House of Commons - Transport and the economy

Transport and the economy - Transport Committee Contents

4 Appraisal and decision-making

Overall process

75. Major transport schemes promoted by local authorities and the Highways Agency would normally be funded by central government. The Secretary of State for Transport decides whether or not to approve funding for such schemes on an individual basis.[103] Part of the decision-making process involves a detailed appraisal of the proposed scheme using an approach specified by the DfT. As there are far more proposals for transport investment than funds available, the appraisal and decision-making processes are critical.

Appraisal

UK transport appraisal

76. The economic appraisal of transport projects in the UK is now approaching its 50^th birthday.[104] Over these years, cost-benefit analysis has been developed to assess the general economic welfare costs and benefits of transport schemes. This assesses the impacts of a broad range of factors, including travel time savings, safety and the environment, by converting them to monetary values. The methodology has traditionally concentrated on impacts that are relatively direct and measurable, such as travel times, but it has increasingly incorporated wider impacts, such as carbon emissions.[105]

77. It has long been recognised that the wider impacts of transport on the economy, such as the agglomeration impacts described in Chapter 2, could be important. However, these were difficult to determine accurately and have not always been well represented in appraisal.[106] The issue was revisited most recently by the Eddington Transport Study.

NEW APPROACH TO APPRAISAL

78. The DfT requires major scheme proposals to be assessed using the New Approach to Appraisal (NATA), a sophisticated method based on cost benefit analysis. NATA was introduced in 1998 to provide more consistent appraisal of public and private transport schemes, and a balanced assessment of economic and environmental benefits, to assist with decision-making within and across modes.

CRITICISMS OF NATA

79. Despite its sophistication, NATA is not without its critics, including two current transport ministers (Minister of State, Mrs Theresa Villiers MP and Under-Secretary of State, Norman Baker MP) when in opposition. The Coalition Agreement included a commitment to reform the decision-making process and the DfT Business Plan says that the DfT will:

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The DfT's Chief Economist (Tera Allas) said that the department had a rolling programme of improvements to NATA.[108]

80. Various criticisms and concerns were expressed in the course of our inquiry. The Royal Town Planning Institute and Transport Planning Society described the existing methods for assessing and prioritising proposed schemes as unsatisfactory and called for a fundamental overhaul.[109] Amongst the criticisms that witnesses made were:

NATA does not clearly identify or fully calculate the impacts of schemes on the "real economy".If the priority is to use transport investment to support an economic recovery, i.e. to use investment as a stimulus measure, then, in the view of various organisations, it would be useful to have specific information on the expected economic returns from investment, as well as on the general welfare returns.[110]
The wider economic impacts (WEI) are still not fully included. The DfT amended NATA in 2010 to allow inclusion of some WEIs which are clearly additional to the conventional benefits of time savings. This has considerably increased the estimated benefits of some schemes. For example, the benefits from Crossrail have increased from £20 billion over 30 years to £50 billion over 60 years. However, some witnesses wanted to see the evaluation broadened further. Questions also remain over the accuracy of the approach used to estimate WEIs.
Regeneration impacts—which are additional to WEIs—are not included. These impacts are harder to define and vary by location and scheme type. They may include jobs created, improved physical environment, improved image, increased confidence in an area and impacts on the attitudes of businesses and investors. The Government's 'economic rebalancing' of the north and south would also fall—at least partly—under this heading. In the view of some of our witnesses, such as Professor Wenban-Smith, these were amongst the most important impacts and needed to feature much more prominently in the appraisal.
The main economic benefit from many schemes is made up of small time savings to many drivers and passengers over a long period.[111] It is not clear if these small time savings are converted into productive economic benefits and some witnesses said that they should be given less weight within the appraisal. The DfT intends to amend NATA so that small time savings will be identified separately so that ministers can see to what extent the appraisal of a scheme depends on this component.
Redistribution impacts amongst different areas and income groups are not assessed. According to the Northern Way, redistribution effects were probably stronger than local productivity gains.[112] For large schemes these may be substantial. Mr Malcolm Griffiths of Bluespace Thinking consultancy said that these impacts had not been officially calculated in relation to HS2.[113]
Some argued that the price of carbon used in NATA is too low, thereby undervaluing impacts on climate change and schemes that may reduce carbon emissions.[114] The DfT says it has increased this to reflect the latest advice from the Department of Energy and Climate Change.
That the whole process was too technical—a "black box"—with too many factors reduced to a monetary value. As such, there was a danger that too much emphasis was placed on the BCR result without a clear understanding of what it comprised.

IN DEFENCE OF NATA

81. NATA also has its strong supporters, some of whom saw the various criticisms as misplaced and changes as unnecessary or unhelpful. Chris Riley, for example, addressed many of the criticisms.[115] There was concern that the appraisal process was now mixing carefully-defined, tangible factors, such as time savings, with WEI factors that were much more complex, harder to measure and poorly understood. There was also the concern that including these wider impacts might involve double counting.

82. Dr Marsden and Professor Mackie were against separating benefits to the economy from other benefits, such as safety and the environment, and implying that the former were somehow of greater value. Dr Adrian Davis, representing the Directors of Public Health in the West of England Partnership Area, said that the economic costs and benefits on public health should be fully included. The cost to the NHS of inadequate physical activity was approximately £9 billion per annum and encouraging active travel was one of the most cost-effective means to promote physical activity.

83. The Secretary of State for Transport said the DfT was unique in Whitehall in having such a sophisticated economic appraisal tool and described how he had been able to use it to good effect in discussions with HM Treasury leading up to the Spending Review.[116]

NON-TRIVIAL SUMS

84. During our inquiry we were given examples of projects with very large projected economic benefits. Some of these were calculated using NATA, and some using alternative methodologies. For example:

Crossrail—£50 billon over 60 years according to the DfT;[117]
Tube upgrades—£36 billion over 60 years (Transport for London);[118]
Removal of tolls on the Humber Bridge—£1.1 billion by 2032 (North Lincolnshire Council);[119]
HS2 plus regional rail enhancements—£1.5 billion per annum in the West Midlands (Centro),[120] and
The Northern Way said that the total wider economic impacts of HS2 (London to Leeds and Manchester via Birmingham) had been estimated at £13 billion over 60 years, including £5 billion in the North.[121]

Mr Griffiths pointed out that the basis for such figures is not always clear and that the figures are not always cited consistently. Figures for the same scheme sometimes differed widely.[122] Other witnesses said that some claims were overly optimistic and hard to substantiate.[123]

85. We endorse the need for a rigorous appraisal process to inform the decision-making process. Without objective appraisal, decisions would have to be taken purely on qualitative grounds. The economic benefits from some transport schemes are very large and justify the large amounts of public investment in transport. It is important, however, that the appraisal is credible and consistent so that decisions can be made objectively. It is clear that the links between transport and the economy are complex and that the wider economic benefits, though much cited, are not always well specified or understood.

86. Although the DfT says that economic appraisal is only one part of the decision-making process, it is clear that considerable importance is attached to its outcome—particularly the resulting benefit to cost ratio. It is, therefore, important that the process should be as robust and widely-accepted as possible.

87. The DfT needs to encourage good practice in appraisal so that it makes the right choices about which schemes to support. We recommend that the DfT should provide a formal statement in the appraisal process about the treatment of regeneration benefits; and identify separately the overall the impacts of a scheme on the 'real economy'. In addition, the Department should promote more ex-post research into the wider economic impacts of transport.

Decision-making process

Policy considerations

88. The DfT has been keen to emphasise that the economic appraisal in NATA is only a tool in the decision-making process. Projects are considered using the Treasury five case model:

Strategic fit;
Value for money;
The ability of the promoter to deliver the project;
Project affordability and financial stability, and
Evidence that the project can be satisfactorily procured.

Of these, the assessment of strategic fit is essentially a policy matter, as is the relative weight to be given to each of the five cases. The other cases are more technical in their nature. If they wish to, ministers can consider issues such as regional equity, modal distribution and modal equity (as well as other policy issues such as carbon impact and compatibility with housing policy) when considering the first case i.e. the strategic fit.[124]

89. The value for money assessment—BCR—is an important aspect, which ministers frequently cite when announcing spending decisions.[125] However, decisions are not taken on this basis alone. The Secretary of State for Transport told us that, if they were, almost all funds would go to strategic highway schemes and schemes in London. He explained that various "non-monetised adjustments" were made, including "regional equity" and "modal equity" consideration.[126] [127]

REGIONAL EQUITY

90. Exactly how the Government applies "regional equity" is not entirely clear. Contrary to a more purist economic approach, the DfT uses a national value of wages in the value for money appraisal, regardless of differences in wages across the regions, otherwise this would "skew investment towards regions with higher average earnings [...] and divert investment from the north to the south east."[128] Beyond this, it would seem to be a matter of ensuring that the distribution of funds appears to be reasonably fair. Whether there is a more rigorous or prescriptive formulae is unclear. It is even less clear how "modal distribution and modal equity" are applied.[129]

91. We asked Mrs Villiers whether the present Government would, in the next few years, seek to redress the imbalance in transport spending between the south-east and the rest of the country. She said:

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She emphasised that although London had received substantial funding for several major public transport schemes in the Spending Review, eight of the 14 major highway schemes approved had been in the north, a perspective endorsed by the Northern Way.[131]

THE CASE FOR GREATER TRANSPARENCY

92. A number of witnesses, such as the CBI, have commented that the decision-making process requires greater transparency. For example,

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Mr Riley said that transparency was one of the most important criteria of a decision-making system. He acknowledged that the present system was reasonably transparent but felt it should go further.[133] The promoter of a scheme is required to publish the business case on its website at the same time that it sends it to the DfT for appraisal. However, Professor Glaister—a seasoned observer of these matters—said that it was difficult to compare the assessments of projects across modes.[134] The Northern Way sought to analyse the transport investment decisions announced in the Spending Review and those announced subsequently. It concluded that, it was difficult to compare across modes and between strategic and local schemes, and that there was "little clarity on how issues of regional equity [were or would be] factored into Ministerial decision making."[135]

93. The DfT is not required routinely to publish information about the schemes that it is appraising or the details of its appraisal under the five factors listed above. The BCRs of the Highways Agency managed motorway schemes, approved in the Spending Review, were published on the HA's website, but these details are not readily available for local authority highway schemes or for rail schemes. Details of the other four criteria, such as strategic fit, do not appear to be in the public domain.

94. The DfT has sought to improve transparency in its decision-making process. The Secretary of State recently provided an update on his decisions on investment in highways transport schemes, providing more detail of the schemes under consideration and their value for money appraisal than previously.[136]

95. Decision-making cannot and should not be reduced to numerical calculation. Value judgements, political considerations and long-term vision are inevitable and proper aspects of the process. We welcome the recent moves by the Secretary of State for Transport towards improving transparency in the decision-making process for transport investment. However, more comprehensive information and greater transparency should be provided in the decision-making process so that both the technical basis and ministerial judgements are explicit.

103 A separate approval is required for planning permission. Back

104 Coburn, Beesley and Reynolds, The London-Birmingham Motorway, Traffic and Economics, Road Research Laboratory Technical Paper 46, HMSO, 1960 Back

105 MacKie, P, Cost-Benefit Analysis in Transport: A UK Perspective, OECD/ITF Joint Transport Research Centre Discussion Papers, No. 2010/16, 2010 Back

106 Sir George Leitch (Chairman), Report of the Advisory Committee on Trunk Road Assessment, HMSO, 1978 Back

107 DfT, Business Plan 2010-211, November 2010, Action 3.1, p 9 Back

108 Q 559 and Ev 252 Back

109 Ev 163 Back

110 Ev w109 Back

111 Ev 208, Ev 163 and Ev w27 Back

112 Ev 156 Back

113 Ev 247 Back

114 Ev 208 Back