Cost-Benefit Analysis in Transport - Professor Peter Mackie

Institute for Transport StudiesFACULTY OF ENVIRONMENT

Peter Mackie

Presentation to Seminar on Improving CBA for Spatial Infrastructure Plans, University of Amsterdam, 11/9/13

Cost-Benefit Analysis in Transport—Role, Status and Challenges

Plan for the next 30 mins

• CBA as a tool to aid decision-making; where does it sit in the overall process?

• Why is CBA seen as a useful tool for decision support?

• What is its current status?

• Technical challenges

• Policy challenges

• Institutional challenges

The decision-making process

Analysis

Pressures

Intuition &

Vision Judgement

The decision-making process

Analysis

Pressures

Intuition &

Vision Judgement

Creativity

Top of Office

AgenciesSaleability

Lobby Groups

Budget

Reputation

Economics

Planning

Legal system

Engineering

The decision hierarchy

Strategy

Programmes

Implementation

Policy Analysis

Project Appraisal

Optioneering

???5 business case model

CBA

CEA

Contentions

• Strategic policy formulation is not always analytically informed and rarely analytically driven

• The institutions and tools to support strategic assessment are weak. Is there commitment to developing the analytical content of the strategic business case?

• Prior political commitment is the bane of cool judgement in decision taking

• There can be mis-assignment between available analytical tools and what the decision hierarchy requires--- eg using a programme appraisal tool for strategic assessment

• The analytical tools themselves are not always completely fit for purpose

Transport CBA

• A powerful analytical tool ; has served the transport community well for a long time. Why?

• A coherent and tractable theory capable of practical use

• Some liberal democratic credentials– discover willingness to pay and add it up

• Tries to handle discounting for time—essential for long-dated projects

• Useful for comparing alternative uses of public money

• Useful as a framework for supporting decentralised decision making eg local public inquiries

• Brings a degree of discipline and rule to the process

Transport CBA—current status

• Recent report for DfT London International Comparison of Transport Appraisal Practices –visit DfT website–we studied England, Netherlands, Germany, Sweden, US, Aus and NZ

• All seven countries have transport appraisal manuals

• The body of evidence on core values for time, safety etc is pretty consistent, impressive and up to date

• Last decade has seen a broadening to cover values for reliability; comfort and crowding; fitness and health ; wider economy impacts ; regeneration ; environmental impacts

• Core application is to capital projects requiring public funds

• The role of CBA in the overall case for decision is not always transparent.

BUT

• I sense there is more challenge to CBA in transport than for a long time

• Technical challenge

• Policy/planning challenge

• Institutional/political challenge

Technical challenge--example

• In a typical road or rail capital project in UK, Employers business trips account for 10% of traffic and 40% of user benefits.

• Most countries use Cost Saving Approach –value of travel time saved equals wage plus non-wage employment cost

• But time use literature challenges this – ‘people can work on the train’ ‘ travel displaces leisure not work’

• Willingness to pay is the gold standard but deriving unbiassed combined employer + employee WTP is tricky.

• So, in context of high speed rail, longstanding appraisal assumptions come under scrutiny, quite rightly.

Policy/planning challenges

• Policy agenda has moved on—the 3Rs, reliability, regeneration and resilience are now key.

• Representing linkages between transport, accessibility change and induced land use change has become much more central ; many projects have a local/regional economic development motive rather than a pure transport sector one.

• Policy embraces walking, cycling, current as well as capital schemes, funding for public transport…

• Economic engineers think in comparative statics ; planners think in dynamics. Who is right?

• All the above makes a demanding agenda for appraisal

Political/Institutional Challenge

• Global financial crisis has made politicians even more interested in real economic impact not fairy gold of CBA

• They want an account of how primary impacts flow through into the real economy.

• They want cities to compete more effectively and to open the budget choices across sectors—the City Deal.

• So CBA has to compete with Gross Value Added methods

• CBA and GVA can produce very different results for the same project – differences in perspective/geography; quality of life benefits; treatment of value of additional output; behavioural vs standard values ; potential vs realised impacts

Conclusions

• CBA in transport is well-established mature technology in terms of theory, framework, methods and values

• But much more strategic questions are being asked about the impact of transport schemes on the spatial economy

• Impacts such as the 3Rs have become more important and are difficult to model never mind evaluate

• There are two views of appraisal – it is an independent testing ground for projects and policies which come forward OR it is there to support whatever policy happens to be and should morph accordingly. This is the intellectual battleground.