2010

Joint Transport Research Centre
ROUND TABLE
21-22 October 2010, Mexico

DISCUSSION PAPERS

16

COST-BENEFIT ANALYSISIN TRANSPORT: A UK PERSPECTIVE
Peter MACKIE, Institute for Transport Studies,
University of Leeds, UK

JOINT TRANSPORT RESEARCH CENTRE

Discussion Paper No. 2010-16

Prepared for the OECD/ITF Round Table of 21-22 October 2010 on
Improving the Practice of Cost Benefit Analysis in Transport

COST-BENEFIT ANALYSIS IN TRANSPORT – A UK PERSPECTIVE

Peter MACKIE*
Institute for Transport Studies
University of Leeds
United Kingdom* The author is grateful to colleagues at ITS, especially Chris Nash, John Nellthorp, James Laird andCharlotte Kelly for discussions and collaborations over the years.

The views expressed in this paper are the author’s and do not necessarily represent theopinions of the University of Leeds, the International Transport Forum or the OECD.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 2010

1

TABLE OF CONTENTS

1. INTRODUCTION .................................................................................................................. 5
2. THE ROLE OF TRANSPORT APPRAISAL........................................................................ 6
2.1
2.2.
2.3.
2.4.

The appraisal context .................................................................................................... 6
The applicability of appraisal ........................................................................................ 8
The scope of appraisal ................................................................................................... 9
The perspective of appraisal........................................................................................ 10

3. TRANSPORT CBA IN THE UK ......................................................................................... 10
4. CRITIQUES OF UK TRANSPORT APPRAISAL ............................................................. 13
4.1
4.2
4.3

The policy critique ...................................................................................................... 13
The planners’ critique ................................................................................................. 14
Technical critiques ...................................................................................................... 15

5. TRANSPORT AND THE ECONOMY ............................................................................... 19
6. CONCLUDING THOUGHTS ............................................................................................. 22
BIBLIOGRAPHY .................................................................................................................... 24

Leeds, September 2010

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 20103

1. INTRODUCTION

Economic appraisal of transport projects in the UK, if dated from the studies of Coburn, Beesley
and Reynolds (1960) and Foster and Beesley (1963), is now celebrating its fiftieth birthday.
It has always been a controversial tool, generating accusations of unacceptable principle,
improper application, inadequate evidence base and bias. One early application was to the appraisal of
the proposed third London Airport where a critic labelled the project appraisal as “nonsense on stilts”
and the method was defended against accusations of being “bastard science and/or insidious poison in
the body politick” (Self 1970, Williams, 1973). Since that time, appraisal has found itself at the centreof public disputes about the road planning system, the treatment of environmental impacts, the socalled “roads generate traffic” issue and the relationship between transport and the economy. The
Government established a special independent committee, SACTRA, to advise it. The 1997
Government undertook a review which led to the so-called New Approach to Appraisal, and in 2009
revisited and “refreshed” the NATA, see the link - http://tinyurl.com/natacons.
But the pages of the magazine, Local Transport Today, show that transport appraisal remains as
controversial as ever, and the new coalition Government is believed to be considering whether yet
further change is required.
So, transport appraisal in the UK is a hotly contested space, and the idea that transport CBA in
the UK is somehow a stable, agreed concept is not true. What is true, however, is that there is a wellcodified history and development of practice which is discussed below. Before that, though, we
review some features of CBA which help to explain its controversial nature and its role in contributing
to decision-making.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 20105

2. THE ROLE OF TRANSPORT APPRAISAL

The reason that appraisal is controversial is that there is disagreement on the role which it shouldplay in decision-making. Since this is a value laden question, agreement is unlikely to be achieved byreference to logic or rationality. A lot depends on the social, economic and legal framework within
which decisions are made.
2.1 The appraisal context
In a country such as the UK, the context can be presented in this form:

Consultation
Focus groups
Public opinion

POPULAR- what the people think

ECONOMIC- measured
value for
money

CORE

Appraisal

Policy development
Lobbying activities

POLITICAL- the policy agenda
and political process

Here is the space within which transport planning decisions happen. There is a political space
where governments decide their goals and aspirations for transport. There is a social space in whichinterested parties are consulted, give their views. There is the economic space in which technicalstudies of an engineering economic kind reside. The three spaces are brought together and are
mediated within a planning system which naturally looks for solutions which can satisfy all threespaces.
The construction of the diagram assumes that there is a balance of forces which can be resolved
within an overlapping core. Sometimes it may be acceptable to move outside the core, but this cancause trouble. For example both the UK and the Netherlands have found that road user charging may
pass the engineering economic test but not be acceptable socially or politically. Note that in somecountries, the balance of forces may be different. For example, external funding may be required inwhich case the goals, criteria and assessment of the external funding agency come into the picture.
A slightly different way of conceptualising transport appraisal is in a hierarchical way:

6

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

DASTS1

Goals
achieved

POLICYAPPRAISAL
Cost Benefit

NATA
DESIGNDELIVERYCost

DMRB etc

effectivenessA point which is frequently made by critics of CBA in the UK is that it is generally not used inother government sectors. So, for example, schools construction requires a building programmebudget and a design manual with some indicators to determine priorities. The argument in transport isthat schemes are complex, heterogeneous, have a range of impacts across jurisdictions and thatsomething is needed to bind together strategy and design. Also traditionally in the UK transport
strategy has been quite weak and the planning level quite strong - this may be different in othercountries such as France.
In any transport scheme proposal, the decision is played out among a number of parties – theplanning system, the scheme promoter, the objectors, the lobbyists, the transport operators, the funders
and so on. The appraisal can be seen as an important part of the rules of engagement within which theinterests of these parties are considered and resolved. The appraisal rules are in the ownership of the
Department of Transport, in its role as chief transport planner. In formulating the rules, theDepartment relies on academic and consulting studies, and consults with a wide range of interests.
The rules should themselves have a strong foundation and credibility, and the Department is often
nervous when the rules themselves come under attack, as they do from time to time. This is a healthy
feature of the system.

1

Delivering a Sustainable Transport Strategy; New Approach to Appraisal; Design Manual for Roads
and Bridges.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 2010

7

The position of appraisal in the British system gives rise to a number of tensions and conflicts:−

the need for consistency with the overall appraisal guidance of the Treasury in the Green
Book;

−

the need to distinguish between the DfT’s role as guardian of the appraisal rules and as ascheme promoter in its own right;−

the need to define exactly what appraisal rules apply to. Is it publicly funded projects? Is it
projects which require planning permission? Does it apply to revenue as well as capital
expenditures? Is it a DfT programme budgeting tool? This is not entirely transparent,
especially in relation to airport and port projects where traditionally CBA has played a lesserrole than in road and rail sectors;−

the consistency of the appraisal regime with policy objectives and targets set by
Government. For example, should all transport projects be at least carbon neutral or canthere be trading across projects within an overall transport carbon budget ceiling?;−

the need to define research requirements to help develop the appraisal by expanding thevalue set, updating existing values and so on. The valuation of travel time has been throughthree generations of study and a fourth is under consideration at the moment;−

the need for maintenance of WebTAG itself.

So, within any decision system, who owns the appraisal regime itself, how that sits within theoverall decision process, and what status it has are important questions for the political economy oftransport.
2.2. The applicability of appraisal
It follows from the previous section that formal appraisal is more suitable in some contexts thanothers. So, where policy initiatives are large, irreversible, and have a range of impacts over space andtime, affecting a range of social groups (travellers, residents, businesses, etc), some form of costbenefit analysis is likely to be useful. This is especially the case if there is a quasi-judicial planning
process in which the promoter puts the case and objectors put their case before an inspector. In that
context, the appraisal provides a useful reference point around which to organise the material for
consideration. In this context, a significant issue is the use of appraisal as a control mechanism – inthe modelling and appraisal is a particular scheme context compliant with good practice as set out inrelevant user manuals? Does the promoter’s case have credibility? Actually one of the strongest
technical and analytical cases for some form of appraisal according to rules with the possibility of
independent challenge is to consider the counterfactual in which appraisal does not exist. Ourconjecture is that political decision making without the checks and balances of decision support tends
to produce worse results. This is seen whenever projects acquire prior political commitment andbecome extremely difficult to stop however poor the economic case (Mackie and Preston, 1998).
Where transport initiatives involve recurrent expenditure or are reversible or can be developed
incrementally, the case for social appraisal, though still theoretically valid, is in practice weakened.
So fares policy, bus and rail service levels, public transport subsidies, highway maintenance are notgenerally subjected to the same sort of appraisal as capital projects. But also, appraisal is significantly
influenced by the asset ownership and regulatory regime; road and rail projects will generally be seen
8

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

as public domain, so that social appraisal has legitimacy, whereas airport and port projects may be
more commercial in nature and be considered as quasi-commercial projects with social implications.
2.3. The scope of appraisal
There is not just one concept called cost-benefit analysis. There is really a family of concepts
which involve differences of practice in different countries. A fundamental distinction may be drawn
between those who see cost-benefit analysis as an extended from of commercial appraisal and those
who use it as applied welfare economics a la Bergson.
Both groups would agree that where markets are incomplete (public goods, externalities) or
where prices are administered or regulated, commercial appraisal can give poor estimates of the social
value of investment. Benefits may accrue to travellers which are not captured by a pricing scheme.
Safety and environmental impacts fall upon users and non-users but are not internalised by market
processes. It is right that a more comprehensive assessment procedure is devised to capture those
impacts in the appraisal. Whether they are all valued in money terms or quantified physically (noise,emissions) or simply written down as impacts – loss of historic or natural assets for example – is alevel below the proposition that there should be a comprehensive account of the forecast impacts.
The difference lies in the view taken of transport investment as a tool of social policy. On one
view, transport is a quasi-private sector activity with certain externalities attached and some pricing
issues. On this view the Kaldor-Hicks criterion is viewed as a sufficient test of project worth – “canthe gainers compensate the losers and still retain some gains?” On this view, CBA is an extended
economic efficiency calculation to assign an efficiency value to projects but viewed from a social
rather than a simple agency commercial perspective. Issues relating to distribution and equity are, on
this view, best dealt with through the taxation and social welfare systems and not through sector
budgets such as transport, water or energy. Authors such as Harberger and Sugden (1999) broadly
take this view. The implication at the technical level is that the task is to find the willingness to pay
values for the impacts on travellers and non-travellers which are not represented in the revenue andcost streams of the project. Behavioural values are what count and should be carried through into
appraisal at whatever level of disaggregation is considered practical.
The alternative view is that CBA is a form of social calculus in which distributive as well as
efficiency considerations are relevant (Pearce and Nash 1981; Galvez and Jara Diaz, 1998). On thisview, except in the extreme case where the marginal utility of income is equal at all income levels,
some reweighting of the costs and benefits is required depending upon which social group they accrue
to. This raises practical difficulties since it is an order of magnitude more difficult to discover the
distribution of beneficiaries by income class, Again, a true appraisal would need to consider the
distributive effects of land price and displacement effects which might be ignored as transfers in an
efficiency analysis, the distributive effects of impacts on intermediate goods sectors like logistics anddistribution are problematic, and so on.
Therefore in practice, proxies are used such as standard average values – for example nonworking time savings and safety benefits in which values are not allowed to vary with the income
level of the recipient. This is equivalent to assuming unit elastic marginal utility of income acrossincome groups

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 20109

2.4. The perspective of appraisal
Cost-benefit analysis is a neoclassical comparative static framework. It relies on comparing astable baseline case against one or more stable do-something cases. A strength of this approach is thatit ties together equilibrium modelling represented in matrix estimation and assignment routines withuser benefit calculations based on the “rule of half” codified by Neuburger (1971) and others. But theapproach can be criticised as limiting. Paradigms such as prospect theory offer alternatives to utility
maximisation but have not yet been operationalised for practical appraisal. Another critique is thefailure to consider disequilibrium dynamics and paths to equilibrium. Transport projects cause shocks
to the economic systems – household change location, firms enter the market in location A and otherfirms exit in location B, forces are unleashed which play out in real time. CBA is strong for assessing
marginal changes to an established network (marginal in terms of the scale of the changes togeneralised cost not the size of the project), weaker for paradigm – altering investments which impact
on the macroeconomy at regional or national level. However, the discipline of appraisal clearly linked
to scheme modelling and forecasting is essential as a check on unsubstantiated claims especially by
those who are not funding the project.

3. TRANSPORT CBA IN THE UK

A useful starting point in a general schema for transport CBA which underpins various appraisal
work in which ITS Leeds has been involved – see for example work for the World Bank at
www.its.leeds.ac.uk/projects/WBtoolkit and for UNECE (2003).
The following figure describes certain key features of transport CBA.

10−

CBA relies on inputs from transport models and forecasts and in that sense is only as good as
the model quality and forecast assumptions which feed it.

−

It requires a set of values which are either standard values or at the minimum common
principles for devising local values.

−

Costs and benefits need to be estimated over the life of the scheme or in practice for alimited number of forecast years with interpolation and extrapolation.

−

The results need to be discounted to an equivalent present value within Ministry of Financerules.

−The results need to be presented in suitable form to the decision makers, the public and otherstakeholders.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

Inputs from Transport Forecasting and Modelling(passenger and freight flows, journey times, costs, accidents and other data)

Unit values

User Benefit
estimation

Costs and benefits to other groups:
Investment
costs

Operator costs
and revenues

Impacts on
Government

Environmental
externalities

Costs and benefits for the investment period andselected forecast years

Interpolation andextrapolation

Cost and benefits streams

CBA Parameters• start year
• opening year
• appraisal period

CBA Parameters• discount rate, e.g.. 6%• base year, e.g.. 2000

Discounting

Discounted cost andbenefits streams,
Present values
Presentation of the results
Summary Measures
Disaggregate CBA Results

Outputs to decision -makers, the public and other stakeholders

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201011

A key feature is that in an ideal world, we would like to measure, model and value all the impacts
on society of a project or policy measure. The point of view should be an overall societal one.
Typically, the project impacts might fall on a range of stakeholders, as in Table 1.

Table 1. Impacts by stakeholder of a transport project

Stakeholder group
Transport users

Transport operators/
Infrastructure providers
Non-users
Rest of economy outside transport
Government

Impacts (changes in)Time
Reliability
Fares/costs
Journey quality
Perceived accident costs
Option value
Revenues
Operating costs
Capital costs
External accident costs
Environmental impact
Agglomeration
CompetitivenessLabour markets
Subsidies
Taxes
Charges
GrantsSome entries in the table will appear twice – for example, increases in operator revenue will bepositive for operators and negative for transport users. The fundamental theorem is that, suitablediscounted,
Present Value of Net Social Benefit (NPV)(1) Consumer Surplus (CS)+(2) Revenues to transport operators+(3) Environmental and Safety externalities+(4) Option and Non-use values+(5) Wider Economic Impact-(6) Costs,

and a simple indicator of Benefit: Cost Ratio (BCR) if required is12Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

[(1) + (2) + (3) +(4) + (5)] / (6)Although in an ideal world, all items of cost and benefit might be valued in monetary terms,
practice falls short of this. The evidence base is lacking for some environmental impacts and “unique”
natural and heritage assets pose ethical as well as practical problems for valuation. In practice,therefore, the framework table is likely to be partly in money, partly in physical impacts and partly indescriptive terms. The final table is likely to be a summary of lengthy documentation. So summary
measures such as NPV and BCR are in practice indicators of a subset of the full table and need to beinterpreted accordingly.
The purpose of the framework table is to estimate the net social gain from doing something
relative to the reference case. Therefore it is essential to avoid double counting. So for example, if atransport improvement is reflected in an increase in transport user benefit (ΔCS) which is then partly
transmitted into a change in land rents, which is then transmitted again into a change in prices andwages in the rest of the economy, the project must not be credited with the same benefit as threedifferent stages of the economic transmission system (Mohring 1993). Conceptually, either the
analysis should capture the final economic system benefits or it should measure the transport sector
benefits plus the additional wider economic benefits. This second approach is the current UK one; wereturn to some issues with it below.
The UK appraisal regime is codified in a publicly available internet resource WebTAG. Alltransport projects requiring an input of public capital expenditure apart from small schemes are
required to undergo an appraisal of the form described above using the value set and methods set out
in WebTAG. So, a significant rule of transport appraisal in the UK is to operate as a control tool toprovide a value for money indicators on a consistent basis as an input to the decision-making process.
It should be stressed that appraisal is one input to a decision process and NOT the process itself; wehave studied the degree to which the decision outcomes on national roads can be modelled andexplained by their performance in the Framework, and similar analysis has been carried out in Sweden(Nellthorp and Mackie 2000, Eliasson and Lundberg 2010). The chapter index to the WebTAG site isat www.dft.gov.uk/webtag/documents/index.php

4. CRITIQUES OF UK TRANSPORT APPRAISAL

There are a number of critiques of transport appraisal as practised in the UK which should betreated with some degree of seriousness. The issue of how transport links to the wider economy isdeferred to the next section as the most significant source of concern with appraisal practice.
4.1 The policy critique
There are various arguments that appraisal is not adequately aligned to policy, or is inconsistentin certain respects with policy objectives, or is not in practice used across the full range of policy
analysis. It is true that in UK practice there is a lot more experience of using appraisal at the “plan”
level than at the “strategy” level and there is not a great deal of open discussion of the relative value
for money of spending public money across Government sub-programmes. Still less is the overt use
Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201013

of common appraisal methods to compare across sector boundaries – for example to assess the relative
performance of transport, health education, regeneration, etc, in city policy. One disadvantage of
CBA in particular is that it is not widely used outside the transport sector and so does not naturally
provide metrics for comparison between transport and other sectors. There is a suspicion that this may
have led to relative underfunding of transport capital especially at the local and regional level.
Another similar point is the absence of points of comparison within the transport budget between
small and large and in particular between capital and revenue spending. Some of the conclusions fromsuch a study might be uncomfortable for central government.
Should appraisal be aligned to policy? In a sense the answer must be “yes”, but policy is often
rather crude, setting out say five goals of transport policy without detailed study of the costs, effects
and trade-offs involved in practical choices. Appraisal is about informing those choices, and a degreeof independence rooted in good quality evidence on consumer and social values is no bad thing. In
some countries such as Sweden, the guardians of transport appraisal are independent of Government.
In Britain, a middle way is taken where transport appraisal is within Government but at arm’s lengthfrom the parts of the DfT which are concerned with particular schemes (responsibility for which in any
case is now mainly outsourced to agencies). This can cause tensions. Two of the new Governmenttransport Ministers have expressed reservations about aspects of the appraisal regime, and it will beinteresting to see how these are handled.
A different policy critique is that transport appraisal is not particularly agile. It is a set piece withstrong internal coherence, and designed to address a subset of policy questions, but not to be easily
adaptable to new questions which come along. In a way this is understandable – because one of its
strengths is its reliance on a good evidence base, it takes time to develop the new evidence required tosupport analysis of new policy needs.
One of the most disliked attributes of travel is unreliability defined as some measure of thevariance of travel time from which may be derived the safety margin required in order to be on time at
the destination on x per cent of occasions. Where the activity at the destination is a job interview, an
opera performance, a flight to Mexico, or simply the need to open the shop on time, this becomes
important. It is one of the big arguments behind reserved track and priorities for buses and trams incities and one of the big arguments in how much to spend on managed motorways. But it is a difficult
problem for appraisal and an even more difficult problem for modelling.
Another example is resilience. In Britain we need to invest on the transport system so as toinsure against various external risks. There are weather risks such as high winds and storms
associated with global warming, there are peak oil risks implying need for fuel diversity beyond what
the private sector would plan for, and there are security risks. Conventional appraisal is not well set
up to address policy needs and forward programmes of this kind.
4.2 The planners’ critique
The planners’ critique of transport appraisal is that it is not set up in a way which tells society
what it needs to know or even what will happen. This relates to the whole question of induced traffic
and, more broadly, induced change associated with transport investment.
The basic ethos of transport engineering economics is that one starts from a base trip matrix andassignment, and then estimates the changes in travel cost associated with a change in the network. For
many years, until the mid-1990s, it was standard practice to use a fixed trip matrix in which all
14Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

behaviours except route choice were assumed to be fixed. Following SACTRA (1994), variablematrix approaches replaced fixed matrix, but normally with constraints such as fixed land-use.

Figure 1.
User
Cost

C1
A
C2

C
B

VolumetravelofFigure 1 illustrates the difference of approach. Engineering economics teaches us to focus on A
(or A plus C) as the measure of user benefit from a change to the transport system. Planners on theother hand argue that in a congested network environment, the difference between C1 and C2 isunstable and will very rapidly be eroded over time, as people take out the benefit of improved
accessibility by travelling further. The apparent constancy of travel time budgets is one supporting
proposition. Moreover, planners argue that the real interest is in area B – what happens to induced
land-use change, employment and economic activity as transport improves. How does the extra
capacity impact on the spatial economy? While it is possible for conventional appraisal to dodge thesequestions by assuming perfect competition, planners are apt to point out correctly that perfectcompetition is not generally consistent with a spatially separated economy which is the very reason
why transport exists! There is therefore a significant issue of how and whether appraisal can beadapted to deal with this issue - see next section.
4.3 Technical critiques
At another level, there are arguments about the value set which is deployed in British practice.
While there are some who are philosophically opposed to monetary valuation per se, more common
are objections to particulars.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201015

4.3.1

Travel time savings – employers’ business

The value of travel time savings (VTTS) on employers’ business is important and difficult to
study. Although employers’ business car traffic in Britain is only around one-sixth of total traffic, thehigh values used for this traffic mean that it typically accounts for half the travel time benefits for cars.
The cost saving approach is used. This says that in a competitive labour and product market, firms
hire labour to the point at which the value of the marginal product is equal to the wage rate; thus thevalue of a travel time saving is equal to the marginal gross cost of labour including labour related
overhead. This requires a number of assumptions to be fulfilled:−

All released time goes into work, not leisure;−

Travel time is 0% productive in terms of work; no work can be undertaken while travelling;−

The marginal value of working and the marginal value of travel to the individual are zero (orhave equal and opposite value);−

The competitive labour market theorem holds; w = vmpl;−

No indivisibilities in the use of time for production so every minute is equally valuable.

A reasonable conjecture is that these assumptions taken together are approximately true formanual workers travelling in the course of their work duties. So, for example, in the case of
professional truck drivers or coach drivers, the cost saving theory remains valid. However it is more
doubtful for other business travel in the course of work.
Empirically, a number of authors have cast doubt on whether VTTS for employers’ businessvaries proportionately with the wage rate, as would be implied by the cost saving approach (forexample Hensher and Goodwin 2004). In a meta-analysis of 77 studies from 30 countries, de Jongand Shires (2006) found a cross-sectional elasticity of the VTTS to income of between 0.4 and 0.5 for
employers’ business purpose. This result could be consistent with higher income “white collar”
workers partly substituting leisure rather than work for travel and/or being able to use travel time forpartially productive work. The world of mobile communications has clearly made this more plausible
over time. It is a concern that EB values of time for passengers (as opposed to freight) may on
average be too high.
4.3.2

Travel time savings – other issues

Many transport projects give use to a high proportion of relatively small time savings – say 5
minutes or less. Welch and Williams (1997) showed in an urban case study that between 25% and
50% of time saving benefits from fairly major schemes could be attributed to these small time savings.
So, two questions legitimately arise:How statistically robust are the traffic assignment models which generate the time difference
estimates? For most schemes, we are dealing with relatively small absolute and proportionate
differences accruing to very large numbers of travellers over a very long period of time which sum togive a large aggregate value. So the security of the model predictions is an important issue.
Can the constant unit value assumption be relied upon? Most countries use the CUV assumption,and there are reasonable logical defences for it, but it is a weakness that stated preference and similar
16Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

choice models rely on extrapolation from larger time savings. Direct empirical support for CUV
assumption is therefore lacking.
A second issue concerns the relationship between VTTS and trip distance/duration. In British
practice the value of time per minute is assumed constant over all trip lengths. But evidence fromother countries tends to support increasing VTTS with trip length, and arguments about driver fatigue,boredom, time requirements at the destination are consistent with that. This is a weak point which
could affect the relative performance of different sorts of schemes.
If VTTS does vary with distance, a related question is whether the average values are calculated
from a pattern of journeys which are representative. I conjecture that in value of time studies, certain
sorts of journey such as very short trips to the shops, or to school; long-distance leisure journeys on
holiday; trips by foreign drivers on British roads tend to be systematically underrepresented.
Finally, there is the well-known question of whether VTTS derived from stated preference
exercises yield values which relate to the driver’s personal value or to the value for the driver andother occupants of the vehicle. This is not easy to be sure of, yet it makes a significant difference
whether the values are interpreted as “per person” or “per car”.
4.3.3

Transport taxation

Another point of controversy in British appraisal practice is the treatment of transport taxes. In aworld of uniform taxes on all goods and services, such as a single rate of value added tax, this would
be a non-issue. But in practice, road traffic pays a fuel tax, rather high by international standards,
equivalent to around $1 US per litre, while public transport, bus and train, is zero rated for VAT andpays little or no fuel tax. This causes complications for appraisal and is the source of arguments thatappraisal practice is inconsistent with policy.
Suppose a new road is proposed which induces additional traffic relative to the base case. Thisroad traffic is willing to pay the generalised time and money costs associated with the additional
travel. They gain to the extent of the triangle of benefit (area C in Fig 1). But the figure is drawn on
the presumption that the cost the user pays for the marginal trip is wholly a resource cost. That is trueof the time cost and the resource cost of extracting fuel from the ground, refining it, distributing it andretailing it. However, the fuel tax element in the final price to the user is not a real resource cost but atransfer payment. CBA principles say this element should appear twice in the appraisal, once as a costto the user and once as an equal and offsetting gain to Government. Providing the marginal track andenvironmental costs of use are accounted for elsewhere in the appraisal, this approach is correct.
However, it is frequently criticised for appearing to treat as a benefit additional consumption of fueland carbon emissions which the Government is otherwise targeting or trying to reduce. This is said tobe sending mixed messages.
This issue is less about the treatment of fuel tax in the appraisal and more about the appropriate
shadow price of carbon. If the fuel tax was set equal to the full marginal external cost of road use,
including the economy-wide shadow price of carbon, then the issue would not arise. Here is an
example of a case where appraisal rules and transport economics can come into conflict with transport
politics.
4.3.4

The benefit : cost ratio

Another issue which has occupied many hours of debate in the NATA Refresh is the definition of
the benefit : cost ratio. Returning to table 1, where the elements of cost and benefit were defined, itPeter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201017

may be noted that whereas, given the values for the elements, the Net Present Value of a project is aunique quantity, the value of the BCR depends on exactly what is counted in the numerator anddenominator of the ratio. For example, should increases in revenues to transport operators be treatedas a producer surplus to be added to the consumer surplus in the numerator or an offsetting item to thecost in the denominator? Should a contribution to the capital cost of a scheme from a private developer
be counted as a benefit item or as an offset to the cost, or both? For certain kinds of schemes,
especially where toll revenue or road user charging revenue is involved, it makes a huge difference tothe BCR what definition is used.
It is therefore worth asking why, given that NPV gives a unique result, it is worth bothering witha BCR with all the problems of defining a ratio. In an unconstrained world in which there wasenough funding to undertake all schemes with a positive NPV, the BCR would be redundant. It is in
the presence of a constrained budget, a rationed resource, which gives rise to the problem. One
solution would be to raise the discount rate to the point at which the supply and demand for funds wasequalised. But this would distort the relative social values of present and future benefits and destroy
the case for long term infrastructure projects. A minimum cut-off BCR is therefore needed as arationing device or hurdle ratio which project should be required to jump over.
The denominator, therefore, should be the unit of constrained resource, and the question is how todefine it. Suggestions have included public capital costs, net public expenditure, and the net public
cost to the Department of Transport and its agencies. The NATA Refresh opted for this last concept.
This places fuel tax effects on the numerator of the ratio, since these are effects which, in the British
public budget system, accrue to the Government budget as a whole and not to the transport sector
budget. This exemplifies the need for appraisal practice to have clearly defined rules in order tooperate consistently across applications.
Whatever definition of the BCR is used, however, one criticism remains. The BCR is a summary
descriptor of the monetised elements of the overall appraisal. By definition, it does not capture thenon-monetised elements. While this is widely recognised, it is all too easy to use the BCR alone as anindicator of relative social value for money. This is fraught with danger if the non-monetised elementsin the overall appraisal are variable across the scheme.

18Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

5. TRANSPORT AND THE ECONOMY

The interaction between transport and the wider economy, and its treatment in appraisal, is one of
the most lively current topics. Historically there are different traditions – for example the German
approach has been to view transport infrastructure as a tool of regional planning and to pay relatively
little attention to transport CBA in favour of a broader regional impact approach. This is perhaps
associated with the strong regional governments in the German political system.
The tradition in the UK has been to rely on transport CBA and to assume that the direct transport
benefits are a good proxy for the total economic system benefits. In the last decade, following theimpetus of the SACTRA report of 1999, the approach has come in for reassessment. In part, this istechnically driven – enhanced computing power makes tools such as Spatial Computable General
Equilibrium more practically usable than before, giving a framework in which transport-economy
linkages can be represented (see for example Elhorst and Oosterhaven, 2008). But mainly they arepolitically driven by the desire to demonstrate to decision-makers the impact of transport infrastructureon the final economy. Time savings are the base metal of the system but impact on GDP is the gold.
It would obviously be more convincing to decision-takers if the impact of a piece ofinfrastructure on the final economy could be modelled and estimated within the appraisal. But this isproblematic because transport appraisal is effectively a reduced form means of aggregating thedemand curves of thousands of different users, representing all stages of the economic process fromprimary products to final consumption. Except in very simple situations such as feeder roads to serve
agriculture or access roads to mines and quarries it is impossible to estimate directly the final impact
on GDP. There is a question mark in any case over whether GDP is the correct metric by which tovalue transport schemes since it gives no weight to leisure time, or most safety and environmental
impacts.
For many years, UK appraisal practice relied on a theorem proved by several authors (Mohring
1976, for example) that in an all-round perfectly competitive economy, the correctly measured directtransport benefits are equal to the final economic system benefits. A judgement was made that it was
too difficult to try to discover the size, and even the sign, of the divergence between the two inparticular cases. On this account, transport impacts would be mediated through effects on accessibility
and land development into changes in the pattern of final output, wages and prices, but except inunusual cases it would be reasonable to assume “no additionality” to the primary transport benefits.
Following the 1999 SACTRA report, this assumption has been revisited by the Department forTransport which has identified three sources of additional wider-economy impacts (conceptually,
additional may be positive or negative). These are:−Agglomeration economies – external economies of access to economic mass not captured 1,
individual firms or transport users;−

Imperfect competition benefits due to output effects in markets where prices diverge frommarginal costs;

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201019−Labour supply effects and the tax wedge benefits of induced labour market behaviours.

We now review very briefly the state of play on each of these potential sources of additionality.
Agglomeration economies are said to exist when the spatial concentration of economic activity
gives rise to increasing returns. These increasing returns arise from labour market pooling, knowledge
spillovers, specialisation, and the sharing of inputs and outputs. These considerations explain whyhead offices of corporations, banks and other enterprises are located in major cities and not in small
towns. One way in which the spatial scale of an economy can be effectively increased is through areduction in the generalised cost of travel. Essentially the argument is as follows: - if there are
increasing returns to economic mass, and if transport in part determines the level of access toeconomic mass experienced by firms, then investments in transport which serve to increase
accessibility can induce some shift in the productivity of firms via economies of agglomeration. Theseare external economies and therefore are additional to the transport user benefits.
Quantifying the relationships is a testing task, but significant recent work has been carried out by
Dan Graham of imperial College London. The main points we draw from Graham’s work are: The principal difficulties in estimating elasticities to economic mass are those of causality andconfounding. The causality issue is that accessibility in/to large agglomerations may be high becausethat is where demand is highest rather than because the higher accessibility has created theagglomeration. Confounding problems arise as the variables of interest are often heavily intercorrelated.
Urbanisation economies are larger than localisation economies. Urbanisation economies relate toproximity to economic mass in general while localisation economies relate to proximity to theeconomic mass of a particular sector (e.g.: textiles).
The UK’s current appraisal guidance is centred around urbanisation elasticities. The guidance,
based on Graham, Gibbons and Martin (2009) quotes an overall agglomeration elasticity of 0.04
across all sectors of the economy (doubling city size increases productivity by 4%), with 0.02 formanufacturing and consumer services, 0.03 for construction and 0.08 for business services.
Returns to agglomeration vary not only by sector but with city size. With an accessibility
measure based on generalised cost of travel, Graham (2007) found that returns vary across sectors,
increasing particularly in banking, finance, insurance, business services and public services. So
composition of economic activity in a city of a given size could be significant.
There remain questions around the causal effect of transport infrastructure on productivity.
Graham and Van Dender (2009) find that variations in productivity between agglomerations may beentirely attributable to differing qualities of labour between locations.
In a spatial economy with regionalised production of goods and services, reduction in transport
costs normally increases competition and reduces market deadweight losses due to imperfectcompetition and spatial monopoly. These can be measured as the price/marginal cost mark-up applied
to the increment of output resulting from the transport improvement.
As with agglomeration, the issues associated with measuring this welfare gain are practical rather
than theoretical:

20

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

−

Estimating relevant market output elasticities and mark-ups; different authors from the
SACTRA report (1999) produced results ranging from 4% to 20% of the transport benefit;−

Ensuring that net rather than gross estimates are used. For example, if a road scheme
improves the market position of firms inside the study area at the expense of other firms
outside the study area, there is a difference between the gross effect on the study area and thenet effect on the economy as a whole.

The comparative static approach does not allow for dynamic interactions between transport
infrastructure and market structures. It is not implausible that the number of firms in sectors likebrewing, fuel oil retailing or supermarket retailing and hence the mark-ups, might vary with thequality of the transport infrastructure.
The third wider impact is also related to the changes in the wider economy induced by a transport
improvement. Suppose that the result is either an increase in employment to supply additional output
or a reshuffling in the labour market with a more efficient match of people to jobs. People will bemaking their choices based on their net of tax wage, but the marginal value of their output will be theirgross of tax wage. There is a tax wedge benefit equal to the difference between gross and net which is
not counted in transport CBA.
As with the imperfect competition effect, there are practical issues in computation:−

The relevant elasticities and the extent to which changes in transport costs are reflected inprices and wages;−

The need to consider this effect not only in the transport-using sectors but in the transport
sector itself. Increased transport productivity through higher speeds will in the end result ina smaller labour force required to carry out the base transport activity and the tax wedge
effects in the transport sector need to be included in the appraisal.

Beyond these points, the tax wedge argument raises questions about the definition of thenumeraire in transport CBA. If it is “one dollar’s worth of resources in the hands of the Government”
then CBA should be about the value of spending that dollar in different ways. It may be that transport
expenditure has exceptional tax wedge effects relative to other forms of spending, but conceptually weshould be counting the net tax wedge effects, not the gross.
To summarise, some progress has been made in the UK towards extending transport CBA tocover the wider economy impacts. However, in parallel with that, there are alternative developments
in progress which demonstrate that appraisal methods are linked to the political environment within
which transport schemes and policies are developed.
While the Department for Transport’s approach has been to modify transport CBA for the threesources of additional benefit, there is renewed interest in alternative methods of estimating the impactof transport investment on city region economies. These are driven by several considerations: - thedesire to incorporate land development and induced economic activity and employment in theappraisal effects just discussed, and most important of all the changes in the UK transport budget
context. The UK has a tradition of strong central government budgetary control and funding even for
local transport projects, so that the position has been quite different from the French “versementtransport” arrangements for its major cities. Now, however, since the credit crunch and public funding
crisis, there will be much less central funding of local transport capital schemes, and the balance ofpower will swing towards local economic partnerships. In that context, the question of interest is thePeter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201021

value for money to the city region of transport infrastructure relative to housing, regeneration andother budget headings for which the city is responsible. So the question the city fathers will ask is: what is the effect of a transport scheme on output and employment at city level.
Unfortunately, transport CBA is not well placed to answer this question and therefore otherapproaches have been used to estimate additional activity measured by Gross Value Added (GVA)(LSE 2009, KPMG 2009 a, b). These approaches are cousins to CBA but focus on:−

The impact of transport improvements on accessibility;−

The relationship between accessibility, real wages and employment at area level – both
displacement from other areas and net generation;−

The further relationship to agglomeration in the city region.

Compared with the micro approach of CBA, this is a more meso-economic approach of the kinddiscussed in previous Round Tables (ITF/OECD 2007, 2008).
It clearly depends crucially on the stability of a few key economic relationships which arethemselves problematic for the reasons of causality and confounding mentioned earlier. For Britain,
with no great tradition of regional accounting and regional economic modelling, this could be asignificant step. However, these approaches are best seen as complementary to CBA; whenevernational funding or a national value for money perspective is required the NATA remains the
mandatory toolbox.

6. CONCLUDING THOUGHTSIt is comparatively easy to trace the development of transport appraisal in the UK over the last
fifty years. Starting from a narrow model in which time and operating costs are traded against capitaland maintenance cost, appraisal progressively developed:

22−

through refining the values of user benefits and also safety impacts;−

through incorporation of behavioural responses represented as fare and generalised costelasticities with feedbacks to congestion (car) and overcrowding (public transport);−

through extension of the user benefit theorem to cover environmental externalities and wider
economic impacts;−

through application across transport modes and to policy/investment packages;−

through creating a climate of opinion within Government and the profession in which theappraisal regime has a certain independence and results are taken seriously as inputs todecision-making, without supplanting the decision-takers’ role.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

As a result, it has probably been reasonable to claim that the UK has been one of the leading
European countries in transport modelling and appraisal, and that the qualities of independence andanalytical capability have served UK consultants well in international markets.
And yet, it would be difficult to assert that the transport sector is the crowning glory of the British
economy. This is partly due to history and geography which created particular challenges for the UK.
But it is also a reminder that transport policy is shaped mainly by politics – central and local
government structures, the planning system, the availability of public finance, policy towards tolls,
fares and charges or sources of sector revenue, attitudes to public transport revenue support,
privatisation and regulation. Appraisal is a useful tool within an overall policy context, but no morethan that.
The strength of transport cost-benefit analysis is its link with modelling and basic traffic data
which, provided growth scenarios are credible, maintains a strong sense of realism in the assessment.
However, the current low discount rate (3.5%) and lengthy appraisal period (sixty years) create major
intellectual problems in coping with capacity limits in future years. The weakness is the upward link
to regional economic planning and forward strategy. The British have always had a resistance to the
top-down master planning approach, preferring bottom-up incremental development.
In the context of very scarce public finance, peak oil, and seriously difficult targets for carbon
emissions the content of transport policy is likely to change in the next period – towards policies
relating to reliability and resilience, towards electricity and away from fossil fuel dependence, towards
the city regions and away from the national network, towards a more integrated economic
development approach. Transport appraisal will need to evolve in order to serve these changing needs.
This is the next challenge for transport appraisal people.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201023

BIBLIOGRAPHY

Elhorst, J.P. and Oosterhaven J. (2008) Integral cost-benefit analysis of Maglev Rail Project undermarket imperfections. Journal of Transport and Land Use, Vol 1, No 1.
Eliasson J. and Lundberg M. (2010) Do Cost-Benefit Analyses influence Transport Investment
Decisions? World Conference on Transport Research, Lisbon.
Foster, C.D. and Beesley, M.E. (1963) Estimating the benefits of constructing an underground line in
London. Journal of the Royal Statistical Society, Series A, vol 126 (1) pp 46-58.
Galvez T.E. and Jara-Diaz S.R. (1998) On the social valuation of travel time savings. International
Journal of Transport Economics, Vol 25, No 2.
Graham D.J. (2007) Agglomeration, productivity and transport investment. Journal of Transport
Economics and Policy, 41, 317-343.
Graham D.J., Gibbons S and Martin, R. (2009) ‘Transport Investments and the Distance Decay of
Agglomeration Benefits’. Report to the Department of Transport.
Graham, D. And van Dender K. (2009) Estimating the agglomeration benefits of transport
investments: some tests for stability. Discussion paper 2009-32, ITF, Paris.
Hensher, D.A. and Goodwin, P. (2004) Implementation values of travel time savings: the extended setof considerations in a toll road context. Transport Policy 11(2), p.171-181.
ITF/OECD (2007) Transport Infrastructure Investment and Economic Productivity, Round Table 132.
ITF/OECD (2008) The wider economic benefits of transport. Macro, Meso and Micro-economictransport planning and investment tools. Round Table 140.
KPMG (2009a) High Speed Rail in Britain: Consequences for employment and economic growth.
Report for Greengauge 21 http://222.greengauge21.net
KPMG (2009b) Value for money from tackling overcrowding on northern city rail services. Report toGreater Manchester Passenger Transport Executive.
LSE Spatial Economics Research Centre (2009) Strengthening the economic linkages between Leeds
and Manchester. Report to the Northern Way. http://www.thenorthernway.co.uk
Mackie, P.J. and Preston, J.M. (1998) Twenty-one sources of error and bias in transport projectappraisal. Transport Policy, Vol 5, No 1.
Mohring, H. (1976) Transportation Economics. Ballinger Press.
24

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF, 2010

Mohring H. (1993) Maximising, measuring and not double counting transportation improvement
benefits. Transportation Research B, Vol 27, No 6.
Nellthorp J. and Mackie P.J. (2000) The UK Roads Review: a hedonic model of decision making.
Transport Policy, Vol 7, No 2.
Neuberger, H. (1971) User benefit in the evaluation of transport and land use plans. Journal ofTransport Economics and Policy, 5 (1).
Pearce, D.W. and Nash, C.A. (1981). The Social Appraisal of Projects – A Text in Cost-Benefit
Analysis. London: Macmillan.
SACTRA (1994) Trunk roads and the Generation of Traffic. HMSO, London.
Self, P. (1970) Nonsense on stilts: Cost-Benefit Analysis and the Roskill Commission. Political
Quarterly, Vol 41, No 3.
Shires, J.D. and Jong, G.C. de (2006) An International Meta-Analysis of Values of Time. In: Bickel etal. (2006 Annex 1) Proposal for Harmonised Guidelines. Developing Harmonised European
Approaches for Transport Costing and Project Assessment (HEATCO). Report to the European
Commission. Stuttgart: IER, University of Stuttgart.
Standing Advisory Committee on Trunk Road Assessment (SACTRA) (1999) Transport and theEconomy, London: The Stationery Office.
Sugden, R. (1999) Developing a consistent cost-benefit framework for multi-modal transport
appraisal. University of East Anglia, UK. Report to Department of Transport.
UNECE (2003) Cost Benefit Analysis of Transport Infrastructure Projects, downloadable fromUNECE transport website.
Welch, M. and Williams, H. (1997) ‘The Sensitivity of Transport Investment Benefits to the
Evaluation of Small Travel-Time Saving’ Journal of Transport Economics and Policy 31
pp. 231-254.
Williams, A. (1973) CBA: Bastard Science and/or Insidious Poison in the Body Politick? In J. N.
Wolfe (ed.) Cost-Benefit and Cost Effectiveness, pp 30-63.

Peter J. Mackie — Discussion Paper 2010-16 — © OECD/ITF 201025