APPLICATION OF SYSTEMS ANALYSIS TO ENHANCE THE PERFORMANCE OF NEW ROAD NETWORKS IN SUPPORTING ECONOMIC GROWTH AND DEVELOPMENT



APPLICATION OF SYSTEMS ANALYSIS TO ENHANCE THE PERFORMANCE OF NEW ROAD NETWORKS IN SUPPORTING ECONOMIC GROWTH AND DEVELOPMENT

Authors

W J Pienaar, Stellenbosch University

Description

This paper provides guidelines on how decision-makers can choose road investment projects on the basis of economic and financial criteria by applying a systems-analysis approach.

Abstract

Guidelines are provided on how decision-makers can choose road investment projects on the basis of economic and financial criteria by applying a systems-analysis approach.Systems analysis can be performed in seven consecutive steps, which are briefly pointed out.Economic and financial analysis techniques can form primary roles in four of these steps. These steps are addressed in more detail. Project evaluation, selection, prioritisation and timing criteria are listed, followed by a description of the way in which the result of each evaluation technique should be interpreted. Criteria that should be adhered to in (a) the selection of mutually exclusive projects (b) the prioritisation of functionally independent projects and (c) the simultaneous selection of a multitude of mutually exclusive and independent projects to form an optimal road system are detailed. Applications of the proposed investment decision rules are illustrated by examples. Two techniques are proposed that may be used as additional decision-making instruments when evaluated projects show similar degrees of long-term financial viability.

Full abstract

This paper provides guidelines on how decision-makers can choose road investment projects on the basis of economic and financial criteria by applying a systems-analysis approach. Road systems analysis can be performed in seven consecutive steps, which are briefly dealt with in the paper.These steps are(1) problem description, (2) systems modelling, (3) generating alternative solutions, (4) evaluation, (5) system selection, (6) implementation and (7) control (i.e. monitoring and review). Economic and financial analysis techniques can form primary roles in four of these steps. They are steps (4) through (7). These steps are addressed in detail in the text. Project evaluation, selection, prioritisation and implementation timing criteria are listed, followed by a description of the way in which the result of each evaluation technique should be interpreted. The evaluation techniques determine project performance on the basis of (a) absolute cost, (b) absolute value and (c) relative value. Five evaluation techniques are dealt with. These techniques are (a) present worth of costs, (b) net present value, (c) benefit-cost ratio, (d) internal rate of return and (e) incremental benefit-cost ratio.Criteria that should be adhered to in (a) the selection of mutually exclusive projects, (b) the prioritisation of functionally independent projects and (c) the simultaneous selection of a multitude of mutually exclusive and independent projects in order to maximise net output in the long run, are supplied. Applications of the proposed investment decision rules and evaluation techniques are illustrated by examples. Two techniques are proposed that may be used as additional decision-making instruments when evaluated projects show similar degrees of long-term financial viability.These techniques are (a) first-year rate of return and (b) capital recovery period.

Keywords: benefit-cost ratio; capital recovery period; first-year rate of return; incremental benefit-cost ratio; independent projects; indivisible projects; mutually exclusive projects; net present value

Publisher

Association for European Transport