12. TRANSPORT APPRAISAL Introduction •Appraisal = is a way of thinking about all the costs and benefits of different spending projects in a systematic manner so that, different projects can be compared and investment made which are going to rpovide the maximum return. •Transport involves the expenditure of resources on a combination of investment in capital items (e.g. stations, tracks, roads) and/or in operations (e.g. subsidy) •Society has limited resources → therefore it should seek to maximise the return from investments Alternatives •Appraisal is a way of predicitng how much utility we as society will derive from the expenditure of resources on one thing compared to another, by predicting the utility that will arise from each •For example → how much utility would we get from spending 10 bn CZK on a new motorway compared to a new railway Appraisal and Forecasting •It is fundamental to realise that inherent in appraisal, there is some kind of prediction or foracsting required •Because we have not built the project, we are only considering whether it will be wortwhile or not → we have to try to forecast the future → sometimes quite far into the future •Two main techniques can be used: • - Looking at the performance of similar, • existing projects • - Using predictive models The appraisal process The role of politics •Appraisal is not the only basis on which projects are selected for funding; politics often play a major role •Politicians may have „non-rational“ reasons for wanting or not wanting projetcs and these may have little to do with the results of appraisal •The appraisals are frequently done after the desicion to build the project had been taken – ex post justification of a political decision •Appraisal provides the advice, that may be ignored by politicians. The politicians také the ultimate decisions. Cost benefit analysis •Cost benefit analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile •The results of CBA is a number: this shows the ratio of benefits to costs for the scheme. •If it is less than 1 (costs exceed benefits) then the rational government or organization would be expected to be unlikely to fund the scheme •Values above 1 indicate the overal benefit to society and higher the ratio, the higher the probabilty that it will be financed Monetary values •The basis of CBA is that a monetary value needs to be allocated to all benefits and costs associated with a given project. •Some costs and benefits can easily be expressed in monetary terms (fares, costs of building roads or operating trains), some are harder to monetize (accidents, noise) and finally some are very extremely diffucult to exprsss in monetary terms (change in the quality of landscape, wider economic benefits) •This is a funamental diffuclty in CBA from their beginings in late 1950s From CBA to SCBA •Private sector → CBA is straightforward → only costs and benefits that can be sold at the market •Public sector → wider range of costs and benefits → what to include and what to exclude? → many factors (time and accidents savings) cannot be bought at the open market •Social costs benefit analysis (SCBA) → CBA that includes factors without direct market value, but with social value One problem •The factors that are excluded from SCBA may be sometimes viewed as more important than those that are included → is it feasible to include all factors? •The results of SCBA shows only how the scheme performs in terms of factors included in the analysis → but not necessarily how it performs in realtion to the objectives set fro the scheme •Alternative appraisal methodology → objective – based appraisal (or multicriteria analysis) Objective - based appraisal •Good objective based appraisal needs clear objectives •SMART objectives → specific, measurable, agreed, realistic and time-dependent •UK governemnt objectives → Economy, Enviroment, Safety, Integration, Accessibility and social inclusion •There is an element of political controversy in objective based appraisal (choice and clarity of goals) → SCBA avoid this •it is difficult to argue against the project that appears to be good value for money → it is quite easy to argue against a projects that performs well against an objective with wchich you do not agree How does CBA work? •Despite the emergence of objective based appraisal, CBA remains the main appraisal tool •The prurpose is to weigh up the costs and benefits and to see whether benefits are higher, and if so, by how much. •Example: Tram bypass in Gothenburg → tram network congested in city cetre → idea of tram bypass to provide faster journey times across town and to provide new journey opportunity Steps in CBA 1)Choose one or more alternative options → against which to assess the tram bypass scheme. The base option (Option B) → to build nothing/minor improvement against (Option A) → building tram bypass 2)Choose length of time → probably several decades → over which to assess 3)Use a predcitve model to calculate the likely ridership during the whole evaluation period on the tram network in Options A, B. → From this, calculate the revenue 4)Use the same predictive model → to calculate total journey times on different options over the whole evaluation period Steps in CBA (2) 5)For Option A calculate the journey time savings likely to result from the project 6)In a similar way, calculate journey time savings on the road network resulting from the tram bypass → if people are predicted to transfer from car and/or bus to tram 7)Calculate construction, maintenance and operating costs of the different options 8)Také away the benefits (revenue plus journey time savings) from the costs for Option A to find out whether benefits exceed costs and, if so, by how much. • Key elements of SCBA (1) •Project appraisal period → usually 30 – 60 years •The benefits that are assessed → changes in travel time, revenues, vehicle operating costs, accident costs, (increasingly) noise and air pollution •Forecasting and modelling → modelling should be traeted as indikative → induced traffic and newly created congestion •Present values → costs and benefits have to be calculated in their net present values (NPV) Key elements of SCBA (2) •Accident valuation → usually based on insurance costs (policing, medical, pain and suffering, economic losses) → willigness to pay for safety improvements •Operating costs → e.g. By raising average speed and reducing congestion, a new road is likely to reduce operating costs for all users •Revenue → discounted flow of revenues Value of time •Values of time → normally the most significant benefit in SBCA → value of time used is abolutely critical to the final outcome of the evaluation •Usually very small individual journey times savings multiplied by a very large number of users over a long period •How to estimate reliably values of time? → estimation techniques → working and non working time → opportunity costs Discussion •Valuing time savings → proportional valuation of small and big time savings? →what we actually do with the time saved? •What to value? → many costs and benefits are left out •Discount rate and length of time → they are arbitrary and critical to the outcome •What does NPV shows us? → they may not help us with trasnport policy objectives •Equity and distributional effects → fairness and political considerations •Project pricing – optimism and inaccuracy → usual escalation of costs Exercise (1) – Discount rate Year Benefit (undiscounted) (£) 2003 35,000 2006 60,000 2008 100,000 2010 25,000 2014 40,000 2017 70,000 •The effect of the discounting rate and project time period •First, discount the following stream of benefits from a project and derive a total NPB for price base year 2002. Use a discount rate of 3.5 per cent. • Exercise (2) – Value of licence •Suppose you are interested in operating a taxi and you are considering purchasing a taxi operating certificate form an existing operator. You estimate that the current operator makes annual excess profits equal to 100.000 CZK. At a 5% rate of interest, what is the maximum price you are willing to pay for this license? Would you be willing to pay this same price if the interest rate were 10%? • Exercise (3) – Investments „needs“ •Critique the following statement: “We currently do not have sufficient airport capacity to meet the continuing growth in airline traffic. In order to avoid gridlock at our nations airport, we need to build additional airports”. • Exercise (4) – Value of time •Decide which values of time you should use for a person who is travelling by underground train on works’ business; and for a person who is travelling to work by bus. Why do you think that values of time when travelling in working time are highest for travellers on the underground and lowest for those on the bus? • The Economics of Investment in High Speed Rail based on J. Preston (2013) Introduction •Origin in Japan - Shinkansen (1964) •Defined as new rail lines capable of operating speeds of 250 kilometres per hour or more •World HSR network (2013) – 22.000 km •China, Japan, France, Spain •Germany, UK, Italy, Korea, Taiwan, …… •HSR extremely costly •Better understanding of the economics of HSR needed Design •Largely freestanding systems (Japan, China) x systems integrated with conventional rail (France, Spain, Germany) •HSR may penetrate city centres using conventional tracks (France) or new tracks (Japan) or may serve edge of city locations (China) Aims •Capacity = separating fast and slow trains •Speed = rail to compete with air • •Promoting national champions (in supply) •Journey time reliability (UK) •Economic development (China) •Political integration/centralization (Spain) •Enviroment (UK) Appraisal and Evaluation •In both ex-ante appraisal and ex-post evaluation of HSR cost-benefit analysis is the dominant methodological tool •Sometimes distributional impacts are important Benefits of HSR (UK evidence) •30% revenue •50% users time savings •10% reduction of rail overcrowding •10% wider economic benefits • •Benefits from reduced rpoad congestion and enviroment improvement were relatively minor HSR traffic (European evidence) •30% abstracted from air •30% abstracted from classic rail •15% from road (predominantly car) •25% generated Capital costs •High capital costs are required to achieve grade separation, curvature and gradient •Costs higher when high population densities, high land values and unfavourable topography •Costs may vary from below EUR 10 million per km (China) to over EUR 100 million per km (HS1 approaches to London) •Economies of density important •Operating speed is a key driver of capital costs Demand •High degree of variability in demand for HSR schemes from below 4 million passengers per annum (Madrid-Seville) to over 200 million passenger per annum (for the Tokaido and Sanyo Shinkansen) •Determinants: population, spatial structures, fare levels, HSR stations location, national and sometimes regional borders •Demand estimations: gravity model Competition •Intermodal competition – very intensive, low cost airlines •Italy – HSR open access competition between Trenitalia and NTV: o30% reduction in fares o45% increase in services o30% increase in demand oIt is not clear whether this competition will be sustainable •High access charges (typically 25-45% of HSR revenue) can limit open access competition Analysis •Paralysis by analysis (UK, US) – many studies, minimum service •Build and see (China, Spain) – large increases in HSR network • •Step by step x big bang approach Test for HSR investment 1.Does HSR make a commercial return? 2.Does HSR make a social return? 3.Does HSR make a social return including impacts on other transport systems and wider economic benefits? 4.Does HSR have social returns when qualitative wider benefits are taken into account? Nash (2015): When to invest in HSR? HSR in France CBA of HSR in Spain CBA of HSR in Britain Nash (2015) HSR costs and benefits HSR in the Czech Republic Is it a good idea to build HSR in the Czech Republic? The „threat“ of being excluded from HSR network in Central Europe Bent Flyvbjerg Biased demand forecasts •The study of traffic forecasts in transportation infrastructure projects. The sample used is the largest of its kind, covering 210 projects in 14 nations. The study shows that forecasters generally do a poor job of estimating the demand for transportation infrastructure projects. •For 9 out of 10 rail projects, passenger forecasts are overestimated; the average overestimation is 106%. For half of all road projects, the difference between actual and forecasted traffic is more than ±20%. •The result is substantial financial risks, which are typically ignored or downplayed by planners and decision makers to the detriment of social and economic welfare. Flyvbjerg, B., Skamris Holm, M. K., & Buhl, S. L. (2005). How (in) accurate are demand forecasts in public works projects?: The case of transportation. Journal of the American planning association, 71(2), 131-146. Cost escalation •The study of cost escalation in transportation infrastructure projects. Based on a sample of 258 transportation infrastructure projects worth US$90 billion it is found that the cost estimates used to decide whether such projects should be built are highly and systematically misleading. •Underestimation cannot be explained by error and is best explained by strategic misrepresentation, that is, lying. •The policy implications are clear: legislators, administrators, investors, media representatives, and members of the public who value honest numbers should not trust cost estimates and cost-benefit analyses produced by project promoters and their analysts. Flyvbjerg, B., Holm, M. S., & Buhl, S. (2002). Underestimating costs in public works projects: Error or lie?. Journal of the American planning association, 68(3), 279-295.