalization, Regulation, Pricing, Economic Stimulus, Financing, Funding, Expenditures, Demand, Production, and Externalities.

8 Source: www.tcd.ie/.../Lecture%201%20-%20Transport%.

Importance of road transport The roads in a big way facilitate advancement in the economy of a country and

they simultaneously facilitate communication. Road transport is one of the most promising and potent means for rapid

industrialization and agricultural advancement. It plays an important role in the economy of the country and is particularly suitable for short and medium distance.

It provides the basic infrastructure for bringing the majority of the people who are living in far off villages into the mainstream of life by connecting them with the rest of the country.

With the spread of green revolution in the country and industrial growth and opening up of new areas, the road transport has assumed greater importance as the growing demands for supply of inputs like fertilizers, seeds etc. as well as the transport of agricultural produce to markets have to be met largely by road transport. Source: http://www.managementparadise.com/forums/elements-logistics/201669-

importance-road-transport.html 9

Benefits of transport systems Transport systems help overcome the effects of distance. They also provide the following benefits Increased size of the market by enabling domestic goods to

be sold globally Enhanced opportunities for international trade and the

benefits or economic integration Enabling of Just in Time (JIT) production techniques.

Components are delivered when needed reducing a firms stock levels hence unit costs

Improved mobility of labour: workers can live many miles from work and commute

Improved UK competitiveness: efficient transport systems minimise travel times and so lower domestic unit costs

10 Source: http://tutor2u.net/economics/content/topics/transport/introduction.htm

Scope and economic function of road transport Scope: To provide the service to people to reach their destination in time at

affordable cost safely. Economic function: Effective and efficient transportation provide economic benefits that result

in multiplier effects such as better accessibility to markets, employment and additional investments. Consequently citizens who are deprived of transportation infrastructure miss out on several economic opportunities.

Directly or indirectly, transport infrastructure may affect: Production processes Interregional/international trade Industrial location Distribution systems Housing/labour markets Land prices Price setting

Examples: apples from Mustang, vegetables from Tarai, tea from Ilam etc.

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Scope and economic function of road transport

Mobility is one of the most fundamental and important characteristics of economic activity as it satisfies the basic need of going from one location to the other, a need shared by passengers, freight and information.

Economies that possess greater mobility are often those with better opportunities to develop than those with scarce mobility. Reduced mobility impedes development while greater mobility is a catalyst for development.

Mobility is thus a reliable indicator of development.

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Automobile dependency Automobile dependency is defined as high levels of per capita

automobile travel, automobile oriented land use patterns and reduced transport alternatives. The opposite of automobile dependency is a balanced transportation system with more mixed travel patterns. Automobile dependency is a matter of degree. In its extreme, nearly all local trips are made by personal automobile because alternatives are so inferior.

Some people suggest that automobile dependency always increases as consumers become wealthier, but this is not necessarily true. Many wealthier regions have balanced transportation systems while some poorer regions are quite automobile dependent. The differences result from public policies that affect transport choices and land use patterns

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Source: Victoria Transport Policy Institute, Website: www.vtpi.org Institute for Science and Technology Policy Murdoch University, Website: www.istp.murdoch.edu.au

Economic Development Impacts of Automobile Dependency

Increased Mobility And Convenience For Motorists Increased Vehicle And Fuel Expenditures Increased Road And Parking Expenditures Increased Traffic Congestion, Crash Damages And Environmental

Impacts Automobile-Oriented Land Use Reduced Travel Choices In summary, automobile dependency has both positive and negative

economic development impacts. Benefits are associated with more efficient local travel that affects productivity and some retail efficiencies. Offsetting these are various inefficiencies and increased costs that are borne throughout the economy.

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Source: Victoria Transport Policy Institute, Website: www.vtpi.org Institute for Science and Technology Policy Murdoch University, Website: www.istp.murdoch.edu.au

Economic impacts of transportation Direct impacts. The outcome of improved capacity and efficiency where

transport provides employment, added value, larger markets as well as time and costs improvements. The overall demand of an economy is increasing.

Indirect impacts. The outcome of improved accessibility and economies of scale. Indirect value-added and jobs are the result of local purchases by companies directly dependent upon transport activity. Transport activities are responsible for a wide range of indirect value-added and employment effects, through the linkages of transport with other economic sectors (e.g. office supply firms, equipment and parts suppliers, maintenance and repair services, insurance companies, consulting and other business services).

Induced impacts. The outcome of the economic multiplier effects where the price of commodities, goods or services drops and/or their variety increases. For instance, the steel industry requires cost efficient import of iron ore and coal for the blast furnaces and export activities for finished products such as steel booms and coils. Manufacturers and retail outlets and distribution centers handling imported containerized cargo rely on efficient transport and seaport operations.

15 Chapter 7 from the book The geography of transport system http://people.hofstra.edu/geotrans/eng/ch7en/conc7en/ch7c1en.html

Government involvement Nepal government is building roads of different

category; e.g. highways, feeder roads, hilly roads etc. (Economic Survey).

Government is also involved in determining the transport fare for passengers and goods (DoTM).

Road tax is collected from each vehicle for the maintenance purpose.

Vehicle registration and renewal of vehicle registration (DoTM).

Imports and sells petroleum products (NOC).

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Motorable road

Fiscal year Black topped Graveled Earthen Total

2010/11 9,902 km 5,670 km 7,637 km 23,209 km

2011/12 10,192 5,787 km 8,410 km 24,389 km

2012/13 10,659 km 5,940 km 8,666 km 25,265 km

2013/14 (mid-March)

10,810 km 5,925 km 8,864 km 25,599 km

Source: Economic Survey, 2013/14 17

Local self-governance and community development program

Fiscal year Black topped Gravel Road graveled Total

2011/12 3,754 km 287 km 676 km 4,717 km

2012/13 3,075 km 178 km 731 km 3,984 km

2013/14 (mid-March)

2,050 km 120 km 487 km 2,657 km

Source: Economic Survey, 2013/14 (data provided Ministry of federal affair and land development)

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Future development in transport Rail transport East west mid hill highway North-south highway Etc.

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Impact of generic development of road transportation

Shortage of clean environment: including air pollution from cars Shortage of energy: the natural oil resources are scraping the

bottom of the barrels Shortage of space: for housing, working, living, recreation and

transport, But also: Increased demand for mobility: amongst others resulting from

increase in leisure activities and increasing of single households, Increased individual demands: everybody enjoys driving a car,

but nobody wants to see a road, hear the traffic or smell exhaust fumes.

20 Source: nr2c_final_report.pdf

Expected concepts of future road construction Reliable Infrastructure, standing for optimising the

availability of infrastructure, Green (environmentally-friendly) Infrastructure,

standing for reducing the environmental impact of traffic and infrastructure on the sustainable society,

Safe and Smart Infrastructure, standing for optimising flows of traffic of all categories of road users and safe road construction working,

Human (-friendly) Infrastructure, standing for harmonising infrastructure with the human dimensions.

21 Source: nr2c_final_report.pdf

From vision to direction for solutions

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Source: nr2c_final_report.pdf

Review questions What are the benefits of road transport in Nepal? What are the impacts of road transport in economy

of Nepal? What kind of transport is essential for growing

urbanization?

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Economic management of road transportEconomic Management of Road Transport (11 hours)ContentsIntroductionWhat is economics?Four basic questions how economics functionsBuyers and sellers in the marketplace answer these questionsWhat is transportation economics?Importance of road transportBenefits of transport systemsScope and economic function of road transportScope and economic function of road transportAutomobile dependencyEconomic Development Impacts of Automobile DependencyEconomic impacts of transportationGovernment involvementMotorable roadLocal self-governance and community development programFuture development in transportImpact of generic development of road transportationExpected concepts of future road constructionFrom vision to direction for solutionsReview questions