Assessing the impact of road provision on economic performance

When integrated as part of an effective transportation system, roads play a key role in stimulating micro- and macroeconomic performance. Determining their degree of effectiveness, however, must also consider the social benefits, particularly in terms of addressing poverty, unemployment and inequality.

By Professor WJ (Wessel) Pienaar*

Judging the state of an economy typically factors in five key macroeconomic criteria1 . These comprise economic growth (including economic development), full employment, price stability, balance of payments stability, and equitable distribution of income, all of which in turn have a bearing on the planning, investment and construction of transportation systems. Positive economic growth occurs only if total real income increases at a faster rate than the population. Only then will average living standards per person increase.

A holistic developmental viewpoint of economic growth must therefore take distributive criteria into consideration – e.g. apart from per capita growth of GDP, an increasing proportion of the population should ideally become materially better off. Additionally, more essential governmental service delivery points (like health services and schools) should be located closer to those groups in the community who lack personal mobility.

Investment in road infrastructure will only underpin economic growth and development if the prerequisite factors of production are available – e.g. sufficient land, access to raw materials, qualified labour, functional utilities (like water and electricity supply) and entrepreneurs who are able and willing to invest in the service area(s) of such roads.

Full employment

The second macroeconomic objective is full employment. However, it is unlikely that this can ever be achieved. It is therefore more realistic to view the goal of full employment as the objective of achieving maximum attainable employment or minimising unemployment.

Road construction, incorporating community participation goals, provides excellent opportunities for temporary and permanent employment, plus the transportation framework implemented should have local socio-economic benefits.

The estimate of the number and type of human resources to be employed in the construction of a road project used in the economic impact analysis (ECIA) must be the estimate of a professional quantity surveyor approved by the road authority. If such an estimate has not been finalised at the time that the ECIA is performed, the assistance of a road quantity surveyor or a road construction project manager or a road construction human resources specialist should be sought.

Price stability

The third macroeconomic objective is price stability with the aim of keeping inflation as low as possible. Within the context of construction, price stability is supported by a saving of economic resources through a lowering of the cost of (road) transport. A saving on transport costs resulting from a new or improved road contributes to more efficient national resource allocation.

Transport demand

A characteristic of transport is that it is not demanded in its own right; it is a means to an end. Therefore, the basis of any analysis of the demand for transport is the fact that this demand is a derived function of other activities.

A road project is regarded as economically justified when the present worth of the reduction in recurring costs during its service life exceeds the present worth of the once-off investment cost of implementing the road. The benefits are determined as the difference in recurring costs without and with the road improvement.

The measure of absolute viability of a project is shown by the size of its net present value (NPV), and the measure of relative viability is shown by its benefit-cost (B/C) ratio or its internal rate of return (IRR) – the former as a ratio and the latter as a percentage.

Balance of payments stability

The fourth macroeconomic objective is balance of payments stability. The balance of payments is a record of a country’s international transactions in a given period, usually one year. Modern economies are highly interdependent, and the successful ones are those that compete effectively in international markets. In a rapidly integrating and globalising world market, therefore, efficient and effective transport and other logistic support structures relating to international goods transactions are of particular importance2 .

In this respect, import expenditure represents approximately 7.4% of the total construction expenditure of rural bituminised road projects in South Africa3 . Considering that a road is a capital good, often involving the importation of technically advanced capital equipment and the creation of specialised industrial capacity, an import propensity of 7.4% is very low.

Equitable distribution of income

The fifth macroeconomic objective is equitable distribution of income. The National Development Commission in South Africa acknowledged that welfare in the country is distributed alarmingly unequally and explains its concern in this regard with reference to the Gini coefficient4. This coefficient provides an indication of income inequality, which ranges in value from 1 in the case of total inequality to 0 in the case of total equality. The Gini coefficient is equal to the ratio of the area between the diagonal and the Lorenz curve divided by the total area of the triangle in which the curve lies.

The Lorenz curve is constructed by plotting the numbers of income recipients, starting with the poorest on the horizontal axis in cumulative percentages and with cumulative personal income percentages on the vertical axis. The Gini coefficient internationally usually ranges between approximately 0.3 (highly equal) and approximately 0.7 (highly unequal)1. In 2011, South Africa’s Gini coefficient was 0.65. The fact that South Africa is frequently indicated as having the highest, or almost the highest, Gini coefficient is evidence of the highly inegalitarian income distribution that characterises the South African economy1 .

Roads and transit modes that close the inequality gap

The provision and use of new and improved roads (especially access roads) and other public road transport facilities (like passenger transport terminals and transfer facilities) can lead to a more equitable distribution of social welfare and income (economic welfare). The users of public transport facilities and services, for example, are mostly transit-captive travellers, as they often do not have the ability to pay for travel on alternative modes of transport, and they are, by implication, the needier group in a community.

Because the appreciation of the marginal utility of income among lower-income groups is considerably higher than among more prosperous individuals, the net economic benefits that a transport project has for them should be weighted accordingly in a social cost benefit analysis (SCBA). From a distributive efficiency (equity) viewpoint, this will ensure that in selecting a project, the one that can make the greatest net contribution to welfare distribution is chosen for implementation.

The method that is used for incorporating social equity in an SCBA is based on

the application of weights to the benefits that are received by the low-income group. The economic impact stemming from the inclusion of welfare distribution weights in an SCBA are twofold.

First, from a transport economic viewpoint, the inclusion of equity in the evaluation process is geared to creating equal accessibility and increased mobility for lowerincome groups in terms of marginal utility. Second, and from a general economic point of view, striving for greater equity is geared towards allotting potential economic activity and its returns to lower-income communities.

Welfare distribution weights can either be based on income or on consumer spending. Traditionally, the weights have been based on per capita income. However, there are two considerations that argue that the weights should be based on per capita consumer spending. The first point is a matter of principle and the second a matter of practice5: First point: the relationship between income and utility attainment is not clear, while per capita consumption expenditure provides a relatively good indication of this relationship. Individuals with the least income must expend their disposable income mainly on life necessities and basic needs satisfaction, while individuals in the middle-income group also have an opportunity for precautionary savings, for example, contributions towards pension, insurance and medical funds. Second point: it will require a considerable amount of calculation and bold assumptions to deduce gains in personal utility from total income, as all transfer payments to and from individuals are not reported in total income statistics.

The importance of location

The measure to which a new road can potentially contribute to a redistribution of welfare among regional populations is a function of regional accessibility.

It is a requirement that an ECIA must address and report the potential of each of the analysed road projects to contribute to a redistribution of per capita income as follows: • Where an entire road project is located within a single municipal area: Indicate the annual per capita household (final or private) expenditure within the municipal area as a ratio of the annual per capita expenditure within the province in which it is located. The report also needs to state the municipal population. • Where a road stretches through more

than one municipal area within a single

province: Indicate the annual per capita household expenditure within each of the municipal areas as a ratio of the annual per capita expenditure within the province in which the municipalities are located, as well as the number of intersections and interchanges on the road that provide access to and egress from the province. The population in each municipality must also be stated.

• Where a road stretches through more

than one provincial area: Indicate the annual per capita household expenditure within each of the municipal areas in each province as a ratio of the annual per capita household expenditure within the province in which it is located, and the annual per capita household expenditure within each province as a ratio of the annual per capita household expenditure within the country, as well as the number of intersections and interchanges on the road that provide access to and egress from the relevant municipal area and the relevant province. The population of each municipality and each province must also be recorded.

Conclusions

Roads exist for the transit of goods and people and, when well planned, have farreaching benefits for economies. At a higher level, transportation masterplans can also make a real difference in closing South Africa’s inequality gap by connecting communities, enabling employment, and facilitating macro- and microeconomic developments.

*Department of Industrial Engineering, Stellenbosch University

REFERENCES

1 Mohr, P. 2019. Economic indicators, Sixth edition. Pretoria:

Van Schaik Publishers 2 Pienaar, W.J. & Vogt, J.J. 2016.

Business Logistics Management,

Fifth edition. Cape Town: Oxford

University Press 3 Pienaar, W.J. 2021. Determination of the cost component in the social cost-benefit analysis of road projects in South Africa.

South African Journal of Industrial

Engineering. Vol 32(1), 14-23 4 National Planning Commission (NPC). 2011. National

Development Plan: Vision for 2030. www.npconline.co.za/.../NPC%20

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Plan%2 [18/08/2022] 5 Committee of Transport Officials (COTO). 2022. Economic impact analysis of road projects,

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