Paper No.

523
COST-BENEFIT ANALYSIS OF RURAL ROADS INCORPORATING SOCIAL BENEFITS
DR. L.R. KADIYALI* DR. N.B. LAL* & RAKESH SATI*
SYNOPSIS
In the agricultural surplus approach for the Economic Analysis of rural road projects, various factors affecting the EIRR value, like
the Analysis period, maintenance strategy adopted and different levels of investment per unit population have been discussed in detail. The
need for quantifying social benefits in economic terms and incorporating them in addition to the conventionally used economic benefits has
been brought out. The social benefits accrued from an all-weather road access as evaluated through extensive field surveys (carried out
at both village and household levels) like increase in income of low-income group households; increased level of literacy and improved
health standards have been quantified in economic terms. It has been concluded that while computing EIRR for a rural road project, social
benefits should not be ignored, as these can be as significant as the conventionally used economic benefits. Also, the aspect of considering
the population served by a rural road project must be given the due importance while computing the EIRR.

1. RURAL ROADS SCENARIO

Being a rural-oriented economy with about 74 per cent of
its population living in villages and about 28 per cent of its
GDP being contributed by agriculture 1,2, India has been
pursuing a programme for connecting all its villages by an allweather road. In the year 2000, it was estimated that about
330,000 out of its 825,000 rural habitations were without an allweather road access3. The Pradhan Mantri Gram Sadak Yojana
(PMGSY) announced in 2000 the aim of connecting all
habitations with population above 500 by the year 2007. Even
after the successful completion of this programme, 170,000
habitations will still be left without an all-weather road access.
Besides, a large percentage of the existing Rural Road length
is at present in a poor state, after years of neglect of
maintenance and upkeep. This length will need to be
rehabilitated and upgraded. At the commencement of PMGSY
in 2000, the programme envisaged an investment of Rs 60,000
crore upto the year 2007. However, a very rough estimate of
investments that will be required during and beyond PMGSY
upto the year 2020, works out to be in the order of Rs 145,000
to Rs 210,000 crore. This is a very huge investment, and calls
for a careful appraisal of engineering standards and adoption
of a suitable prioritisation criteria. Economic considerations
are of paramount importance in the selection of appropriate
design standards for rural roads.
2.

ECONOMIC ANALYSIS OF RURAL ROAD

PROJECTS

2.1. An Important Tool for Project Appraisal

Economic analysis, which compares the benefits from and
costs of a project, is an important tool in project appraisal. It
helps in :

determining whether the investments are worthwhile

at all under the generally prevailing scarcity of

resources in an economy;
arriving at a rate of return, normally known by the
term Internal Rate of Return (IRR) or Economic
Internal Rate of Return (EIRR);
prioritisation of projects in terms of their
attractiveness; and
evaluating alternative design options and
maintenance strategies.

All the above objectives are extremely important for Rural

Road planners. The investments involved are very large and
the options available are many. Hence, Economic Analysis of
Rural Road projects must be undertaken before any
investments are made. External funding agencies like the
World Bank and the Asian Development Bank insist on
Economic Analysis, but even for locally funded Rural Road
projects, this analysis should be insisted upon.
2.2. Traditional Economic Analysis Approach is
Inadequate for Rural Roads
The traditional approach for Economic Analysis of
Highway projects is to compare the costs with benefits
comprising of :

savings in vehicle operating costs (VOC)

value of time savings (VOT) of vehicle occupants
savings in accident costs

This approach is inadequate for Rural Road projects

because :

traffic volumes are very low, and the traffic consists

of a high percentage of non-motorised vehicles
(cycles, animal-drawn carts, cycle rickshaws etc);

* Consutlants, L.R. Kadiyali and Associates, New Delhi, Email: lrka@vsnl.com

Written comments on this Paper are invited and will be received upto 30th Sept., 2006.

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DR. KADIYALI, DR. LAL & SATI ON

for new links to unconnected villages, it is difficult to

estimate the traffic volume after the provision of links;
and
the benefits from VOC and VOT are generally too
small to justify the investments.

Even then, the benefits from VOC and VOT are quantifiable
and must be included in the analysis. But there are other more
significant benefits which a Rural Road brings in and these
need to be evaluated. Basically, these benefits pertain to the
increase in future economic activity, brought about by the
road project. This increase may be attributed to the road
investments alone or road investments plus investments on
agriculture, forestry, irrigation, etc.
2.3. Producer Surplus Approach
This approach, pioneered by the World Bank4,5 nearly
three decades ago, is as under:
(a) In the absence of any road, the isolated village
community may be producing just the quantity
needed for its consumption (subsistence farming).
The transport costs are so high that the farmer does
not find it remunerative enough to take it to the market
and sell it at the prevailing market price.
(b) If a road is built, it may result in the following
consequences:

the transport costs come down and the farmgate price (the price received by the farmer for
his product at the farm gate) is high enough to
induce him to grow more of the commodity and
sell it, as seen from the shift in production from
Q1 to Q2 as the farm-gate price increases from P1
to P2 in the Marginal Cost Curve MC1 (Fig. 1).

cost curve MC1 thus shifts downwards to MC2

increasing the production from Q2 further to Q3
the shaded area gives the farm-level benefits.
the farmer may diversify his agricultural
operations, shifting from the traditional foodcrops under subsistence farming to more
remunerative crops like fruits, vegetables,
flowers, mushrooms etc.
(c) Thus, the benefits can be evaluated for each crop.
The steps involved are :
determine the production of each crop without
the project in the base year (Q1)
determine the local consumption of each crop
without the project in the base year (Q1c)
determine the farm-gate price without the project
(market price minus transport cost) (P1)
determine the value of exports of each commodity
without the project [(Q1-Q1c)P1]
determine similarly the value of exports of each
commodity with the project [(Q2-Q2c) P2]
sum up for the n crops and find the difference
between with and without which is the
benefit (B1)
B1 = [(Q2-Q2c)P2] - [(Q1-Q1c)P1]
There are several other issues that need to be looked into.
These are :
1.

In the determination of the production of crops, what

area of land should be considered?
The answer is : The land area which comes under the
zone of influence of the road. This can be demarcated
on a map showing the rural road network, the
distances between farms and market centres, the
terrain and the means of transport.

2.

The production of crops can be determined from a

base-line survey before the road is constructed. How
can the cropping pattern and production be
determined after the road is constructed at the time
of project formulation?
If the post-project analysis is to be done, the data
can be collected after the project is completed. But if
pre-project analysis is to be done, data on the
cropping pattern and production from the villages in
the vicinity which have been already benefited from
a road project completed recently can be collected.
Suitable adjustments need to be made for the land
area to bring the comparison at par.

Fig. 1. Marginal cost curves

as the transport costs come down, the cost of

agricultural inputs also come down, thus making
the production costs come down. The marginal

3.

The construction of the road does not bring about

changes in cropping pattern and production
immediately. The benefits (B1) take some time to
fructify. How can this be accounted for?

COST-BENEFIT ANALYSIS OF RURAL ROADS INCORPORATING SOCIAL BENEFITS

Three possible scenarios emerge6

Scenario I (Optimistic)
The full benefits take three years to be realized. The
following is the distribution of the benefits :
Year
Year
Year

1
2
3

50%
80%
100%

Scenario II
The full benefits take four years to be realized as under :
Year
Year
Year
Year

1
2
3
4

25%
50%
75%
100%

Scenario III

before and hence incurring higher operating costs (fuel,

lubricants, tyres, spare parts, depreciation etc.) will perceive
monetary benefits. The subject of VOC, as influenced by
road condition (geometry, riding quality etc.), has been well
researched in India7,8. In fact, standard tables giving the values
of VOC components have been published by the Indian Roads
Congress9, and can be used.
It should, however, be noted that the benefit due to
reduction in VOC of vehicles carrying agricultural produce to
the market has already been accounted for through the
increased quantity of goods produced (in the Producer
Surplus approach) and should not be counted again. The
benefit due to reduction in VOC of vehicles other than those
carrying agricultural goods needs to be considered. This is
designated as B2.
2.5. Savings in Travel Time of Passengers

The full benefits are realized in a period of 7 years as

under :
Year
Year
Year
Year
Year
Year
Year

133

1
2
3
4
5
6
7

2.5%
5%
10%
25%
40%
65%
100%

The above three Scenarios are shown in Fig. 2

As roads get built, the travel time of villagers, particularly

to the market centre, gets reduced. A value may be assigned
to these savings approximately by the simple wage rate
approach. Either the full wage rate or a fraction of it can be
considered. However, it is a debatable point whether the
small savings in time of rural travelers can be considered in
the analysis. It may also be argued on the other hand that
since many social benefits (such as health, education etc.)
are ordinarily neglected in the analysis, the travel time savings
which are quantifiable could be included. In any case, the
benefit due to this component (which may be termed as B3) is
small in comparison with B1 and B2 and its inclusion or noninclusion does not make a significant impact on the outcome
of the analysis.
2.6. Traffic Surveys
A one-day classified volume count is adequate. It has
been observed from the authors experience that the night
traffic is almost negligible. Thus, normally a 16 hour count
from 5 AM to 9 PM should be adequate.

Fig. 2. Percentage of benefits accrued due to the road

with time

From among the three scenarios (I, II and III) considered

above, Scenario I (wherein the full benefits accruing from the
road are realized in 3 years time) was found to be close to the
ground reality for the area from where the data was collected
for this Study. In all computations for working out the EIRR for
this Study, therefore, the Scenario I only was considered.
2.4. Savings in Vehicle Operating Cost
When good paved all-weather roads are provided to link
villages, one tangible benefit is the reduction in vehicle
operating cost (VOC). Traffic which was using earthen tracks

Traffic on rural roads increases to a large extent only

after the harvest. This increase is in the commercial vehicles
like tractor-trailers and trucks. Since the benefit of VOC saving
on account of vehicles carrying agricultural goods is not to
be counted under the Producer Surplus approach, no
significant error takes place even if traffic surveys are carried
out off-season.
2.7. Traffic Growth Rate
As roads get built and the impact of them on the rural
economy gets built up, the traffic on the roads grows. The
growth rate depends upon the growth rate of the economy.
For traffic on highways (National Highways, for example), an
elasticity of about 1.5-2.0 is assumed with respect to GNP to

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DR. KADIYALI, DR. LAL & SATI ON

determine the traffic growth rate. When Indias economy was

growing at the traditional rate of 3.5-4.0 per cent till the 1980s,
a traffic growth rate of 7.5 per cent was being considered for
highways. As the economy is growing at a faster rate now, in
the region of 5-7 per cent, the traffic growth rate considered is
10-12 per cent. There is no recorded data on rural roads in
India to establish the rural road traffic growth rate. In the
absence of this, it may be on the conservative side to adopt a
rate at least equal to the GNP growth rate. Till more studies
are done, it may be safe to assume a growth rate of 6 per cent,
as suggested in the IRC Rural Roads Manual10 .
2.8. Analysis Period

considered.
3.
4.
5.

Traffic growth rate considered can be 5 per cent.

An analysis period of 20 years can be considered.
The maintenance of the road can be considered at
three levels:
(i) Normal routine maintenance and periodic
renewals at specified frequency of 8 years.
(ii) Routine maintenance neglected and periodic
renewals at specified frequency of 8 years.
(iii) No routine maintenance and delayed periodic
renewals.

6.

The costs of routine maintenance and periodic

surface renewals for case (i) are given below:

The commonly adopted analysis period of highway

projects is 20 years. There is no reason to deviate from this
for Rural Roads. A 20 year analysis period covers adequately,
the future maintenance requirements.

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

2.9. Maintenance Costs

Maintenance of all types of roads is a sadly neglected
operation in India. This is particularly true of Rural Roads.
As a result, a large proportion of Rural Road assets built at
great cost have been lost. Timely maintenance in the form of
routine maintenance and periodic renewals not only preserves
the assets but also has an impact on the VOC. The Economic
Analysis of Rural Road projects must acknowledge the
importance of proper maintenance. It is worthwhile to carry
out a sensitivity analysis under various scenarios of
maintenance, such as :
1.
2.
3.

Normal routine maintenance and timely periodic

renewals.
Normal routine maintenance neglected, but periodic
renewals at specified intervals.
Normal routine maintenance and periodic renewals
are both neglected.

2.10. Economic Analysis : Computation of EIRR

The economic analysis can be carried out on the
following basis :
1.

The benefits considered are :

(i)
(ii)
(iii)

2.

Agricultural Producer Surplus (B1)

VOC savings (B2)
VOT savings (B3)

The benefit B1 can be spread over a three-year period

with the following break-up :
1st year
2nd year
3rd year

50%
80%
100%

No further increase in B1 after 3 years need be

Maintenance
Cost (Rs/km)
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2,00,000
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2,00,000
5,000
10,000
15,000
20,000

7.

A factor of 0.9 can be used to convert financial costs

to economic costs.

8.

The value of travel time savings can be considered

on a simple wage rate approach. An average daily
wage of Rs.70, yielding an hourly value of time of
Rs.9 can be considered.

A sample spread sheet showing computations for EIRR

is annexed at Annex-1
3. FACTORS AFFECTING EIRR
3.1. Salient Information on 8 Rural Roads Selected for
the Study
For purposes of computing the variations in the EIRR
value resulting from various influencing factors, both

COST-BENEFIT ANALYSIS OF RURAL ROADS INCORPORATING SOCIAL BENEFITS

135

economic and social, comprehensive field data collected by

the authors from 8 selected rural roads was utilized. Salient
information on these selected rural roads lying in the IndoGangetic plains, covering both relatively backward and
developed areas, is given below in Table 1.
Table 1

Fig. 3. Variation of EIRR with analysis period

* Upgradation Project
During the field surveys, the field data collected was
both at the village level and also at the household level in
selected households of each village surveyed. In order to
evaluate the socio-economic impact of an all-weather road
connection, data was collected from both connected and
unconnected villages in the vicinity under similar conditions.
All the 8 selected rural roads are black-topped, and were
constructed about 3 years back.

difference in EIRR values obtained for the analysis periods of

15 years and 20 years, declines further. It is only to be expected
that the difference between EIRR values for 20 and 25 year
analysis periods will decline still further. From the trends of
these results, it is obvious that an analysis period of 20 years,
as generally adopted for highway projects, is suitable for rural
road projects also. It may be pointed out here that the
discrepancies observed in the EIRR values for different periods
of analysis can be overcome to a certain extent by considering
the Salvage Value of the road at the end of the period of
analysis.
3.3. Effect of Maintenance Strategies on EIRR
It is to be recognized that the maintenance strategies
adopted play a significant role in arriving at the EIRR values.
Three different strategies have been considered, designated
as Cases I, II, and III illustrated in Fig. 4.

3.2. Effect of the Period of Analysis on the EIRR

While carrying out an economic analysis for a rural road
project, it is necessary to select an analysis period over which
the costs incurred (including construction and time-related
maintenance costs) and the benefits accrued (net incremental
agricultural production value and the time-related VOC and
VOT savings) are computed. For each of the eight selected
roads R-1 to R-8, four analysis periods were considered (viz.,
5 years, 10 years, 15 years and 20 years) and EIRR computed
for each of these four periods of analysis. The results are
shown in Fig. 3.
As can be observed from Fig. 3, the EIRR values obtained
for only 5-year analysis period are very low compared to those
obtained for the 20-year analysis period; for five of the eight
roads, EIRR values are even negative for a 5 year analysis
period. Moreover, there is an appreciable difference between
the EIRR values obtained for the 5 year and 10 year analysis
periods. This difference between the EIRR values declines
for the analysis periods of 10 years and 15 years. Again, the

I : With Routine maintenance.

II : With Routine maintenance but with periodic renewals.
III : Without Routine maintenance and delayed renewals.

Fig. 4. Alternative Maintenance Strategies, I, II & III

In Case I, routine maintenance measures are taken as per

established norms and periodic surface renewals provided after
every 8 years, when the terminal level of serviceability
corresponds to a PCI of 2.0.
In Case II, no routine maintenance measures are taken,
resulting prematurely in a lower level of PCI or a road surface
with higher degree of surface roughness than anticipated as
per the normal performance model. With no routine

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DR. KADIYALI, DR. LAL & SATI ON

maintenance, while surface renewal becomes warranted after

about 6 years of service life, it has been assumed that surface
renewal is taken up only after 8 years of service life, when the
road condition has deteriorated to a level around PCI of 1.0,
well below the terminal level of serviceability. Obviously such
a delayed surface renewal would cost much more than the
surface renewal undertaken in the appropriate year of roads
service life.
In Case III, without any routine maintenance and
considerably delayed remedial input when the PCI of the road
falls down to a totally unacceptable PCI of around 0.5, major
rehabilitation/reconstruction has to be resorted to, at a very
high cost.
The EIRR values obtained for each of the three cases of
maintenance strategies (Cases I, II and III) are shown in Fig.
5 for each of the eight selected rural roads R-1 to R-8. It may
be noted that four of the eight selected roads, considered
economically viable (with EIRR>12 per cent) under Case I are
rendered economically unviable under Case III while three of
the roads are rendered economically unviable even under
Case II.

initial construction cost per unit population, higher is the value

of EIRR and vice versa. It also provides an economic tool to
select the most appropriate type of a rural link road of a
particular length to serve the total population sought to be
linked by an all-weather road. For example, if only 1 km length
of road is required to link a population of 500, then from Fig. 6,
an initial investment of Rs. 4.5 lakh only is warranted if an
EIRR of atleast 12 per cent is to be ensured. This initial
investment would perhaps imply only a gravel road of 1 km
length and not a black-topped one. In order to justify a blacktopped road, one kilometer road length should serve a total
population of about 1200, if an EIRR of 12 per cent is to be
ensured.

Fig. 6. EIRR with varying initial investments per units

population

4.

SOCIAL BENEFITS QUANTIFIED IN ECONOMIC

TERMS

4.1. Need for Quantifying Social Benefits

Fig. 5. Effect of the level of maintenance on EIRR

3.4. Variations in EIRR with Different Levels of Initial

Investment per Unit Population
For each of the eight selected rural roads R-1 to R-8, Fig.
6 shows the EIRR value (obtained from an economic analysis)
plotted against the initial investment made per unit population
(i.e, initial construction cost the total population served by
the road). It may be noted that for arriving at the EIRR, both,
the initial construction cost and the time-related maintenance
costs were considered. The maintenance cost constitutes
about half of the initial cost but has a very high built-in labour
component, which could be looked upon as advantageous in
as much as it provides increased employment opportunities to
the rural unemployed particularly during the lean season of
the year.
The straight line relationship shown in Fig. 6 developed
statistically by linear regression analysis shows that lower the

It is well known that the benefits accrued by the provision

of an all-weather road access to a rural habitation include both
economic and social benefits11, 19. While carrying out a CostBenefit analysis for a rural road project in India, it is customary
to consider only the economic benefits. In several parts of the
country, notably the North-Eastern States and the Hill States
etc, however, social benefits can be as important, if not more
than the economic benefits. It is, therefore, considered
important to identify the social benefits accrued by providing
road access and quantify them in economic terms so as to
incorporate them as benefits together with the economic
benefits designated as B1, B2 and B3, for computation of the
EIRR. A recent study20 also brings out the importance of
incorporating social benefits in the economic analysis.
The more important social benefits which can be
meaningfully quantified in economic terms pertain to the
increase in average annual income of the low-income group
households; increase in the adult literacy level, thereby
increasing the earning potential of workers and also bringing
down the growth rate of population; improved health standards
which in turn lead to higher output etc. An attempt has been
made in this Paper to quantify the social benefits in economic
terms and evaluate the EIRR after incorporating these in
addition to economic benefits.

COST-BENEFIT ANALYSIS OF RURAL ROADS INCORPORATING SOCIAL BENEFITS

4.2. Increased Income of the Low-Income Group

Households (S1)
For each of the eight selected rural roads, field surveys
were carried out at the village level as also at the household
level covering the beneficiary villages and also unconnected
villages in the vicinity under similar conditions. The data on
average annual income obtained from the beneficiary villages
was compared with the data collected from unconnected
villages to evaluate the benefit of increase in income resulting
from the provision of an all-weather road access. The lowincome group households were defined as those households
having an annual income of less than Rs. 25,000/-. After the
provision of an all-weather road access, it was found that, on
an average, there was an increase in the order of Rs. 400 to Rs.
500 per year in the annual income of the low-income group
households. Around 25 per cent of the total households were
found to be belonging to the low-income group.
It may be pointed out that undoubtedly there was an
appreciable increase in the annual income of the rich farmers
and middle-level farmers but these enhanced incomes have
already been accounted for while computing the economic
benefits. In the case of low-income group households, the
increase in income is mainly due to the availability of an allweather outlet from the village which enables poor people to
seek better employment opportunities through improved
transportation facility.
Considering this social benefit, designated as S 1, in
economic terms and adding this to the economic benefits B1,
B2 and B3 for each of the eight selected rural roads, the
enhanced EIRR values are shown in Fig. 7.

137

selected rural roads, it was found that about one-third of the

total population served by a road constitutes the working age
group (15 to 50). As a result of the provision of road access,
the increase in the adult literacy level in terms of the number of
matriculates and above in a rural habitation was found to be in
the order of 10 per cent. For adult literates (matriculates and
above), a daily wage increase from about Rs. 70 to about Rs.
100 was observed. From among the adult literates (matriculates
and above), while the males constituting 50 per cent of the
total, were working full time, only about 5 per cent of the females
were employed.
Earlier studies on socio-economic aspects of rural roads
have also established that the provision of an all-weather road
access does improve the literacy level. An attempt has been
made now to quantify the increase in earnings of the adult
literate workers in economic terms, designating this social benefit
as S2. By adding this benefit to the economic benefits B1, B2 and
B3, the increased EIRR values for each of the eight selected rural
roads can be seen in Fig. 8. It may be observed from Fig. 8 that
relatively, the consideration of social benefit S 2brings up the
EIRR value more than that for social benefit S1

Fig. 8. Increase in EIRR after incorporation social benefits S2

Alongwith econimic benefits B1, B2 and B3

4.4. With Improved Health Standards, Reduced

Absenteeism/Higher Output (S3)

Fig. 7. Increase in EIRR after incorporation social benefits S1

alongwith economic benefits B1, B2 and B3

It is interesting to note that the data collected during field

surveys at the household level in connected as well as in
unconnected villages, shows that by providing on all-weather
road access, 6 to 9 per cent of the BPL (Below Poverty Line)
households could be lifted above the poverty line.
4.3. With Increased Adult Literacy, Increase in Earning
Potential of Workers (S2)
During the field surveys carried out for each of the eight

With the provision of an all-weather road access, it was

found during field surveys that access to health facilities for
the connected villages are vastly improved in comparison to
the unconnected villages. These are reflected in a number of
ways like the percentage of persons going out of the village
for medical treatment, incidence of child mortality, percentage
of persons above the age of 60 years, rate of absenteeism from
the work place etc. From all such health indicators, it can be
inferred that undoubtedly, the inhabitants of a connected village
enjoy higher health standards than those living in an
unconnected village.
With improved health standards, the absenteeism from
the work place of an average worker was found to be lower by
about 5 per cent when compared with an average worker not
provided with the health facilities made available by an allweather road access. The workers were subdivided equally

138

DR. KADIYALI, DR. LAL & SATI ON

into Regular Labour and Casual Labour working over a

period of 180 days and 90 days respectively during a year.

increasing the rate of return for the same investment on the

construction and maintenance of the road.

The daily wage for a casual labourer was found to be

about Rs. 60 per day while for a labourer employed on a regular
basis, it was about Rs. 70 per day.

Adopting this approach, the increase in EIRR values due

to the gradually increasing exportable surplus over the 20 year
analysis period can be seen in Fig 10, for each of the eight
selected rural roads. However, it is observed that the increase
in EIRR for this benefit (S4) alone, is somewhat lower than that
for benefit S1 or S2 or S3.

As mentioned earlier, the percentage of the total

population in the working age group is around 30 to 35 per
cent. Thus, with improved health standards, the social benefit
(S3) resulting in reduced absenteeism could be quantified in
economic terms.
For each of the eight selected rural roads, the enhanced
EIRR values obtained after considering the social benefit (S3)
in addition to the economic benefits B1, B2 and B3 can be seen
from Fig. 9. The increase in EIRR values by considering S3 in
addition to B1, B2 and B3 can be seen to be higher than that
found by considering S1 or S2 over and above B1, B2 and B3.

Fig. 10. Increase in EIRR after incorporating Social Benefit

S4 alongwith economic benefits B1, B2 and B3

4.6. Social Benefits Accruing from the Road Lead to

Overall Rural Development

Fig. 9. Increase in EIRR after incorporation social benefit S3

alongwith economic benefits B1, B2 and B3

4.5. With Increased Adult Literacy, Reduced Rate of

Population Growth/Increased Exportable Surplus
(S4)
Over the past few decades, there is a definite trend of a
gradually increasing level of adult literacy in the country and
gradually declining rate of growth of population21. Also,
globally, in the developed parts of the World, with nearly
hundred percent level of literacy, the rates of growth of
population are extremely low, while in some of the third world
countries, the literacy levels are low and population growth
rates are high.
From the data collected during the field surveys carried
out on each of the eight selected rural roads, it has come out
clearly that an all-weather road access facility brings about an
increase of around 10 per cent in the number of matriculates
and above. It is, therefore, to be expected, considering the
past trends in the country that, with the gradually increasing
percentage of literates in a village, the population growth rate
will gradually decline from the present 1.6 per cent to 1.2 per
cent towards the end of the 20-year analysis period. This
aspect amounts to a gradual reduction in local consumption,
thereby increasing the exportable surplus and consequently

It is interesting to note from the analysis described above

that the various social benefits accruing from the road are not
confined to farmers only. Increased adult literacy, Improved
health standards, Increased income for the low-income group
households etc. benefit both farmers as well as non farmers.
Another noteworthy feature of quantifying social as well
as economic benefits accruing from the road is that there are a
number of inputs being made towards overall development in
rural areas, other than the provision of road access. It is nearly
impossible to completely isolate the benefits accruing from
the road alone. For example, use of fertilizers increase the
agricultural yield but to get the fertilizers to the farms, a road is
needed. Similarly making education free will increase the
percentage of literates in the village, but to get qualified
teachers to the village, a road is needed.
5.

COMPARISON OF EIRR VALUES WITH AND

WITHOUT THE CONSIDERATION OF SOCIAL
BENEFITS

5.1.
For each of the 8 selected rural roads, a comparison
of EIRR values with and without the consideration of social
benefits is given at Table 2. Two plots of EIRR against initial
investment per unit population are shown in Fig 11; one
considering only the economic benefits and the other
considering the social benefits in addition to the economic
benefits.
5.2. In general, the trends of both the plots in Fig. 11
show that lower the initial investment per unit population for a
rural road project, higher is the EIRR value and also higher is

COST-BENEFIT ANALYSIS OF RURAL ROADS INCORPORATING SOCIAL BENEFITS

TABLE 2. COMPARISON OF EIRR VALUES WITH AND WITHOUT

CONSIDERATION OF SOCIAL BENEFITS

139

and higher is the increase due to social benefits.

5.5. For the same situation of a 5 km long road to be
constructed to serve a total population of 10,000, if a blacktopped road at a cost of Rs. 10 lakh per km length is to be
constructed, it would amount to an initial investment of Rs.
500 per unit population. Referring to Fig. 11, corresponding to
an initial investment of Rs. 500 per unit population, an EIRR
value of 23 per cent is obtained when only economic benefits
are considered, which increases to 36 per cent when social
benefits are considered in addition.
5.6. Finally, considering the special case of a very small
habitation of population 250 in the hills, if a minimum EIRR of
12 per cent is aimed at, an initial investment of Rs. 950 per unit
population or a total investment of about Rs. 2.4 lakh only is
warranted which may only be enough for formation cutting/
bridle path or a mule track over a length of 1 km.
6. CONCLUSIONS

Fig. 11. Comparison of EIRR values with and without

consideration of social benefits

the increase due to the consideration of social benefits over

and above the economic benefits. It implies that higher the
population served by a road, lower is the initial investment per
unit population for that road and higher is the increase in EIRR
after considering social benefits.
5.3. On the one extreme, consider a small habitation of
500 persons to be connected by a one-kilometer long road. If
only an all-weather gravel road is to be constructed at a cost
of Rs. 4 lakh, the initial investment per unit population will be
Rs. 800, giving an EIRR value of 15 per cent, considering only
economic benefits, which will increase to 21 per cent if social
benefits are also considered. If, however, an EIR of 12 per cent
is aimed at, an initial investment of Rs. 950 can be incurred i.e,
a road type which will cost Rs. 4.75 lakh.
5.4. On the other extreme, consider a number of
habitations with a total population of 10,000 to be connected
by a 5 km long road. If an all-weather gravel road of 5 Km
length is to be constructed at a cost of Rs. 4 lakh per km
length, an initial investment of Rs. 20 lakhs will be needed,
amounting to Rs. 200 of initial investment per unit population.
Corresponding to an initial investment of Rs. 200 per unit
population, an EIRR value 28 per cent is obtained considering
only economic benefits and the EIRR will jump to about 52 per
cent if social benefits are also considered. Thus, the lower the
initial investment per unit population, higher is the EIRR value

6.1. The Agricultural surplus approach to the Cost-Benefit

analysis of rural road projects is suitable, provided an analysis
period of atleast 15 years is considered, maintenance strategy
to be adopted is clearly defined and time-related maintenance
costs incorporated accordingly in the analysis.
6.2. It is not only desirable but necessary that the
population served by a rural road must also be considered in
the Cost-Benefit Analysis of the rural road project.
6.3 There is an immediate need to identify the more
important social benefits that can be quantified in economic
terms. In this paper, the increase in income of the low-income
group households; improved health standards; increased
literacy level with consequent increase in earning potential of
workers and reduced growth rate of population have been
successfully quantified in economic terms. It was also found
that 6 to 9 per cent of BPL households could be lifted above
the poverty line through the provision of an all-weather road
access.
6.4. The data base used in this paper was restricted to
only 8 rural road projects, all located in the same region.
However, exhaustive data base needs to be developed covering
regions with varying levels of socio-economic development
and located in different types of terrain.
7. POINTS FOR DISCUSSION
(a) The need to quantify all social benefits accruing from
the road access in economic terms and then determining
the EIRR on the basis of combined social and economic
benefits.
(b) For working out Master Plans for Rural Road Network
development, the importance of considering the

140

DR. KADIYALI, DR. LAL & SATI ON

combined socio-economic impact of the network.

9.

Manual on Economic Evaluation of Highway Projects in

India, SP:30, Indian Roads Congress, New Delhi, 1993.

(c) Developing strategies for new construction,

upgradation and maintenance of rural roads on the basis
of combined social and economic needs.

10. IRC:SP 20, Rural Road Manual, 2002.

(d) Further R&D work needed by way of carrying out field

studies in selected areas covering hill areas, tribal areas,
economically backward areas, cyclone affected areas
etc. where various socio-economic aspects of rural road
development can be studied in-depth.

12. Reports on the Socio-Economic Aspects of Rural Roads in

Basti (Uttar Pradesh), Consulting Engineering Services, New
Delhi, 1985.

REFERENCES
1.

Planning Commission,
planningcommission.nic.in

GOI

Website,

http://

2.

World Bank Website, http://www.worldbank.org/

3.

PMGSY Website, http://www.pmgsy.org/

4.

Curt Carnemark et al, The Economic Analysis of Rural Road

Projects, World Bank Staff Working Paper No. 241,
Transportation Department, The World Bank, Washington
DC, 1976.

11. Reports on the Socio-Economic Aspects of Rural Roads in

Banswara (Rajasthan), Dalal Consultants and Engineers Pvt.
Ltd. Mumbai, 1985.

13. Reports on the Socio-Economic Aspects of Rural Roads in

Bhiwani (Hariyana), NCAER, New Delhi, 1985.
14. Reports on the Socio-Economic Aspect of Rural Roads in
Karbi-Anglong (Assam), NCAER, New Delhi, 1985.
15. Reports on the Socio-Economic Aspects of Rural Roads in
Kheda (Gujarat), IIM, Ahmedabad, 1985.
16. Reports on the Socio-Economic Aspects of Rural Roads in
Kolar (Karnataka), Tata Economic Consultancy Services,
Mumbai, 1985.
17. Reports on the Socio-Economic Aspects of Rural Roads in
Patiala (Punjab), National Transportation Planning and
Automation Centre, New Delhi, 1985.

5.

Beenhakker, H.L., Identification and Appraisal of Rural Road

Projects, World Bank Staff Working Paper No. 362, The World
Bank, Washington DC, 1979.

18. Reports on the Socio-Economic Aspects of Rural Roads in

Ratnagiri (Maharashtra), IIM, Banglore, 1985.

6.

Economic Analysis of Selected Rural Roads, submitted to

the World Bank, L.R. Kadiyali and Associates, October 2003.

19. Reports on the Socio-Economic Aspects of Rural Roads in

Salem (Tamil Nadu), National Transportation Planning and
Automation Centre, Trivandraum, 1985.

7.

Road User Cost Study in India, Final Report, Central Road

Research Institute, New Delhi, 1982.

8.

Updating Road User Cost Data in India, Final Report of a

Study sponsored by the Ministry of Surface Transport and
the Asian Development Bank, L.R. Kadiyali and Associates,
New Delhi, 1991.

20. Socio-Economic Impact Study of Rural Roads in Two Indian

States, Prepared for the World Bank by the Centre of Studies
on Social Sciences, Pune, 2001.
21. Indian Planning Experience-A Statistical Profile, Planning
Commission, GOI, January 2001.

COST-BENEFIT ANALYSIS OF RURAL ROADS INCORPORATING SOCIAL BENEFITS

141
Annex-1

SAMPLE SPREAD SHEET FOR THE COMPUTATION OF EIRR

142

DR. KADIYALI, DR. LAL & SATI ON

COST-BENEFIT ANALYSIS OF RURAL ROADS INCORPORATING SOCIAL BENEFITS