Research 350 - NZ Transport Agency

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ECONOMIC DEVELOPMENT BENEFITS OF TRANSPORT INVESTMENT SCBA compares project benefits with project costs over a period of time (the evaluation period) and uses discounting to reflect the current value of a series of future values. Importantly, SCBA provides clear decision rules (i.e. the Net Present Value, NPV, of project benefits, and benefit-cost ratio, BCR). These indicate the extent to which society is better off (in efficiency terms) from undertaking the project relative to some other course of action (i.e. the Base Case). The NPV indicates the excess of project benefits over project costs (if any) over the evaluation period. The BCR is the ratio of project benefits to project costs. Thus, a BCR above 1.0 represents a project worth undertaking from the point of view of social investment. Conversely, a BCR of less than 1.0 indicates that society would be better off using its resources elsewhere. As suggested above, SCBA thus provides a clear decision rule as to the economic efficiency and social welfare effects of undertaking a given transport project. Key to the understanding of SCBA is the concept of consumer and producer surplus. The consumer surplus represents the benefits derived from the purchase of a commodity, less the costs of the purchase. This is generally represented as the area under a demand curve (and above a given ‘price line’). The demand curve, in turn, reflects the ‘willingness to pay’ (WTP) for a given commodity by various members of society. Likewise the producer surplus, represents the area above the supply schedule (but below the given price line). Within an SCBA framework, total benefits of a given project are measured by the sum of the consumer and producer surpluses. For example, to the extent that a given change (e.g. a transport improvement which lowers the cost of a given trip) results in a change (i.e. increase) in the consumer surplus (and assuming no impacts on the producer surplus), society is said to be better off (in gross terms). Naturally, such benefits would need to be weighed against the social costs of undertaking the project. Implicit to the evaluation of a proposal is the need to compare the situation with the proposal (the project case, e.g. construction/augmentation of a highway, railway or port) with some alternative, i.e. the base case (which is generally specified as a ‘do minimum’ scenario). The ‘opportunity costs’ to society of constructing and operating the project (e.g. construction and operations costs) are therefore set against the social benefits arising from undertaking the project. Note that the opportunity costs essentially reflect the diversion of resources – land, labour and capital – away from other productive sectors towards undertaking the project. The benefits reflect how much ‘better off’ members of society are, as measured by the sum of the increase of consumer and producer surpluses. This provides a net benefits result – the extent to which society is better off from undertaking the project. 18
2. APPROACHES TO ASSESSING NATIONAL ECONOMIC BENEFITS Figure 2.1 indicates the basic process involved in constructing a ‘generic’ SCBA. Undertake the Project Scarce Resources Allocated to the Project Value of Project Output Project Benefit = $X Inputs (e.g. Capital Costs, Operational Costs, Travel Time Savings, Vehicle Operating Savings, Accident Savings) Do not Undertake the Project Scarce Resources Allocated to Alternative Uses Value of Output from Resources in Alternative Uses Project Opportunity Cost = $Y Model Outputs NPV (Benefits – Costs) BCR (Benefits/Costs) Measures economic efficiency.consumer welfare Includes measures of non-market traded commodities (some non-work travel time, some accident costs, environment and externalites) If X>Y, recommend the project Figure 2.1 SCBA process <strong>Transport</strong> SCBA, in the form generally recommended in manuals and text books typically allows for the following factors arising from the project: • Project capital costs • Project operating costs • Travel time savings (or additional costs) including non-work travel time savings • Vehicle operating cost savings (or additional costs) • Accident cost savings (or additional costs) • Changes in environmental impacts The recommended form also includes accounting for the effect of induced demand (also called generated trips, i.e. new trips prompted by the transport improvement) and diverted demand (i.e. trips diverted from other modes to the project mode). However, organisations such as the UK’s Standing Advisory Committee for Trunk Roads Assessment (SACTRA) have called for the development of a more fully specified SCBA, which would also include allowance for additional factors 1 such as: 1 In addition to this list, some commentators have called for the inclusion of the social cost of public funds, i.e. an allowance for the distortionary effects of financing transport investments through taxation. Recent Australian estimates suggest that every extra dollar of (Australian Commonwealth) government spending imposes a social cost of taxes equivalent to some $0.24 – i.e. implying that costs for any given government financed project should be increased by an additional 24% (BTE 1999, p. 79). An obvious point is that allowance for such a factor would reduce the net benefits from transport investment – implying that conventional estimates overestimate such benefits (rather than the reverse, as critics of SCBA often argue). However, there are many objections to allowance for the social cost of public funds. Most notably, governments may finance transport investment from a variety of other (less distortionary) devices such as budget surpluses, reduced spending in other areas, increased borrowing or direct charges. A further point is that an increasing number of transport projects are partly or wholly funded by the private sector. 19
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Research 350 - NZ Transport Agency

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