LeedsUniWhite Institute for Transport Studies FACULTY OF EARTH AND ENVIRONMENT ITS Logo white Chris Nash Appraisal of transport projects – the British approach LeedsUniWhite ITS Logo Black New Leeds logo green Discounting for time •Suppose the project yields 100k euros of net benefit per year for 3 years. With a discount rate of 3.5%: • net benefit discount discounted benefit Year factor 1 100 0.966184 96.6 2 100 0.933511 93.4 3 100 0.901943 90.2 Present value of benefits 280.2 If the project costs 200, then the net present value is 280.2-200=80.2 LeedsUniWhite ITS Logo Black New Leeds logo green Outline •Development of appraisal methods •Current approach •Key issues • - Appraisal optimism • -Value of time • -Value of environmental impacts • -Wider Economic Benefits • -Scarcity of investment funds • • LeedsUniWhite ITS Logo Black New Leeds logo green Transport Appraisal in the 1960s •Pioneering studies of the Victoria Line (London Underground) and the M1 Motorway •By the end of the 1960s, cost benefit analysis routinely applied to main road schemes (financial appraisal the norm on rail, although the Cambrian Coast study was a pioneering study of a rail closure) LeedsUniWhite ITS Logo Black New Leeds logo green Transport Appraisal in the early 1970s •Solely concerned with economic efficiency – simply presented an NPV •Nothing about who gained and who lost •Concentrated on construction and maintenance costs, time and accident savings: neglect of environment, planning and wider economic impact •10% discount rate and 30 year horizon so emphasis on the short run •Much criticised as narrow and mechanistic LeedsUniWhite ITS Logo Black New Leeds logo green The Leitch report (1977) • •Framework approach •Nested CBA in a broader multi criterion approach in which much material (e.g. environmental impacts) was presented in physical rather than in money terms •Problem of volume of information; no formal way of trading off costs and benefits expressed in different units LeedsUniWhite ITS Logo Black New Leeds logo green New Approach to Transport Appraisal (NATA) 1998 •Revised the framework • •To be applied to all decisions: -Road investment -Public transport investment -Subsidies • •Move to 3.5% discount rate and 60 year time horizon LeedsUniWhite ITS Logo Black New Leeds logo green NATA objectives •Environment •Economy •Safety •Accessibility •Integration •Now replaced by a simple grouping of impacts into •Economic, Environmental, Social and Government Finance LeedsUniWhite ITS Logo Black New Leeds logo green Current approach in TAG (transport analysis guidance) •Based on Treasury Green Book (2020) •5 cases approach to appraisal •- Strategic case -Economic case - Commercial case - Financial case - Management case. LeedsUniWhite ITS Logo Black New Leeds logo green The Treasury Green Book: Appraisal and Evaluation in Central Government •The purpose of the Green Book is to ensure that no policy, programme or project is adopted without first having the answer to these questions: •❑ Are there better ways to achieve this objective? •❑ Are there better uses for these resources? • •Thus a shortlist of alternatives must be appraised. •The shortlist must always include the ‘do minimum’ option •(note – this may be problematic for instance if traffic is growing fast) • • LeedsUniWhite ITS Logo Black New Leeds logo green Transport analysis guidance - GOV.UK (www.gov.uk) •- All projects should be compared with a do minimum base case -Forecasts need to be made of costs and benefits throughout the life of the project (assumed to be 60 years in the case of major transport infrastructure but DfT caps benefits after 20 years) -As far as possible all costs and benefits should be valued in money terms -All costs and benefits should be discounted back to the present using a discount rate of 3.5% for the first 30 years and then 3% after that -A benefit cost ratio is then calculated as the ratio of benefits minus costs to all excluding the government over net government transport funding - LeedsUniWhite ITS Logo Black New Leeds logo green •International context: •many other countries have similar appraisal practice and guidance −e.g. Netherlands, Sweden, Germany, USA, NZ, Australia (NSW), France, Denmark, Canada, Japan ... −international comparisons: see ITS (2013) •international level: −EU: DG REGIO CBA guide (2014) ; DG Mobility & Transport ‘HEATCO’ guidelines (2006); Handbook on External Costs (CE Delft, 2019) −The World Bank (2005) http://go.worldbank.org/09MMD2C490 − − • • 1. • TAG and appraisal systems worldwide LeedsUniWhite ITS Logo Black New Leeds logo green Transport Economic Efficiency Table •User Benefits •(time, operating costs, user charges, delays during construction) •Private Sector Provider Impact •(revenues, costs, grants and subsidies) •Other Impacts •Net Business Impact •Total LeedsUniWhite ITS Logo Black New Leeds logo green Notes •-Generated trips valued using ‘rule of a half’ i.e. given half the benefit figure of trips that would take place anyway. •-Users perceive costs and benefits in market prices (i.e. including tax). Government and firms perceive them at factor cost. • Need to use a common unit of account – conversion factor 1.19 LeedsUniWhite ITS Logo Black New Leeds logo green Public Accounts Table •Local Government Funding • •Central Government Funding •(inc. impact on tax revenues) • •Total LeedsUniWhite ITS Logo Black New Leeds logo green Analysis of Monetarised Costs and Benefits Table (other monetised effects) •Noise •Local Air Quality • Greenhouse Gases •Journey Quality • Physical Activity • Accidents •NB Common values applied regardless of incomes •(equivalent of applying weights except for money costs – can have perverse impacts) •But values assumed to rise in proportion to GDP/head LeedsUniWhite ITS Logo Black New Leeds logo green Appraisal summary table •Economy •Business users •Transport providers • Regeneration • Wider Impacts •Environmental •Noise •Air Quality Greenhouse gases • Landscape Townscape Historic Environment •Biodiversity • Water Environment • LeedsUniWhite ITS Logo Black New Leeds logo green Appraisal Summary Table CTD •Social •Commuting and Other users Time and Reliability •Accidents • Affordability • Option and non-use values •Public accounts •Cost to Broad Transport Budget • Indirect Tax Revenues LeedsUniWhite ITS Logo Black New Leeds logo green Valuation of costs and benefits – key issues • •Optimism bias •Value of time (esp business travel and small time savings) •Value of environmental impacts •Wider Economic Benefits •Scarcity of investment funds • • • LeedsUniWhite ITS Logo Black New Leeds logo green Optimism Bias • Recommended optimism bias uplifts for different projects at different stages of the life of a transport project • Stage 1 Stage 2 Stage 3 •Roads 44% 15% 3% •Light rail, Metro 66% 40% 6% •Conventional rail 64% 18% 4% •Stage 1 Strategic appraisal •Stage 2 Outline business case •Stage 3 Full business case LeedsUniWhite ITS Logo Black New Leeds logo green Values of Time for rail travellers per hour (2010 prices) DfT 2015 Previous New commuting 6.81 10.01 other leisure 6.04 4.57 Business 31.96 36.19 (>100km) LeedsUniWhite ITS Logo Black New Leeds logo green Why do businesses value time savings so highly? •Ability to work effectively on the train should reduce value •But: •Ability to fit more meetings into a day •Reduced travel in unsocial hours •Better productivity at destination - LeedsUniWhite ITS Logo Black New Leeds logo green Values of Time for rail travellers per hour (£2010 market prices) • •Commuting 9.95 •Other non business 4.54 •Business <50km 10.02 • 50-100km 16.21 • 100-200km 28.23 • >200km 40.72 LeedsUniWhite ITS Logo Black New Leeds logo green Major changes •For working time, previously used the cost savings approach (wage rate plus overheads) •This was much criticised (people work whilst travelling; but they get other benefits from time savings – can do more work on a single visit, avoid an overnight stay etc) •Switched to valuing business time savings using willingness to pay studies •Values depend on length of trip – much higher for long distance trips • LeedsUniWhite ITS Logo Black New Leeds logo green Multipliers for waiting, walking and late time • •Walking and waiting revised from 2.5 to 2 •Late time revised from 3 to 2.4 LeedsUniWhite ITS Logo Black New Leeds logo green WHAT ELSE HAVE THE RAILWAYS VALUED? •Walking time (to and from station and at interchange) •Waiting time (at departure and at interchange) •Interchange penalties •Headway and Displacement Time •Reliability (Late arrivals and large delays) •Crowding (Standing time and crowded while seated) •Rolling stock improvements (new trains and specific attributes) •Station improvements, staffing and security •Information provision, purchasing and fare simplification •On-board facilities (e.g. catering, wi-fi, toilets, cleanliness) •Seating layout •See the Passenger Demand Forecasting Handbook LeedsUniWhite ITS Logo Black New Leeds logo green Externalities • •what are externalities? –not part of user cost (GC) or producer costs –externalities are effects for which no money compensation is paid –occur where markets are absent (e.g. no market for clean air, so when an HGV pollutes the air no compensation is paid) • The challenge: •methods are needed to measure the value to people of these impacts so that they can be included in the CBA. LeedsUniWhite ITS Logo Black New Leeds logo green Safety Typical costs imposed by transport accidents: –material damage –police and fire service costs –insurance administration –legal and court costs –medical and healthcare costs* –lost economic output* –pain, grief and suffering* Cost per fatality, serious or slight injury LeedsUniWhite ITS Logo Black New Leeds logo green Safety: Overall Casualty Values • Source: TAG Data Book (DfT, July 2017) Screen Clipping LeedsUniWhite ITS Logo Black New Leeds logo green •UK Noise values: •benefit transfer from Birmingham study, 1997, gives UK values at 2002 prices • • • • • • • • • • • • •Source: Nellthorp, Bristow and Day, 2005/7 Environment: Noise LeedsUniWhite ITS Logo Black New Leeds logo green Environment - air pollution damage and abatement costs (2010) •PM10 damage costs (£/household/1μg/m³) 92.7 • •NOx damage costs (£/tonne) 955 • •NOx abatement costs (£/tonne) 29000 LeedsUniWhite ITS Logo Black New Leeds logo green Values of carbon (£ per tonne of CO2e; 2010 prices) • • 2010 52.3 • 2020 60.7 • 2030 70.8 • 2040 136.6 • 2050 202.3 LeedsUniWhite ITS Logo Black New Leeds logo green How to value impact of diverting passengers from other modes? •Ideally use a multimodal model •If that is not possible, use diversion factors LeedsUniWhite ITS Logo Black New Leeds logo green Diversion Factors (change in passenger km as a percentage of change in rail km) typical inter city values Walk -0.47 Cycle -0.46 Car Driver -26 Car Passenger -20 Bus -7.4 Total km travelled 46 Source: WEBTAG LeedsUniWhite ITS Logo Black New Leeds logo green Marginal external costs and indirect taxation (2010) (weighted mean for all roads and times of day) cars heavy goods vehicles Congestion 10.1 52.4 Infrastructure 0.1 9 Accidents 1.6 2.8 Local Air Quality 0.1 2.5 Noise 0.1 7 Greenhouse gases 0.9 3.8 Other 0 6.4 Indirect taxation -4.7 -34.1 Total 8.2 49.7 LeedsUniWhite ITS Logo Black New Leeds logo green Sources for previous table •Source: •Cars: Department for Transport (2017 TAG databook •Heavy Goods Vehicles Department for Transport (2009) Mode Shift Benefit Values: Technical Report •Note: values for heavy goods vehicles are estimated 2015 values in 2010 prices •Note: dominance of relief of congestion over environmental factors controversial • • LeedsUniWhite ITS Logo Black New Leeds logo green Wider economic impacts •It is usually assumed that when a transport scheme attracts new economic activity to an area it is simply shifting it from somewhere else. But some additional benefits are now recognised. •1. Agglomeration externalities •Productivity depends on effective density (i.e. accessibility to population) esp for business services •(size of labour market •Economies of scale in supply of services •Speed of technological change) • • • LeedsUniWhite ITS Logo Black New Leeds logo green Wider economic benefits CTD •2. Imperfect competition in output markets •10% uplift in benefits (based on studies of price cost •margins) • 3. Labour supply • Reduced commuting costs generate increased labour supply (people entering the market or longer hours) • Benefits of extra trips already estimated (but value to user depends on post tax income) • But government benefits from extra tax revenue •(‘tax wedge’) LeedsUniWhite ITS Logo Black New Leeds logo green Wider economic benefits CTD •4. Move to more productive jobs due to land use changes -If project attracts jobs to where productivity is higher. •Again net benefit is increased tax revenue. - - • LeedsUniWhite ITS Logo Black New Leeds logo green Two ways of dealing with scarcity of investment funds 1.Shadow price public funds 2.Compute the BCR (benefits per pound of government funds) and require a value significantly above 1 3. •Britain currently does the latter LeedsUniWhite ITS Logo Black New Leeds logo green Value for Money (VfM) and BCR Categories •For most projects, which impose a net cost on the Broad Transport Budget: • • • • • • DfT (2017), Value for Money Framework • Screen Clipping LeedsUniWhite ITS Logo Black New Leeds logo green Conclusions •British transport appraisal nests CBA within a wider assessment of impacts •It is state of the art on many issues e.g. •Value of time and environmental impacts •Wider economic impacts •But still much uncertainty on some issues •No formal method to combine quantitative and qualitative elements • • LeedsUniWhite ITS Logo Black New Leeds logo green Questions for discussion •Are there important impacts still omitted from the British approach? •Is it possible to value safety and environmental effects in money terms? LeedsUniWhite ITS Logo Black New Leeds logo green References •The general approach to appraisal of the British government is outlined in: • •The Green Book (2020) - GOV.UK (www.gov.uk) • •The current British DfT guidance on appraisal can be accessed via the TAG website Transport analysis guidance - GOV.UK (www.gov.uk) • •Estimation of the new values of time is described at DepartmentforTransport(2015)Understanding_and_Valuing_Impacts_of_Transport_Investment •https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/470998/Understanding_and _Valuing_Impacts_of_Transport_Investment.pdf LeedsUniWhite ITS Logo Black New Leeds logo green References continued • •Department of Business, Energy and Industrial Strategy (2021) Valuation of greenhouse gases: for policy appraisal and evaluation tps://www.gov.uk/government/publications/valuing-greenhouse-gas-emissions-in-policy-appraisal/valua tion-of-greenhouse-gas-emissions-for-policy-appraisal-and-evaluation •Department for Transport (2016) Understanding and valuing the impacts of transport investment: wider impacts transport appraisal guidance (WebTAG) htts://www.gov.uk/government/consultations/transport-investment-understanding-and-valuing-impacts •Graham D J (2007) Agglomeration, productivity and transport investment, Journal of Transport economics and Policy, 41 (3) ,317-343 •Nellthorp,J;Bristow,AL;Day,B (2007) Introducing Willingness-to-pay for Noise Changes into Transport Appraisal: An Application of Benefit Transfer Transport Reviews 27, 327-353 • • LeedsUniWhite ITS Logo Black New Leeds logo green References continued •Venables, A.J. (2007), ‘Evaluating urban transport improvements. Cost–benefit analysis in the presence of agglomeration and income taxation’, Journal of Transport Economics and Policy, 41 (2), 173–188. • •Wardman M (2001) A review of British evidence on Time and Service Quality. Transportation Research E, Vol 37, No 2 pp 107-128. •