Julian Smith, Edward Clayton, Daniel Hanson
August 10, 2017
Transportation needs are increasing all over the world — in developed regions seeking to grow their economies while reducing carbon emissions, and in developing regions where vast numbers of people are, for the first time, accessing global markets. A call for advanced 21st-century networks of roads, airports, shipping facilities, train routes, and public transportation is resounding in cities, small communities, and rural areas alike. Investment in transportation infrastructure is surging globally, with money going into the development of new transportation systems as well as upgrades and extensions of older ones. At the same time, the transformation of the global economy through digitization is driving new patterns of transport for both goods and people.
In both urban and rural communities around the globe, the challenge of moving people and cargo efficiently, safely, and sustainably — while providing transportation for all segments of society, not just the wealthy — remains a problem begging for new solutions in our increasingly globalized, urbanized, digitized, and environmentally compromised world. Long-established theories and techniques of planners and policymakers must evolve if they are to help sort out our ever more complex transportation infrastructure. We must embrace new methods and new technologies if we are to build and operate transport systems that deliver these goals while functioning inclusively, to the benefit of all.
The problems are many. Planners and policymakers need to consider that a large number of the world’s transport systems cannot meet the needs of rapidly growing populations, and many passengers face safety, security, and accessibility issues. Investors need to rethink traditional approaches to cost-benefit analysis so that investments capture as many of the different impacts of transport as possible, and do so in a way that balances rigor with innovation.
If transportation planners and policymakers can successfully address these challenges, they will make a major contribution to improving the lives of people in all types of communities — large and small, central and remote — while at the same time protecting nature and making it possible to deliver the benefits of economic growth in a sustainable, inclusive way.
Planning for even the simplest form of transportation — laying out a proposed route for bicycle paths in a city neighborhood, for instance — presents challenges. Scale it up to the city or regional level, and the complexities involved increase exponentially, especially at a time when the megatrends of urbanization, social and economic upheavals, and climate change and other environmental issues bear heavily on the success of even the best-laid plans. Nowadays, no region or municipality should embark on a planning effort without a guiding principle that takes into account all these factors.
To that end, we have developed an approach that we call “total appraisal,” which can help policymakers and transportation planners understand the myriad impacts and trade-offs that come into play when planning any transport infrastructure project, and identify the options that will result in the optimal outcome: a sustainable transport system that balances the needs of all stakeholders.
Exhibit A illustrates a hypothetical use of the framework to plan for a major road project. The framework comprises three main impact zones: welfare (the types of social benefits and costs that form part of the standard appraisal tool kit), economic (the impact of the project on key economic metrics that do not generally feature explicitly in costbenefit analyses, such as the impact of a project on GDP and jobs), and fiscal (the cost of the project and its impact on various taxes). The length of the lines indicate the size of individual impacts; green lines indicate positive impacts, while red lines are negative. To use the framework, planners must assess the actual size of each impact and interpret it with care. One of the key strengths of the framework is how it can evolve — through the inclusion of additional impacts, for example — to properly capture the changing nature of any project over time.
Welfare impacts. Standard approaches to appraisal focus on the benefits that are likely to arise from a project. The mainstay of such analysis tends to be the value of journey time savings — the value of the time saved by being able to get from point A to point B more quickly. Other benefits, however, are sometimes included, such as the economic value of greater certainty of travel time, and the impact on productivity.
Social and environmental impacts should also be factored in, particularly if consensus can be reached on how they are measured. Key impacts include the reduction of accidents, greenhouse gases, and noise, plus the visual amenities and an enhanced quality of life if the project is truly successful.
For example, disutility of work is a crucial impact that is essential to quantify if welfare analysis is to link successfully with economic impact analysis. If a project incentivizes people to work more than before, the analysis should also factor in the value that people lose by sacrificing leisure time. It is critical to remember that GDP captures the monetized impact of more economic activity but not the value of forgone leisure time.
These benefits are then added up and compared with the costs of implementing the project, through the use of a benefit cost ratio (BCR). A BCR in excess of one — preferably substantially so, in excess of four — is required for a project to be considered good value for the money. Different BCRs can be used, ranging from relatively simple ones such as “simple BCR,” which factors in just the value of journey time savings and impacts on air and noise pollution, through to more complex ones such as “total BCR,” which captures as many of the different impacts of a project as possible. Simple BCRs are often considered to be sufficient for small and relatively straightforward projects, whereas larger and potentially transformational projects lend themselves to the use of more complex BCRs that better capture the impacts of the project but can be controversial because of a lack of “tried and tested” methodologies.
Economic impacts. This is where the framework measures the effect of a given transportation policy or plan on a city or region’s economy. It includes the expected changes in economic output or growth and associated changes in employment, productivity, and the like.
The assessment of economic impacts is important, but it is also controversial. Although appraisals of the value of projects have traditionally been carried out based on their BCR, decision makers tend to be at least as interested in their impacts on GDP and jobs. The key is to assess the welfare impacts and economic impacts together and holistically. This is surprisingly difficult, but doing so can help policymakers make better decisions. As powerful as it is for decision makers to be able to make statements such as “The project will add $X billion to GDP and create Y new jobs, and generate $Z in benefits for each $1 that is invested,” it is also crucial to be able to reconcile these figures with each other. Projects can get into difficulty when this has not been possible, largely because planners sometimes assume, wrongly, that welfare and GDP impacts are somehow the same, or can be simply added together.
Furthermore, opinions on the benefits can differ substantially. The most contentious question tends to be whether transportation projects can pave the way for economic growth — and therefore significant numbers of new jobs — in the areas they serve. Common sense suggests that they can, but project appraisal methods often question whether there will be much new job creation in the long run. This is because they tend to assume that the impact of transport projects will be felt far into the future and that, in the long run, the economy will evolve in a way that ensures full employment. The key is to base the analysis on flexible assumptions that take into account such factors as how much spare capacity there is (and will be) in the labor market. That will enable planners to explore just how much of a difference such considerations are likely to make.
Fiscal impacts. It is crucial to understand and be able to optimize the costs of the project, as well as the extent to which these costs, and the associated financing, will be sourced from the private or the public sector. The tax impacts also need to be assessed carefully. We have found, for example, that productivity improvements resulting from people being able to travel from point A to point B more quickly — and being better connected in general — can lead to significant increases in economic activity, which in turn can lead to higher levels of tax receipts. Although these additional tax revenues are often not explicitly part of the appraisal of projects, understanding the extent to which projects can be effectively self-financing can be extremely useful in objective evaluation of the project.
Using a total BCR rather than a simple BCR to analyze the prospects of our hypothetical road allows us to capture a wider range of impacts. Put together, they show how a project that might otherwise be viewed as marginal actually offers considerable value and should therefore proceed. Though the road will cost $1.8 billion, it will generate an increase in GDP of $3.9 billion, and total welfare benefits of $3.7 billion, along with 10,000 new jobs. In addition, it will generate a total BCR of 2.0 — $2 of welfare benefits will be generated for every $1 that is invested in the project for construction and maintenance. Moreover, 38 percent of the project costs could be “self-financed” through the present value of higher tax revenues.
Total appraisal is a sector-specifc version of PwC’s Total Impact Management and Measurement (TIMM) methodology.
In the coming years we will see a technological revolution in transportation that will affect all users, passengers, and freight shippers alike, and will inevitably drive new approaches by regulators, funders, and policymakers. Decisions made now will lock in the future shape of transport, so it is essential that the technologies currently being unleashed are used to ensure that the new transport world will be both sustainable and inclusive. This requires close collaboration by governments, academics, systems developers, investors, and users. Most of all, it requires a clear vision of what a user-centered transport system will look like, what it will take to build it, and how to appraise it in a way that takes into account the total impact of the investments and policies that are under consideration.