Wider Economic Impacts in Transport Infrastructure Cost-Benefit Analysis - A Bridge Too Far?

By Dobes, Leo; Leung, Joanne | Agenda: A Journal of Policy Analysis and Reform, January 1, 2015 | Go to article overview

Wider Economic Impacts in Transport Infrastructure Cost-Benefit Analysis - A Bridge Too Far?


Dobes, Leo, Leung, Joanne, Agenda: A Journal of Policy Analysis and Reform


Introduction

A conventional cost-benefit analysis (CBA) of transport projects invariably focuses on items such as savings in travel time and fuel costs, as well as on changes in any externalities such as negative environmental outcomes or vehicle crashes. Aggregated, they provide a measure of the change in the 'generalised cost' of travel attributable to the provision of new or enhanced transport infrastructure such as a road, a railway or a bridge. The underlying assumption is that all markets, including transport-using ones, are perfectly competitive.

Conventional CBA nevertheless requires examination of secondary, transport-using markets that are distorted due to factors such as taxes or imperfect competition (see, for example, Boardman et al. 2011: ch. 5). On the basis that market economies are in fact subject to various distortions, policymakers in the United Kingdom in the 1990s began to explore the implications for the evaluation of transport projects.2

In recent years, the so-called wider economic impacts (WEI)3 of transport have been addressed in three separate categories: agglomeration effects, imperfect markets, and tax revenues from increased economic growth.4 Agglomeration effects were discussed by Alfred Marshall in the context of external economies that firms and workers can reap in larger markets. Firms benefit from interactions with 'correlated branches of industry', workers more easily find jobs suited to their particular skills, and employers better match available skills to jobs (Marshall 1948: book IV, chs X, XIII). The new economic geography and WEI literature have built on these concepts.

A second category of benefits is attributed to users of transport services working in industries that exhibit imperfect competition. Lower transport costs are assumed to translate into increased production and lower prices, thus benefitting society. Lower transport costs can be expected to increase production in both imperfectly competitive sectors and in more competitive industries. Part of this additional production (GDP) will flow to the government in the form of taxes and will be spent on other projects or programs of benefit to the community. Conventional transport CBA does not include this effect because it considers only the primary, transport market, so a WEI perspective adds it as an additional benefit.

Adjustment of standard CBAs using WEI concepts can increase the estimated benefits of a project substantially. In the case of the proposed light-rail link in Canberra, Capital Metro (2014: table 29) includes WEI effects that constitute 20 per cent of total benefits. There is some risk that multipliers or so-called uprate factors will be applied routinely to estimated benefits of transport projects.

Given the increased focus by Australian governments in recent times on transport infrastructure projects, it is important to ensure that the estimated WEI benefits are not exaggerated. In a budget-constrained world, any bias in the estimation of transport sector benefits would be at the expense of potentially meritorious projects in other sectors such as health or education. Aspects of WEIs are therefore examined below from both a theoretical and an empirical perspective.

Wider economic impacts of transport infrastructure: Some theoretical considerations

The standard analysis of the benefits of a transport-related project can be represented diagrammatically, as in Figure 1.5 The vertical axis shows the generalised cost of transport: typically the cost paid for a trip, including travel time, fuel and any change in externalities such as vehicle crashes. The horizontal axis typically shows the number of trips. The demand curve therefore indicates the maximum willingness to pay for particular numbers of trips made. Figure 1 does not show the capital cost of the project, which is estimated separately.

Area A in Figure 1 represents the gain in consumer surplus to existing users; those already making trips but who experience lower costs because of improved infrastructure. …

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