Wednesday

CBA and transport

First - what is CBA?

From Wiki:

"Cost-benefit analysis is a term that refers both to:
  • a formal discipline used to help appraise, or assess, the case for a project or proposal, which itself is a process known as project appraisal; and
  • an informal approach to making decisions of any kind.

Under both definitions the process involves, whether explicitly or implicitly, weighing the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option. The formal process is often referred to as either CBA (Cost-Benefit Analysis) or BCA (Benefit-Cost Analysis).

A hallmark of CBA is that all benefits and all costs are expressed in money terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their “present value.” Closely related, but slightly different, formal techniques include Cost-effectiveness analysis, Economic impact analysis, Fiscal impact analysis and Social Return on Investment(SROI) analysis. The latter builds upon the logic of cost-benefit analysis, but differs in that it is explicitly designed to inform the practical decision-making of enterprise managers and investors focused on optimising their social and environmental impacts."

What about its application to TRANSPORT?

Again, from Wiki:

"

Cost-benefit analysis is mainly, but not exclusively, used to assess the value for money of very large private and public sector projects. This is because such projects tend to include costs and benefits that are less amenable to being expressed in financial or monetary terms (e.g. environmental damage), as well as those that can be expressed in monetary terms. Private sector organizations tend to make much more use of other project appraisal techniques, such as rate of return, where feasible.

The practice of cost-benefit analysis differs between countries and between sectors (e.g. transport, health) within countries. Some of the main differences include the types of impacts that are included as costs and benefits within appraisals, the extent to which impacts are expressed in monetary terms and differences in discount rate between countries. Agencies across the world rely on a basic set of key cost-benefit indicators, including:

  • PVB (present value of benefits);
  • PVC (present value of costs);
  • NPV (PVB less PVC);
  • NPV/k (where k is the level of funds available) and
  • BCR (benefit cost ratio, PVB divided by PVC).

The concept of CBA dates back to an 1848 article by Dupuit, and was formalized in subsequent works by Alfred Marshall. The practical application of CBA was initiated in the US by the Corps of Engineers, after the Federal Navigation Act of 1936 effectively required cost-benefit analysis for proposed federal waterway infrastructure. [1] The Flood Control Act of 1939 was instrumental in establishing CBA as Federal policy. It specified the standard that "the benefits to whomever they accrue [be] in excess of the estimated costs.[2]

Subsequently, cost-benefit techniques were applied to the development of highway and motorway investments in the US and UK during the 1950s and 60s. An early, and often quoted, more developed application of the technique was made to London Underground's Victoria Line. Over the last 40 years, cost-benefit techniques have gradually developed to the extent that substantial guidance now exists on how transport projects should be appraised in many countries around the world.

In the UK, the New Approach to Appraisal (NATA) was introduced by the then Department for Transport, Environment and the Regions. This brought together cost-benefit results with those from detailed environmental impact assessments and presented them in a balanced way. NATA was first applied to national road schemes in the 1998 Roads Review, but subsequently rolled out to all modes of transport. It is now a cornerstone of transport appraisal in the UK and is maintained and developed by the Department for Transport.[10]

The EU's 'Developing Harmonised European Approaches for Transport Costing and Project Assessment' (HEATCO) project, part of its Sixth Framework Programme, has reviewed transport appraisal guidance across EU member states and found that significant differences exist between countries. HEATCO's aim is to develop guidelines to harmonise transport appraisal practice across the EU.[11][12] [3]

Transport Canada has also promoted the use of CBA for major transport investments since the issuance of its Guidebook in 1994.[4]

More recent guidance has been provided by the US Dept. of Transportation and several state transportation departments, with discussion of available software tools for application of CBA in transportation, including HERS, BCA.Net, StatBenCost, CalBC, and TREDIS. Available guides are provided by the Federal Highway Administration[5][6], Federal Aviation Administration[7], Minnesota Department of Transportation[8] and California Department of Transportation (Caltrans)[9].

During the early 1960’s, CBA was also extended to assessment of the relative benefits and costs of health care and education in works by Burton Weisbrod.[10][11]. Later, the US Dept. of Health and Human Services issued its CBA Guidebook[12]."

What about CBA and Transport?

"There are well established appraisal techniques for assessing the costs and benefits of transport changes. Economists have repeatedly demonstrated that, in a perfectly competitive economy, a fully-specified cost benefit analysis (CBA) would capture all the economic impacts of a change to the transport system. Economic benefits such as the benefits to a firm of workers being prepared to travel further to work are another representation of the value of time savings included in the CBA, not additional to these benefits.

Perfect versus imperfect competition

Markets are not, however, perfectly competitive. As a result, there are two important conditions influencing economic impacts: first, the extent to which transport-using industries are perfectly competitive; and, secondly, the extent to which prices in the transport sector reflect social costs.

Where monopoly power is prevalent in transport-using industries, firms will charge prices to maximise profit, but these prices will be higher than they should be to maximise economic welfare. Similarly, if there are potential economies of scale that cannot be realised in a small local market, again prices are higher than they need or should be. In these circumstances and provided prices in the transport sector reflect marginal social cost, a transport scheme which opens the area up to wider competition and a wider market may bring prices down, and may in turn produce additional economic activity. The end result is benefits which are greater than the direct benefits as assessed by the CBA.

Conversely, if transport-using industries are perfectly competitive and prices in the transport sector are less than marginal social costs (e.g. congestion or pollution costs are not fully paid for by the producer of them), total benefits will be less than the direct benefits assessed by CBA. Other possible combinations of circumstances in the transport-using and transport sectors exist for which it is not possible to state a general rule about the existence and sign (positive or negative) of additional impacts.

We have commissioned new work, extending recent research into the implications of imperfect competition (Venables and Gasiorek (1997)). This work provides a theoretical framework which illuminates the linkages between transport and the economy and may help to identify the circumstances in which transport changes could have a significant economic impact. For example:

  • It lends support to the view that in certain circumstances there will be economic impacts additional to those captured by CBA. Crucially, these impacts could be either positive or negative.
  • It also lends support to the concept of network effects.
  • It gives some general guidance as to the circumstances in which improving transport links between regions could work to the advantage or disadvantage of peripheral regions, or of industrial sectors within regions."
What about transport investment and growth?

From the Department for Transport:

"The Committee's main findings at present are:
  • In certain circumstances transport investment may have economic impacts which are additional to those measured in conventional cost benefit appraisal. These additional impacts could be either positive or negative. Recent research may help identify the circumstances in which such impacts might be significant. The Committee's further work will consider the feasibility of developing this work into practicable improvements in appraisal methodology. At present this is an open question.
  • There is scope to achieve some reduction in national traffic volumes through restraint measures which will at the same time improve economic efficiency. This is likely to entail packages of price and non-price measures, focused on congested parts of the network. The Committee's work does not enable it to say anything about the scale of traffic reduction which could be achieved without harmful effects on the economy.
  • While in certain circumstances transport schemes may bring added economic benefits to an area needing regeneration, in other circumstances the opposite might occur. Better communications will enlarge markets for goods, services and workers: the area as a whole may gain or lose from this depending on the structure and competitiveness of the local economy. It follows that there is no simple, unambiguous link between transport provision and local regeneration.
  • The Committee believes that the state of the art in local and regional economic impact studies is under-developed. The pervasive, often implicit assumption, that the benefit of improved accessibility will always accrue to the target area may often be misplaced; the possibility of the net impact running counter to regeneration objectives cannot be ruled out. The Committee indicates some thoughts about an improved approach which it will consider further for its final report."

And the wider economic benefits of transporttation....

And as for Monte Carlo simulation....

And a good quote to show evidence of research?

"There is very little realism in CBA, and 40 years or more of CBA in transport has contributed to the parlous condition of transport policy and provision in the UK. CBA is a contested area. The way that valuation of time is carried out for road schemes leads to a situation where we invest to reduce time spent travelling and then adapt by travelling longer distances so that we maintain a constant time budget. This is why we have congested roads. The valuation of time methodology is artificial and deeply flawed."

Source

Don't forget that the Heathrow and all this and this and this make up the comprehension question in the June 2010 exam.


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