Written evidence from Professor Roger
Vickerman (TE 21)
PROBLEMS IN IDENTIFYING THE WIDER BENEFITS
OF TRANSPORT
1. INTRODUCTION
- THE ISSUES
1.1 Transport as a determinant of land use and
economic development has been the subject of much controversy.
What have become known as wider economic benefits (WEBs) or, to
reflect the fact that there may also be negative net effects,
wider economic impacts (WEIs), continue to provide difficulties
on both theoretical and empirical grounds and hence there is no
clear guidance for their use in appraisal.
1.2 Formal appraisal techniques tend either to
exclude the possibility of wider economic impacts, largely because
of the fear of double counting, or simply include an arbitrary
add on. The fear of double counting is a major issue in the appraisal
literature. But frequently there is pressure from promoters facing
an inconclusive benefit-cost analysis to recognise that some of
the indirect effects of a project could have been omitted.
1.3 Recent research has improved our understanding
of the way in which accessibility affects the performance of firms,
the public sector and labour markets. In imperfect markets reduced
transport costs can have differential impacts on different sectors
and different regions. These could also impact on the public sector's
ability to maintain or develop services in those regions as there
may be an impact on the tax base. Transport improvements may affect
the labour market, leading to widening catchment areas and allowing
workers to move to higher productivity jobs, leading to agglomeration
impacts which go beyond the simple sum of the benefits to individual
firms.
1.4 The conceptual and theoretical arguments
have advanced, but the empirical evidence remains problematic.
Both the SACTRA Report in 1999 and the Eddington Report in 2006
found it difficult to give precise guidance on this at both national
and regional/local level. This is in part because there is no
a priori relationship between transport improvements and their
consequences for the economy. It is difficult to determine whether
the link between better accessibility and economic performance
runs from accessibility to performance or vice versa. There are
conflicts between estimates based on different methodologies.
The interrelationships and spillovers between different areas
could have major impacts - transport improvements in one area
can either enhance or detract from economic performance in other
areas.
1.5 This has important policy implications. Underinvestment
in transport infrastructure as a result of the failure to include
any WEIs could lead to lower growth and congestion in affected
areas. On the other hand overinvestment as a result of including
assumed WEIs which do not exists could lead to problems for public
budgets and negative externalities associated with over expansion.
The former may occur if one jurisdiction tries to leave it to
others to invest so it can benefit from spillovers, the latter
where regions are competing with each other to attract mobile
investment by enhancing local accessibility. Hence there are implications
for the most appropriate level at which to implement transport
policy.
2. IMPLICATIONS
FOR APPRAISAL
2.1 The first stage is to improve the application
of Cost-Benefit Analysis (CBA) recognising the existence of externalities
(such as environmental impacts) and imperfect competition (in
the absence of perfect competition it cannot be assumed that changes
in transport costs will be directly reflected in prices).
2.2 To take into account all the impacts on the
wider economy appears to require a much larger modelling exercise
such as the use of computable general equilibrium (CGE) models.
These have been used in a variety of studies, but are very dependent
on assumptions made about the parameters used; small changes can
lead to significant swings in the overall conclusion.
2.3 There are issues about the appropriate geographical
scale of analysis. How large an area is affected by a scheme?
Are there spillovers? Are the gains to one region at the expense
of another or is there a real net gain?
2.4 Most appraisal is carried out on single schemes,
but these are usually links in a wider network; the creation of
a new link will affect, and be affected by, conditions on other
links on the network and decisions about the programming of investments
will affect the valuation of any one investment in that programme.
2.5 Too much emphasis may have been placed on
the appraisal of new infrastructure investments to the exclusion
of upgrade investments or service level improvements; are there
similar levels of gains to be found?
2.6 There may be effective ways of making progress
without large scale modelling. A development of the Economic Impact
Report to focus on identifying where the issues identified above
may arise could pose the questions:
- ¾ Are
there increasing returns or imperfect competition in the region
under study?
- ¾ Do
these differ by industry?
- ¾ What
is the relative importance of transport costs in inputs or outputs
for that industry?
- ¾ Will
the change in transport costs affect this relationship - i.e.
will it increase competition from regions with established advantages
or enable economically more peripheral regions to compete more
effectively?
3. IMPLICATIONS
FOR POLICY
3.1 The overriding implication is that simple
rules can be dangerous, especially simple rules derived from complex
models.
- ¾ Investment
in transport can seriously damage the health of an economy by
changing competitive structures in a region and exposing it to
more competitive regions elsewhere.
- ¾ But
a failure to invest in transport can be just as damaging by not
allowing a region's enterprises to compete effectively with other
regions.
- ¾ There
is no simple a priori rule for knowing into which category
a region will fall, and indeed that category may differ for different
investments.
- ¾ Transport
policy has to be able to explore carefully the transport needs
of a region's economy rather than making the assumption that all
increases in speed and reductions in transport costs are bound
to have positive effects.
3.2 Traditional methods of appraisal, depending
on complex transport planning models and what may seem to be obscure
evaluations of the benefits of time savings and accident reduction,
may be insufficiently transparent to be clearly understood by
all stakeholders. This makes their conclusions difficult to challenge
in any constructive manner.
3.3 This reflects problems with the levels of
decision making. Spillovers between areas make it difficult for
a single jurisdiction to coincide with the area receiving most
benefits, the area incurring most costs and the area providing
most of the finance. Where policy is established by higher level
jurisdictions but implemented at lower levels there is scope for
policy refraction.
3.4 Competition between different policy-making
authorities can lead to bias in investments where excessive competition
leads to over-investment in non-viable competing facilities such
as under-used regional airports, or the fear of competition to
reluctance to fund investments where the benefits may accrue to
neighbouring regions leads to under-investment and a sort of "race
to the bottom" effect.
4. CONCLUDING
REMARKS
4.1 The discussion has come full circle on the
existence and importance of the wider benefits of transport projects,
from "transport is critical to economic growth", to
"beware double counting, the user benefits will capture (almost)
all impacts", to "wider benefits are the key to understanding
the real effects of transport investments". We still have
no universal response to the question "are there wider benefits
of transport investments which are not captured in a simple CBA
counting direct user benefits?". The best we can say is "it
depends". However, recent research has taken us much closer
to knowing what it depends on. We know that the impacts can be
negative as well as positive. We know that they will vary from
region to region and project to project and we know what to look
for as indicators of possible sign and magnitude.
4.2 There remains much on the research agenda:
- ¾ We
need more empirical evidence on the effect of imperfect competition
and the productivity gains from transport.
- ¾ More
needs to be done on assembling micro-behavioural evidence; on
link versus network effects and on spillovers and jurisdictional
competition.
- ¾ We
need evidence from more ex post studies, have transport
investments really made the difference claimed?
Roger Vickerman is from the Centre for European,
Regional and Transport Economics, University of Kent
September 2010
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