Total Appraisal: Infrastructure decisions to make the economy fit for purpose
01 February 2017
Investment in transport infrastructure is crucial in efforts to ensure that the economy is fit for the rest of the 21st century and beyond. The stakes are massive, so how can we identify and develop the projects that will have maximum impact on the economy and our quality of life?
We believe there are three key aspects of project appraisal which need to be explored and developed to bring real clarity to decision-making.
1. Programmes versus projects
Transport projects have traditionally been appraised on a standalone basis but they are now increasingly being viewed by their sponsors and stakeholders as parts of wider programmes. Appraisals should therefore consider the impact of the whole programme and how this would change if certain components were not to go ahead. This allows us to understand what value is being added by specific parts of the programme and whether the sum of the parts is indeed greater than the whole.
This highlights one of the many conundrums in appraisal today: the assessment of projects on a standalone basis is based on a need to understand what benefits will be generated by each individual “tranche” of expenditure, but transport systems are essentially networks where the impact of one piece of the network can be, and often is, dependent on other pieces of a bigger jigsaw. There is therefore a potential disconnect between the basis on which decisions are made and the impacts that these decisions are intended to unlock.
2. Quantifying the unquantifiable
There is a need to “quantify the unquantifiable” to inform decisions on infrastructure projects. What will the impact of a project be on a national park or a local landmark? How will it affect air quality or visual amenity and how will improvements in long distance connectivity affect business productivity? How might key pieces of infrastructure have knock-on and “transformational” effects throughout the economy? This kind of analysis requires real courage to develop new approaches but it can be done successfully.
For example, a recent PwC project calculated how willing the public are to spend more to protect visual amenity. The example we used involved putting electricity pylons underground, but this theory could be readily be transferred into transport.
We have also carried out innovative research to quantify the impact of improvements in long distance connectivity on business productivity. We have also estimated the extent to which these effects vary by region and sector, which is of fundamental importance in efforts to rebalance the economy. Is it best to spend money in areas that give us the most “bang for buck” (e.g. the service sectors in the South East) or where there may be less bang, but improvements are more pressing (e.g. the non-service sectors elsewhere in the country)? And on numerous occasions we have broken new ground in quantifying the potentially transformational effects of key infrastructure using what are referred to as “general equilibrium” techniques. This is important because the fundamental purpose of some investments is to unlock new opportunities in the economy, which can be missed when applying standard approaches.
It takes courage to apply these new, innovative approaches as they are less commonly used and not widely understood. But when used correctly the pay-off can be enormous. It can sometimes be better to be controversially right than relying on tried and tested approaches but result in narrower benefits.
3. GDP and Benefit Cost Ratios
Policymakers have traditionally focussed on the Value for Money of investments – measured by the Benefit Cost Ratio (or “BCR”). But politicians and the general public are often at least as interested in the impact of projects on GDP and jobs. Our recent work has shown that it is possible to analyse both of these things – holistically and in a joined up way. This allows opinions to coalesce rather than fragment and to bring clarity to decision-making.
Our approach to this type of analysis also allows us to better understand how the impact of a project may depend on the extent of spare capacity (or unemployment) in the economy and how competitive markets are. Getting to grips with this is vital in understanding whether, where and when major transport projects could make genuine and significant improvements in job creation and regional development rather than simply moving activity around the economy.
In an increasingly competitive economy, where funds are limited, the Total Appraisal of projects is a crucial tool for effective decision-making. If we get this right, we can build a dynamic and inclusive economy which improves the lives of everyone. But getting it right requires courage to come up with innovative but robust solutions, collaboration to make them work, and approaches which create and build upon trust.