Revenue

CSE504 & Benefit Cost &

Impact

Cost-Benefit Analysis
Dr. Mark Hsu
Class Outline
❑ Cost-benefit analysis
❑ Valuation techniques
❑ Time value of money
❑ Investment criteria
- Net Present Value (NPV)
- Benefit/Cost Ratio (B/C)
- Internal Rate of Return (IRR)
- Discounted Payback Period
❑ Case study – Hong Kong Express Rail Link

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 ❑ Decision making tool
❑ Not limited to tangible costs and
benefits.
❑ The values may change upon the
situation, preference and timing.
❑ Compare with “no action” or “do-
minimal” scenario.
(“With” and “Without” Analysis)

Source : Mayfield's Economics Blog (May 22, 2009)

http://mayfieldeconclass.blogspot.hk/2009/05/cartoon-cost-benefit-analysis.html

3
Infrastructure Projects
An infrastructure is a particular allocation of scarce resources in the
present which will result in a flow of output in the future.
Main problem in most public project
appraisals are:
❑ Long life-span
❑ their uneconomic nature make it wildlife habitat
difficult to monetize Land
Labor & Material
Travel time 
Vehicle operating costs  Accessibility

Oagain
Traffic accidents  
Economic benefits 
aReliability
Capital

Community impacts  

4
What is Cost-Benefit Analysis
❑ CBA is a analytical tool for public decision making by evaluating
the impacts of an investment, program or action , accounting for
these
we want to consider
an

all the benefits and costs in monetary terms. fortos und convert them into
monetary teams
❑ CBA measures the efficiency, welfare change, or resource
allocation effects of an investment (a regulatory change), by
outlining the dollar value of the gains and losses for the society.
❑ If present value of expected benefits > present value of costs
= Positive NPV
= Increase efficiency of the society !

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Why Use CBA
❑ CBA provides a consistent and systematic basis for comparing
alternatives with different levels of estimated benefits at
different timeframes for policy decision-maker.
❑ Does the proposal provide a net benefit to the society?
❑ Should an existing project or program be continued?
(“with” and “without” analysis)
❑ Which option is preferred over others (net monetary benefits)?
(NPVA ($) > NPVB ($) > NPVC ($))

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Advantages of CBA

• Easy to understand and interpret

Simplicity
• Applicable for various scenarios and locations

• Provides an objective way to evaluate social

Objectivity gains and costs
• Bases on a common measuring unit - $

Comprehensiveness
• Both tangible & intangible costs and benefits
are being assessed
a
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Major Steps of CBA
1. Identify project needs
2. Identify project constraints
3. Define the base case
4. Identify alternatives of the projects
5. Define a time periodeliveryell
6. Define work scope
7. Analyze project effects
8. Monetize benefits and costs
9. Calculate the present values (discounting)
10. Analyzing the options
11. Risk Assessment (sensitivity analysis)

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 Major Steps of CBA
1. Identify project needs
❑ Clearly state project needs so that key relationships can be identified,
and a wide range of alternatives can be examined.
❑ The project’s objective should not be too broad, making it difficult to
examine all of the trade-offs, or too narrow, excluding key relationships.

2. Identify project constraints

❑ Outline social, economic, political, technical, institutional context and
limitation, and specific assumptions about the future.
e.g. expected regional population and traffic growth, travel time of alternative
modes, nearby development, etc.

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 Major Steps of CBA
3. Define the base case
❑ Known as the “no action” case – the continued operation of the
current facility without any major investments.

4. Identify alternatives -the compone with the base case

❑ Identify project alternatives, which can vary from rehabilitation of
existing facilities to new construction, full reconstruction, or
replacement.
e.g. Improvement of an existing railway line
- upgrade the existing facilities (upgrade speed on 80% of the line) or
- rebuilt the railway line or
- construct a new road along the train route.
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 Major Steps of CBA
5. Define a time period
❑ Set the analysis period over which the life cycle costs and benefits of all
To
of the alternatives will be measured. railway line >
years
.
construction period
,
not the
any repl
belt also the whole
6. Define work scope
❑ Define the level of effort for screening alternatives. A complete analysis
of all options is neither achievable nor necessary.
❑ Screening alternatives allows a wide range of initial options to be
considered with only a reasonable level of effort. The level of effort is
proportional to the expense, complexity, and controversy of the project.

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 Major Steps of CBA
7. Analyze project effects
❑ Analyze the effects that the project would have on the society to
calculate the costs and benefits.
❑ Include direct and indirect, environmental and social impacts, and other
effects relative to the base case(no-action).
Refer to previous reports, papers, guidelines and case studies.
❑
❑ Inclusion of social and environmental impacts, by referring to the local
T standards/codes.
Follow to
need
they if not
,
e.g. EU Vehicle noise rules (97/24/EC) regulates the prescribed level for a motorcycle should not
exceed 80 dB(A).
the regulationswill
I
fined
then they
get (Australia)Protection of the Environment Operations (Noise Control) Regulation 2017 regulates
the prescribed level for a motorcycle should not exceed 94 dB(A).
(Hong Kong) Noise Control Ordinance provides descriptions without the prescribed level.

❑ Avoid double-counting and over-estimation.

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 Comparison of the international assessment of urban rail project evaluation
A study in 2008 compares CBA approaches to urban rail project evaluation in
Australia, the US, the UK, Canada, New Zealand, Germany, Holland, France,
Japan, Hong Kong, the Korea and Singapore.
Australia USA UK France Germany Japan HK
Capital Costs       
O&M Costs       
Costs of required mitigation measures to
Costs    
reduce the negative effects of the project
Costs of required improvements on
 
other transport system
Residual value     
Travel time savings       
PT User Fare savings and out-of-pocket
     
savings
Benefits Travel time savings      

Auto User Operating cost savings      

Vehicle ownership and maintenance
 
cost savings

Sources: Gwee, Currie and Stanley (2008) 13

 Comparison of the international assessment of urban rail project evaluation
Australia USA UK France Germany Japan HK
Air pollution     
GHG emission   
Externalities Water quality impact  
Noise impact      
Benefits Impact to nature and landscape 
Accident cost savings       
Savings in “avoided costs”   
Others
Option Value 
Agglomeration Benefits 
Evaluation Period (years) 50 20 60 30 40 30-50 30-120

Noise impact – many countries use a hedonic pricing method except Germany which bases the value on the cost for equipping houses with
noise-proof glazing.
Accident cost savings – (a) human capital approach involves estimating the costs arising from a crash that can be directly measured,
including the loss of future earnings. (b) WTP approach involves estimating the monetary amount that people are
willing to forgo to reduce the risk of death or injury.
Savings in “avoided costs” – whatever would be done in the absence of the any rail initiative in “no action” case.

Sources: Gwee, Currie and Stanley (2008) 14

 Major Steps of CBA
8. Monetize benefits and costs
❑ All costs and benefits are expressed in money units.
❑ Can be challenging with external effects, public goods and missing
markets, e.g. health, human life, ecosystem services.
❑ Valuation techniques include Direct Market Valuation, Revealed
Preference Approaches, Stated Preference Approaches, and Benefit
Transfer.

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How to determine the Economic Value
Market Price

Production Function
Direct Market
Valuation Avoided damages

Replacement cost

Stated Preference Contingent Valuation

Valuation
Techniques (Hypothetical market) Choice Experiments

Hedonic Pricing Analysis

Revealed Preference
Travel Cost Method
(Proxy market)
Random Utility Method

Benefit Transfer

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Direct Market Valuation
❑ Direct Market Valuation - data from actual market.
❑ Market price - reflect the actual goods and services that are bought
and sold in markets.
e.g. capital investment, O&M costs, revenue (from other local suppliers), etc.

❑ Avoided damages - cost of actions or objects to prevent the damages.

e.g. Noise impact from road traffic = cost for equipping houses with noise-proof glazing.
Smog impact in urban area = expenses that the residents to hire workers to clean windows.

❑ Replacement cost - cost of reproducing the original level of benefits.

e.g. Damage to natural wetland = cost of a man-made wetland.

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How to determine Non-market Value
❑ Willingness to Pay (WTP)
❑ The maximum amount you are willing to pay to attain desirable outcome or
avoid undesirable outcome.
❑ WTP is constrained by the individual's budget.
❑ Willingness to Accept (WTA)
❑ The minimum compensation you would accept for a loss or an action not
occurring.
❑ WTA is not bounded by income.
❑ Applied in Contingent Valuation, Choice Experiments, Hedonic Pricing
Analysis, and Travel Cost Method.

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Contingent Valuation (CV)
❑ To measure individual preferences for changes in the quantity or quality of a
non-marketed good or service.
e.g. benefits of improving air and water quality, cost of noise and dust, etc.
❑ Steps Involved
❑ Creating a survey/questionnaire.
(a) Open ended: ask ‘what is your maximum WTP for...?’
(b) Bidding game: a sequence of increasing amount is shown to the respondent until he says ‘no’.
(c) Dichotomous choice: respondent answers yes/no to whether he is willing to pay a given amount
❑ Choosing an appropriate survey technique.
e.g. face-to-face interview, mail survey or telephone survey.
❑ Identifying the stakeholders and developing a sampling strategy.
❑ Survey analysis.
❑ Aggregating the WTP or WTA of the respondents.

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 Example for CV – WTP for de-carbonization
Aim to evaluate residential WTP for de-carbonization of electricity
supply in Hong Kong (electricity mix)
A phone survey was conducted for a random sample of 1,460 households
(2016) and open ended method was applied.

The average WTP is 48-51%, relative to

current bills, if the de-carbonization target
is achieved via natural gas and renewable
energy.
However, WTP declines to 32-42% when
whois willing
to more de-carbonization entails additional nuclear
just the survey
for more sustainable energy imports from China.

Source: Cheng, Cao, Woo, and Yatchew (2017); HK EPD 20

Choice Experiments (CE)
❑ A survey based technique that uses choice cards as an instrument to
discover individual preferences of attributes or characteristics in different
levels.
❑ Respondents are presented with a number of discrete alternatives and asked to
state their preference.
❑ By including price/cost as one of the attributes of the good, willingness to pay
can be directly revealed from people’s choices.
e.g. recreational values or landscape values for a given natural site, etc.

❑ Minimize the biases that can arise in open-ended CV studies.

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 Example for CE – Green building development
Aim to evaluate the WTP of HK citizens for enhancements on various aspects of
environmental performance in green buildings.
6 environmental attributes and 2 scenarios were listed in each choice card and
the respondents need to state their preference.

The respondents are found to be willing to pay more for energy conservation, than indoor air quality
improvement, noise level reduction, landscape area enlargement, or water conservation.

Source: Chau, C. K., Tse, M. S., & Chung, K. Y. (2010) 22

Hedonic Pricing Analysis (HP)
❑ A wisely-used technique, mainly used to estimate economic values of
environmental qualities (e.g. air, water, or noise pollution) and environmental
amenities (e.g. aesthetic views or proximity to recreational site) .
❑ HP relies on transactions of the property market to estimate the economic
benefits or costs associated with environmental quality. Households reveal
their preferences for these goods through their decisions about where to
locate.
❑ Required to collect data on property value and attributes, and environmental
quality attributes.
❑ Only captures people willingness to pay for perceived differences in
environmental attributes, and the direct consequences.

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 Example for HP – Long Island case study
The town of Southold, Long Island, New York is a relatively rural area.
Intensive data were collected on residential property sales for a specific time period (1996)
based on different attributes (property structure (S), neighborhood (N), accessibility,
environmental (e) characteristics that affect prices)
PRICE = f (N, S) + e
The environmental variable is the property adjacent to: open space, farm land, major roads
and wetland.

Properties locate near open space and wetland are

found with 12.8% and 0.3% higher per-acre value than
similar properties located elsewhere. The value of open
space and wetland can be revealed from the increase in
property price.

Source: Kanojia and Jadhav (2016) 24

Travel Cost Method (TC)
❑ Used to estimate the value of recreational benefits of the ecosystems.
It assumes the value of the site (or service) is reflected on how much
people are willing to pay:
❑ Time and travel cost expenses that incurred to visit a site (national parks,
reserves, fishing and hunting sites)
❑ Depends on number of trips at different travel costs.
e.g. (i) changes in access costs for a site, (ii) elimination of an existing site,
(iii) addition of a new recreational site or (iv) changes in environmental quality at a site.

❑ The simplest travel cost models assume that individuals take a trip for
a single purpose.

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 Example for TC – Great Barrier reef case study
Aim to quantify the value of Great Barrier reef (2 million visitors annually)
A total of 607 people was interviewed, later aggregated
into 39 regions of origin.
Main variables include: visitation rate, travel costs, and
socioeconomic shift variables (e.g. GDP per capita).

The best estimates of the annual recreational benefits range from $0.7-$1.6 billion.
(an average value of between US$ 350-800 per visit, times 2 million visitors)
 Compare with other ecotourism sites: McNeil River-watch brown bears in Alaska (US$ 250 per
visitor) or a site to see lemurs in Madagascar (US$ 276-$360 per visitor).
 Conservation policies to protect these resources are warranted and should be supported.

Source: Carr and Mendelsohn (2003) 26

Benefit Transfer
❑ Use values in other studies (similar goods or services), and then
adjust the transferred values by using correction factors or meta-
analysis. Typically requires less resource and time. way
efficient
❑ Appropriate to use when:
(a) the study case is similar to the policy case;
(b) the issues (e.g. nature of the project) are similar in the two cases;
(c) the original valuation procedures are theoretically sound.
❑ Two forms of the benefit transfer method:
(a) Unit transfer method: from a study or as a mean from several studies.
(b) Function transfer method: the function statistically relates people WTP to attribute
and the people whose values were elicited.

e.g. Travel time savings for urban rail: 30-50% of the average hourly wage rate for 1 hour saving.

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Benefit Transfer
❑ Best to use values from the same region in the past 5-10 years.
❑ Appropriate adjustments on :
❑ Income or price if use values across regions;
(i.e. income elasticity; GDP per capita; Purchasing Power Parity)
❑ Price if adopted from studies conducted years ago (i.e. inflation rate) ;
❑ Other cultural and value differences between regions.
❑ May be associated with uncertainty about values, hence a sensitivity
analysis is recommended to assess the uncertainty and transfer error.

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 Example for Benefit Transfer – Income adjustment
Aim to value the willingness to pay (WTP) for constructing 9 new wastewater
treatment plants in Spain.
➢ The reference studies were selected from a database of 40 cases on the basis of
two criteria: project type and the socioeconomic context of the country.
➢ 28 selected projects were referred with WTP divided by national per capita GDP.
➢ The WTP for the projects in Spain was calculated with the average WTP,
weighted by (per capita) GDP, and in turn weighted by Spanish per capita GDP.
➢ The estimated WTP is EUR$ 88.11 per household (2011 prices)
The described methodology implicitly assumes the income elasticity of WTP as being equal to 1,
meaning that the ratio of WTP valued in each of the 28 reference countries and in Spain, that is
equivalent to the ratio of per capita GDP at the different sites.

$1 in Spain = $1.30 in UK = $1.47 in Germany (2011)

Source : European Commission (2014) pp.317 29

 Valuation Captured Benefits Limitations
a. Market data available
Market Price Users Limited to market goods and services
b. Relatively simple to use
a. A practical approach with less a. Can potentially overestimated
Avoided damages /
Users resource (time, data, money) input b. Replacements are unlikely to provide
Replacement
b. Based on market price data the same types of benefits
Contingent Users and a. Potential bias in response
Valuation non-users b. Hypothetical market (not observed
Able to capture non-use values
Choice Users and behavior)
Experiments non-users c. Resource intensive
a. Data intensive
Based on market data and a sound
Hedonic Pricing Users b. Only reflects impacts to the extent
economic theory
that individuals are aware of them
a. Limited to recreation
Based on observed behavior, and possible b. Data intensive
Travel Cost Users
to estimate consumer surplus c. Problematic for multiple destination
trips
Users and Avoids the cost/time of Reliability? How can the transferred
Benefit Transfer
non-users engaging in ‘primary studies’ values be validated?

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Major Steps of CBA
1. Identify project needs
2. Identify project constraints
3. Define the base case
4. Identify alternatives
5. Define a time period
6. Define work scope
7. Analyze project effects
8. Monetize benefits and costs
9. Calculate the present values (discounting)
10. Analyzing the options
11. Risk Assessment (sensitivity analysis)

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 Major Steps of CBA
9. Calculate the present values (Discounting)
❑ Costs and benefits occur at different points in the life of the project so
the valuation must take into account the time at which they occur.
❑ Time value of money (TVM) : money that is available at the present
time is worth more than the same amount in the future, due to its
potential earning capacity.

e.g. $100 saved today at an annual interest rate (r) of 4% will be worth:
$104.00 in 1 year; $108.16 in 2 years ; $112.49 in 3 years.
Future value (FV) of $100 at the end of the 3rd year is worth $112.49
Present value (PV) of $112.49 in the 3rd year is worth $100

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Time Value of Money
❑ Discounting allows comparisons for current and future costs & benefits
on an equal basis, by converting future value to present value by
applying a discount (or a negative interest) rate.
FV = PV(1 + 𝑟)𝑡 FV = Future Value PV = Present Value
r = discount rate t = number of periods

❑ FV converted to PV (assume r = 0.1)

Future Present
Values Values

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 Selection of Discount Rate
A. Social Opportunity Cost of Capital (SOC)
❑ It largely reflects the cost in financial market (what “similar” projects
would provide in returns if undertaken in private sector).
❑ It assists in determining the “efficient” allocation of resources between
the public and private sectors. e.g. toll road, high speed rail, etc.

WACC = Kb  D  (D+E) + Ke  E  (D+E)

WACC = Weighted Average Cost of Capital (Government)
Kb = real return on government bonds
Ke = cost of debt or loans (interest rate)
D = equity (government bond)
E = debt or loans

Source : European Commission (2014), Young, L. (2002) 34

 Selection of Discount Rate
B. Social Rate of Time Preference (SRTP)
❑ It is the rate at which society is willing to postpone a unit of current
consumption in exchange for more future consumption.
❑ It is the rate of return needed to make society indifferent between
consuming x today and x(1+r) in the next period.

SRTP = 𝑝 + 𝑒  𝑔
𝑝 = “pure” rate of time preference
e = elasticity of marginal utility with respect to consumption
g = expected growth rate in per capita consumption

Source : European Commission (2014), Young, L. (2002) 35

Selection of Discount Rate
SRTP SOC
UK HM Treasury (2013)
Life span > 30 years 3.5%
31 ~75 years 3.0%
Over 75 years 2.5% US Office of Management and Budget
(1992/2003)
European Commission (2014) Refer to private investment 3%(*1) & 7%
Cohesion countries 5.0 %
Other Member States 3.0% World Bank and ADB
10-12% (*2)
Washington State Institute of Public Policy (2016)
For projects won’t crowd-out private sector
und 4 %
2.0% / 3.5% / 5.0% Will ->

Note:
1. The rate is based on government borrowing rates
2. Refer to Zhuang et al. (2007) and Harrison (2010)
SOC > SRTP
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 Major Steps of CBA
10. Analyzing the options
❑ There are a number of decision rules to differentiate between
options/investment projects. These include:
❑ Net Present Value (NPV)
If NPV > 0, accept the project!
❑ Benefit-Cost Ratio (BCR)
If BCR > 1, accept the project!
❑ Internal Rate of Return (IRR)
If IRR > Discount rate, accept the project!
❑ Payback period

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Example – NPV & BCR
Years
0 1 2 3 4 5
Costs
Initial Investment 75,200
Operating Costs 29,000 29,000 29,000 29,000 29,000
Total Costs 75,200 29,000 29,000 29,000 29,000 29,000
Benefits
Total benefits 48,000 52,000 59,000 62,000 68,000

Discounted
Discounted Costs 75,200 27,619 26,304 25,051 23,858 22,722 Sum up to
Discounted Benefits - 45,714 47,166 50,966 51,008 53,280 calculate B/C
Discounted Cash Flow - 75,200 18,095 20,862 25,915 27,149 30,558 ratio
Cumulative Cash Flow - 75,200 - 57,105 - 36,243 - 10,328 16,821 47,379
NPV $ 47,379
B/C Ratio = $248,134 / $200,755 = 1.236

Discounted Factor at 5% 1 0.952 0.907 0.864 0.823 0.784

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Example – IRR
 Trial and error
Discounted Years
NPV
Rate 0 1 2 3 4 5
5% - 75,200 18,095 20,862 25,915 27,149 30,558 47,379
10% - 75,200 17,273 19,008 22,539 22,539 24,216 30,376
15% - 75,200 16,522 17,391 19,725 18,868 19,390 16,696
20% - 75,200 15,833 15,972 17,361 15,914 15,673 5,554
25% - 75,200 15,200 14,720 15,360 13,517 12,780 - 3,624 IRR is around 23%
30% - 75,200 14,615 13,609 13,655 11,554 10,504 - 11,262

60,000

40,000

NPV ($) 20,000

IRR
- Discounted Rate (r)
5% 10% 15% 20% 25% 30%

-20,000

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Example – Payback period
Years
0 1 2 3 4 5
Costs
Initial Investment 75,200
Operating Costs 29,000 29,000 29,000 29,000 29,000
Total Costs 75,200 29,000 29,000 29,000 29,000 29,000
Benefits
Total benefits 48,000 52,000 59,000 62,000 68,000

Discounted Cash Flow - 75,200 18,095 20,862 25,915 27,149 30,558

Cumulative Cash Flow - 75,200 - 57,105 - 36,243 - 10,328 16,821 47,379
NPV 47,379
B/C Ratio = $248,134 / $200,755 = 1.236 Payback Period
IRR% 22.9% 10,328/(10,328+16,821)
Discounted payback 3.4 Years = 0.38
Hence 3+0.38  3.4 years
It is an attractive project to invest !
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 Major Steps of CBA
11. Sensitivity analysis
❑ An analytical framework to address the uncertainty about both the
predicted impacts and the appropriate monetary valuation of each
unit of the impact.
❑ Main purpose of sensitivity analysis: take can

❑ To identify the critical variables; -that we really need to

❑ To instigate the consequences of likely adverse changes;

❑ To identify actions that could mitigate possible risks;
❑ To reduce the likelihood of undertaking bad projects while not failing to
accept good projects.

Source : European Commission (2014) 41

Sensitivity Analysis
❑ Sensitivity Analysis varies model inputs separately to see how
sensitive the CBA result is to each variable’s value while all
else remaining constant.
❑ Variables are tested (range  10%30% ; probability distribution)

Variables Changes in NPV with 10% changes

in variable
Investment cost 11%
Operating costs 20% Most sensitive variable
Carbon emissions 2%
Health impacts 32%

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 Sensitivity Analysis
Spider plot illustrating the elasticity (line gradients) of each variable.

Steeper line indicate more sensitive

- Investment Cost (+35%)

- Traffic demand (-32%)
- Unit value of time (-36%)
Break-even point for Investment Cost lies
on +35%
-40% -20% 0% +20% +40% (alternative labelling)

Source : European Commission (2014) pp.131 43

 The Use of CBA
❑ CBA is used in a wide range of public investment projects:
I • Motorway

Suitabltwo
more
e
Transportation • Railway
• Ports, airports

• Waste treatment
For
projectsnigerand
Environment • Water supply and sanitation
• Natural risk prevention

• Industrial investment
Industry and
ware
• Energy production and renewable
Energy

serverter
sources

versit
• Schools & other training facilities
Social • Hospitals
• Parks and forests
·
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Case Study – HK High Speed Rail
❑ The Hong Kong Section of the Express Rail Link (XRL)
❑ Construction started in year 2010, ended in 2018.
❑ Connecting the Mainland section (25,000km long national high-speed
rail network).
❑ 26 km long
❑ Train speed – 200 km per hour
https://www.youtube.com/watch?v=v1pqpoLV_s8

Source : Transport and Housing Bureau (2008) 45

Identifying Associated Cots and Benefits
link
express
-
HK XRL

Costs Benefits

Initial Operation
and External Operator User External
Investment Maintenance Costs Benefits Benefits Benefit
Cost (O&M) Cost

Construction Operation Traffic Carbon

Travel Time Reliability
Carbon Carbon Revenue Accident Emission
Saving Improvement
Emission Emission Reduction Reduction

46
HK XRL Costs - Valuation
❑ Initial Investment Cost
❑ HK$85.3 billion1 (June 2015 estimation)
❑ It is assumed to distribute evenly during the 8-year construction period –
HK$10.66 billion per year.

❑ Operation and Maintenance Cost

❑ HK$733 million per year (3.7% from 1st year of operation to 2021; 4.9% from
2021 to 2031)2
❑ Infrastructure operations (e.g. repair, maintenance, energy use, etc.)
❑ Services operations (e.g. wages, insurance, traffic management expense, etc.)
❑ Services management (e.g. administration, fare/toll collection, overhead, etc.)

1 MTR Corporation Limited (2015) ; 2 Transport and Housing Bureau (2009) 47

HK XRL Costs - Valuation
External Costs
❑ Construction Carbon Emission
❑ Emission is mainly generated from the steel and concrete use.
❑ No data on construction CO2 emission of HK XRL – from literature review.
❑ California HSR - 3,200 tonnes of CO2e per km1
Average = 5,213
❑ Australia HSR - 7,226 tonnes of CO2e per km2

❑ The construction carbon emission of HK XRL is assumed to be 5,213

tonnes CO2e per km.

1 Chang and Kendall (2011); 2 Melbourne Energy Institute (2014) 48

HK XRL Costs - Valuation
External Costs
❑ Construction Carbon Emission
❑ Monetary value of carbon – social cost of carbon estimated by the US
government = US$39 per tonne1.
❑ US$ is converted to HK$ by the Purchasing Power Parity (PPP) exchange rate#
published by World Bank (US$1 = HK$5.69)2.

❖ Annual construction carbon emission cost of the HK XRL

= [(26 km 5,213 tonnes CO2e per km US$39)/8 years] 5.69
= HK$3.8 million
# PPP exchange rate compares the purchasing power of two different currencies, accounting for the differences in
inflation rates and cost of living.

1 Interagency Working Group on Social Cost of Carbon (2013); 2 The World Bank (2015) 49
HK XRL Costs - Valuation
External Costs
❑ Operation Carbon Emission
❑ No local data available – from literature review.
❑ One of the main factors in affecting the energy use of the HSR is the
speed of the train1, 2.
❑ HK XRL runs at a maximum speed of 200 km per hour.
❑ According to van Wee et al. (2003), the average electricity use per
passenger kilometer of trains that run at 200 km per hour is 95 watt-
hour(Wh).
❑ Energy consumption per passenger kilometer of the HK XRL is
assumed to be 95Wh.

1 Pourreza (2011); 2 Bvan Wee et al. (2003) 50

HK XRL Costs - Valuation
External Costs
❑ Operation Carbon Emission
❑ The daily XRL passenger forecast of 2018 is 96,299, with an annual growth
rate of 7.4% till year 20311,2.
❑ Annual electricity consumption (kWh)
= 95 Wh per passenger km 96,299 365 26 km 0.001
= 86,818,363 kWh
❑ Emission factor of CO2e provided by CLP is 0.64 kg/kWh

❖ Annual operation carbon emission cost

= 86,818,363 kWh 0.64 kg/kWh carbon cost per tonne (US$39  5.69) 0.001
= HK$12 million
1 Planning Department (2014); 2 Lu and Hsu (2017) 51
HK XRL Benefits - Valuation
Operator Benefits
❑ Revenue
❑ Access charges to railway line and tickets are the main source of revenue
for railway projects.
❑ Total revenue at 1st year of operation – HK$1.118 billion
(fare revenue HK$1.068 billion, non-fare revenue HK$50 million)1.
❑ Annual growth rate – 13% from 1st year of operation to 2021, 5.7% from
2021 to 20311.

1 Transport and Housing Bureau (2009) 52

HK XRL Benefits - Valuation
User Benefits
❑ Travel Time Saving
❑ One of the major benefits of high speed rail projects.
❑ With HK XRL, 42 million hours of travelling time can be saved per year1.
❑ Value of time (VOT) varies according to the purpose of the trip.
❑ Business trips – average wage rate.

&
❑ Leisure or personal trips – 30 to 50% of the average wage rate
(e.g. San Francisco Bay Area Metropolitan Transportation Commission model
estimated the VOT for leisure trips as 32% of the wage rate).

previous sandies
from

1 Transport and Housing Bureau, 2009 53

HK XRL Benefits - Valuation
User Benefits
❑ Travel Time Saving
❑ The estimated purpose of trips of HK XRL – 36% business, 64% non-
business1.
❑ The average wage rate in Hong Kong is HK$60 per hour2.
❑ VOT of business trip – HK$60/hr.
❑ VOT of non-business trip – HK$19.2/hr (32% of average wage rate)

❖ Value of annual travel time saving

= (42,000,000 hrs36% $60)+(42,000,000 hrs  64% $19.2)
= HK$1.4 billion

1 Transport and Housing Bureau (2009); 2 Census and Statistics Department (2015) 54
HK XRL Benefits - Valuation
User Benefits
❑ Reliability Improvement
❑ HSR is more reliable than road transports in terms of relatively accurate
arrival and departure time with fewer delays occurred.
❑ Planning Time Index can be used to measure the improved reliability1.
❑ It refers to the amount of actual travelling time needed plus the extra
buffer time.
e.g. Average PTI of California is found to be 1.30, which means for each traveler
on the road, he/she would reserve 30% of the actual travel time as the buffer
time1.
❑ By shifting from road transports to railway, the buffer time can be saved.

1 Parsons Brinckerhoff (2014) 55

HK XRL Benefits - Valuation
User Benefits
❑ Reliability Improvement
❑ PTI 1.30 is adopted for the HK XRL case as no local data is available.
❑ Average traveling time from Hong Kong to Shenzhen – about 1.5 hours
by road transport (Coach), the buffer time of a traveler will be 27
minutes (30% of 1.5 hours).
❑ 21,467 daily passenger trips is estimated to shift from coach to XRL1.
❑ Total buffer time saved = 21,467365 1.5hrs 30% = 3,525,955 hrs/yr

❖ Value of reliability improvement

= (3,525,955 hrs36% business trip $60/hr)+(3,525,955 hrs  64%
non-business trip $19.2/hr)
= HK$119 million
1 Lu and Hsu (2017) 56
HK XRL Benefits - Valuation
User Benefits
❑ Reduction of Traffic Accidents
❑ HSR is considered safer compared to road transports.
❑ Wilhelms (2014) reported that for every 100 million-passenger miles driven
in the US, 1.13 people will die due to traffic accident, while there are only
0.04 deaths by rail.
❑ Hong Kong traffic accidents in 2014:
Traffic accident No. of accident in 2014 (1) Accident rate per 1,000
person in 2014
Fatal 100 0.014
Seriously injured 2,615 0.36
Slightly injured 17,139 2.4

1 Transport Department (2014) 57

HK XRL Benefits - Valuation
User Benefits
❑ Reduction of Traffic Accidents
❑ Accident avoided with the XRL
Total number of passenger
Accident rate per Number of accident
Traffic accident trips shift from coach to
1,000 person in 2014 avoided per year
HSR per year
Fatal 0.014 109.7#

Seriously injured 0.36 7,835,366 2,820.7#

Slightly injured 2.4 18,804.9#

# (accident rate per 1,000 person/1,000)  7,835,366

58
HK XRL Benefits - Valuation
User Benefits
❑ Reduction of Traffic Accidents
❑ Cost of traffic accidents
❑ Direct costs – medical rehabilitation cost, cost of insurance, vehicle repair
cost etc.
❑ Indirect costs – productivity lost due to injury
❑ The average cost of road crashes in New South Wales, Australia (WTP,
value per person)1
❑ Fatality – US$2,479,776
❑ Seriously injured – US$247,049
❑ Slight injury – US$13,652

1 NRMA (2012) 59
HK XRL Benefits - Valuation
User Benefits
❑ Reduction of Traffic Accidents
❑ Since no local data is available, the costs of accident of NSW, Australia
are adopted for the XRL case.

❖ Total cost of accident avoided

= cost of accident  PPP exchange rate 5.69  no. of accident
avoided
= Fatality (HK$1,547,858,821)+ Seriously injured
(HK$3,965,082,840)+Slightly injured (HK$1,460,762,375)
= HK$7 billion

60
HK XRL Benefits - Valuation
External Benefit
❑ Carbon Emission Reduction
❑ This benefit is highly depending on the extent of passenger shifts from
road transports to HSR.
❑ 21,467 passenger trips diverted from coach to HK XRL per day 1
❑ Daily per passenger carbon emission by coach – 0.13 kg 2
❑ Total amount of carbon emission avoided
= 21,467*0.13kg*365 = 1,018.6 tonnes per year

❖ Value of carbon emission reduction

= 1,018.6 tonnes*US$39*5.69
= HK$230 thousand per year
1 Lu and Hsu (2017); 2 Transport and Housing Bureau (2009) 61
HK XRL Costs and Benefits
Annual Values
Items
(million HKD)
Initial Investment Cost 10,662 (for 8 years)
O&M Cost 733
Costs
Construction Carbon Emission 3.8
External
Operation Carbon Emission 12
Operator Total Revenue (fare + non-fare) 1,118
Travel Time Saving 1,423
Reliability Improvement 119
Benefits User
Reduction of Traffic Accidents
(fatality + serious injury + lightly 6,920
injury)
External Carbon Emission Reduction 0.2

62
HK XRL CBA – Discounting & Decision Rules
❑ Evaluation parameters
Parameters

Discounting period Year 2010 – 2066 (57 years)

XRL construction period Year 2010 – 2017 (7 years)

Discount rate 4%* * Suggested by HK government

❑ Decision Rules
❑ Net Present Value (NPV)
❑ Benefit-Cost Ratio (BCR)
❑ Internal Rate of Return (IRR)

63
HK XRL CBA – Results
❑ Net Present Value (NPV)
n bt – c t
NPV = ∑ - Initial investment
t=1 (1 + r)t
Discounted Net Cash Flow & Net Present Value
r = discount rate 250,000,000,000

t = year
200,000,000,000
n = analytic horizon (in years)
150,000,000,000

100,000,000,000

NPV of the HK XRL = HK$218.8 billion 50,000,000,000

0
2000 2010 2020 2030 2040 2050 2060 2070

Decision Rule -50,000,000,000

If NPV > 0, accept the project -100,000,000,000

NPV Discounted NCF

64
HK XRL CBA – Results
❑ Benefit-Cost Ratio (BCR)
n
Bt
∑ ( 1 + r )t r = discount rate
t=0
BCR = t = year
n
Ct n = analytic horizon (in years)
∑
t=0 ( 1 + r )t
Value (billion HK$)

BCR of the HK XRL = 3.4 Total Discounted Benefits 308.8

Decision Rule Total Discounted Costs 90

If NPV > 1, accept the project Benefit-Cost Ratio 3.4

65
HK XRL CBA – Results
❑ Internal Rate of Return (IRR)
❑ IRR is the discount rate at which NPV equals zero
CF1 CF2 CFn
0 = (Initial Investment) + (1+IRR)
1 + (1+IRR) 2 +…+ (1+IRR) n
IRR = internal rate of return
CF = cash flow of the year (B-C) Internal Rate of Return
n = analytic horizon (in years) 1,000,000,000,000

800,000,000,000

600,000,000,000 Discount rate IRR

IRR of the HK XRL = 11.7% 400,000,000,000

200,000,000,000

Decision Rule 0

If IRR > discount rate, accept the project -200,000,000,000

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24%

NPV

66
HK XRL CBA – Sensitivity Analysis
❑ Sensitivity Analysis
❑ It is regarded as a risk assessment with the main purpose of determining
the variables that are critical in altering the outcome of the CBA.
❑ Carried out by adjusting variables by a certain amount (e.g. ±10%-20%),
one at a time.
❑ 4 variables are tested:
❑ Discount rate
❑ Construction cost
❑ Annual rate of passenger increase
❑ Fare

67
HK XRL CBA – Sensitivity Analysis
❑ Variable - Discount rate
❑ Although HK Government suggested using 4% discount rate for infrastructure
projects, there is no consensus on the choice of discount rate yet.
❑ A higher discount rate of 7%, which is the rate used for California HSR and
Australian HSR CBA, is applied for the analysis.

Sensitivity analysis result

➢ NPV reduced from HK$218.7 billion 4% discount rate 7% discount rate

to HK$73.5 billion NPV HK$218.8 billion HK$73.7 billion

➢ BCR reduced from 3.4 to 2 BCR 3.4 2

IRR 11.7% 11.7%

68
HK XRL CBA – Sensitivity Analysis
❑ Other 3 variables
❑ ‘Annual rate of passenger increase’ has the steepest slope.
❑ NPV is more sensitive to the change of the passenger growth rate.

Sensitivity analysis result Sensitivity Analysis

300,000,000,000
Change in NPV Change in NPV
with 10% with 20% 250,000,000,000

Net Present Value (HK$)

Variables
change in change in 200,000,000,000
variable variable
150,000,000,000
Construction costs 4% 7%
100,000,000,000
Annual rate of
10% 17%
passenger increase 50,000,000,000

Fare 1% 3% 0
-20% -10% 0 +10% +20%
% change in variable
Cosntruction cost Annaul rate of increase of passenger Fare

69
HK XRL CBA – Conclusion
❑ Distribution of Discounted Costs and Benefits
❑ Largest share – construction cost (58%) & reduction of traffic accidents (72%)
❑ Insignificant – construction carbon emissions & carbon emission reduction.

Share of discounted total costs Share of discounted total benefits

Operation Carbon
Construction
Emissions
Carbon
1%
Emissions
0%
Revenue
12%
O&M Cost Travel Time Saving Carbon
41% 15% Emission
Reduction
Construction Cost 0%
58% Reduction of
Traffic Accidents
72% Reliability
Improvement
1%

70
HK XRL CBA – Conclusion
❑ The HK XRL is an economically feasible construction project.
(NPV > 0, BCR > 1, IRR > Discount Rate)
❑ NVP reaches zero at around year 2027.
(Payback period about 10 years)
❑ Sensitivity analysis shows that annual rate of passenger increase
plays a significant role in altering the NPV.
❑ Most of the transportation infrastructures – benefits rely on the
patronage forecast and modal shift prediction for valuation.
❑ The accuracy of the predictions is a key factor in affecting the
precision of the CBA result.

71
 COST VS BENEFIT OF THE GREEN
DECK DEVELOPMENT

72
 Objectives

❑ Identifying the tangible and intangible costs and benefits of the Green Deck development.
❑ Determining if the benefits of the Green Deck development outweigh its costs.
❑ Conducting a sensitivity analysis as a risk assessment for infrastructure investments.

VS

Tangible Intangible

73
 Processes of Cost Benefit Analysis

Step 4
Sensitivity Analysis

Step 3
Cost and Benefit Analysis

Step 2
Valuing the Costs and Benefits

Step 1
Identifying Associated Costs and Benefits

74
 Cost & Benefit Identification
Tangible:
➢ Costs/benefits that directly influence Design & consultation cost

the individual decision makers Tangible

(Halsnæs et al., 2007). Construction cost

Construction Stage
➢ Assumed the government is the main
Temporary traffic congestion
investor.
Intangible
Intangible: Costs Construction Carbon emission cost
➢ Costs/benefits or ‘externalities’ that
would influence the utility of other Tangible Operation and maintenance cost
individuals, but which are not taken into Operation stage
consideration by the individuals Intangible Operation Carbon emission cost
causing them (Halsnæs et al., 2007).

75
 Cost & Benefit Identification
Visitor expenditures

Tangible Revenues (art & sports)

Property value (hedonic)

property
values and
des
Benefits Operation stage
Air pollution reduction
gree
the

Carbon sequestration might

Noise pollution reduction

Intangible Surface runoff reduction

Temperature reduction

Health and well-being T Students

be
might
Travel-time reduction willingt
doexerige
mont

76
 Cost & Benefit Identification
Example on Calculating the Benefit:
Visitor expenditures ➢ Temperature reduction: 11.82 million/year
❑ Energy saved
Tangible Revenues (art & sports) • Average electricity rate: 1.83 HKD/kWh (CLP, 2023)
• Temperature reduction by trees in Hong Kong:
Property value (hedonic)
on average 2.4 Celsius degree (Kong et al. 2017)
Air pollution reduction • Saved electricity by reducing one Celsius degree:
Benefits Operation stage 2501277 kWh (Fung et al. 2006)
Carbon sequestration Saved electricity cost by temperature reduction:
2501277 * 2.4 * 1.83 = 10.99 million HKD/ year
Noise pollution reduction
❑ Emission avoided
Intangible Surface runoff reduction • Emission factors of electricity generation: 0.55 kgCO2e/kWh
(CLP, 2022)
Temperature reduction
• Social cost of CO2: 43 USD/tonne (Interagency working group
Health and well-being on social cost of carbon, 2013)
• PPP exchanged rate: 1 USD = 5.875 HKD (world bank, 2021)
Travel-time reduction Total save on annual emission cost:
2501277 * 2.4 * 0.55 * 0.043 * 5.875 = 0.83 million/year

77
 Cost Valuation
Parameters for Benefits Evaluation Values References and Notes

Duration of Construction (year) 11 (Arup, 2022)

Space Use (Total Site Area) (hectare） 3.0004 (Arup, 2022)

Total Construction Cost (million HKD) 6890 (Arup, 2022)

Annual Operation & Maintenance (O&M) cost per hectare 3.6 (LSCD, 2015)

Median Hourly Wage rate in 2021 (HKD) 75.7 (Census and Statistics Department, 2022a)

Average persons in each vehicle 2 (Transport Department, 2022)

Traffic flow of the cross-harbour tunnel in 2021 107,450 (Transport Department, 2022)
(Interagency working group on social cost of carbon,
Social Cost of Carbon (USD/ton) 43
2013)
PPP exchange rate of HKD/USD 5.875 (World bank, 2021)

Carbon emission intensity (kg CO2/m2) 386.5 (Hong et al. 2015)

CLP Group's Greenhouse Gas Intensity (kg CO2/kWh) 0.55 (CLP, 2022)

Electricity per day (kWh) 5800 (CLP, 2021)

78
 Benefit Valuation
Parameters for Benefits Evaluation Values References and Notes

Art gallery entrance fee (HKD) 10

(HKMOA, 2022)
Number of visitors (million per year) 9.73
(Song et al., 2017 and Vu et al., 2015)
Property (Hedonic) value increased rate
27.03 (Hui et al. 2022)
by the Green Deck project (percentage)
Consumer Price Index 1.34 (C&SD, 2022)

Number of full-time staff and students at PolyU 26873 (PolyU, 2022)

Average annual rainfall in Hong Kong (mm) 2307.1 (Hong Kong Observatory, 2022)
Willingness to pay to reduce road noise per
115.60 (Leong, 2019)
decibel/year/person (HKD)
Temperature reduction by trees (Celsius degree) 2.4 (Kong et al., 2017)

Non-residential electricity rate (HKD/kWh) 1.83 (CLP, 2023)

CLP Group's Greenhouse Gas Intensity (kg CO2/kWh) 0.55 (CLP, 2022)

Median hourly wage in Hong Kong in 2021 (HKD) 75.7 (Census and Statistics Department, 2022a)

Medical cost saving per person (HKD/person/year) 1829 (Census and Statistics Department, 2022b)

Population living near Green Deck 132022 (Census and Statistics Department, 2022c)

79
 Cost & Benefit Valuation
Annual Values
Items
(million HKD)
Design and Consultation Cost 25.05
Tangible
Construction Cost (11-year) 626.36
Construction Stage
Cost of Temporary Traffic Congestion 755.78
Cost Intangible
Construction Carbon Emission 0.27
Tangible O&M Cost 10.80
Operation stage
Intangible Operation Carbon Emission 0.29
Revenues (art gallery & sports complex) 9.29
Tangible Visitor expenditures 598.47
Property value (hedonic) 411.39
Air pollution reduction 5.53
Carbon sequestration 0.02
Benefit Operation stage
Surface runoff reduction 0.14
Intangible Noise pollution reduction 9.32
Temperature reduction 11.82
Health and well-being 79.68
Travel time reduction 0.28

80
 B -- benefit

Cost and Benefit Analysis

C -- cost
t -- time period
T -- time horizon, 50 years
r -- discount rate, 4%
𝑟𝐼𝑅𝑅 -- Internal Rate of Return
𝑇
1 Net Present Value (NPV) 𝑁𝑃𝑉 = ෍
𝐵𝑡 − 𝐶𝑡
1+𝑟 𝑡
𝑡=1

σ𝑇𝑡=1 𝐵𝑡
൘ 𝑡
1+𝑟
2 Benefit-Cost Ratio (B/C Ratio) 𝐵𝐶𝑅 =
σ𝑇𝑡=1 𝐶𝑡
൘ 𝑡
1+𝑟

𝑇
𝐵𝑡 − 𝐶𝑡
3 Internal Rate of Return (IRR) 𝑁𝑃𝑉 = ෍
1 + 𝑟𝐼𝑅𝑅 𝑡
=0
𝑡=1

81
 is

Cost and Benefit Analysis pays

mit speed
longer than
D
ful highrit
1 Net Present Value (NPV) 2 Benefit-Cost Ratio (B/C Ratio)

NPV: HKD 3.32 billion

Item Value

Total Discounted Benefits HK$12.79 billion

Total Discounted Costs HK$9.47 billion

BCR 1.35

Pay back year

2058 Decision Rule
If NPV > 0, accept the project
If BCR > 1, accept the project

82
 B -- benefit

Cost and Benefit Analysis

C -- cost
t -- time period
T -- time horizon, 50 years
r -- discount rate, 4%
𝑇 𝑟𝐼𝑅𝑅 -- Internal Rate of Return
𝐵𝑡 − 𝐶𝑡
3 Internal Rate of Return (IRR) 𝑁𝑃𝑉 = ෍
1 + 𝑟𝐼𝑅𝑅 𝑡
=0
𝑡=1

The IRR is the rate of return of the investment

project that makes the NPV equals zero.

IRR = 5.5%

Decision Rule
If IRR > Discount rate, accept the project

83
 Comparison with urban infrastructures in Asia
NPV: HKD 3.32 billion B/C Ratio: 1.35 IRR: 5.5%

Item Value

Total Discounted Benefits HK$12.79 billion

Total Discounted Costs HK$9.47 billion

Pay back year
2058 B/C ratio 1.35

Cost Benefit Analysis Result of the Green Deck Project

No Project Location B/C ratio Ref.

1 Stormwater treatment China 1.91 Liu er al. (2016)

2 Public housing prefabrication China 1.81 Shen et al. (2019)

3 Solar photovoltaic system for commercial buildings India 1.11 Goel and Sharma (2022)

4 Waste recycling Vietnam 1.01 Tong et al. (2021)

84
 Risk Assessment
Sensitivity Analysis
The selected parameters concerning visitors and property value:

◼ Parameter 1: Number of visitors

◼ Parameter 2: Expense of each visitor

◼ Parameter 3: Property value

Parameters are adjusted from -20% to +20%.

85
 Sensitivity Analysis

Advised marketing strategies to

attract visitors

➢ Roll out souvenirs of Green Deck (e.g., cups, purses,

and clothes)

➢ Organize cultural activities or exhibitions

collaborating with surrounding parties (e.g., PolyU
and Hong Kong Coliseum)

86
 Conclusions
❑ This study estimated the costs and benefits of the Green Deck development.

The result shows that the Green Deck project is economically feasible (pay back year: 2058).

Net Present Value (NPV): NPV = HK$3.32 billion > 0,

Benefit-Cost Ratio (B/C Ratio): B/C ratio = 1.35 > 1,

Internal Rate of Return (IRR): IRR (5.5%) > Discount Rate (4%).

❑ Compared with some urban infrastructure development projects in Asia, the B/C ratio of the
Green Deck project is viable.

❑ Marketing strategies (e.g., collaborations with surrounding art and cultural institutions) are
advised to target attract more visitors to increase the net present value.

87
Thank You!
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