The Economics of Transport Appraisal

A.J. Harrison

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351793377
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

This book, first published in 1974, provides a comprehensive review of the application of economic concepts to the appraisal of transport systems. It presents the basic economic ideas underlying their application to transport appraisal. The exposition of these concepts links recent advances in economic theory to practical evaluation procedures. The bulk of the book is concerned with how the basic concepts may be put to use.

Chapter 1
Introduction

Scope and Purpose of this Book

The transport sector is one of the largest in any advanced economy. As incomes rise, an increasing share of consumers’ expenditure is devoted to travel, a large amount of it on private car purchase and operation. In consequence, governments spend large sums on the provision of the roads infrastructure. At the same time, they spend large sums on the subsidisation of public transport services to maintain a proper balance between public and private provision. Yet in transport as in some other fields, the volume of public expenditure is only a partial guide to the importance of the decisions made by government. Direct public expenditure on road safety, for example, runs at only a few million pounds a year, but the total costs which safety measures impose on transport users and the benefits they bring, may be of the order of a hundred times as much. On a yet wider levet the nature of the transport system available has important implications for industrial growth, urban development, the quality of environment and the enjoyment of leisure. Thus, in terms of both size and complexity the transport sector merits the attention it has attracted from analysts of various disciplines.

It has posed two challenges. The first of these, to obtain a basic understanding of the workings of the transport sector on which to base prediction of its future development and of the effects of policy proposals on it, is not our concern in this book, fundamental though it is to our abilities to tackle the second challenge. This is to devise means of comparing the relative merits of different proposals within each part of the transport sector, between parts of the sector and between transport and the rest of the economy. This book is concerned with the contribution of economic techniques to these tasks.

Over recent years, interest in the field of public expenditure and policy appraisal, and in particular in the derivation of quantitative methods for assessing the relative worth of alternative investments has greatly expanded. The particular method considered in this book is the form of economic appraisal known as cost-benefit analysis. This is no longer a precise term. It is easy enough to point to the formulation of the basic concepts by economic theorists and to seminal applied studies such as those by Arthur Maass and other American scholars on the design and evaluation of water resource systems and by Michael Beesley and his colleagues on the London to Binningham Motorway and Ouistopher Foster and Michael Beesley on the Victoria Line, two specific projects which provided a testing ground for the application of economic analysis to problems of public decision-taking in the transport sector. But there has been a tendency recently to describe any systematic analysis of the benefits and costs of a particular proposal as cost-benefit analysis, even if it relies on techniques unrelated to economic thinking. This is no bad thing in itself and indeed some advantages flow from it, e.g. the merging of specifically economic techniques with other traditions and other means of providing advice to decision-takers. This book, however, while trying to relate economic techniques to alternative or complementary approaches, sticks fairly closely to the basic concepts which economists have fonnulated and tried to put into practice under the name of cost-benefit analysis, while drawing attention where appropriate to links with other types of appraisal methodology. In general, early developments in the field of public sector expenditure appraisal have been concerned with investment projects. These might be very large – a large irrigation scheme or a major highway system – but the general context has been a limited one. In recent years, the trend in both public and private sectors has been towards the creation of a systems framework, in which the individual project features as part of a total programme. This tendency has two basic impulses underlying it: on the one hand, the development of mathematical modelling techniques based on large-scale computer use, often labelled systems analysis, and, on the other, dissatisfaction with the procedures employed in government for the development of policy proposals, in all fields of government action, not merely expenditure programmes.

These two impulses came together in the US Department of Defence and out of this experience came the new budgetary procedure, the Planning Programming Budgeting System. This has been looked to, if with scepticism, under this or some similar title, as a means of rationalising the total resource allocation problem facing a government agency by bringing together for joint consideration projects or policies having similar outputs or objectives. While these developments were going on in the US Department of Defence, engineers in the field of urban transport were beginning to develop models of transport systems (Paralleling the military systems analysis) which have made it possible to consider evaluating all the components of very large investment programmes at one and the same time and to relate them to the wider urban and land use planning context. Thus the ability and the need for strategic appraisal appeared around the same time; how Closely they have matched we will consider below.

These two developments led to increasing attention being paid to the context in which projects are developed in the transport sector, and emphasised a trend, already apparent, towards blurring the distinction between project appraisal and policy appraisal. In practice, these is no distinction with regard to the type of work that has to be done. Formally the only difference is that, in the case of policy appraisal, initial outlay (which may be a simple regulation), is of such negligible cost that it does not feature in the calculations. But in both cases, what is being examined is a stream of benefits and costs through time. In this book, therefore, project and policy evaluation will be treated as equivalent terms, and the potential field of application of the techniques to be described is consequently broadened, from small-scale decisions on individual claims for subsidy to large-scale reviews of the direction of overall policy.

In most countries, it is in the transport sector that the techniques of cost-benefit analysis have been most highly developed in theory and most widely put into practice. Established cost-benefit procedures exist, for example, for inter-urban roads, urban public transport and urban road projects, though in other areas especially those concerning the impact of transport on the environment at large, techniques are only just beginning to develop. Yet while cost-benefit analysis has reached the stage of routine application to some problems of public decision-taking in the transport sector, there exists as yet no general survey of the state of the art or exposition of the underlying concepts. This book aims to fill this gap by:

• (a) describing in simple terms the basic concepts employed in the economic appraisal of transport projects;
• (b) discussing some of the practical problems met with in applying them;
• (c) relating the techniques of cost-benefit to the political, organisational and institutional context within which it must work and to other methods of estimating the value of transport projects;
• (d) providing a guide, based on an extensive bibliography, to the current state of the art in evaluating projects in different parts of the transport sector and to deeper examination of some of the problems and concepts referred to in the main text.

It is not written for the specialist economist, for whom there are more technical books, but for anyone, with some knowledge of economic principles, who wishes to see how they may be applied to public sector transport decision-making. As a result, some theoretical problems get rather scanty treatment. They can be followed up by reference to the bibliography. At the same time, this book is not a manual. It does not try to lay down precise operational rules which the transport analyst can apply. Given the range of transport projects and the variety of circumstances in which they must be appraised, this simply cannot be done. The aim, therefore, is to set out the considerations which the analyst must take into account when tackling individual problems.

Outline of Rest of Book

The basic analytic framework underlying the economic appraisal of transport projects is developed in the following three chapters. In most of the rest of this book, we are concerned with putting this framework to use. Chapters 5–7 are concerned with the evaluation of those items of cost or benefit for which no direct monetary equivalent exists, both for users of the transport system, and non-users. Chapter 8 is concerned with problems arising with financial data; although financial data on costs or benefits is often straightforward to handle, there are frequent occasions when they present problems for the practical analyst as knotty as any of the matters discussed in the preceding chapters.

As far as practical procedures are concerned, the main omission from this book is consideration of forecasting methods. There is a close link between the way in which forecasts are made and the evaluation criterion based on economic analysis; Chapter 9 is devoted to problems which can arise from failures to relate the two. Once the estimates of benefit and cost have been prepared, then conclusions can be drawn on whether or not the projects concerned should be carried out or advice can be formulated on the value of proceeding on different courses. How the results of any appraisal should be presented is the subject of Chapter 10. The final three chapters attempt to place the methods discussed into context by relating them to the situations in which they are actually likely to be applied and by assessing their merits in relation to some alternative approaches. The rest of this introductory chapter discusses briefly some general issues underlying the use of economic analysis in public sector problems.

The Task of Appraisal

The general aim of any appraisal system is to improve the quality of the choices made between alternative investments and alternative policies. What is meant by ‘improving the quality of decisions’? The common sense answer is that the courses of action which are chosen tend to have more desirable effects than those which are rejected, that good alternatives are distinguished from less good. In the case of a private firm, this can be phrased in terms of an improved level of profitability. A firm is better able to meet its overall objective of maximising profits if it has effective means of choosing between the various apparent opportunities for making profits open to it. An appraisal system which improves its abilities so to choose is obviously worthwhile.

To apply this analogy to the public sector, some different but comparable objective is needed, since the objectives of maximising profit is rarely relevant to public sector problems. Most of the projects and proposals which are the subject of appraisal yield no direct money or financial return to the agency carrying them out. If the government builds roads, the effect on government revenues via fuel taxation may be favourable or unfavourable but whichever it is, it sheds little light on the social benefit of the road. The same is true of most other transport projects. Many yield some direct money benefits to vehicle operators, but these are only a fraction of the identifiable effects. If the objective of maximising profits is not a sensible guide to action, what can be put in its place?

A possible formulation of objectives for the transport sector is: to maximise the welfare to be enjoyed by individuals and by society through the use of transport, subject to the constraints set by the wish to pursue other objectives. The obvious difficulty with an objective of this kind is that it is vague. Some means of determining to what extent any particular proposal contributes towards it is required, but the objective itself does not, unlike the objective of profit maximisation, suggest what the means should be. There is no obvious equivalent to the profit and loss account of the commercial enterprise: can an alternative be found?

The problem can be put another way. In the transport sector we are concerned with such factors as: travel times, travel costs, accidents, vehicle noise, visual intrusion and other aspects of amenity. Most transport proposals will produce all these kinds of effects, but not of course in the same proportions. Whoever is the responsible decision-taker must therefore choose between different bundles of these effects – schemes with large amounts of time savings, low accidents, but high noise and schemes with lower travel benefits but little environmental nuisance. However difficult these choices may be, they cannot be avoided. Somehow these ‘incommensurable’ items have to be compared and ‘traded-off either one against the other, or against money. To do this, we require a way of summing up these various effects, which are initially measured in physical terms – minutes, decibels etc. – and therefore cannot be readily combined into a single measure of the extent to which the proposals concerned -:end towards ¢te achievement of the objective of maximising welfare. What is needed is a set of weights one for each physical measure, expressed in some common unit which, for example, express the relative importance of a minute’s time saved and a noise reduction of one decibel. How should these be derived?

We may see how economic analysis approaches this question by pursuing further the analogy with the private sector. In ordinary markets for goods and services, individuals express their preferences by buying some items rather than others. The goods they wish to purchase can normally be obtained only through the outlay of financial resources, while the physical resources used to make the goods concerned – men, capital and land – command a price because of their value in the production process. In these markets, therefore, money becomes the standard unit of account for a large number of very disparate items; goods and services of all kinds, qualities of labour, types of capital equipment. All this is taken for granted in a modern capitalist economy. But in the fields with which we are concerned, transport decisions made by public authorities, this convenient measuring rod is not available to allow us to sum up the various effects, no more and no less disparate than the goods and services supplied in the private sector, which ensue from these decisions. The aim of cost-benefit analysis, however, is, wherever possible, to infer weights – or values if they are expressed in money terms – by appropriate analysis of choices made within the money economy, for the effects with which public sector decisions are concerned. Once these are expressed in a common unit, then it becomes possible to sum them up and compare the value in common terms of different policy proposals or investment plans. This is not to say that all the effects stemming from transport projects can be suitably weighted. How far pure economic techniques take us, how far they must be supplemented from other sources and what the implications of partial coverage are, are subjects to be explored later in this book.

Cost-benefit analysis is often criticised for reducing everything to money terms, as though this were morally unattractive or because the effects concerned are essentially ‘subjective’ or beyond price. This criticism is perfectly valid if the means of deriving the weights or values do not command acceptance. But to object to the concept as such may be to miss the point. Any way of presenting or analysing the choices involved in public sector decisions which goes beyond simple listing and description – even the informal processes of individual judgement – comes up against the need for weights, implicit or explicit in the decision process. The effects concerned are no more or less subjective or intangible than those derived from privately purchased commodities and the trade-offs between tl1em are unavoidable given the nature of the decisions involved. If a road is to be built, time savings can frequently be gained only at the expense of increased accidents or environmental nuisance: environmental improvement at the cost of making travel less convenient. However intangible or subjective such consequences are, the choice of one course of action over another implies some relative valuation of them. Weights, in money or other terms are simply reflections of these relative values.

In some cases, it may not be possible to find such values. For example, an individual in perfect health is unlikely to submit voluntarily to death or serious injury, nor be persuaded to do so by the offer of large amounts of money. There is no sense in which he would be prepared to trade-off life or bodily harm against the utility which money can bring. The same might be true of certain factors in the social or physical environment. But many of the factors with which we are concerned in this book are commonly traded-off by individuals or governments against each other or against money and it is to such day-to-day trade-offs that economists have tended to look when seeking to devise the weights required for estimating total costs and benefits. Thus our starting point is that there are sufficient such factors to make the process of deriving weights worthwhile, not that all items which might be included in an appraisal can necessarily be expressed in this way.

Placing money values on effects which normally do not have such values attached to them is not the totality of cost-benefit analysis – although it is an area where the economist has a special contribution. In the total appraisal process the evaluation stage is often a relatively short one if basic values (weights) exist for the main effects. Once these basic values have been derived, by the means to be discussed below, the process of financial appraisal in the public sector is close to that in the private sector – indeed, the similarity is made even closer by the fact that attempts must be made, even in financial appraisals, to estimate the effect on profits or costs of various intangibles – consumer appeal, general climate of business opinion etc. Conversely, much of the information entering into a cost-benefit analysis, particularly that concerned with costs, is precisely the same as that which enters into a financial appraisal. Such basic processes as forecasting are common to each.

The major barriers to effective work in the public sector are as frequently problems of cost estimation, forecasting and basic data deficiencies as they are of failure to derive acceptable values for those effects for which no monetary equivalents, i.e. agreed weights, exist. The cost-benefit analyst frequently finds that much of the information he requires is in a form in which it can be directly used for appraisal purposes and hence requires no special skills on his part: estimates of capital costs, changes in vehicle operating costs, manpower reductions etc. often present no special problems. In this case the contribution of the public sector analyst is, like the analyst in the private sector, to make sure that all relevant alternatives are considered and that the full implications of each are brought into the appraisal process. These will include in both sectors many items which cannot, even in principle, be quantified and given a specific money weight, or value.

This book, however, as was indicated in the introduction, will be primarily concerned with evaluation aspects of appraisal, a subject which is not solely a ‘technical’ matter, in the sense that other components of an appraisal process such as forecasting procedures might be so described. Because we are concerned with finding a measure of social values, we are concerned with politics, in the broadest sense. We must, therefore, before going on to describe the methods of economic appraisal with which this book is concerned, set out the basic political assumptions which underlie their use.

Political Assumptions

To the extent that analysis is concerned with exploring the effects, or outputs, of policies, with spelling out the implications of various courses of action, or trying to find the most effective way of achieving agreed objectives, its place in the political system remains modest and relatively uncontroversial. But as the previous section has indicated, cost-benefit analysis aims to go further than this, by suggesting what values should be attached to the various effects distinguished and attempting to assess the relative importance of the various objectives which policy may pursue. It must do this, if it is to be relevant to a wide range of public sector decisions most of which, as we have already suggested, do involve decisions on how to value a unit of one kind of output against a unit of another or on the level, mindful of the costs involved, at which output of publicly provided services should be set.

But by extending into the field of valuation, cost-benefit analysis necessarily raises issues...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Original Title
• Original Copyright
• CONTENTS
• ACKNOWLEDGEMENTS
• 1 Introduction
• 2 Benefits to Transport Users
• 3 Extensions of the User Benefit Measure
• 4 Further Exploration of User Benefits
• 5 Valuing Costs and Benefits: Method
• 6 User Benefits: Empirical Aspects
• 7 Non-User Costs and Benefits
• 8 The Adjustment to Resource Costs
• 9 The Use of Approximate Measures
• 10 The Presentation of Costs and Benefits
• 11 Cost-Benefit and Financial Measures
• 12 The Context for Economic Appraisal
• 13 Cost Benefit Analysis in Relation to Some Other Common Measures
• Bibliography
• Index