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Comparing Road and Rail
Investment in Cost-Benefit Analysis

Discussion Paper
Tom Worsley

Institute for Transport Studies
University of Leeds

Comparing Road andRail Investment in
Cost-Benefit Analysis

Discussion Paper
Tom Worsley

Institute for Transport Studies
University of Leeds

The International Transport ForumThe International Transport Forum is an intergovernmental organisation with 62 member countries. It
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ITF Discussion Papers
ITF Discussion Papers make economic research, commissioned or carried out in-house at ITF, available toresearchers and practitioners. They describe preliminary results or research in progress by the author(s)and are published to stimulate discussion on a broad range of issues on which the ITF works. Any
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Comments on Discussion Papers are welcome.
Cite this work as: Worsley, T. (2020), “Comparing Road and Rail Investment in Cost-Benefit Analysis”,
International Transport Forum Discussion Papers, No. 2020/29, OECD Publishing, Paris.

Acknowledgements
My thanks go to Professor Peter Mackie for his advice and suggestions on a draft of this discussion paper.

COMPARING ROAD AND RAIL INVESTMENT IN COST-BENEFIT ANALYSIS | ITF DISCUSSION PAPER

Table of contents
Introduction ................................................................................................................................... 5
The context for transport investment appraisal................................................................................ 5
The context for transport investment appraisal: Road schemes ........................................................6
The context for transport investment appraisal: Rail schemes ..........................................................6

Investment decisions and the recovery of project costs from users ................................................... 8
When do road and rail projects need to be compared? .................................................................... 9
Critical differences between road and rail and their treatment in cost-benefit analysis .................... 10
Differences between road and rail users: Leisure, commuting and business trips .........................10
Differences between road and rail in the services supplied to users ...............................................12
Treatment of mode shift effects between road and rail ...................................................................16
Freight appraisal ..................................................................................................................................17
Urban transport programmes and projects .......................................................................................18
Comparing road and rail: Some conclusions ................................................................................... 18
References ................................................................................................................................... 20

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Introduction
Cost-benefit analysis has long been established as a means of informing decision makers about the expected
impacts of transport projects and policies. It provides a means of assessing the case for an investment proposal incircumstances in which conventional market forces are either lacking or fail to operate efficiently. In place ofdecisions based on commercial criteria and expectations of profit, cost-benefit analysis informs decision makers
about a broader metric in terms of the social value of a project. The methods of cost-benefit analysis require an
assessment of one or more of a number of options for addressing an existing or anticipated problem, for example abottleneck in a transport network, and comparing the expected outcome of the preferred option and alternatives
with a do-minimum counterfactual.
In principle the methods of cost-benefit analysis are equally applicable across all surface transport modes. Highway,
rail and urban transport schemes share many common characteristics and all are aimed at improving the lot of thetraveller. All require accounting of the environmental and other impacts of the project. In practice, as this report
explains, there are a number of differences between the modes that decision makers need to be aware of whencomparing the merits of investment between modes.
The methods of cost-benefit analysis have applications that extend well beyond the appraisal of transportinterventions. The UK Treasury’s Green Book (UK Government HM Treasury, 2020), provides guidelines forappraisal and evaluation for use by all government departments. The Department for Transport has taken theframework set by the Green Book and developed it in its Transport Analysis Guidance (TAG) (UK Government
Department for Transport, 2019) so that it provides decision makers with information about the social value ofalternative policies and investment options for addressing transport problems. Other UK Government departments
have their own appraisal guidance which is specific to their responsibilities and policy objectives. Transportcost-benefit analysis is part of a cross government discipline of policy making.

The context for transport investment appraisal
The application of cost-benefit analysis takes place within the framework of the government’s policy objectives.
Improving accessibility, making it easier to travel and reducing road accidents have long been the aims of transport
investment programmes. As environmental concerns became a priority, appraisal methods were extended toensure that these emerging policy concerns became part of the methods used to inform decision makers about
their choice of options. Decisions about how a project is funded and the extent to which those who benefit should
contribute to its cost are part of the policy framework within which investment decisions are made.

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The context for transport investment appraisal: Road schemes
Choices about where transport infrastructure should be built and how much money should be invested inevitably
fall to public sector decision makers. Transport infrastructure is long lived and irreversible and so the risks involvedin such investment make most projects unattractive to the private sector. For more than half a century cost-benefit
analysis has been the preferred technique in many countries for understanding the likely effects of a project and forselecting the option that is best suited to delivering a successful outcome.
The risk involved in the provision of transport infrastructure is not the only reason for decisions about investment
and broader strategy being made in the public sector. Transport infrastructure displays many other divergencesfrom competitively provided services. The highway system is a network, with the benefits a user derives from one
link depending on those derived from all other links used on the journey, while there is very limited scope forcompetition between potential highway providers to ensure efficient ways of meeting user demands. Most roads
are free at the point of use and so lack a market-based means of ensuring a financial return to the investor. Tollroads are not an exception to these conditions: such roads are generally built and operated on a concession model,
with the plans, route and often the toll levels being determined by the national or regional government, albeit
financed by the private sector. However, the requirement that users pay a toll has the effect of pricing-off thosepotential users whose benefit from using the road would be less than the toll.
Road schemes also have effects that extend well beyond the interests of their users. External effects, including
traffic noise, greenhouse gas emissions and other impacts on air quality are of concern to the people who live close
to the scheme. Nor are the impacts invariably negative ones: a scheme that removes traffic from a densely
populated area can have significant environmental and safety benefits, although these might be offset to a greateror lesser extent by the impact of a new by-pass on landscape and bio-diversity. While a country’s regulatory andlegal framework can go some way to abating the more extreme of these environmental impacts, they do notaddress the specific cases that arise during and following the building of new infrastructure.
As a result of these market failures, methods for applying cost-benefit techniques to highway schemes have beendeveloped into formal guidance by many countries and by international organisations. Relationships between roaddesign, vehicle performance and road capacity are well understood, as are the methods of analysing road users’
responses to changes in road capacity. Over the past sixty years, there have been incremental advances in themethods used, in particular in the quantification and valuation of the environmental impacts of road traffic. At thesame time policy makers in many countries have become accustomed to cost-benefit analysis as one of theconsiderations relevant to the decision making process.

The context for transport investment appraisal: Rail schemes
While there has been a long history of public provision of roads, dating back to the Romans in parts of Europe, theevolution of rail networks has followed a less consistent pattern. In many countries during the nineteenth century,
when much of today’s network was built, private sector companies were responsible for promoting and operating
their countries’ rail networks. Monopoly power was limited in many countries through government intervention in
the setting of passenger fares and freight rates and in regulating first passenger and subsequently employee safety,
but decisions about investments were made on the expectation of earning a profit. In other countries the state
took on the role of developing the rail network, often with the aim of fostering economic development and national
unity.
By the middle of the twentieth century national, devolved or regional level governments had, in most countries,
taken over both ownership of and responsibility for the operation of their rail networks. However, during much of
the second half of this century, there were relatively few demands for significant increases in rail capacity. Whileroad traffic experienced rapid growth as car ownership and goods vehicle use increased, passenger rail traffic inmost countries remained at broadly constant levels. So while there was a clear need for providing decision makers
with a method for prioritising decisions about investment in road infrastructure, there was no comparable need toappraise enhancements to the rail network. Investment in the rail sector continued, but most expenditure was

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aimed at ensuring that the nationalised rail operator could continue to operate the existing level of service at theminimum full life cost to the government. Decisions about rail investment were usually based on considerations ofcost effectiveness. In the case of the UK’s British Railways Board, proposals to provide improvements in the qualityof service, such as installing air conditioning in new trains, were required to be financially viable. Investment in
upgrading assets was approved only if there was evidence that the anticipated revenue from demand generated by
the improvement was sufficient to cover its incremental costs. Constraints on public expenditure provide one
explanation for such a policy, under which resources for maintaining the existing network were prioritised. But it
was also a political decision that rail users, who tended to be from the higher income groups, should pay for the
benefits of rail enhancements rather than the typical taxpayer.
Certain urban rail schemes provided an exception to this general rule of financial appraisal being the decision rulein the case of rail infrastructure. London’s Victoria Line was a project which had no financial justification. Indeed
since the structure of fares on the London Underground at that time was based on the distance travelled, the newline, which effectively provided a diagonal route across central London in place of two sides of a square, had theeffect of reducing fare revenues. But an early application of the methods to an urban rail scheme, made possible by
the then new multi-modal transport model for London, demonstrated transport user benefits from the timesavings, relief of crowding and reduction in road congestion which persuaded a reluctant UK Treasury to continue
to fund the scheme. High speed rail lines in certain other countries also provided the opportunity and need for theapplication of cost-benefit analysis.
Over the past two decades many countries have experienced substantial growth in rail patronage: this growthtends to be greatest on routes serving the major conurbations. While revenue from passenger fares might broadly
cover operating costs and on some routes the depreciation of renewable assets, it makes little or no contribution to
the initial investment, the costs of which, on the existing network, were largely reimbursed to shareholders morethan a century ago.
The failure of the revenue from passenger fares to cover in full the additional costs of new rail infrastructure is not
the only reason for departing from a policy under which rail users simply pay for the benefits they derive from newinvestment. Railways share many of the attributes of the road system which inhibit the efficient operation ofmarket forces. New railways can also result in degradation of landscape, loss of biodiversity and noise nuisance.
Offsetting such negative impacts is the beneficial effect that rail investment can have through inducing road users
to shift to the more environmentally benign mode and reduce the levels of congestion experienced by remaining
road users. All of these impacts need to be assessed.
The network and monopoly effects identified above as a reason for the public provision of roads is equally relevantto the rail network, as are the risks of investing in long lived assets with no alternative use. Experience of effective
frameworks for the regulation of privately provided services such as water and energy demonstrates that suchconsiderations are not necessarily a bar to the model of a regulated utility being applied to the provision of rail
infrastructure and services. But there are several key differences between most regulated utilities and the railway
in addition to the failure of rail revenues to cover the full costs of new infrastructure.
Railways are an essential part of any country’s pattern of land use. Indeed it was the introduction of the railway andother public transport that allowed cities to grow beyond the boundaries of an area that could be covered on foot.
The role of railways in influencing land use and in contributing to the delivery of a government’s spatial strategy
continues to serve as a prime reason for public sector involvement in rail investment. The importance thatgovernments attach to the railway as a means of influencing policy on land use is reinforced by the extent to whichgovernments in many countries intervene in the market for rail travel by the setting limits on the level of certain
passenger fares that railway operators are permitted to charge.
Both for the reasons given above and in order to ensure comparability between modes in the decisions of policy
makers, cost-benefit analysis is widely used for the appraisal of rail and other public transport schemes.
Decision makers face a choice between maximising the benefits and increasing rail fares on the improved routes toensure that the direct beneficiaries contribute to the costs. In some cases, such as airport express services, financial
appraisal alone is used to make the case for the project because of the ability of the users to pay and the limited
extent of any external benefits.

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Investment decisions and the recovery
of project costs from users
The size of an investment programme that meets a given return in cost-benefit terms is influenced by the extent towhich policy makers decide that the direct beneficiaries should contribute to the costs of the project through tolls
or higher fares. In the case of some rail projects the revenue from the additional demand generated by theinvestment will provide a source of funds sufficient to repay the costs of the scheme. In other cases a policy of cost
recovery will require the scheme sponsor to increase the level of fares to meet some or all of the costs by capturing
through the fare box a part of the benefits of the investment. While such a policy results in a transfer of thebenefits that passengers would have gained in absence of the fare increase to the scheme sponsor or to the train
operator, the effect on generated demand is reduced. The requirement to increase the level of fares or impose tolls
above that assumed in the do minimum counterfactual has the effect of pricing off some or, in the extreme case, allof the generated demand which, in the cost-benefit analysis, makes up part of the benefit which can be attributed
to the scheme.
The effect on user benefits of increasing fares or other user charges can be illustrated through the standard
diagrams, shown below as figures 1 and 2, typically used as a teaching aid in student courses on appraisal
methodology. In absence of any increase in fares (figure1), a transport project reduces the generalised cost of
travel, in terms of the value of the travel time and other inconvenience saved, from 𝐺𝐶0 𝑡𝑜 𝐺𝐶1 , increasing railusers’ benefits or consumer surplus by 12(𝑇1 + 𝑇0 ) (𝐺𝐶0 - 𝐺𝐶1). The generated demand, (𝑇1 - 𝑇0 ) results in additional
revenues (ΔR) which make a contribution to the costs of the scheme, increasing the ratio of benefits to costs.
Figure 2 sets out the effect of policy which requires that investment is funded through an increase in rail fares, suchthat passengers pay for the benefits they receive. In the extreme case, as shown in figure 2, in which the increase infares needed to fund the project is equivalent to the increase in benefits and 𝐺𝐶0 = 𝐺𝐶1, all of the consumer
surplus is transferred to the rail operator. The increase in fares suppresses all of the demand that would otherwise
have been generated by the scheme, eliminating a source of benefit that forms part of the cost-benefit case.
Figure 1. Appraisal using cost-benefit analysis

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Figure 2. Financial appraisal

Where opportunities for price discrimination exist, some of the demand priced-off under a standard fare might becaptured through fares which differentiate between different users. Moreover, the assumption in the simple
cost-benefit analysis that the level of fares remains unchanged is open to challenge. Decision makers might well use
the opportunity to set an above average increase in fares for the improved services to ensure that passengers makesome contribution to the costs. Such decisions are often made in the run-up to the opening of the scheme, longafter the appraisal has been completed.
In some cases, such as investment in rail freight facilities in the UK, sponsors of schemes for which the decision toinvest is based on financial appraisal are eligible for public sector grants to cover certain external benefits, such as
road congestion relief on account of the mode shift induced by the project. This represents a hybrid approach,combining a mix of cost-benefit appraisal for impacts outside the scheme promoter’s interests with the objective of
earning a financial return on the investment. But this does not change the principle that financial appraisal may
require an increase in the price paid by the user when compared with the do-minimum and that this increase
reduces the demand generated by the scheme, an effect which is not a feature of appraisal using cost-benefit
analysis. Thus the ‘pass mark’ for a cost-benefit based project is generally lower than for one based on a financial
appraisal because of the deterrent of the increase in fares to potential users.

When do road and rail projects need
to be compared?
The circumstances under which there is a need to compare road and rail schemes differs between countries andbetween the different institutions responsible for transport infrastructure. Road and rail projects are rarely if evercomplete substitutes for each other. Rail’s market share is greater for long distance trips and for commuter flows
into larger urban areas. Rail has traditionally been the mode chosen for heavy freight flows, such as coal, ores andconstruction materials. While road is no longer seen as the solution to urban transport problems, it remains thedominant mode for all journey purposes and is the only mode that can meet the demands of dispersed patterns ofland use. In some cases, such as the UK’s Oxford to Cambridge corridor, road and rail investments are seen as© OECD/ITF 2020

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complementing each other in a comprehensive programme for increasing housing supply and employment
opportunities, shifting economic activity away from more congested, ‘over-heated’ locations. But it is only in
exceptional circumstances that a decision maker will face the choice between rail and road as a means of resolving
a specific transport bottleneck.
Informing the choice of mutually exclusive options is only one of cost-benefit’s functions. The method also helps
decision makers to set priorities between projects within the transport budget or, in countries where road and rail
draw on separate budget allocations, to decide on the distribution of funds between the two modes. And
cost-benefit analysis provided decision makers with evidence on whether, because the benefits of a specificscheme exceed its costs, it represents value for money. There are therefore good reasons for ensuring that decision
makers who are conversant with the methods of cost-benefit analysis appreciate the similarities and thedifferences when this technique is applied to the different modes. The following sections of this report review thedifferences between the modes and between their users which have the resulted in certain distinctions in
cost-benefit methods when applied to the different modes and consider the relevance of these differences for
decision makers.

Critical differences between road and rail
and their treatment in cost-benefit analysis
There are two sources of differences between rail and road schemes of relevance to cost-benefit analysis. The
users of rail projects, who tend to drawn from a smaller and more urban population, are not necessarily typical of
the population of road users in countries where road travel is the dominant mode. And there are many differencesin the services supplied. Road investment is concerned with the provision of highway capacity and has no influenceon the vehicles which drivers and firms choose to use. Investment in rail and public transport generally comprises
some mix of track and vehicle improvements, often with upgrading of stations and increased service frequency. The
methods used to appraise and model transport users’ responses to investment in the different modes have been
adapted and extended so as to account for these differences.

Differences between road and rail users: Leisure, commuting
and business trips
Road and rail tend to serve different markets. As noted above, rail’s share is greatest over longer distances and forcommuting into the larger urban areas where road congestion and lack of car parking space reduce theattractiveness of the car. Workers in the largest cities and those who travel greater distances tend to have higher
incomes: thus in most countries the average incomes of rail passengers are higher than those of the average roaduser. Research into the value transport users put on time savings shows that those in higher income groups tend toplace a higher value on such savings, suggesting a difference between the two modes in the value of time saved.
These differences apply to both trips made in the course of work, including briefcase travellers travelling tomeetings and conferences, and trips made for commuting and leisure purposes.
For most travellers the quality of the time spent on a journey varies according to the mode used. Some railpassengers find an uncrowded trip enables them to use time as productively as at their workplace. For others, suchas households with small children, the convenience and privacy of a car may outweigh any advantage of public
transport. The influence of technology on the value of time savings was the subject of a recent ITF Roundtable (ITF,
2019).

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Despite these differences in travellers’ willingness to pay for time savings, most countries have adopted a national
average value of time savings for use in appraisal that varies only by journey purpose when appraising publicly
funded projects. For commuting and for leisure travel, a national average value is used for each of the two
purposes which does not differentiate between modes, regions or other characteristics of a scheme and its users.
This practice of using national average appraisal values for commuting and for leisure purposes is often described
as an ‘equity’ value on the grounds that it treats all transport users as equal. Whether the adoption of a nationalcross-modal average for the value of time savings when there is evidence of a higher willingness to pay on the partof rail users constitutes a bias against rail investment is debatable. For schemes that are financially viable and arefinanced by the private sector, willingness to pay based values will provide the investors with an indication of the
expected return on their investment.
Projects aimed at relieving overcrowding on rail and metro networks provide an exception to the practice oftreating all travel time as of equal value. Many countries with dense urban transport networks have derived fromsurveys or other methods a set of multipliers for the national average value to represent the benefit of the
reduction in discomfort passengers experience when, instead of travelling in crowded conditions, the new scheme
delivers a better travelling experience. Values of up to 3 times the national average value are used in the case of
crush level loadings when many passengers are standing. In this respect appraisal differs between rail, a mode forwhich crowding values are a well establish source of benefit, and roads, for which a change in driving conditions
from congested to free flow is rarely part of the appraisal method, despite evidence of road users’ willingness to
pay a premium to avoid congested conditions. The UK Department for Transport is currently researching the effects
on highway appraisal and on the modelling of route choice of values of time that vary by congestion level.
The United Kingdom and some other countries have taken a different approach to valuing savings in the time spentby business travellers when using the different modes. Business time savings have generally been valued using thecost savings approach, whereby the time saved is valued at the average wage rate of the traveller. Travel survey
data can provide evidence of the distance-weighted earnings of business travellers by mode. With the inclusion of amark-up on earnings to allow for employment related costs borne by employers, this results in a measure of thevalue to the economy and hence to society of a unit of business time savings on each mode.
Recent research into the value of business time savings has shifted the focus away from the cost savings approachto a willingness to pay basis. One of the reasons for this change was a growing appreciation of the difference
between modes in both the characteristics of the traveller and the attributes of the journey. In particular, there is astrong perception that the relative attractiveness of the two modes has changed because of the opportunity thatthe rail passenger now has to use the time spent on the journey in a wider variety of ways than is possible for the
car driver. However, the surveys of business travellers carried out in the case of the United Kingdom study showedthat rail passengers put a higher value on travel time savings than did car drivers. Rail business travellers tended to
be in higher paid jobs and their employer derived more value from the activity carried out at the trip’s destination
than in the case of car users, an effect that more than offset the differences in their use of in-vehicle time. In
addition, there was clear evidence of the values being higher for the longest distance trips, which are more likely to
be made by rail. It is now UK practice to differentiate by distance bands for rail and road business time savings and,in the case of the longer distance bands, to use higher values for rail than for road.
Consistency between road and rail is therefore achieved by the use of a standard national average value for timesavings for commuting and leisure journey purposes, with road and rail business values differing to reflect theirimpact on productivity. The practice of adopting mode specific willingness to pay based multipliers on the national
average values in the case of projects aimed at reducing overcrowding on rail networks reflects both the benefit
that passengers derive from improved commuting conditions and of the priority that decision makers attach toaddressing extreme levels of crowding on the railway. Comparable treatment of road conditions is still at the
research stage.

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Differences between road and rail in the services supplied to users
The application of cost-benefit methods to transport projects is concerned primarily with the assessment oftransport users’ responses to changes in the supply of transport services, quantifying and valuing those responses
in terms of the benefits to existing users and to those who are induced to travel on account of the change. There
are significant differences between highway authorities and rail and other public transport operators in the natureof the services provided. A well conducted economic appraisal provides a comprehensive assessment of the costs
and benefits of these services and of transport users’ responses to changes in their provision.
Appraising and modelling increases in road capacity
The services provided by a highway authority are made up of the physical capacity of the road space and the designof that infrastructure, together with controls on the use of that space through traffic signals, speed limits and otherrestrictions. Methods for modelling road users’ responses to these increases in highway capacity against a
counterfactual of retaining the existing network or alternative upgrade options are well established. Models
permitting different levels of granularity are applied according to the level of detail required. These range frommodels which provide no more than a representation of lane capacity through a link based on speed/flow
relationships to the detailed modelling of complex intersections and the inter-relationships between a series ofsignalled junctions. Software for highway models is available commercially or from international organisations suchas the World Bank. Many traffic models allow for the volume of trips to vary with the speed and hence the cost of
the trip, so as to account in the model and in the appraisal for this induced demand.
Urban transport models differ according to the purpose which they have been designed to meet, whether for theplanning of multi-modal strategies or the optimisation of a city’s traffic signals. Recently urban models have been
extended to include provision for cycle lanes and the appraisal methods augmented to include the benefits ofactive travel. Urban models tend to be specific to the city for which the model was designed and, while theresponses and appraisal values are common at a national level, they rely on a detailed network and specification of
public transport services and so are not immediately transferable between locations.
The traffic models that are used to estimate changes in vehicle flows and speeds will in most cases provide
estimates of the changes in environmental impacts. These include changes in greenhouse gases (CO2), in local air
quality (NOx, PM10s and SO2) and in noise levels. It is common practice to include the monetised values of thesechanges in environmental impacts in a highway cost-benefit analysis.
While government and international regulations on road vehicles impose conditions which ensure that vehicle
owners comply with safety and environmental standards, the provision of vehicles is a market based decision madeby each of the large number of road users who might benefit from a project. Thus considerations such as the
comfort and quality of a road vehicle are not part of a highway scheme appraisal. Nor is it assumed that a road
improvement will induce households to buy new or better cars from which they might enjoy more than a marginalincrease in consumer surplus that could be attributed to the scheme.
Road traffic models represent the geography of the area where changes are expected to take place through astructure of zones which produce or attract the trips. These trips are then assigned to the highway network, usuallywith a simplified process for modelling the local road network. The numbers of trips produced by or attracted toeach zone depends on factors such as the number of households and of jobs in each zone.
Rail capacity – infrastructure and the timetable
The supply of passenger benefits from a rail project is delivered through a rather different process. Indeed, thefixed infrastructure, in terms of the civil engineering, track, power supply and train control system is of no value tothe passenger in absence of a train service. And most rail projects are aimed at enhancing the train service toensure that passengers benefit from the increase in the capacity of the track and in the speed at which trains canbe operated. Higher speeds allow for journey time savings: in this respect a rail project delivers benefits that arecomparable to those from a road investment.

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Additional capacity on the railway, either from longer trains or more frequent services, usually results in passengers
being able to travel in less crowded conditions. As noted above, many countries make use of a multiplier on thevalue of time savings to reflect the additional benefit that passengers perceive when crowding is reduced, amultiplier which applies even if the overall journey time remains unchanged.
Investment in greater frequency of rail services provides passengers with a greater choice over the time of day atwhich they travel. Rail passengers value greater service frequency, either in terms of reduced waiting times in thecase of intensive metro style systems or in terms of the greater choice in the case of long distance routes. The useof a value for waiting time, usually valued at double the national average in vehicle time, in the case of public
transport schemes is well established in many countries’ appraisal methods.
In some cases new rail or metro vehicles offer an improvement in the quality of service when compared with thealternative of retaining or upgrading the existing rolling stock. Access to Wi-Fi, more comfortable seats andimproved in-vehicle information about station stops, delays and options for mitigating their effects all form part ofthe change in the quality of service that investment in public transport can deliver. Public transport providers needto know the value that passengers place on such attributes in order to justify the additional costs when ordering
the rolling stock or when bidding for public funding of the services they provide.
There is no equivalent in the case of road appraisal to changes in rail vehicle quality. Changes in service frequency
are also a rail specific attribute, although some urban transport models allow road users to gain a benefit fromchanging the time of day at which they travel in the case of a scheme which reduces peak period congestion andthereby attracts traffic back into this period.
A further difference between rail and road investment is in the role of the station at the start and end of each partof the journey. Investment in improving rail services frequently requires increased capacity at stations toaccommodate increased demand and to improve the quality of a journey. The benefits of Transport for London’s
GBP 640 million Bank Station Upgrade scheme were estimated using a model of pedestrian flows between theunderground platforms and both the street level and the other platforms in the case of passengers changing trainsat the station. The cost-benefit analysis made use of specific values for walking and waiting time spent in crowded
conditions on the level, on stairs and on escalators: there was no change to the train services using the station.
Modelling the effects of investment on the supply of rail services
There is no equivalent on the rail network of the generic relationship between increases in road capacity and traffic
flows and speeds and hence savings in travel times. The capacity of any part of the rail network is specific to theroute, the signalling and control system in place, the mix of train types and services operated. The process of
estimating what investment is required to increase the capacity of a specific service or to reduce journey times onthat route requires detailed route based engineering knowledge.
The modelling of rail patronage and the linking of changes in the supply of rail services with their effect onpassenger demand also tends to be specific to the route and the aim of the project rather than of generalapplication. Initial modelling and appraisal of a new high speed line might focus on time saving benefits and mode
shift effects. A policy aimed at reducing peak hour congestion will adopt a model which includes the relationshipbetween train capacity, train frequency, passenger demand, waiting times and crowding levels subdivided into
short time periods on the route to be improved. Some models allow for passengers’ responses to the reduction incrowding to include the generation of new trips and a shift of trips from the shoulder to the peak hour. The
benefits will be made up of overcrowding relief, shorter waiting times in more pleasant conditions and a greater
ability to travel so as to depart or arrive at the passenger’s preferred time, rather than having to make acompromise about arrival or departure times because of the trains being so crowded. In those cases in which a
decision has been made to recover part of the cost of the project from an increase in fare levels, the model used toforecast changes in demand will need to make provision for the relevant fares increases and elasticities as part of
the responses to the change in service provision, adding a further dimension of complexity to the rail model andsubsequent appraisal.

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Most rail models are based on data from ticket sales on station to station flows. They therefore lack theinformation on the access and egress stages of the journey which influence passengers’ choices for all trips whichstart or end at some distance from the station. Linking data on station to station flows with estimates of how rail
travellers reach and leave the station and whether a scheme might induce them to choose a different station for
the trip is challenging. In this respect rail models differ from those used for road and urban public transport
schemes, for which adequate household survey data exist to populate the models with more specific origin anddestination data.
The relationship between the purpose of the intervention, the policy objectives it aims to address and the transportmodel used dictates the coverage of the appraisal. In the United Kingdom most passenger rail services have beenprocured through bids to operate a specific franchise, with the bidder proposing and costing enhancements to thebasic specification. Improvements in the quality of service include options such as the provision of Wi-Fi, on-train
sales of food and drink, staffing of stations and operation of more trains than in the specification. Values for each
attribute derived from survey and stated preference studies are used to compare bids and reach a decision about
the award of the franchise based on, among other considerations, the costs and benefits of each bid. Similar
considerations apply to the specification of a concession to operate a service.
Differences between road and rail: The modelling and appraisal of unreliability
In those cases where adequate data are available, the modelling and appraisal of transport schemes is extended toinclude the effect of the investment on reducing the likelihood of unexpected delays. There is a variety of
approaches to estimating and valuing changes in reliability on the different modes, assessment of which goes wellbeyond the scope of this report. Relevant to the issue of comparability are the differences between the two modes
in users’ perception of unreliability, with rail journeys generally running to a schedule set by the operator, while theexpected duration of a road journey depends on the experience of the driver. In the United Kingdom rail appraisalhas made use of estimates of the reduction in the average minutes of lateness that a scheme can be expected todeliver, with a multiple of the standard value of time savings, which varies by journey purpose and othercharacteristics of the trip, to represent the additional inconvenience of a late arrival at the passenger’s destination.
There are various options for estimating changes in reliability for road schemes. A measure of the expected change
in the standard deviation of typical journey times is made for inter-urban road projects in the United Kingdom. A
monetary value, derived from the same survey methods as are used to determine the value of time savings anddefined as the reliability ratio, is then applied to the measure of the standard deviation. A reliability ratio of 0.4 ofthe value of time savings for the relevant journey purpose is currently used by the UK’s Department for Transport.
The benefits of reducing unreliability for public transport projects other than heavy rail schemes, which aredescribed above, are estimated using one of two methods. A value of the average lateness, set at 2.4 times theappropriate value of time savings is used in some cases, with an alternative of following the highway based
approach of estimating the change in the standard deviation of journey times but adopting a higher reliability ratioof 1.4.
A consequence of using different methods for road and for rail when quantifying and valuing reliability is that road
users place a larger value on occasional substantial delays than on a series of frequent small delays of the same
total duration. And, while early train arrivals are neither detrimental nor beneficial, road users put a value on
predictability. The difference in the methods used in the United Kingdom can in part be explained by the different
institutions responsible for delivering road and rail services, with average minutes lateness one of the indicators
used by the Department for Transport to manage the performance of the franchised train operators.
Both quantifying and valuing changes in reliability on road, rail and other public transport are subject touncertainty. The cost to the traveller of an unexpected delay differs according to the purpose of the trip. Even thebest designed survey will elicit a wide range of values. At the same time, the extent to which an increase in thecapacity of a road or a rail service will reduce the variance of average journey times depends on a complex
interaction of factors, many of which are uncertain. For this reason the UK Department for Transport excludes
estimates of the value of reliability benefits from the quantified benefit cost ratio and considers them only at thestage in the decision process at which all of the less certain impacts are addressed.

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Differences between road and rail: Taxation and revenues
A change in consumer spending on road travel, such as might be induced by a highway scheme, has a different
impact on overall government revenues from that of an equivalent change in expenditure on rai l travel. A wellconducted cost-benefit analysis will account for these differences and the consequent changes in government
revenues with any shadow price of public funds used to mark-up project costs being equally applicable tothese changes in government revenues.
In most countries road fuel is taxed at a higher level than the average rate of taxation on consumer spending.
So a road project which reduces travel times and thereby increases the number of trips , shifting motorists’spending from other goods and services to fuel, will increase total tax revenues. For this reason, cost-benefit
analysis treats an increase in tax receipts as a benefit: motorists value the fuel they use at the market price,including tax, while the additional tax revenue allows the government either to reduce other taxes or toincrease public spending. Normally though, taxes are transfers and a simple increase in taxes that would leadto increase of tax receipts would be treated as a transfer. If the Marginal Cost of Public Funding wereconsidered, raising taxes also incurs a cost in terms of disincentive to economic activity. This discussion
though is outside of the scope of this discussion.
Rail and other public transport services are generally taxed differently, paying a rate of tax which is often
lower than the average rate on other goods and services. A rail scheme which results in more rail travellers
will reduce overall tax revenues as consumers shift their spending from a typical mix of goods and services tolow or zero taxed rail fares.
As noted above, the treatment in cost-benefit analysis of revenue from rail fares is a further source ofdifference between road and rail schemes. Incremental revenue from the demand induced by the scheme
will, to a greater or lesser extent, offset some of the costs of the scheme. The extent of the offset depends onthe contractual and commercial arrangements under which train services are procured. Under some models
of private sector provision, some of the revenues generated might be part of the profit earned by theoperator. Where services are procured through competitive franchising or through a concession arrangement,
an assumption that all generated revenues accrue to government is usually made.
As noted above, revenues from the users of rail and other public transport schemes provide a potential
source of funding and an opportunity for managing demand, by, for example, charging higher fares for peak
period travel. In those cases in which policy makers decide to increase fares on the improved part of the
network as a contribution to the funding of the scheme, the modelling of passengers’ responses to thischange in the money cost of travel needs to take account of the effect of such a change on demand whencompared with the Do-Minimum counterfactual. The interaction between capacity, demand and a policy of
optimising overall fares revenue through yield management, subject to whatever constraints a government
might place on increases in specific point to point fares, results in further challenges to the modelling andappraisal of rail schemes. In many cases, such as the UK’s HS2 scheme, the appraisal assumes no change inthe level or structure of fares between the do-minimum and with scheme scenarios. This assumption helps tosimplify the appraisal of the scheme: it does not anticipate the situation that might occur i f, when the newline opens, the train operator decides to raise the fare to reflect the improved quality of service.

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Treatment of mode shift effects between road and rail
Road and rail are, at the margin, substitutes: certain trips which, if not made by one mode, can be made with littleinconvenience by the other. In many cases land use patterns and low spatial densities eliminate public transport from theset of available choices but, where alternatives exist, investment in one mode will result in a shift in traffic from othermodes. Mode shift effects can result in impacts, for example the benefits of a reduction in pollution and congestion on
account of road traffic diverting to rail, and there are well established methods of modelling and valuing these effects.
Mode shift effects – road schemesExperience in the United Kingdom has shown that the extent to which investment in highway improvements induce rail
travellers to change their mode of travel is generally very limited. Road schemes are rarely primarily aimed at serving only
the long distance and city centre commuter markets in which rail’s market share is greatest. Only a very small proportionof the car drivers on a typical inter-urban scheme are likely to be making trips that have been shifted from rail. In urban
areas many of the interactions between car traffic and other modes occur through the re-allocation of road space
between public transport, active travel modes and private vehicles. Urban transport models can be used to show the
impacts on journey times and on delays for the different modes as a result of different options for prioritising public
transport. An appropriate multi-modal transport model will also show, given the changes in travel times for each modefor each option and the values of time savings for the different user groups, the benefits of each of the options to inform
decision makers about their relative merits.
Mode shift effects – rail schemes
Rail schemes generally have a more significant effect on mode choice for the limited markets in which they compete. Partof the benefit that can be attributed to rail investment is the reduction in road traffic as a result of the trips that switch
modes on account of the improvement in rail services. The benefits of mode shift to rail are made up of any reduction inroad congestion on the routes from which the trips have transferred, together with the reduction in environmental
damage, such as changes in air quality, greenhouse gases and noise, and changes in road accident rates. Mode shifteffects can also be the result of a shift to a different destination because the rail investment makes it a more attractive
choice.
Estimating the magnitude of such changes requires either a multi-modal transport model, which can provide details of
the route and destinations from which car drivers have transferred, or a less detailed method. An example of the latter isprovided by the UK Department for Transport’s recently updated TAG Unit A5.3 Rail Appraisal (UK Government
Department for Transport, 2019). Details of diversion factors by flow category show, for different parts of the country andfor different distance bands, the proportion of the new trips induced by a rail scheme which are likely to have been
diverted from car driver trips. The diversion factors are derived from surveys of travellers’ intentions and from the UK’s
National Transport Model. Estimates of the benefits of this shift from road have been taken from the UK’s National
Transport Model: a spreadsheet in the Department for Transport’s TAG databook (UK Government Department forTransport, 2019), gives estimates of the marginal external costs of a car km by road type, area type and time of day. In
absence of a multi-modal transport model, the analyst is required to reach a judgement, based on the estimates of therail trips generated by the investment, about the roads and time periods from which these trips have been diverted. The
data in this guidance make it possible to estimate the benefits, in terms of congestion relief, environmental damage andaccident reduction, from mode shift to rail without access to a full multi-modal transport model.
Most major urban public transport schemes are appraised using the changes in travel patterns derived from a multimodal model. Such models, usually estimated using local household and other survey data, are aimed at explaining theobserved choices that people in different parts of the urban area make and how these choices are influenced by personaland household characteristics and by the set of travel options they face. The benefits of mode shift are estimated directly
within the transport model: there is no requirement for externally estimated diversion factors. As noted above, suchmodels also serve to estimate the impacts of urban highway improvements and of the re-allocation of urban roadcapacity.

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Freight appraisal
In some countries, including the UK, decisions on investment in rail freight infrastructure are made using different
criteria from those that are applied to road freight haulage. In such cases the financial viability of the investment inrail freight is an influence on the decision. There are several reasons for this practice. Whereas rail freight projects,
such as improved access to container ports or the construction of passing loops on busy lines, are designatedexclusively for the use of freight trains, the road network is an asset which is shared between all classes of traffic.
A further consideration is the relationship between the infrastructure provider and the freight user. There is nocommercial relationship linking the provider of highway infrastructure and services with road freight hauliers andtheir customers. The benefits from a highway scheme to road goods vehicles are appraised using the same
methods as for car driver and car passenger travel, using values of time savings and vehicle operating cost changes
specific to the road freight sector, with some countries including in the estimate of cost savings the benefit ofreducing the time taken to deliver the commodity carried. Similar considerations apply to the external costs causedby heavy goods vehicles.
In most countries rail freight is operated as a commercial enterprise. There is a business relationship between theowner of the freight and the company responsible for moving that consignment. In this respect, rail is no different
to road. But unlike the road sector, the freight haulier enters into a commercial contract with the infrastructure
operator and owner for the right of access to the infrastructure and for the provision of a path or series of paths on
the network which can be used to move trainloads of goods between one location and another. The train operator
pays the infrastructure owner an access charge to fund the investment and to meet any additional operating andmaintenance costs incurred on account of the additional freight trains.
The train operator’s revenue comes either from the sale of the commodity transported at its destination or fromcharging the owner of the freight for transporting it. While the outcome of the freight project might be a reductionin the cost paid by consumers of rail hauled goods, this outcome is delivered through market forces rather than
through public sector intervention. In most countries the infrastructure owner’s potential to exercise monopoly
power over the right of access and the access charges levied is restricted by an independent rail regulator so as toincentivise the network owner to ensure efficient allocation of capacity, an institutional model which applies evenwhen the infrastructure owner is a public sector entity.
It is practice in the United Kingdom to attribute to a rail freight scheme the benefits of any shift from road to rail asa result of that scheme. The method of quantifying and valuing the mode shift benefits follows the approach
outlined above for car driver diversion, with account taken of the greater congestion and environmental impacts
caused by heavy vehicles. Typical values are given in the UK Department for Transport’s TAG Databook (2019). As in
the case of car mode shift, changes in tax revenues on account of reductions in road fuel consumption are includedin the appraisal. Diversion factors in the case of freight mode shift are specific to the scheme.
These external benefits are appraised because of a UK government scheme which provides grants to firms which
implement schemes which result in mode switch and which would not be commercially viable without agovernment grant. Award of a grant is subject to several conditions, including a requirement that the benefits ofthe switch exceed the level of grant required.
Decisions about major new freight infrastructure investments, such as Alpine tunnels or schemes to accommodate
the growth in cross boundary transit traffic are generally based on the use of more comprehensive cost-benefit
analysis. Environmental objectives, primarily mode shift effects provide much of the justification for such projects.
In addition, rail freight transport cost savings on account of fewer delays and national policies such as thedevelopment of a strong logistics sector can help to strengthen the case for investment in rail freight infrastructure.

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Urban transport programmes and projects
While the values and methods used for the appraisal of road and of rail projects are equally applicable to urban
transport projects, decision makers will often draw on a wider range of policies than the improvement of a single
mode. Demand management, road space reallocation and the promotion of cycling and walking as active modes all
form part of the set of policies aimed at improving mobility and making cities better places for residents, workers,
businesses and visitors. A variety of transport models are used in the appraisal of urban transport policies, ranging
from the detailed representation of traffic movements in congested conditions at different types of road junctions
to more strategic level multi-modal models to depict the interactions between different categories of road vehicle,
heavy and light rail, bus and active travel. The relationship between transport and land use is also relevant to urban
planning and policy. A land use transport interaction model, such as London’s LONLUTI model (Transport for
London, 2014), is often part of the hierarchy of models used to help formulate urban investment programmes andpolicies.
Appraisal methods have been modified or enhanced in a number of ways to accommodate specific urban policies.
Schemes for congestion charging have adopted values of time savings segmented by income band to represent theextent to which charging reduces demand by pricing off those with a greater choice of options and with a lower
than average ability to pay. Evidence from studies of the relationship between physical fitness and human healthhas been used to derive appraisal values for those investments in active travel which induce people to take up
cycling and walking and hence promote good health and reduce hospital admissions and working time lost to
sickness.

Comparing road and rail:
Some conclusions
Cost-benefit analysis has long been used as a means of providing decision makers with information about thesocial value of investments in road and rail transport. Road and rail are rarely complete substitutes. They
differ in the problems that new infrastructure is intended to resolve. An understa nding of the extent to whichappraisals of the different modes can be compared is desirable because policy makers need to decide onpriorities, on the allocation of budgets and on whether the benefits of any project exceed its costs.
Many features of cost-benefit analysis are common to the appraisal and modelling of road, rail and otherpublic transport schemes. This includes as the use of time savings as the major source of transport user
benefits. But the rail ‘offer’ to the transport user differs in a number of respects from the service a car driverderives from new or improved infrastructure. The link between road traffic congestion, road capacity andjourney times which is an inherent part of any highway model does not apply in the context of rail inves tment.
A rail service requires rolling stock, a timetable and stations, each of which might be part of the investment
package. The quantification and value of time savings has been augmented to include the benefits that railpassengers gain from improvements in the attributes of the rail service, with values derived from passenger
surveys and other approaches, such as stated or revealed preference methods. At the same time rail demandmodels have been enhanced to take account of passengers’ responses to such changes. In this respect there
are differences between road and rail appraisal, but there are good reasons for these differences.
There remains a risk that, where such methods and models have not been developed and the benefits of a railscheme are restricted to in-vehicle time savings, the appraisal will omit some of the benefits. Without goodevidence on passengers’ willingness to pay for reductions in crowding and other service improvements,

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decision makers would lack the information they need to weigh up the benefits and costs of such projects. Of
equal relevance to the decision is the reliability of the model used to predict the changes in demand that the
project will induce. A model which fails to perform adequately when tested against observations and against
predictions of transport users’ behaviour from other sources will not provide decision makers with theevidence they need for a sound choice of project. If comparability between modes is a requirement, thenperformance of the models used for the different modes must be broadly similar.
Decision makers have the option, when assessing the cost-benefit case for new infrastructure, of recovering
part of the project costs from users. Exercising such an option reduces demands on public sector funding andmight satisfy a policy objective that users pay for the benefits they receive. Such policies are more readily
applied to rail and other public transport schemes as there is already a requirement that users pay to accessthe network. The practice of tolling roads differs between countries and those countries with a history of
tolling generally restrict charging to the high quality interurban network.
A policy of requiring users to pay for the benefits they gain has the effect of pricing off some or most of thedemand generated by the scheme and reducing overall benefits. Moreover, unless the external benefits of thescheme, such as its contribution to promoting sustainable land use and economic development, are identified,valued and funded by the public sector, much of the rationale for the project will be lost to decision makers.
Policy on the funding of rail freight schemes in the United Kingdom provides one example of theinfrastructure provider, the train operator and the customer making a commercial decision about case for
upgrading specific parts of the network. Schemes which are not financially viable are eligible for a public
sector grant which does not exceed the quantified mode shift benefits. But countries with major transit flows
use full cost-benefit analysis to inform the business case.
The cost-benefit appraisal is only one part of the business case that a decision maker will want to understand
before being in a position to reach a decision. Policy objectives that are not directly part of the cost-benefit
appraisal will influence the process of project selection. Decision makers might wish to strengthen links
between the more and less prosperous regions of the country, or to rebuild de-industrialised cities.
Cost-benefit analysis can show decision makers the extent of any benefits that transport users in a highincome region have to forego if a decision is made to opt for a scheme with lower net benefits in a region ofpolicy priority. Well informed decision makers will understand the differences between modes, in terms how
they benefit transport users, their costs and the circumstances under which they are likely to offer the bestsolution to a problem. A well conducted cost-benefit analysis is part of the process of ensuring that decision
makers understand the strengths and weaknesses of the business case put to them.

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Investment in Cost-Benefit Analysis

International Transport Forum
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Published: 12/2020

This paper examines whether the results of cost-benefit analyses(CBA) for road and rail projects can be compared with each other.
Road and rail projects address different transport needs and aim tosolve different problems. This does not make comparisons between
CBAs for each mode impossible, but requires a nuanced approach.