Research 350 - NZ Transport Agency

APPENDIX D
Appendix D: Cost-benefit analysis, regional
impacts and external
economies of scale
(Rye, M., Ohr F., & Lyche, L., 7th International Conference on
Competition and Ownership in Land Passenger Transport, Molde,
Norway, June 2004.)
AD.1
Synopsis
This is a largely theoretical paper which reviews the issue of ‘agglomeration benefits’ and
‘knowledge spillovers’ as additional benefits, ignored by SCBA. The central argument is that
improved transport links which remove ‘vital bottlenecks’ may increase a firm’s willingness to
pay for an additional worker, above the average industrial wage.
This is related to the fact that new transport links may create external economies of scale,
including knowledge spillovers if firms co-locate within the region now serviced by such links.
The formation of such industrial clusters will enhance firm profitability and therefore increase
potential wages.
While SCBA will take into account access to a larger labour pool through induced demand
effects, the standard value of travel time savings (VTTS) measure will be based on average
industrial wages. Therefore, the higher regional willingness to pay for additional workers in
industrial clusters as a result of improved transport links will not be reflected in the VTTS and
the project will underestimate regional benefits.
The authors note however, that empirical evidence for such regional agglomeration benefits
is lacking in their own ex-ante studies (Lych 2001) and in other ex-post work (Brathen 2001).
They suggest this may be because the infrastructure improvements must represent a
significant improvement over past links – or alternatively that such benefits may not exist!
They conclude that SCBA offers a satisfactory measure of efficiency in most cases, but call for
the use of judgement for individual projects to determine whether there may be a case for
factors such as agglomeration benefits.
AD.2
Comments
While theoretically interesting, the empirical case for agglomeration benefits remains
unproven in this paper. One issue is whether a – theoretically – higher firm willingness to pay
would necessarily be reflected in actual wage rates (and thus in VTTS).
Another issue is whether improved transport links actually result in wages in the region
under question benefiting from the suggested higher productivity, or whether, in part, these
benefits would flow to another region (the ‘two way road problem’). Even assuming that the
benefits remain within a given region it may be difficult to ‘pick out’ the trips made by those
who are beneficiaries and to apply a differential VTTS.
From a New Zealand perspective a further concern is that of equity. Differentially separating
out projects in areas which may potentially offer higher wage rates runs counter to
Transfund’s equity-based approach to valuing the benefits of travel time savings.
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