Making decisions that will boost growth
By Nick Forrest, Mark Ambler and Tom Robinson
In the current weak economic environment, understanding the broader economic impact of key decisions is vital for businesses, governments and regulators. Policy-makers are looking to take decisions which will boost economic growth and have a positive economic impact. So when they are evaluating new projects and developments, including proposals put to them by businesses, a robust and credible economic impact assessment is a key part of the decision-making process.
For example, if a government is looking to support a manufacturer deciding to locate or expand, both parties will benefit from a detailed understanding of the economic impact of that new investment. Similarly, energy policy-makers and regulators will need to understand the economic impact of the developments they are considering – such as the supply chain impact of their nuclear and off shore wind proposals.
Based on our recent work in this area we would highlight three key elements which make economic impact assessments robust and credible and ultimately support successful investment decisions:
1. Understanding the net impact is key
A credible assessment of economic impact requires an understanding of what would have happened in the absence of the policy, initiative or investment. This understanding provides differentiation between net impact and gross economic impact. Economic impact assessments need to answer questions such as: What would have happened anyway? Would activity be transferred from other locations or times? Taken together, these adjustments to gross impact (called additionality adjustments) can be significant but will vary across projects. To understand fully the impact of an activity you must understand what the world would have been like without it.
2. Supply-side effects can boost economic impact
Economic impact assessments often focus on the direct, indirect and induced impact of initiatives by tracing changes in spending, employment and output. These are essentially the demand-side effects. But, there are a range of wider economic, social and environmental impacts which can drive a broader supply side economic impact. For instance, productivity may be enhanced by improvements to skills and infrastructure. Competition may be positively affected too. Also, local communities and the environment may benefit. The challenge is often how to quantify and value these impacts as many are complex or have no market transactions associated with them. However, economic techniques exist such as hedonic pricing and conjoint analysis which permit the values of the impacts to be estimated. For example, the Department for Transport  has methodologies for valuing the impact of changes to travel times, congestion and transport reliability. The Department of Health  has a framework for valuing impacts on the quality and quantity of life using their ‘quality adjusted life years’ measure.
3. Important linkages may exist between projects
Where programmes of related projects exist, the overall impact may depend on the interaction of the projects within the programme. The impact of the programme may exceed the sum of the impacts of the underlying projects. It is important, therefore, to consider whether (and how) projects complement each other, for example because they are in similar or related industries, in the same location or running concurrently. The significance of these linkage effects can have bearing on the aggregate impact of programmes and can be missed when considering individual projects in isolation. This is equally true for programmes of regulatory reform - where one reform could have consequences for the impact of another - right through to large redevelopment programmes where multiple projects in the same geographical area could provide economic, environmental or social spillovers that reinforce each other’s direct and wider impacts. The timelines of multiple projects may also be important if a pipeline of projects influences economic confidence and the willingness to invest and move into an area.
Assessing economic impact is not easy and it is tempting to leave off some of the more complex effects set out above. But the full picture of potential impacts will help inform the decisions which, in time, will improve and enhance our communities.
 Transport Analysis Guidance, WebTAG, Department for Transport, http://www.dft.gov.uk/webtag/
 Policy Appraisal and Health, Department of Health, 2004
Nick Forrest - Contact via email | Telephone: +44 (0)207 804 5695
Mark Ambler - Contact via email | Telephone: +44 (0)20 7213 1591
Tom Robinson - Contact via email | Telephone: + 44(0)20 721 34302