A good highway network provides several benefits to the general public and the society at large.

However, any new highway project, or improvements to an existing highway for meeting increased traffic demands should be justified from the economic point of view. That is to say, an analysis of the economic cost – the initial cost and maintenance cost over the period of the design life and the cost of the benefits that accrue to the road-users and the society – both quantifiable and non-quantifiable – should be made, so that the project is justifiable from economic considerations. Vehicle operation costs should also be studied as part of this exercise.

Economic analysis of highways involves a thorough study of highway costs and benefits. For this, different methods have been evolved – net present value (NPV) method, benefit/cost ratio (B/C Ratio) method and internal rate of return (IRR) method. A comparative study of these methods yields valuable information.

Highway financing comprises the analysis of costs, different methods of financing highway projects sources of revenue and different organisations involved.

Highway administration involves the study of the administrative set-up in the country, which is responsible for the maintenance and operation of the highway network for providing maximum benefit to the society.

Economics of Highway Pavements:


For the economic analysis of a highway project, a comparative economic study of different alternatives of either a new project or an improvement to an existing road is needed. For this, it is necessary to assess the benefits to the road-user on completion of the improvements or the new roadway, and the cost of the highway transport in all its aspects.

A highway affords several benefits to the general public or the road-users. Some may be direct or primary benefits and some others indirect or secondary benefits.

Primary benefits can be quantified in terms of their monetary value, but secondary benefits cannot be treated thus.

Primary or Direct Benefits:


(i) Reduction in the operation costs and maintenance costs of vehicles.

(ii) Increase in revenue from the motor vehicles – vehicle registration tax, life tax, fuel tax, income from passengers and goods transportation, excise and customs duties, sales tax, and so on.

(iii) Saving in travel time – In the case of commercial vehicles, the time saved can be utilised for additional trips and increased earnings.

(iv) Reduction in accidents due to improvements to an existing road – Costs of vehicle damages and damages to other properties, injuries to road-users and loss of life can be minimised or saved.


(v) Benefits to the general public include land appreciation and increase in employment opportunities.

Secondary or Indirect Benefits:

(i) Increase in comfort, convenience and safety of the road-user.

(ii) Increase in educational, business, recreational, and health services values.


(iii) Increased value of natural resources owing to convenient access by road.

(iv) Improved mobility of essential goods and services, making them accessible even to remote places.

(v) Improved mobility for defence forces contributing to the security of the country.

Economics of Pavement Types:


The basis for comparison is the total economic cost of the pavement:

1. Initial cost or construction cost.

2. Maintenance cost during the entire design life – includes routine maintenance, periodic maintenance/patch repair and periodic renewals.

3. Cost of operation of vehicles.

This is known as life-cycle costing.

Design Life or Period of Analysis:

The life of any road depends upon the traffic and also the climatic conditions.

In the absence of accurate data, the following values may be assumed for the design life of certain types of road specifications:

Initial Cost of Construction:

This depends upon the cost of aggregates, binder cost, hire charges for plant and machinery and cost of labour. The other costs are those of land acquisition, formation, drainage and cross- drainage structures.

All these costs vary from place to place and time to time. As a rough guide of relative costs, bituminous macadam, cement concrete and bituminous concrete cost similar amounts per unit, with the last one costing slightly more.

Thus, these costs have to be worked out for specific cases, considering the items involved.

Maintenance Cost:

The cost of maintenance of a road depends on several factors. Important among them are the traffic volume and traffic loads, wearing course, materials, machinery, labour and the minimum level of serviceability acceptable for the category of the road.

The nature of terrain and climatic conditions also are to be considered. It is observed that annual cost of maintenance is much less for cement concrete than for bituminous construction although the initial cost of construction is higher.

Vehicle Operating Cost (VOC):

A wide variety of factors influence vehicle operating cost:

(1) Road Characteristics:

Surface roughness

Type of surface

Geometric features – horizontal and vertical alignment

(2) Vehicle Characteristics:

Age, make, engine capacity, load, vehicle condition, fuel, tyres, and maintenance influence the vehicle operating cost.

(3) Environment-Related Factors:

Altitude, rainfall and temperature.

(4) Traffic-Related Factors:

Speed, traffic volume and traffic composition.

In general, it has been found that there would be a significant reduction in vehicle operating cost for each vehicle type with improvement in road surface; it ranges from 20% for bus, truck and LCV to 50% for a car and two-wheeler.

Important Factors Contributing to the Cost of Vehicle Operation:

(i) Fuel

(ii) Tyre life

(iii) Lubricants

(iv) Spare parts

(v) Maintenance labour (These are distance-related components).

(vi) Depreciation

(vii) Crew costs or wages

(viii) Value of passenger time

(ix) Value of commodity in transit.

(x) Fixed costs-interest on capital, registration fee taxes, insurance, toll charges on roads, Road permit charges for trucks, overheads like electrical and postal charges, stationery, etc. (These are time-related components).

Speed-Flow Equations:

In highway economic analysis, the effect of traffic on speeds is important. ‘Speed-flow equations’ have been developed through extensive research in India.

The variables are:

1. Nature of the terrain – plain, rolling and hilly.

2. Nature of the highway facility – single-lane, two-lane, four-lane divided carriageway – with paved shoulders or with earthen shoulders.

3. Nature of the vehicle – cars, buses, light commercial vehicles, heavy commercial vehicles (two-axled and multi-axled), and two-wheelers.

A speed-flow equation relates the velocity of the vehicle, V, with the volume of traffic in PCU per hour, Q. Traffic volume in both directions is considered for single-lane, intermediate- lane and two-lane roads, while for four-lane divided carriage way the volume in the direction of speed measurement is taken into account.

Several sets of such equations are given for different vehicles, travelling on different kinds of highway facilities, negotiating different terrains.

VOC Equations for Individual Components:

The vehicle operating cost of a particular kind of vehicle is composed of the costs of a set of individual components. Equations have been developed for each of these, and they involve a set of variables relevant to the particular component.

For example, the components involved in the computation of VOC for cars are:

1. Fuel consumption [affected by velocity (km/h), road roughness (mm/km), rise (m/km) and fall (m/km), for example.]

2. Cost of spare parts (excluding taxes and including taxes)

3. Maintenance labour

4. Tyre life

5. Engine oil

6. Other oils

7. Grease

8. Speed:

(a) Single-lane

(b) Intermediate line

(c) Two-lane

(d) Four-lane (divided carriageway)

9. Utilisation

10. Fixed costs

11. Depreciation costs (excluding taxes and including taxes)

12. Value of passenger’s time (Work and non-work taken together)

VOC Tables:

These tables have been prepared making use of the VOC equations; a vast number of tables are presented for different categories of vehicles travelling on different highway facilities with different roughness values, and negotiating different terrains.

Economic costs exclude taxes, whereas financial costs include taxes. The costs obtained are for uncongested traffic flow conditions. For congested traffic conditions, the costs are increased by a multiplying factor, called the congestion factor, calculated based on volume-capacity ratio, or the ratio of the traffic volume to the traffic capacity of the highway facility. This is for distance- related congestion. (Time-related congestion also may be considered.)

The VOC tables give the vehicle operating costs (both economic costs and financial costs) in Rs/km. These costs are based on the prices prevailing on 31 March 2009; they can be used for future years by applying the appropriate wholesale price index (WPI) calculated by the Ministry of Finance, Govt. of India, year after year.

Highway Financing:

Highway financing is the aspect of raising the funds necessary for the construction and maintenance of a new highway project or improvements to an existing road.

The construction of highway and their maintenance is the responsibility of the Government in India, as it is in many other countries. The funds necessary for this are realised from the main beneficiaries – the road-users – in the form of direct and indirect taxes.

Two common methods of raising finances for highways are:

(i) Pay-as-you-go method

(ii) Credit-financing method.

(i) Pay-as-you-go Method:

In this method, funds collected by the Government in the form of several types of taxes from the beneficiaries, primarily the road-users, are utilised to implement new highway projects or improvements to existing ones, and also for maintaining them.

(ii) Credit-Financing Method:

In this method, funds are raised by the Government by borrowing money from the general public through credit bonds, guaranteed by the RBI on behalf of funds. The interest payable (along with the principal) to the purchasers of these bonds is in a time-frame of 10 -15 years and such payment is met from the future income. Funds maybe borrowed from international lending agencies such as the World Bank and Asian Development Bank, and returned with interest in a mutually agreed time-frame of say, 10 to 20 years.

India is known to spend a mere 40% of the taxes collected on highway construction and maintenance, while advanced countries like Japan (130%) and the USA (100%) spend a high proportion of the taxes collected from road-users on new highway schemes and improvements to existing ones.

Sources of Revenue:

There are multiple types of taxes levied on the road-user by the central government, the state governments and the local bodies like municipalities and corporations.

These are enumerated below:


(i) Import duty on motor vehicles and spares

(ii) Import duty on petroleum products

(iii) Excise duty on vehicles and spares

(iv) Excise duty on petroleum products

(v) Tolls at selected locations like bridges, and special roads like expressways and national highways.


(i) Sales tax on motor vehicles and spares

(ii) Sales tax on petroleum products

(iii) Motor vehicles tax (annual/life tax)

(iv) Taxes on goods transport

(v) Route permit fees

(vi) Driving license fees

(vii) Toll levied by states.

Central Road Fund (CRF):

Created in 1929, CRF collects a certain minimum amount for every litre of petrol filled in vehicles and administers it separately for special purposes such as road research, road and bridge schemes of national importance, construction of bypasses and parallel service roads and purchase of machinery.

Toll Roads and Toll Revenue:

Many countries have modernised their road network by constructing superior highways such as expressways on the basis of tolls collected and financed them through toll revenue – for example, Japan, Korea and France, in the recent past. The system has been in vogue in the USA for a long time.

Of late, the Government of India has been taking up toll-financed projects – new highways as well as improvements to existing highways, especially national highways and state highways.

Advantages of Toll Roads:

(i) Toll road are completed in a relatively short time as they are done by private entrepreneurs.

(ii) Toll collection is efficient because it charges the actual road-user — it is a sort of ‘road pricing’.

(iii) Toll revenue provides funds not only for the recovery of the capital outlay, but also for maintenance.

(iv) Toll roads are built and maintained to high standards to attract users.

(v) Good way-side amenities are provided on toll roads.

Disadvantages of Toll Roads:

(i) When toll roads are constructed with borrowed capital, their costs tend to be high.

(ii) Toll is an additional cost component to highway costs.

(iii) Delays are caused at toll plazas, unless automatic toll collection methods are introduced.

(iv) If an alternative toll-free road is available to the particular route, users tend to shy away from the toll road, resulting in under utilisation of a superior facility,

(v) Since these are financially viable over long periods – 20 to 30 years, uncertainties like inaccurate traffic projections occur, reducing the level of serviceability in due course.

PPP Models in Toll Projects:

PPP stands for Public Private Partnership in enterprises. In such models, private infrastructure builders and companies, and other private entrepreneurs participate in building, operating and maintaining superior highway facilities along with Government organisations on mutually agreed basis of participation.

Some of these models are given below:

Build, Operate and Transfer (BOT):

This has been a successful model in India, as in some other countries, through World Bank funding.

Critical success factors in this model are:

(a) Shortest construction period

(b) Advantage of good technical solution

(c) Lowest construction cost and tolls

(d) Largest share of revenue to the government

(e) Shortest concession period

(f) Safe standby credit from government in the event of cost over-run.

(g) Least environmental impact.

A few variations of this model are:

(i) Build, own, operate, and transfer (BOOT)

(ii) Build, own and operate (BOO) – No transfer of ownership to the private entrepreneur

(iii) Build, own, operate and lease (BOOL)

(iv) Build, own, operate and sell (BOOS)

(v) Build, operate, lease and transfer (BOLT) – The operator builds the highway infrastructure, operates it for a certain period, leases it from the government, and finally transfers it at the end.

(vi) Build, operate, train, and transfer (BOTT) Design, Build, Operate, and Transfer (DBOT)

A private investor (concessionaire) is supplied with the IRC standards and specifications and entrusted with the responsibility of evolving the designs, construction and operation. They are also responsible for maintenance during the period of concession in accordance with the model concession agreement.

A few variations of this model are:

(i) Design, build, finance, operate and transfer (DBFOT)

(ii) Design, Finance, Build and operate (DFBO)

(iii) Design, build, operate, and maintain (DBOM)

Lease, Develop and Operate (LDO):

The government retains ownership of an existing facility, receives payments from a private lessee as specified in the lease agreement, which, in turn, finances and operates the facility.

Rehabilitate, Operate and Transfer (ROT):

This model is similar to BOT, the work being rehabilitation of an existing facility.

General Success Factors for PPP Models:

1. Entrepreneurship and leadership

2. Strength of the consortium

3. Right project identification

4. Technical solution advantage

5. Suitable transfer package

6. Flexibility for future growth

Financial Viability:

The minimum criteria for financial viability for Indian conditions (2006) are:

(i) Internal rate of return (IRR) – 14%

(ii) Equity IRR – 15%

(iii) Debt service coverage ratio – 1.33%

(iv) NPV – should be positive.

(v) Payback period – not more than 12 years for a project with a concession period of 20 years.

Highway Administration:

Roads, along with other modes of transport such as railways, airports and seaports, are an essential infrastructure for the economic development of the country. In view of this, traditionally the Government of India has been vested with the power and responsibility of constructing and maintaining roads in the country.

Administration of National Highway:

National highways fall under the jurisdiction of the central government. The National Highways Act was passed in 1956 empowering the Government of India to declare certain highways as National Highways, with the power to include some more at a later date as considered appropriate.

The National Highways Authority of India (NHAI) has the control and management of National Highways; however, they may delegate some of their functions to the State Government of the state in which a particular stretch is situated.

The State Public Works Departments are requested by the NHAI to execute construction and maintenance jobs on an agency basis for a certain amount of charges or commission. The yearly programme of ordinary maintenance, surface renewals and special repairs is prepared by the state PWD and forwarded to the Ministry of Surface Transport (MOST) (Road Wing). The work is executed after approval by the Road Wing.

Although the National Highways constitute only about 2 per cent of the total length of the road network, nearly 60 per cent of the freight and 36 per cent of passengers are moved by these highways.

Ministry of Road Transport and Highways (MORTH):

This ministry is responsible for all matters connected with Road Transport. It is headed by a Director General (Road Development) and assisted by a number of engineers in different cadres.

MORTH serves several functions such as planning, construction and maintenance of National Highways, inter-state roads of economic importance and strategic roads such those in sensitive border areas, besides administering the Central Road Fund and other funds sanctioned by the Central Government.

Central Road Fund (CRF):

This was instituted by the Government of India in 1929. The fund derives its finances from additional duty on petrol, diesel and other fuels.

80 per cent of the accruals in this fund are allocated to the state governments for administering the roads in their respective states and the balance 20 per cent is kept as CRF (Reserve).

Roads under Other Central Ministries:

Ministry of Defence finances roads in areas of military importance; the construction and maintenance of these roads are looked after by engineers of the Military Engineering Service (MES).

Roads in the vicinity of railway lines are financed, constructed and maintained by the Ministry of Railways and their engineers of the Indian Railway Service of Engineers (IRSRE).

The Border Road Organisation (BRO), set up in 1960, is in charge of roads in border areas. The Ministry of Rural Development looks after the rural road development programmes. The Ministry of Urban Development, along with local bodies in urban areas take care of urban transport.

Administration of State Roads:

The state government is responsible for the construction and maintenance of State Highways, major district roads, other district roads and village roads. The State Public Works Departments and Departments of Roads and Buildings look after the construction and maintenance of the roads in their respective states.

With regard to the administration of rural roads (ODRIS and VRIS), there is diversity – in some states, the state PWD looks after these, while in some others, local bodies such as Zilla Parishads, Mandal Parishads and Panchayat Samitis take care of the construction and maintenance of these roads using their own funds, supplemented by grants from State and Centre.

Central Road Research Institute (CRRI):

Road research received a fillip through the establishment of Central Road Research Institute (CRRI) in Delhi in the year 1950; this is one in the chain of national laboratories under the Council of Scientific and Industrial Research (CSIR).

The objectives of CRRI are to conduct research programmes:

(i) Basic and applied research in the design, construction and maintenance of different types of roads.

(ii) Utilisation of locally available materials for road construction.

(iii) Traffic safety and transport economics.

(iv) Construction of low-cost roads.

(v) Development of self-sufficiency in road machinery and plant and equipment.

(vi) Technical consultancy services to other organisations.

(vii) Publication of the results of research and technical material.

(viii) Conducting refresher and training courses for staff of other research institutions and highway departments.

State Highway Research Laboratories:

Some states have established highway research laboratories of their own for research, testing and quality control during highway and bridge construction.

Some of them are:

1. Highways Research Station, Chennai

2. Maharashtra Engineering Research Institute, Nasik

3. Gujarat Engineering Research Institute, Vadodara

4. A.P. Engineering Research Laboratories, Hyderabad. (Only testing of Engineering Materials, including bituminous materials is done, besides several other research and testing activities in other areas of civil engineering).

Highway Research Board (HRB):

This was instituted by the Indian Roads Congress in 1973 to coordinate all matters pertaining to highway research.

Highway Staff Training Institute:

The National Institute for Training of Highway Engineers (NITHE), Noida, imparts training to fresh highway engineers of central PWD and other State Highway Departments.

Road-Making Machinery:

The Central Government procures and provides heavy road- making machinery to State authorities.

National Rural Road Development Agency:

For successful implementation of the ambitious rural road development programme – Pradhan Mantri Gram Sadak Yojana (PMGSY) – the National Rural Road Development Agency (NRRDA) has been set up by the Ministry of Rural Development, Government of India.

Road Safety Audit (RSA):

Road safety audit consists of a formal safety performance examination of an existing road or a road for future use, or an intersection, by an independent multi-disciplinary team of professionals with varied expertise. It qualitatively estimates potential road safety issues and identifies opportunities for improvements in safety for all road-users.

Road safety audit differs from traffic safety studies in two key ways:

1. RSA is a pro-active investigation rather than a reactive examination of sites of potential hazards or sites with history of poor safety performance.

2. The investigating staff is independent of the staff responsible for design, construction/maintenance of the particular highway facility. This is to ensure an unbiased and objective assessment of the safety issues on the stretch under examination.

Road safety audit is practised in the U.K., the U.S.A., and Australia. It is considered mandatory in the U.K, for any new highway scheme.

The Ministry of Road Transport and Highways (Govt. of India) has recommended a Road Safety Audit Methodology based on the report of a research study by the Central Road Research Institute (CRRI) in 2001. This is being followed by the National Highways Department. There is also a Road Safety Audit Cell in the Ministry.