Institute for Transport StudiesFACULTY OF ENVIRONMENT

The economic basis of major transport decisions

Beesley Lecture 17th November 2016

Tom WorsleyVisiting Fellow, ITS

Outline

• The development of the current policy position • Some statistics – travel demand and investment • DfT’s investment appraisal framework:

• the core method• developments to appraisal and decision-making

• Reasons for the focus on transport investment• Future prospects and challenges

Transport policy 2005-2015 – Eddington Report

Eddington Transport Study (2005) – HMT and DfT• Analysed links between transport and growth , growth and carbon

Recommended:• Improvements to the existing network, targeted on urban areas, inter-

urban corridors and international gateways • Policy mix, including pricing for congestion and emissions– demand

management• Systematic approach – policy priorities, options, full cost benefit appraisalNo substitute for careful cost benefit analysisNoted that: ‘Step change measures’ ...’likely to result in modest returns relative to smaller scale options.’ Connectivity of the UK network was good.

Transport policy 2005-2010

3 White Papers – 2 all modes, 1 rail – implementation of Eddington

Strong emphasis on sustainability – carbon, incremental schemes, making better use, urban road pricing schemes

Focus on rail investment in response to:• Continuing demand growth and capacity constraints• The increasing importance of cities in the economy• Political support

Exceptions:• Proposals for HS2 emerging• Case for Crossrail developed

Transport policy 2010-2015 -Recent policy statements

Roads Investment Strategy 2015These changes are underpinned by a step-change in investment in our strategic

roads, worth over £15 billion to 2021. Taken together, this scale of reform and investment has allowed us to dramatically increase our ambitions for the SRN

Northern Transport Strategy March 2016Central to all our plans is enhancing our transport connectivity – this Government is

spending £13bn on transport for the Northern Powerhouse over this Parliament, including dramatic improvements to our roads and railways in the North.

DFT Business Plan 2015 We will increase the level of investment in transport by 50% by 2020

Other major schemes include:• Completion of Crossrail and Thameslink, other London schemes, HS2,

airport expansion, Intercity Express, rail electrification

Has the nature of transport problems changed?

A shift from the Eddington paradigm:• From the incremental to the transformational• Perception that transport can change the economy at a more than local

level• Continuing growth in rail patronage, road traffic growth resumed in 2013• Growth in the economies of cities – high cost rail solutions• Carbon has been ‘put back in the box’ • Pricing and demand management now off the policy agenda

To return to this theme

Transport investment 2005-2014

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.00

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Investment in Road and Rail 2005-2014 £m 2010 prices

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Transport investment 2005-2014

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Transport investment as % of all public expenditure 2005-2014

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Passenger kms by mode 1952-2014

Rail passenger journeys 1831-2014

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WW2 1939-1945Nationalisation (BR) 1948

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Privatisation 1995Annual passenger journeys

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Road traffic – actual and forecasts 1995-2040

Transport investment and the decision-making process

Most decisions made directly by government – central or localA set of rules for promoters of publicly funded transport

schemes to establish:• Accountability• Transparency• Openness to challenge• Public interest

Limited role of regulation – ORR responsible for setting performance targets and monitoring investment programmes, for rail open access and safety

Why does Government have a dominant role?

Market Failures• Roads - absence of user pricing.• Rail - regulation by government of commuter and some other fares

Monopoly/network effectsExternalities:• Interaction with land use planning, with urban agglomeration• Environmental impacts

Politics

Government’s investment appraisal methods

• HM Treasury Green Book• DfT’s WebTAG – transport economic appraisal guidance

• WebTAG evolved from methods derived in late 1960s applied to trunk road schemes and from 1998 ‘New Approach To Appraisal’ Periodically reviewed: updated, extended incrementally in scale and scope and in improved presentation

• Based on the theory of consumer behaviour with empirical support from observations and surveys of travel behaviour and other impacts.

• Economic appraisal is one part of the framework for decision-makers

The DfT’s WebTAG

Provides transport modelling and transport appraisal guidance for scheme sponsors. Mandatory for government funded schemes

• Model serves to estimate volume of demand for a transport scheme and other impacts and provide a comparison with ‘no scheme’• WebTAG advises on modelling methods

• Appraisal – used to value the changes made by the scheme, usually based on willingness to pay (because of absence of an adequate direct payments process)• WebTAG specifies appraisal methods and provides a databook of

values

The essentials of a transport model

A spatial representation of the supply of transport and of the demand to travel • A matrix of trips between the origins and destinations in the model,

assigned to the transport network and allocated to the modes represented, based on users minimising their disutility of travel

• A process which allows for testing options, with accessibility measured through travel times and costs, the market for those changes and a new equilibrium between demand and supply

• A transport model is invariably augmented by a forecasting model – future year demand drivers and responses to the changes in future years

• Output – changes in the quantity and quality of travel

Measuring and valuing the costs and benefits

Valuing of the benefits/costs of an option in terms of;• Time savings, including crowding, reliability• Other journey quality – stations, interchange• Physical activity (cycle and walk schemes)• Safety• Environment – noise, air quality, carbon, land/townscape, heritage,

water quality, biodiversity• Changes in costs, including infrastructure and taxes – transport user,

operators and government• Categorised by the economy (business), social (commute, leisure),

environment, public accounts

Compared with ‘do-minimum’ and with other options

Valuing the costs and benefits- value of time savings

Measure of willingness to pay for a change Evidence from market research type surveys and from

behaviour

Universal currency – almost all projects influence travel timesTime savings proxy for accessibility change – converted into

new choices of where to live, work etcPeople could always have taken the savings as timePredictable, an output from the design and an iteration on

design (eg HS2)New study completed 2015 – DfT updated values.

Process of Appraisal

Costs and benefits forecast for every year from model and interpolation

60 year appraisal period, HMT discount rate 3.5% falling to 3.0%

Demand cap after year 20 Discounted to provide a PVB and a PVC = BCR(initial BCR)Appraisal Summary Table – presents decision-makers with

overview of each significant impact, quantified and valued where possible and a BCR

Developments in appraisal 2005-2016

The codification of the decision-making process – the Transport Business Case

The Value for Money Business Plan input indicator

Wider economic benefits – strengthening links between investment and the economy

Devolution of decision-making away from WhitehallReduction in discount rate from 8% to 3.5%/3.0% and 60 year

appraisal period (2003)Valuation of the major environmental impacts

The Transport Business Case Model

Financial: affordability, funding, financial risks, contributionsManagement: governance, risk management, stakeholders

Commercial: procurement, capability, risk allocationEconomic: Green Book/WebTAG Cost benefit analysisStrategic Case: Fit with policy, need for the scheme, timingFinancial, management and commercial cases largely a set of

yes/no decisionsEconomic case both yes/no (BCR>1.0) and ranking with

constrained budgetStrategic case – contribution to local/national GVA and other

objectives

BCR and VfM

Not all benefits or costs are monetised – eg landscapeSo decision-makers review the BCR in the light of

unquantifiables and determine a Value for Money category for each scheme

From the BCR to a Value for Money category – BCR +/- judgement on unquantifiables = VfM

VfM Categories:• Poor <1, low 1.0 -1.5, medium 1.5 -2.0, high 2.0 - 4.0 and very high >4.0

Most high and above schemes are approved, some in lower categories.

Effectiveness of Appraisal : DfT Business Plan Input Indicator

• DfT Value for Money annual reporting - Percentage of DfT’s appraised project spending by VfM category

• The ‘go/no go’ decision is strongly influenced by need to avoid a ‘poor’ VfM outcome

poor low medium high v.high2014 3 <1 7 41 48

2013 6 80 14

2012 42 58

2011 68 37

Additional Costs and BenefitsWider impacts:• Transport investment increases economic mass/agglomeration benefits

through better urban accessibility;• Raises productivity directly through better connectivity• Business response to intensify/relocate and increase number of

employees/firms in the now more productive city• More output per person and hence more tax revenues – a benefit in the

economic case – extra GVA from relocation not itself a benefit• Estimates of increase in productivity depend on the transport model and

associated land use model for relocation effects

Strengthens the economic case for urban schemes – part of the ‘adjusted’ BCR – and provides link to GDP

Transport and GDP

Transport investment can increase GDP by:• Reducing business transport costs – business user benefits• Increasing the economic mass of cities, raising productivity• Inducing people and firms to shift to more productive locations• Increasing labour force participation

The GDP effect can be derived from models which include:• Business time savings, agglomeration benefits and extra GVA from

relocation/intensification

Time savings provides a means of measuring the changes in accessibility which link transport with GDP effects

Transport and GDP

Models have been developed– LUTI, reduced form and SCGE – to estimate the changes to local and in some cases national GDP

Different models produce very different estimates – responses very context specific, especially for ‘transformational’ projects

Establishing the counterfactual is unclear – opportunity cost of the transport and complementary investment?

Interpreting such models is a challenge - yet the demand for a national or local ‘GDP effect’ is strong

CBA and ‘real economy’: which metric(s)?

Economic Case – the BCR (a ratio) and DfT’s VfM (high, medium, low, poor) metric provides for:

• Go/no-go decision• Ranking• Documented, accountable evidence

Strategic Case - GDP metric has strengthened the Case despite uncertainty about size of effect:• Evidence of spatial distribution of tangible business benefits – hence

source for funding• Impressive number, though largely divorced from Chancellor’s strategy

Why the focus on investment in transport? External effects

Growth in rail patronage since mid 1990s – likely causes:• Economic growth, though rail continued to grow during recession• Urbanisation and structural change – in location of jobs and households• Mode shift – car business users, car costs and young people• Quality of service• Yield management fares

Forecasts of continuing but slower growth in rail and road traffic – population growth, income growth, some limited improvements in journey times

Why the focus on investment in transport? Technical reasons

Changes to appraisal values and methods over past decade have increased the BCR:

• Discount rate and appraisal period• Formalisation of Transport Business Case• Wider benefits, strengthen economic case and provide evidence of GDP

effect for the strategic case• Greater quantification of environmental impacts leaves less room for

judgement• Optimistic demand growth forecasts based on OBR 2%pa per capita

GDP and ONS population projections –but impact of BREXIT?

Why the apparent increase in transport investment? Policy influences

Policy influences:• With fiscal and monetary policy largely ineffective, transport spending

remains an active central government initiative• The link between transport and growth can be used to justify an

ambitious programme• Influence of London - investment has been very London focused until

the Northern Transport Strategy and remains big city centred • Government’s ability to promote non-infrastructure solutions is limited by

separation of responsibilities for operations and infrastructure• National Infrastructure Commission• Mega-projects have a separate budget.• The desire for big announcements

Challenges and Prospects - Devolution of delivery

Roles of Highways England and of Network RailAim- to incentivise efficient delivery of investment and

management of infrastructure.

Creation of triangular relationship between central government, infrastructure provider and local authorities.

Whose objectives come out top – strategic traffic or commuters?

Have we got the right mix of projects and policies? Balance between cities and interurban?

Challenges and Prospects - Devolution of delivery

Trade-offs between targets and cost benefit analysisTargets incentivise – simple, widely understood through

organisation – eg rail reliability

CBA’s multiple objectives and trade-offs ‘too complex’But simple targets put good solutions at risk The Economic Case ensures acceptable VfM but targets drive

option selection – ‘no longer chasing the BCR’.Who owns the Business Case? Sponsor or Government?

How might local transport policies develop?Does the Northern Transport Strategy provide a model? TfN

prioritises national schemes, but cities still compete for local funding.

Sources of local funding very limited:• Some scope, mainly in London, through increases in local taxation and

developer contributions• Estimates of GVA attributable to the scheme rarely explain displacement

and counterfactual: is the transport/GVA model robust?• Other policies – training, skills, land assembly, public realm creation

need to accompany the transport intervention

What role for places outside London and the city regions?

How might policy develop? Roads

Scope for capacity increases through managed motorways and other increments close to exhaustion

New alignments – are major new routes a feasible option? History suggests that often they are not

Will technology and societal change reduce the demand to travel?Will automated vehicles make much better use of the existing network,

reducing case for capacity and reduce harmful emissions?Separation of responsibility for local and trunk roads doesn’t encourage

coherent planning- have we got the division right?What role for charging at point of use to replace the new National Roads

Fund and so managing demand?

Roads, funding and charging

Push factors• Technology – easy to identify location of vehicle for targeted charging

and a requirement for automated vehicles• Reducing amounts of fuel duty – need for a new funding stream• Infrastructure options less attractive – cost and environment

Negative factors• Public acceptability• Significant gainers and losers - fuel duty already falling – it will soon be

too late.• Setting the correct charge.

How might policy develop? Rail

Two policy priorities- cost control and capacity – revenue should be a third

• Growing demand, infrastructure constraints: increasing long run marginal costs

• Technology – digital railway – a lower cost solution?• Are the causes of demand growth set to continue? • Will conurbations remain a policy priority?• Long term financial plan needed – how will new capacity be funded?

What will rail cost and what will rail users contribute?• Might institutional changes influence costs? Vertical integration?

The High Level Challenge

Ambitious places have a ‘vision’ – how might transport realise that transformation?

What else is needed to deliver the vision?

What about non-core ‘less visionary’ places?Are the institutions right – responsibilities between national

and local, private and public? Are there new sources of funding?

What evidence is required to support decisions? How do we move from the narrow transport BCR to a more holistic understanding of what ‘good’ means?

Discussion