Presentation by Tom Worsley, Visiting Research Fellow, delivered as part of the annual series of Beesley lectures, organised by the Institute of Economic Affairs at the Institute of Directors in London.

1. Institute for Transport Studies
FACULTY OF ENVIRONMENT
The economic basis of major transport
decisions
Beesley Lecture 17th November 2016
Tom Worsley
Visiting Fellow, ITS

2. Outline
• The development of the current policy position
• Some statistics – travel demand and investment
• DfT’s investment appraisal framework:
• the core method
• developments to appraisal and decision-making
• Reasons for the focus on transport investment
• Future prospects and challenges

3. Transport policy 2005-2015 –
Eddington Report
Eddington Transport Study (2005) – HMT and DfT
• Analysed links between transport and growth , growth and carbon
Recommended:
• Improvements to the existing network, targeted on urban areas, inter-
urban corridors and international gateways
• Policy mix, including pricing for congestion and emissions– demand
management
• Systematic approach – policy priorities, options, full cost benefit appraisal
No substitute for careful cost benefit analysis
Noted that: ‘Step change measures’ ...’likely to result in modest returns
relative to smaller scale options.’ Connectivity of the UK network was good.

4. Transport policy 2005-2010
3 White Papers – 2 all modes, 1 rail – implementation of
Eddington
Strong emphasis on sustainability – carbon, incremental
schemes, making better use, urban road pricing schemes
Focus on rail investment in response to:
• Continuing demand growth and capacity constraints
• The increasing importance of cities in the economy
• Political support
Exceptions:
• Proposals for HS2 emerging
• Case for Crossrail developed

5. Transport policy 2010-2015 -
Recent policy statements
Roads Investment Strategy 2015
These changes are underpinned by a step-change in investment in our strategic
roads, worth over £15 billion to 2021. Taken together, this scale of reform and
investment has allowed us to dramatically increase our ambitions for the SRN
Northern Transport Strategy March 2016
Central to all our plans is enhancing our transport connectivity – this Government is
spending £13bn on transport for the Northern Powerhouse over this Parliament,
including dramatic improvements to our roads and railways in the North.
DFT Business Plan 2015
We will increase the level of investment in transport by 50% by 2020
Other major schemes include:
• Completion of Crossrail and Thameslink, other London schemes, HS2,
airport expansion, Intercity Express, rail electrification

6. Has the nature of transport
problems changed?
A shift from the Eddington paradigm:
• From the incremental to the transformational
• Perception that transport can change the economy at a more than local
level
• Continuing growth in rail patronage, road traffic growth resumed in 2013
• Growth in the economies of cities – high cost rail solutions
• Carbon has been ‘put back in the box’
• Pricing and demand management now off the policy agenda
To return to this theme

7. Transport investment 2005-
2014
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
6000.00
7000.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
£m2010prices
Investment in Road and Rail 2005-2014 £m 2010 prices
Road
Rail

8. Transport investment 2005-
2014
0
1
2
3
4
5
6
7
8
2005 2006 2007 2008 2009 2010 2011 2102 2013 2014
%ageofpublicexpenditure
Transport investment as % of all public expenditure 2005-2014

9. Passenger kms by mode
1952-2014

10. Rail passenger journeys 1831-
2014
WW1 1914-1918
WW2 1939-1945
Nationalisation (BR) 1948
Suez crisis 1957
Privatisation 1995
0
5
10
15
20
25
30
35
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1831
1835
1839
1843
1847
1851
1855
1859
1863
1867
1871
1875
1879
1883
1887
1891
1895
1899
1903
1907
1911
1915
1919
1923
1927
1931
1935
1939
1943
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
NationalRailroutelenght
(thousandskm)
NationalRailjourneysperyear(millions)
Annual
passenger
journeys
Route
length

11. Road traffic – actual and
forecasts 1995-2040

12. Transport investment and the
decision-making process
Most decisions made directly by government – central or local
A set of rules for promoters of publicly funded transport
schemes to establish:
• Accountability
• Transparency
• Openness to challenge
• Public interest
Limited role of regulation – ORR responsible for setting
performance targets and monitoring investment
programmes, for rail open access and safety

13. Why does Government have a
dominant role?
Market Failures
• Roads - absence of user pricing.
• Rail - regulation by government of commuter and some other fares
Monopoly/network effects
Externalities:
• Interaction with land use planning, with urban agglomeration
• Environmental impacts
Politics

14. Government’s investment
appraisal methods
• HM Treasury Green Book
• DfT’s WebTAG – transport economic appraisal guidance
• WebTAG evolved from methods derived in late 1960s applied to trunk
road schemes and from 1998 ‘New Approach To Appraisal’
Periodically reviewed: updated, extended incrementally in scale and
scope and in improved presentation
• Based on the theory of consumer behaviour with empirical support
from observations and surveys of travel behaviour and other impacts.
• Economic appraisal is one part of the framework for
decision-makers

15. The DfT’s WebTAG
Provides transport modelling and transport appraisal guidance for scheme
sponsors. Mandatory for government funded schemes
• Model serves to estimate volume of demand for a transport scheme and
other impacts and provide a comparison with ‘no scheme’
• WebTAG advises on modelling methods
• Appraisal – used to value the changes made by the scheme, usually
based on willingness to pay (because of absence of an adequate direct
payments process)
• WebTAG specifies appraisal methods and provides a databook of
values

16. The essentials of a transport
model
A spatial representation of the supply of transport and of the
demand to travel
• A matrix of trips between the origins and destinations in the model,
assigned to the transport network and allocated to the modes
represented, based on users minimising their disutility of travel
• A process which allows for testing options, with accessibility measured
through travel times and costs, the market for those changes and a new
equilibrium between demand and supply
• A transport model is invariably augmented by a forecasting model –
future year demand drivers and responses to the changes in future
years
• Output – changes in the quantity and quality of travel

17. Measuring and valuing the
costs and benefits
Valuing of the benefits/costs of an option in terms of;
• Time savings, including crowding, reliability
• Other journey quality – stations, interchange
• Physical activity (cycle and walk schemes)
• Safety
• Environment – noise, air quality, carbon, land/townscape, heritage,
water quality, biodiversity
• Changes in costs, including infrastructure and taxes – transport user,
operators and government
• Categorised by the economy (business), social (commute, leisure),
environment, public accounts
Compared with ‘do-minimum’ and with other options

18. Valuing the costs and benefits-
value of time savings
Measure of willingness to pay for a change
Evidence from market research type surveys and from
behaviour
Universal currency – almost all projects influence travel times
Time savings proxy for accessibility change – converted into
new choices of where to live, work etc
People could always have taken the savings as time
Predictable, an output from the design and an iteration on
design (eg HS2)
New study completed 2015 – DfT updated values.

19. Process of Appraisal
Costs and benefits forecast for every year from model and
interpolation
60 year appraisal period, HMT discount rate 3.5% falling to
3.0%
Demand cap after year 20
Discounted to provide a PVB and a PVC = BCR(initial BCR)
Appraisal Summary Table – presents decision-makers with
overview of each significant impact, quantified and valued
where possible and a BCR

20. Developments in appraisal
2005-2016
The codification of the decision-making process – the
Transport Business Case
The Value for Money Business Plan input indicator
Wider economic benefits – strengthening links between
investment and the economy
Devolution of decision-making away from Whitehall
Reduction in discount rate from 8% to 3.5%/3.0% and 60 year
appraisal period (2003)
Valuation of the major environmental impacts

21. The Transport Business Case
Model
Financial: affordability, funding, financial risks, contributions
Management: governance, risk management, stakeholders
Commercial: procurement, capability, risk allocation
Economic: Green Book/WebTAG Cost benefit analysis
Strategic Case: Fit with policy, need for the scheme, timing
Financial, management and commercial cases largely a set of
yes/no decisions
Economic case both yes/no (BCR>1.0) and ranking with
constrained budget
Strategic case – contribution to local/national GVA and other
objectives

22. BCR and VfM
Not all benefits or costs are monetised – eg landscape
So decision-makers review the BCR in the light of
unquantifiables and determine a Value for Money category
for each scheme
From the BCR to a Value for Money category – BCR +/-
judgement on unquantifiables = VfM
VfM Categories:
• Poor <1, low 1.0 -1.5, medium 1.5 -2.0, high 2.0 - 4.0 and very high >4.0
Most high and above schemes are approved, some in lower
categories.

23. Effectiveness of Appraisal : DfT
Business Plan Input Indicator
• DfT Value for Money annual reporting - Percentage of DfT’s
appraised project spending by VfM category
• The ‘go/no go’ decision is strongly influenced by need to
avoid a ‘poor’ VfM outcome
poor low medium high v.high
2014 3 <1 7 41 48
2013 6 80 14
2012 42 58
2011 68 37

24. Additional Costs and Benefits
Wider impacts:
• Transport investment increases economic mass/agglomeration benefits
through better urban accessibility;
• Raises productivity directly through better connectivity
• Business response to intensify/relocate and increase number of
employees/firms in the now more productive city
• More output per person and hence more tax revenues – a benefit in the
economic case – extra GVA from relocation not itself a benefit
• Estimates of increase in productivity depend on the transport model and
associated land use model for relocation effects
Strengthens the economic case for urban schemes – part of
the ‘adjusted’ BCR – and provides link to GDP

25. Transport and GDP
Transport investment can increase GDP by:
• Reducing business transport costs – business user benefits
• Increasing the economic mass of cities, raising productivity
• Inducing people and firms to shift to more productive locations
• Increasing labour force participation
The GDP effect can be derived from models which include:
• Business time savings, agglomeration benefits and extra GVA from
relocation/intensification
Time savings provides a means of measuring the changes in
accessibility which link transport with GDP effects

26. Transport and GDP
Models have been developed– LUTI, reduced form and SCGE
– to estimate the changes to local and in some cases
national GDP
Different models produce very different estimates – responses
very context specific, especially for ‘transformational’
projects
Establishing the counterfactual is unclear – opportunity cost of
the transport and complementary investment?
Interpreting such models is a challenge - yet the demand for a
national or local ‘GDP effect’ is strong

27. CBA and ‘real economy’:
which metric(s)?
Economic Case – the BCR (a ratio) and DfT’s VfM (high,
medium, low, poor) metric provides for:
• Go/no-go decision
• Ranking
• Documented, accountable evidence
Strategic Case - GDP metric has strengthened the Case
despite uncertainty about size of effect:
• Evidence of spatial distribution of tangible business benefits – hence
source for funding
• Impressive number, though largely divorced from Chancellor’s strategy

28. Why the focus on investment in
transport? External effects
Growth in rail patronage since mid 1990s – likely causes:
• Economic growth, though rail continued to grow during recession
• Urbanisation and structural change – in location of jobs and households
• Mode shift – car business users, car costs and young people
• Quality of service
• Yield management fares
Forecasts of continuing but slower growth in rail and road
traffic – population growth, income growth, some limited
improvements in journey times

29. Why the focus on investment in transport?
Technical reasons
Changes to appraisal values and methods over past decade
have increased the BCR:
• Discount rate and appraisal period
• Formalisation of Transport Business Case
• Wider benefits, strengthen economic case and provide evidence of GDP
effect for the strategic case
• Greater quantification of environmental impacts leaves less room for
judgement
• Optimistic demand growth forecasts based on OBR 2%pa per capita
GDP and ONS population projections –but impact of BREXIT?

30. Why the apparent increase in transport
investment? Policy influences
Policy influences:
• With fiscal and monetary policy largely ineffective, transport spending
remains an active central government initiative
• The link between transport and growth can be used to justify an
ambitious programme
• Influence of London - investment has been very London focused until
the Northern Transport Strategy and remains big city centred
• Government’s ability to promote non-infrastructure solutions is limited by
separation of responsibilities for operations and infrastructure
• National Infrastructure Commission
• Mega-projects have a separate budget.
• The desire for big announcements

31. Challenges and Prospects -
Devolution of delivery
Roles of Highways England and of Network Rail
Aim- to incentivise efficient delivery of investment and
management of infrastructure.
Creation of triangular relationship between central
government, infrastructure provider and local authorities.
Whose objectives come out top – strategic traffic or
commuters?
Have we got the right mix of projects and policies? Balance
between cities and interurban?

32. Challenges and Prospects -
Devolution of delivery
Trade-offs between targets and cost benefit analysis
Targets incentivise – simple, widely understood through
organisation – eg rail reliability
CBA’s multiple objectives and trade-offs ‘too complex’
But simple targets put good solutions at risk
The Economic Case ensures acceptable VfM but targets drive
option selection – ‘no longer chasing the BCR’.
Who owns the Business Case? Sponsor or Government?

33. How might local transport
policies develop?
Does the Northern Transport Strategy provide a model? TfN
prioritises national schemes, but cities still compete for local
funding.
Sources of local funding very limited:
• Some scope, mainly in London, through increases in local taxation and
developer contributions
• Estimates of GVA attributable to the scheme rarely explain displacement
and counterfactual: is the transport/GVA model robust?
• Other policies – training, skills, land assembly, public realm creation
need to accompany the transport intervention
What role for places outside London and the city regions?

34. How might policy develop?
Roads
Scope for capacity increases through managed motorways and other
increments close to exhaustion
New alignments – are major new routes a feasible option? History
suggests that often they are not
Will technology and societal change reduce the demand to travel?
Will automated vehicles make much better use of the existing network,
reducing case for capacity and reduce harmful emissions?
Separation of responsibility for local and trunk roads doesn’t encourage
coherent planning- have we got the division right?
What role for charging at point of use to replace the new National Roads
Fund and so managing demand?

35. Roads, funding and charging
Push factors
• Technology – easy to identify location of vehicle for targeted charging
and a requirement for automated vehicles
• Reducing amounts of fuel duty – need for a new funding stream
• Infrastructure options less attractive – cost and environment
Negative factors
• Public acceptability
• Significant gainers and losers - fuel duty already falling – it will soon be
too late.
• Setting the correct charge.

36. How might policy develop?
Rail
Two policy priorities- cost control and capacity – revenue
should be a third
• Growing demand, infrastructure constraints: increasing long run
marginal costs
• Technology – digital railway – a lower cost solution?
• Are the causes of demand growth set to continue?
• Will conurbations remain a policy priority?
• Long term financial plan needed – how will new capacity be funded?
What will rail cost and what will rail users contribute?
• Might institutional changes influence costs? Vertical integration?

37. The High Level Challenge
Ambitious places have a ‘vision’ – how might transport realise
that transformation?
What else is needed to deliver the vision?
What about non-core ‘less visionary’ places?
Are the institutions right – responsibilities between national
and local, private and public? Are there new sources of
funding?
What evidence is required to support decisions? How do we
move from the narrow transport BCR to a more holistic
understanding of what ‘good’ means?

38. Discussion