Davao Public Transport Modernization Project (RRP PHI 45296-006)

ECONOMIC AND FINANCIAL ANALYSIS

A. Introduction

1. The proposed Davao Public Transport Modernization Project seeks to implement a new
bus-based public transport system in Davao City to replace the existing jeepneys. The project
consists of implementing a new four-tier, about 30 route, bus network on over 600 kilometers in
Davao, with about 1,000 bus stops, 1,100 electric–diesel buses, as well as terminals, depots, a
driving school, bus lanes, and queue-jump lanes, which will be supported by an intelligent
transport system. The project also contains institutional capacity development that supports
managing new franchising mechanisms. It offers an inclusive social development program to
support those now employed in the sector during the transition to a modern public transport
system.

2. This economic and financial analysis summarizes the findings of Asian Development Bank
(ADB) due diligence and includes adjustments required to meet ADB guidelines. 1 The economic
analysis was undertaken to assess the economic viability of the project. It compares the benefits
and costs of the with-project and without-project scenarios over a 30-year operation period to
estimate the economic internal rate of return and the net present value at a discount rate of 9%.
The analysis uses the domestic price numeraire, and findings are presented in this document in
United States dollars using an exchange rate of ₱56.02 = $1. A financial analysis was undertaken
to assess the financial sustainability of the project. A detailed financial cost–benefit analysis is not
presented here because the fares will not be set at a level sufficient to ensure full recovery of the
initial capital, and attempting to do so would reduce the economic benefits of the projects. The
project investment decision is based on its economic viability.

B. Project Rationale

3. Davao City, with its 1.78 million population, is the third largest city in the Philippines. The
Davao region experienced 8.2% average annual economic growth during 2014–2019. 2 Strong
economic growth in Davao has resulted in rapidly growing demand for travel across the expanding
urban area, which is primarily based on a low-rise, low-density urban model. Public transport
services are failing to keep up with changes in travel demand in terms of both geographical
coverage area and operating hours.

4. The Government of the Philippines recognizes the urgency for upgrading and improving
urban transport efficiency to realize sustained economic growth in the country. Therefore, the
government is asking development partners to help modernize urban transport. ADB supported
Davao City by developing the urban transport plan under a policy advisory technical assistance
project: the Davao Sustainable Urban Transport Project. 3

1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila; ADB. 2005. Guidelines for the Financial
Management and Analysis of Projects. Manila; and ADB. 2009. Financial Due Diligence: A Methodology Note.
Manila.
2 Philippines Statistics Authority. 2020. 2000–2020 Gross Regional Domestic Product. Manila. The growth rate from
2019 to 2020 was –7.6% because of the coronavirus disease pandemic.
3 ADB. 2012. Technical Assistance to the Republic of Philippines for the Davao Sustainable Urban Transport Project.
Manila (TA 8195-PHI). https://www.adb.org/projects/45296-003/main.
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5. The project will support the strategic target for the country in the transport sector, which is
governed by the National Transport Policy. 4 The project will directly address the issue of shortage
of road-based public transportation identified in the Philippine Development Plan 2023–2028. 5
The project will provide a public transport system which features reliability, safety, accessibility,
environmental soundness, and comfort. Also, this project will contribute to the country’s first
nationally determined contribution, which sets a 75% greenhouse gas emission reduction and
avoidance target by 2030 as part of the Philippines' commitment to the Paris Agreement on
Climate Change. 6

C. Demand Analysis

6. A feasibility study consultant carried out surveys in 2017 at various locations of Davao
City. Passenger demand data for various public transport modes in key locations in Davao City
are shown in Table 1.

Table 1: Daily Passenger Demand in Davao City per Public Transport Mode
Road Location Filcabs Jeepneys UV Express Buses Tricycles Total
Davao–Cotabato Boundary of Davao City 1,188 5,801 11,918 14,386 1,847 35,140
Highway and Davao del Sur
Davao–Agusan Boundary of Davao City 7,605 21,645 27,496 60,063 2,310 119,119
Highway and Davao del Norte
Quimpo–Quezon Bolton Bridge 31,884 67,754 7,021 16,626 408 123,693
Boulevard
MacArthur–Quirino Bankerohan 81,644 69,548 5,453 677 2,276 159,598
Highway Bridge
Eden–Gold Street Ma-a Bridge 453 453 143 0 2,461 3,510
C. P. Garcia (Diversion Bridge crossing Davao 723 723 5,067 15,119 122 21,754
Road) River
Source: Asian Development Bank estimates.

7. The surveys, together with surveys carried out by the Japan International Cooperation
Agency under the Davao City Infrastructure Development Plan and Capacity Development
Project, were used to estimate the public transport demand. The data from these surveys was
applied in the EMME transport modeling software (version 4.2.9) to develop the Davao Strategic
Transport Model to provide a quantitative analysis of public and private transport use in Davao
City. The model estimated public and private transport demand for both the with-project scenario
(modernized buses) and without-project scenario (jeepneys) based on the cost. For simplicity, it
was assumed that (i) all jeepney and filcab users would transfer to modernized buses; (ii) there
would be no modal shift from or to public transport as a result of the project implementation; and
(iii) there would be no impact on tricycles, long-distance buses, taxis, and freight movement.

8. Future public transport demand growth was estimated at 1.3% per year considering GDP
and population growth forecast, and private vehicle ownership, while the estimated growth for
private vehicle demand is 5%. The projected annual public and private transport demand is in
Table 2.

4 Government of the Philippines, National Economic and Development Authority. 2018. National Transport Policy and
its Implementing Rules and Regulations. Manila.
5 Government of the Philippines, National Economic and Development Authority. 2022. Philippines Development Plan
2023–2028. Manila.
6 Department of Finance. 2021. President Duterte approves PHL commitment of 75 percent emissions reduction target
by 2030. Press Release. Manila.
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Table 2: Projected Annual Ridership of Davao City Transport Network

Public Transport Daily Demand Private Vehicle Daily Demand
Year (number of passengers) (number of vehicles)
2023 764,043 71,566
2053 1,125,645 309,304
Source: Asian Development Bank estimates.

D. Economic Analysis

1. Economic Cost

9. The costs to be incurred for the project comprise construction, bus fleet procurement, land
acquisition and resettlement, 7 traffic disruption during construction, 8 and operation and
maintenance (O&M) costs. Economic costs were derived from financial costs through the
following adjustment: (i) excluding price contingencies, taxes and duties, and interest during
construction; and (ii) applying a shadow wage rate factor of 0.6 for unskilled labor. With the
growing demand for public transport, the ridership will increase over the project life and additional
buses are assumed to be purchased after 15 years of operation. The associated cost for additional
bus purchase is considered in the economic analysis.

10. The estimated cost of the project is based on the design consultants’ estimates. The total
economic cost of the capital investment is $1,096 million, which is lower than the financial cost,
including the additional bus purchase. The O&M costs are estimated to be $55.5 million in the
first full year of operation in 2022 prices, and include the following costs: labor, energy,
maintenance and rehabilitation, administration, and vehicle replacement. E-buses are assumed
to be replaced every 25 years and diesel buses every 15 years. The labor costs and energy costs
for buses have been estimated based on the unit cost per kilometer. The project aims to develop
a modern bus system, and O&M costs are substantial compared to infrastructure projects. The
project also involves a social development program, and the associated cost has been included
in the economic cost.

2. Economic Benefits

11. The main economic benefits of the project are time savings for public transport users,
vehicle operating cost (VOC) savings for jeepneys (replaced by modernized buses) and private
vehicles, and perceived travel time (amenity) benefit. The analysis also considered road safety
benefits, as the project will reduce traffic and hence road crashes; and the impact of reduced
emissions of greenhouse gases. The analysis also considered air quality benefits as the project
mostly runs within urban areas. With the major civil works (terminals, depots, and driving school)
mostly built on existing vacant land, traffic congestion and related costs to road users during
construction were considered minimal and are included in the analysis. The economic benefit for
the social development program has not been considered in the analysis, 9 which is also a
conservative approach.

12. Time savings. Traffic congestion and operational inefficiencies in Davao City's existing
public transport system result in long and uncomfortable trips for public transport passengers. The

7 For land acquisition cost, no assessment or market analysis was made, and the acquisition cost was adopted as the
economic value of land.
8 It is estimated as the increase in travel time of public transport passengers and private vehicle users.
9 The social development program includes financial and nonfinancial assistance. Financial assistance is the transfer
of money without economic benefit; for the nonfinancial assistance, it is difficult to predict the project-affected people’s
choice of the listed assistance, and it is subsequently difficult to estimate the economic benefit.
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proposed project will provide a reliable and comfortable mode of public transport, which will yield
travel time savings for both public and private transport users because of faster travel times in the
with-project scenario compared to the without-project scenario. The Davao Strategic Transport
Model estimates the time savings for public and private transport users. It is estimated that public
transport users will save about 5.62 minutes per day on average, while private vehicle users will
benefit from an average time savings of about 1.09 minutes per day. Time savings were valued
using a base value of time of $1.79 per hour for existing jeepney riders, which are the large
majority of users, and $7.17/hour for private vehicle users, which was converted to 2022 prices
by applying inflation factors. The adopted value of time in the Davao region is obtained from the
Department of Public Works and Highways, which is based on origin–destination survey.

13. The value for car owners in work is estimated on the basis of minimum annual income
requirement for obtaining a vehicle; the time value of passengers in public transport vehicles is
set at per person-hours of the passengers, which are assumed to have an annual income of less
than the people who can acquire their own vehicles. The value of time is assumed to grow in line
with per capita income growth in real terms. For this analysis, 3.09% annual growth in value of
time in real terms is adopted for 2022, and 5.99% from 2023 onwards.10 The total value of time
savings benefits is estimated to be $4,847 million in 2022 prices.

14. Vehicle operating cost savings. VOC savings consist of two components: VOC savings
for public transport vehicles (jeepneys) and VOC savings for private vehicles. VOC savings for
jeepneys are generated from operation cost and replacement cost based on a 6.67% annual
replacement ratio and 15-year life span for the without-project scenario. VOCs for modernized
buses (with-project scenario) have been included in the economic costs, so they are not counted
under this section. Meanwhile, VOC savings for private vehicles were calculated using constant
annual travel distance and average reduction in unit running cost because of the increase in
average travel speed as a result of the project. The total VOC savings are estimated to be $1,382
million over the 30-year operation period in 2022 prices.

15. Amenity benefit. The amenity benefits represent the improvement in the quality and
provision of amenities and the associated benefits gained by bus passengers. This includes both
amenities improvement experienced before boarding and in-vehicle improvements. The adopted
methodology to value amenity benefit is similar to estimating travel time savings, in line with
Government of New South Wales guidance.11 Amenities are valued using equivalent in-vehicle
time (IVT) minutes, which is often determined by stated preference valuation surveys representing
the passengers’ willingness to pay. 12 The average travel time benefit per passenger was
estimated to be 3.61 minutes, 13 derived from a comprehensive database which was further
adjusted downward to be prudent. The total amenity time benefit is estimated to be $2,662 million.

16. Road safety benefits. With a larger vehicle capacity, the modernized buses will reduce
the number of public transport vehicles on the road. The reduction in road travel will be associated

10 The GDP annual growth is based on https://neda.gov.ph/dbcc-reviews-growth-assumptions-for-fy-2021/ and Davao

Region, Gross Regional Domestic Product, by Industry, Growth Rates (PSA); the population growth is based on
https://psa.gov.ph/sites/default/files/attachments/hsd/pressrelease/Table%202_0.pdf
11 The document Principles and Guidelines for Economic Appraisal of Transport Investment and Initiatives is accessible

via: https://www.transport.nsw.gov.au/sites/default/files/media/documents/2017/principles-and-guidelines-for-
economic-appraisal-of-transport-investment.pdf
12 Public Transport Research Group at Monash University, accessible via: http://publictransportresearchgroup.info/

portfolio-item/best-practice-approaches-to-public-transport-customer-amenity-valuation/
13 3.61 minutes is the reduced estimated value after adjustment for the project with the original estimated value of 7.22

minutes.
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with a reduction in injuries and casualties from road crashes, and reduced emissions of
greenhouse gases. According to traffic accident data provided by the Department of Public Works
and Highways, the crash rate is estimated to be 0.67% fatalities and 7.92% injuries per million
vehicle kilometers. With the unit social cost for fatalities and injuries growing as real GDP per
capita grows, over the 30 years of operation it is estimated that the project will save $5 million in
road safety. 14

17. Greenhouse gases reduction benefits. The project will reduce carbon dioxide (CO2)
emissions by about 140,000 tons annually on average because of the change in the composition
of public transport vehicles. According to ADB guidelines, $43.2 per ton of CO2 equivalent (in
2020 prices) is adopted to monetize the greenhouse gas emission reduction benefits. The
emissions associated with construction are considered minimal and not included in the economic
analysis. The saving because of CO2 emission reductions over the 30-year operation period is
estimated at $267 million in 2022 prices.

18. Air quality benefits. The project will also reduce emissions of nitrogen oxides and fine
particulate matter because of improved vehicle emission standards, reduced traffic congestion,
and reduced total vehicle numbers. The design consultants have estimated the change in road
vehicle pollutant emissions using Defra’s Emission Factor Toolkit v10.1, 15 which is a Microsoft
Excel tool to assist with the review and assessment of local air quality. The monetary value of this
change as a result of modernizing the bus fleet has been undertaken using the toolkit, which has
considered the risk of different diseases because of the concentration of pollutant emissions and
the associated social cost. The value of the air quality benefit was estimated to be $8.4 million
per annum starting from the full operation of the project.

3. Cost–Benefit Analysis

19. The project cost–benefit analysis compares economic costs in the with-project and
without-project scenarios. The summary evaluation results are shown in Table 3. The analysis
shows that the project is viable, with an economic internal rate of return of 11.39% and a net
present value of $319 million, using ADB’s discount rate of 9%.

Table 3: Economic Analysis Results

($ million)
Capital O&M Time VOC Amenity Safety GHG Air Net
Year Cost Cost Savings Savings Benefits Benefits Reduction Quality Benefits
2023 132.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (132.6)
2024 626.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (626.6)
2025 182.5 55.5 44.2 31.0 26.4 0.0 6.3 8.4 (121.8)
2026 22.5 55.7 48.1 32.8 28.3 0.0 6.4 8.4 45.8
2027 20.7 55.5 51.7 35.8 30.4 0.0 6.6 8.4 56.8
2028 19.1 58.7 55.7 36.5 32.6 0.0 6.7 8.4 62.2
2029 18.6 72.9 60.0 37.3 35.1 0.0 6.9 8.4 56.0
2030 9.0 72.8 64.6 38.0 37.6 0.0 7.0 8.4 73.9
2031 0.0 109.8 69.6 38.8 40.4 0.0 7.2 8.4 54.6
2032 0.0 73.0 74.9 39.5 43.4 0.1 7.4 8.4 100.6
2033 0.0 76.9 80.7 40.3 46.6 0.1 7.5 8.4 106.7

14 The unit value of social cost for fatalities and injuries is estimated based on M. R. M. de Leon, R. G. Sigua and P. C.
Cal. 2005. Estimations of socio-economic cost of road accidents in Metro Manila. Journal of the East Asian Society
of Transportation Studies, vol. 6 (2005), pp. 3,183–3,198 (Table 12).
15 https://laqm.defra.gov.uk/air-quality/air-quality-assessment/emissions-factors-toolkit/
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Capital O&M Time VOC Amenity Safety GHG Air Net

Year Cost Cost Savings Savings Benefits Benefits Reduction Quality Benefits
2034 0.0 72.8 86.9 41.1 50.0 0.1 7.7 8.4 121.4
2035 0.0 93.5 93.6 42.0 53.7 0.1 7.9 8.4 112.1
2036 0.0 72.8 100.9 42.8 57.7 0.1 8.1 8.4 145.1
2037 0.0 72.8 108.7 43.7 61.9 0.1 8.2 8.4 158.3
2038 48.2 255.0 117.2 44.6 66.5 0.1 8.4 8.4 (58.0)
2039 16.1 94.0 126.3 45.6 71.4 0.1 8.6 8.4 150.3
2040 0.0 76.0 136.1 46.5 76.6 0.1 8.8 8.4 200.7
2041 0.0 76.2 146.8 47.3 82.3 0.2 9.0 8.4 217.7
2042 0.0 76.0 158.3 48.0 88.3 0.2 9.2 8.4 236.4
2043 0.0 80.8 170.7 48.8 94.8 0.2 9.4 8.4 251.5
2044 0.0 76.2 184.1 49.7 101.8 0.2 9.7 8.4 277.6
2045 0.0 76.0 198.6 50.5 109.3 0.2 9.9 8.4 300.9
2046 0.0 100.1 214.2 51.5 117.4 0.2 10.1 8.4 301.7
2047 0.0 76.2 231.2 52.4 126.0 0.2 10.3 8.4 352.3
2048 0.0 226.0 249.5 53.4 135.3 0.2 10.6 8.4 231.3
2049 0.0 76.0 269.3 54.5 145.3 0.3 10.8 8.4 412.4
2050 0.0 76.2 290.7 55.5 156.0 0.3 11.1 8.4 445.7
2051 0.0 76.0 313.9 56.7 167.5 0.3 11.3 8.4 482.0
2052 0.0 76.0 339.0 57.9 179.8 0.3 11.6 8.4 520.9
2053 0.0 268.7 366.1 59.1 193.0 0.3 11.8 8.4 370.1
2054 0.0 268.7 395.5 60.4 207.3 1.0 12.1 8.4 415.9
Total 1,095.8 2,996.8 4,846.9 1,382.1 2,662.5 5.0 266.6 251.5 5,322.1
( ) = negative, GHG = greenhouse gas, O&M = operation and maintenance, VOC = vehicle operating cost.
Source: Asian Development Bank estimates.

20. Sensitivity tests. The analysis included sensitivity tests to ensure a robust result. The
following scenarios were considered a 15% increase in capital cost (case 1), a 15% decrease in
time saving benefit (case 2), a 1-year delay in bus system operation (case 3), removal of air quality
benefits (case 4), a 20% decrease in growth rate of value of time for 2023 onwards (case 5), a
20% decrease in amenity benefits (case 6), and a 15% increase in O&M cost (case 7). The results
of the sensitivity analysis are in Table 4. The most significant impact is observed in a delay in bus
system operation. To reduce the risk, upfront preparations have been conducted, including
advance procurement, to keep the project timeline.

Table 4: Sensitivity Analysis Results

(%)
Base
Item case Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7
EIRR (%) 11.39 10.21 10.36 9.77 10.78 9.95 10.62 10.52
Switching value 34 (33) (32) (59) 41
( ) = negative, EIRR = economic internal rate of return.
Source: Asian Development Bank estimates

E. Financial Analysis

21. A financial assessment was undertaken to examine the sustainability of the project, based
on the associated incremental earnings and operational costs that will accrue to the government.
Passenger fares are the main source of direct revenues from the project. Feasibility study
consultants carried out surveys to analyze affordability and willingness to pay, where the
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commuters indicated that they are willing to pay additional fares for improved public transport
services given the existing fare level. The analysis assumes a base fare of ₱9.27 plus ₱1.80 per
kilometer based on the Public Utility Vehicle Fare Guide issued by the Department of
Transportation, increased in line with inflation. A discount rate of 4% was also applied to seniors,
students, and persons with disability. The proposed fare level is in line with the existing jeepney
fares, so it will not decrease the ridership from the current public transport demand level in terms
of affordability.

22. The onboard advertising revenue is estimated to equal 5% of fare revenues, which is based
on international experience in bus operation. The estimates also include advertising revenues at
bus stops and terminals and lease income from commercial kiosks in the terminals, but do not
consider additional revenues that would accrue from development of land around the terminals.

23. In the operation stage, the government will designate a system manager to concession out
the bus operation to a small number of private bus operators through initial 5-year performance-
based contracts, under which the government will finance the payment to the bus operators and
receive all revenues. The government will then take all risks associated with public transport travel
demand, and additional buses and replacement buses will also be procured by the government
before leasing to private operators. The government has also committed to provide subsidies in
the event of force majeure, such as a pandemic, as needed.

24. The financial analysis is then assessing if (i) revenues generated by the upgraded bus
transportation will be enough to cover the routine maintenance and operations costs of the
concessionaire, and (ii) sufficient budget allocation can be provided for periodic maintenance and
fleet renewal to maintain the economic benefits from the project.

25. Financial sustainability. The result of the financial analysis is presented in Table 5. The
estimated total revenue for the project over 30 years of operation is ₱285,928 million in nominal
terms with fare revision in line with inflation, which is sufficient to cover daily operating costs taken
by the private operators (net surplus is estimated to be ₱40,392 million). 16 Other O&M costs include
O&M of the essential infrastructure such as traffic signals, intelligent transport system, and bus
stops, and periodic maintenance and replacement of vehicles, which will be undertaken by the
government. 17 Under normal conditions, no additional budget allocation will be required as
revenues generated fully cover routine O&M costs for the assets. However, the project revenues
are insufficient to cover the initial capital investment, periodic maintenance, and bus replacement
costs. The bus fleet will be procured and renewed by the government.

Table 5: Financial Forecasts for Operation and Maintenance

(₱ million)
Daily Bus O&M Cost for Periodic
Revenue Operating Costa Net Essential maintenance and
Year (a) (b) (a–b) Infrastructure bus replacement
2024 3,218 (1,888) 1,330 (771)
2025 5,059 (2,950) 2,110 (1,206)
2026 5,279 (3,048) 2,231 (1,237) (14)
2027 5,507 (3,149) 2,358 (1,274)
2028 5,746 (3,253) 2,492 (1,312) (230)

16 The net surplus will be ₱11,799 million when a 10% decrease in revenue is assumed, and ₱15,838 million when a
10% increase in daily bus operation cost is assumed.
17 Part of cost for the O&M of the essential infrastructure and periodic maintenance and replacement of vehicles will be

covered by the surplus of the bus operation.

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Daily Bus O&M Cost for Periodic

Revenue Operating Costa Net Essential maintenance and
Year (a) (b) (a–b) Infrastructure bus replacement
2029 5,995 (3,361) 2,633 (1,380) (16)
2030 6,254 (6,353) (99) (1,421)
2031 6,525 (6,564) (39) (1,464) (2,894)
2032 6,808 (6,782) 25 (1,507) (17)
2033 7,103 (7,008) 95 (1,552) (2,308)
2034 7,410 (7,241) 170 (1,598)
2035 7,731 (7,481) 250 (1,646) (1,952)
2036 8,066 (7,730) 337 (1,696)
2037 8,416 (7,986) 429 (1,747)
2038 8,780 (8,260) 520 (1,799) (16,343)
2039 9,161 (8,532) 629 (1,853) (1,903)
2040 9,558 (8,815) 743 (1,909)
2041 9,972 (9,108) 864 (1,966)
2042 10,404 (9,410) 993 (2,025)
2043 10,854 (9,723) 1,131 (2,085) (3,418)
2044 11,325 (10,046) 1,279 (2,158)
2045 11,815 (10,380) 1,435 (2,213)
2046 12,327 (10,725) 1,603 (2,280) (2,748)
2047 12,861 (11,081) 1,780 (2,348)
2048 13,419 (11,451) 1,968 (2,419) (20,543)
2049 14,000 (11,830) 2,171 (2,491)
2050 14,607 (12,223) 2,384 (2,566)
2051 15,240 (12,629) 2,611 (2,643)
2052 15,900 (13,048) 2,852 (2,722)
2053 16,589 (13,482) 3,107 (2,804) (30,519)
Total 285,928 (245,536) 40,392 (56,089) (82,904)
( ) = negative, O&M = operation and maintenance.
a. Includes estimated private operator profit margin of 17%.

Source: Asian Development Bank estimates.

26. Financial viability considerations. The project is not fully financially viable as a stand-
alone project, with a negative financial internal rate of return. The financial internal rate of return
is much lower than the economic rate of return, and raising fares significantly would reduce
ridership resulting in a decrease in economic benefits. Because of the low financial viability, the
project cannot be undertaken by the private sector and requires public sector support. The viability
of the project for the public sector will be higher than for the private sector, as the government will
collect taxes and duties on the project works, operations, and the project resulting business and
economic activities. The investment decision for the public is based on the project’s economic
viability rather than on its financial viability.

27. The Department of Transport and the Davao City administration will conduct a review of
bus operation 2 years after commencement of bus operation and will discuss and agree on the
O&M arrangement and the financial support from Department of Transport to the city, if
necessary.