Influence of Value of Time on Profitability of Railway Projects

Abstract

The recent worldwide financial crisis has imposed limitations on public and private spending on new transport infrastructures. As a result, there is a need for new stricter criteria to prioritize projects in a more socioeconomically efficient way. Project appraisal is a common tool used for this effort. The value of time (VOT) is a relevant element in the appraisal of transport projects. VOT is essential for the calculation of the gain derived from the reduction of overall travel time for users by the development of a project. Because demand for the planned infrastructure is predicted on the basis of VOT, the estimation of VOT is a key element for the determination of the global modal split. This study analyzed the influence of VOT on the profitability of railway projects. Specifically, the components affected by VOT were studied according to their presentation in a railway project appraisal manual. The analysis was performed from two points of view. First, a theoretical formulation was deduced for the relation between VOT, which was included in the cash flow of the different components identified, and the internal rate of return, which represented the profitability of an infrastructure project. Second, a practical case for a suburban railway line was studied to identify the sensitivity of the internal rate of return to VOT, that is, the influence of VOT on the profitability of the project.