Transport economists have misled politicians for too long

Tom Worsley is concerned that the National Infrastructure Commission (NIC) has rejected conventional cost-benefit analysis in its proposed approach to appraising the options for rail investment in the Midlands and the North (Letters LTT 7 Aug). 

The NIC has indeed recognised that conventional economic analysis starts from ‘user benefits’ that are mainly travel time savings, yet this is inconsistent with empirical evidence that average travel time has not changed over many years (a point I have been making for some time). The NIC’s alternative approach is to assume that adding to transport capacity does not relieve congestion or crowding, but leads to more journeys, allowing denser city centres and the agglomeration economic benefits that result. While agglomeration benefits for businesses are well recognised, the NIC intends to estimate analogous consumer benefits resulting from increased density of services and amenities, which would replace conventional time saving benefits.

The NIC’s initiative to replace conventional transport cost-benefit analysis is very welcome, in my view. The orthodox approach is theory-based, rather than evidence-based, being reliant on modelled reductions in generalised costs, which outturn evidence fails to substantiate. Moreover, the conventional methodology is silent on the spatial distribution of economic benefits, a matter of increasing importance in decision-making.

There are, nevertheless, queries as to whether the NIC treatment will capture all relevant economic benefits resulting from new transport investment, two in particular: the higher wages arising from more productive jobs in denser cities; and the uplift to residential property values in districts that become better connected to city centres, both suburbs and nearby towns. If all significant economic benefits could be captured in the new methodology, then this would be suitable for cost-benefit analysis consistent the Treasury’s Green Book. It would also, as the NIC claims, be a more straightforward approach to appraisal and decision making.

Tom argues that the transport capital budget has greatly benefitted from conventional cost-benefit analysis, based on the DfT’s Transport Analysis Guidance, by generating evidence of value for money expected from projects that ministers have approved. The way I would put it is that ministers and the Treasury have been bamboozled by the transport economists who have developed an excruciatingly elaborate methodology that, nevertheless, fails to reflect observed changes in travel behaviour and seriously misleads on the nature of the economic benefits of transport investment. I hope that the NIC effort will show that it is possible to rectify these shortcomings.