Research 350 - NZ Transport Agency

2. APPROACHES TO ASSESSING NATIONAL ECONOMIC BENEFITS
Likewise, Austroads compared a number of past Australian SCBAs of rural and urban roads
with equivalent BCRs derived from an Australian economic model (AE-CGE). In some cases the
CGE-modelled BCRs exceeded those estimated by SCBA; in others the reverse was true.
Austroads concluded that ‘it appears that any economic benefits that flow on to the economy
from road projects that are not captured in cost benefit analysis are relatively minor’ (BTE
1999, pp. 115-116).
To the extent such differing approaches can be compared, these results do not indicate that
CGE captures significantly greater economic benefits than SCBA.
Moreover, the lack of dynamic structure within a given CGE model may bias its results in
relation to those obtained by SCBA, unless it is allowed for. For example, ACG’s (1996)
modelling of the impacts of CityLink using the MMRF indicated that it would reduce
production costs and thereby induce investment, boosting the productive capacity of the
economy. This, in turn, would cause gains in national output and thereby in national
consumption.
However, the lack of a dynamic modelling structure in the MMRF meant that the cost of the
induced investment was not allowed for. In order to allow for such costs, ACG adjusted
consumption gains during the project’s operational phase downwards. The consumption
losses during the construction phase were adjusted upwards, with simulations indicating that
CityLink would ‘crowd out’ other investment prior to becoming operational (BTE 1999, p.
115; ACG 1996, p. 40).
There is no evidence that ACG has similarly adjusted the ESSAM model to account for any lack
of dynamics in its study of New Zealand road investments.
If a lack of model dynamics is an issue, why not simply create fully dynamic models, with
specified relationships (i.e. elasticities) between key endogenously specified variables? A
simple answer is that costs of doing so would be considerable and the credibility of such
work, particularly in view of data restrictions, would be questionable. For example, as noted
above, models which do specify employment impacts endogenously have come under
considerable criticism for their lack of realism. Investment decision-making process also
constitute a particularly difficult issue (see below). In many cases, data to permit the
development of such models simply do not exist.
A related point, suggested in the discussion of partial and general equilibrium above, is that
if both CGE and SCBA must, by necessity, treat some variables as exogenous, the reasoning
in employing the more complex CGE methodology is questionable on grounds of parsimony.
A partial defence is that CGE offers at least some additional degrees of realism by relaxing
some of the exogenaity assumptions of SCBA, such as prices. However, BTE contends that in
many cases SCBA’s assumptions regarding exogenaity and the ignored ‘feedback loops’ are
of little consequence (BTE 1999, p. 110). The above comparisons with the Austroads and ACG
studies being a case in point.
Further, even assuming ‘correct’ specification of CGE models, the ambiguous results obtained
with the Austroads and ACG CityLInk studies noted above could also be taken to indicate that
SCBAs can either overestimate or underestimate benefits, depending on assumptions and
circumstances. There does not appear to be a consistent underestimation of benefit streams
by SCBA. Indeed there is no reason why a partial equilibrium approach such as SCBA should
consistently underestimate benefits (BTE 1999, p. 109). As BTE note, when attempted,
sensitivity testing of CGE models produces a range of outcomes, - within which SCBA
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