Life-Cycle Cost-Benefit Analysis
of Infrastructures
P. Thoft-Christensen
Aalborg University, Aalborg, Denmark
Symposium Toluca , Mexico, November 2009
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November 2009
OUTLINE
• Motivation
• Three founders of LC-CB analysis
• Social return on Investment
• Traditional formulations
• The Future Transport Infrastructure in
Denmark
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CALIFORNIA MARINE TRANSPORTATION SYSTEM INFRASTRUCTURE NEEDS
http://www.mtsnac.org/docs/CALMITSAC_%20MTS_%20Infrastructure_Needs%2010_22_03.htm
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• The flow of goods to and from California ports and along
associated inland transportation corridors must be
recognized for the huge economic benefit it brings to the
producers, manufacturers, transporters and consumers of
those goods throughout the entire nation.
• Given the magnitude of this flow of goods, Congress must
establish viable funding sources that will allow the goods
movement infrastructure to keep pace with the steadily
increasing growth of this sector. This may entail the
creation of new sources of funds given that existing funding
programs are already oversubscribed and/or dedicated.
• The funding needs of the MTS in California are great and
cover a broad range of modes and facilities. The total
funding need for the recommended MTS projects in
California is $23.7 billion ($7.2 billion in Northern
California and $16.5 billion in Southern California.)
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Cost-benefit analysis is a term that refers both to:
• to help appraise, or assess, the case for a project or
proposal
• an informal approach to making decisions of any kind.
Under both definitions the process involves, whether explicitly
or implicitly, weighing the total expected costs against the
total expected benefits of one or more actions in order to
choose the best or most profitable option.
Benefits and costs are often expressed in money terms, and
are adjusted for the time value of money, so that all flows of
benefits and flows of project costs over time (which tend to
occur at different points in time) are expressed on a common
basis in terms of their “present value.”
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What is needed to perform a Life-Cycle CostBenefit Analysis of Infrastructures?
• Engineering knowledge
• Economic understanding
• Mathematical experience
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Jules Dupuit
(1804-1866)
• He was born in Fossano, Italy then under the
rule of Napoleon Bonaparte.
• At the age of ten he emigrated to France with
his family where he studied in Versailles winning a Physics prize at graduation.
• He then studied in the Ecole Polytechnic as
a civil engineer.
• He gradually took on more responsibility in
various regional posts.
• He received a Légion d'honneur in 1843 for
his work on the French road system, and
shortly after moved to Paris.
• He also studied flood management in 1848
and supervised the construction of the Paris
sewer system.
http://www.economyprofessor.com/theorists/julesdupuit.php
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•Engineering knowledge
•Economic understanding
•Mathematical experience
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•Assume that the consumer is originally in equilibrium when the price of
water is at p1 and the quantity taken is q1.
• Now assume with Dupuit that the price of water falls to p2. At the lower
price for water the individual is in disequilibrium at point c.
•The marginal utility of the last unit of the consumer's existing stock is
greater than the now-lower marginal utility of water represented by the
lower price.
• In terms of price,
Dupuit constructed this
demand curve in 1844.
•
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what the consumer
would pay for q1 of
water is greater than
the price he or she
must pay for quantity
q1
The same quantity of
water (q1) could be
bought at a lower
total expenditure, but
Dupuit assumed that
the consumer would
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not do this.
Alfred Marshall
(1842-1924)
• Alfred Marshall was born in London.
• Professor of Political Economy at the University
of Cambridge from 1885 to 1908.
• He was the founder of the Cambridge School of
Economics which rose to great eminence in the
1920s and 1930s:
• Arthur Cecil Pigou and John Maynard Keynes,
the most important figures in this development,
were among his pupils.
•Alfred Marshall's magnum opus, the Principles of
Economics (Marshall, 1890a) was published in
1890 and went through eight editions in his
lifetime.
•It was the most influential treatise of its era and
was for many years the Bible of British economics,
introducing many still-familiar concepts.
http://www.economyprofessor.com/theorists/alfredmarshall.php
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•Engineering knowledge
•Economic understanding
•Mathematical experience
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• His specialty was MICROECONOMICS—the study of
individual markets and industries, as opposed to the
study of the whole economy.
• In his most important book, Principles of Economics,
Marshall emphasized that the price and output of a
good are determined by both SUPPLY and demand: the
two curves are like scissor blades that intersect at
equilibrium.
• Modern economists trying to understand why the
price of a good changes still start by looking for
factors that may have shifted demand or supply, an
approach they owe to Marshall.
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Vilfredo Pareto
•Vilfredo Pareto (1848 – 1923) was an Italian
industrialist, sociologist, economist, and
philosopher.
• He made several important particularly in the
study of income distribution contributions to
economics, and in the analysis of individuals'
choices.
• His legacy as an
economist was profound.
•Engineering knowledge
•Economic understanding
•Mathematical experience
1919
•Partly because of him, the
field evolved from a branch
of social philosophy as
practiced by Adam Smith
into a data intensive field of
scientific research and
mathematical equations.
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Pareto optimality.
A Pareto-optimal allocation of resources is achieved when it is not possible to
make anyone better off without making someone else worse off. Given a set
of choices and a way of valuing them, the Pareto frontier or Pareto set is
the set of choices that are Pareto efficient. The Pareto frontier is particularly
useful in engineering: by restricting attention to the set of choices that are
Pareto-efficient, a designer can make tradeoffs within this set, rather than
considering the full range of every parameter.
Example of a Pareto frontier.
The boxed points represent
feasible choices, and smaller
values are preferred to larger
ones. Point C is not on the
Pareto Frontier because it is
dominated by both point A and
point B. Points A and B are
not strictly dominated by any
other, and hence do lie on the
frontier
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Traditional Formulations
Expected Advantage = Expected Benefits - Expected Costs
E[ A] 
E[ B]  ( E[Cinitial]  E[Cmanagement]  E[C failure]  E[Cuser ])
User costs are in most cases the dominating factor.
E[ A]  E[ B]  E[Cuser ]
General Formulations
More general formulations include also factors which are not easy or
impossible to include such as environmental and social costs.
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The traditional formulation may be used in cases like:
• Comparing a small number of bridges proposals,
• Deciding whether e.g. a bridge should be repaired or
replaced,
• Planning a maintenance strategy for a group of bridges,
• Reliable data are not available.
The limitations are:
• A number important factors are left out,
• Cannot be used for a major infrastructure.
In this presentation problems and data related to a
complicated major infrastructure net consisting of
roads structures, harbours, air ports, etc is discussed.
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Social Return on Investment (SROI)
• SROI is an approach to understanding and managing the
impacts of a project, an organization or a policy.
• It is based on stakeholders and puts financial values on the
important impacts identified by stakeholders which do not have
market values.
• The aim is to include the that are often excluded from markets in
the same terms as used in markets, that is money, in order to give
people a voice in resource allocation decisions.
• SROI analysis refers not to one single ratio but more to a way of
reporting on value creation.
• It bases the assessment of value in part on the perception and
experience of stakeholders, finds indicators of what has changed
and tells the story of this change and, where possible, uses
monetary values for these indicators.
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The Future Transport Infrastructure in
Denmark
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The Danish Infrastructure Commission was appointed in
2006:
"the overall objective is for Denmark to maintain and develop
its position as one of the countries in the world with the best
transport systems”
•To analyze and assess the key challenges and development
potential for the infrastructure and national traffic investments
until 2030.
• To identify and assess the strategic options and priorities and
to put forward suggestions to strengthen the basis for the
national investment decisions in the transport area.
Systematic and economic prioritization of the governmental
investments in the transport infrastructure.
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Background
• The opportunities and the welfare of the individual
citizen depends of a modern and efficient infrastructure.
• The growing globalization and development in EU will
result in an significant increase in international goods
transport.
• The overall objectives are for Denmark to develop its
position as one of the leading countries regarding
transport systems.
• This will require profitable investments in a new and
modern infrastructure to establish the best settings for
high mobility and effective logistics.
• However, it is at the same time important to take into
account the consequences, the increasing traffic may
result in, for the environment, the noise, and safety.
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• Mobility is important to us as individuals to be able to do the
things we want – and the individual has mobility as a high
priority.
• Almost everybody is in contact with the transport system on
a daily basis – in our way to work, to visit family, to leisure
activities or to travel to the countryside.
• The average Dane spends more time on transport than on
completing their primary education.
• Danish households spend an average 15 pr. Of their income
on transport. That is more than we spend on food.
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The Existing Road Infrastructure
Major Roads
Motorways
Motor traffic roads
Main roads
1022 km
316 km
2460 km
2
Area
44000 km
Population
6.5 million
2
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Railway Net
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Harbours
120 harbours
100 mio. tons of goods
• 70% international
• 30% domestic
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Air ports
More than 100 international destinations
Copenhagen
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2004
Car
Person
Percent
km. Mill.
61,198
81.5
Buss
7,301
9.7
Train
6,074
8.1
Airpla
ne
308
0.4
180 Ferry
247
0.3
Total
75,128
100
Traffic 1984-2004
In average 15,000 km per year
2% increase per year
Cars
140
Railways
Busses
Airplanes
100
Ferries
80
1984
1990
1995
2000
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2004
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Transport of Goods
Ships
Trains
Trucks
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Consequences of Infrastructure Changes
• Environmental – climate
• Noise
•Traffic safety
• Landscape
• Fauna
•
•
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Environmental Consequences - Emissions
Traffic
CO2
CO
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1000 tons
Road Traffic
Railways
Air Planes
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Ships
Total
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Traffic Safety
Car km
Number of persons
in billions
killed in the traffic
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Estimated Road Traffic in 2030
0-10,000 per 24 hours
40,000 - 60,000
Increased traffic is 70 %.
2005
> 100,000
2030
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Estimated Crowded Road Traffic in 2030
0 – 20 hours per 24 hours
Hotpoints
500 – 800 hours
> 2,000 hours
2005
2030
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Cost-Benefit Analysis
Three different methods are used to present the results of a
cost-benefit analysis.
Net Present Value
The total value for the society of the advantages and disadvantages in
the expected life-time discounted back to the present.
Benefit-Cost Relation
The present value for the society of 1 $ invested by the society.
The Internal Rate
The internal rate is the corresponding to a project net present value
equal to zero.
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Example Cost-Benefit Analysis
Enlarge the existing motorway or build a new?
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2005 DKR Millions
Enlarge
motorway
Financial expenses
Construction, maintenance
New
motorway
- 1,376
- 2,009
2,108
1,978
305
101
-235
-190
Net present time value
877
-120
Internal rate of interest
7.8 %
5.8%
0.64
-0.06
Traffic advances
Time reduction, driving exp., inconveniences
External expenses
Accidents, noise , air pollution, CO2
Other consequences
Net profit per public invested
1 DKR
Quantitative consequences may be important, but are treated otherwise.
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Effects included in LCCB analysis in Denmark
 Construction costs
 Inconveniences during the construction
Working expenses
Travel time reductions
Traffic safety
Noise
Local and global air pollution
Polluted soil and ground water
Area application
Indirect effects
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•Effects not included in LCCB analysis in Denmark
Influence on the surroundings
Vibrations
Loss of landscape values
Loss of cultural artifacts values
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To ensure the appropriate use of resources six concrete
focus areas are recommended until 2030:
•
•
•
•
•
•
The ring connections must be completed in the
Copenhagen area on roads and rail
A complete plan for the development of the
infrastructure in the urban region of East Jutland must
be prepared
Effective linking of the individual regions to the overall
transport corridors and hubs must be ensured
The Danish gateways to the rest of the world must form
a central part of an effective transport network
Intelligent technological solutions must ensure optimal
utilization of the infrastructure
The effort to limit the impact of transport on the
environment and the climate must be intensified.
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Governmental Infrastructure Budget 2010 -1020
Bus, bycicles,
Safery & env., 6
0
Roads, 24
Investment in
billions DKR
New railways,
35
Ext. Railways,
15
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