Antti Talvitie
1. Introduction
Transport Projects are always evaluated. But it is rarely clear whose point
of view is taken in the evaluation and, especially, what factors are considered in
choosing the alternative and making the decision. Since late 1960s benefit-cost
analysis, grounded on microeconomic theory, and the broad national point of view
with compensation for harm have become the accepted academic norms. Many
textbooks and papers have been written on the topic of benefit-cost analysis of
mutually exclusive projects.1 The method has become mystified by complicated
mathematics, assumptions on human motivation, extent and prices of included
factor and externalities, data validity, and what rules should be used to
compensate those harmed by a project. These problems persist without resolution.
Transport modes, especially roads, posses some monopolistic attributes but
competition is possible. Just-on-time transport, footloose industries, competition
for productive labor markets, environmental awareness and concern for living and
working environments a customer oriented approach to transportation- mean that
a parallel road is not a necessity for competition. Roads in different areas, cities
and even countries offer the competition. Different modes also compete.
Transport organizations, both those providing the facilities and those
providing the services, have changed or are changing from self-serving technical
organizations to public-serving organizations. The geographic location of the
facility, its design features that influence travel time and cost, traffic safety, and
the cost of operation are just a few of important issues in project evaluation. The
issues of pricing and the method of paying for service, financing, regulating and
organizing the transport sector institutions are also relevant in order to maintain
fair competition. Citizens and other affected interests have viewpoints beyond
pricing and compensation of use or harm. These have a fundamental effect on
project evaluation and cannot be ignored. All project decisions are always made
1 Layard R. abd S, Glaister, eds. (1994) Cost-Benefit Analysis,
Cambridge University Press Cambridge, UK. : Small K. (1997) Project
Evaluation, Transportation Policy and Economics : A Handbook in Honor
of John R. Meyer (draft chapter); Wohl. M. and B. Martin, (1067)
Evaluation of Mutually Exclusive Design Projects, HRB Special Report
92, Washington DC; and references therein.
in program context. It is a rare project that has exclusive alternatives or is without
a budget constraint. There always are trade-offs that must be considered and
area considered- in making decisions.
This paper traces the origins of evaluation in the transport sector in the
second section, and briefly narrates its history in the U.S. because that example is
emulated in the rest of the world. In the third section the factor normally included
in benefit-cost analyses are reviewed by way of an example from the sixties. In
the fourth section the several frameworks for benefit-cost analyses are examined
very briefly. This section concludes with a proposal for the benefit-cost criterion
to evaluate and compare projects. It concludes that the key for evaluating
transport projects is to organize the transport sector as commercialized agencies
and run them like a business. The paper then proposes in the fifth section a
framework for commercializing the highway sector the enables the creation and a
fair comparison of alternatives, discusses how project and program evaluation
could be undertaken in that framework, and appraises its potential for bringing
forth intermodal competition and cooperation. The final section concludes.
5 The CATS planners also knew that plans were dynamic, the
transportation plan does not necessarily stay fixed but is subject to
periodic revision. The process of review and appraisal against
objectives (which may be modified from time to time by public
decisions) are as essential as the plan itself (Vol. I, p.2)
Change in consumer surplus is the most widely used criterion for benefit-
cost analysis in (road) transport projects. In figure 1, it is the area AXYB 6. This
is not, however, the only possible way to measure benefits.
The second way would be a change in total (perceived) user benefit, XYVn
Vo Figure 2. This attractive definition is rarely used for reasons that I do not
know-unless it is that in many practical cases the demand curve is totally inelastic,
vertical that is, and the change in user benefit would be zero regardless of
improvement.
These definitions of benefit are employed in theoretical writings and based
on the willingness to pay-as the area below the demand curve. This notion is
important. Rarely-and I suspect never in practice are the benefits calculated
from an estimated demand function. Rather, the economic evaluation is resource
based. Figure 1 is interpreted as showing the reduction in user costs. That is, it is
assumed that the users perceive the total (variable) costs in making their (short
term travel decisions-as in fact is implied in figure 1. This is rarely the case.
Thus, it is not only necessary that the distinctions between the price-volume
function is made explicit, but also that the demand curve is estimated using the
commensurate perceived prices. Only in this way it is possible to evaluate if a
project is a worthwhile undertaking.
The third way to look at the benefits is to exclude the consumer surplus
portion, fig. 3.
Figure 3 can be looked at in two different ways. If the vertical axis is the
generalized cost then the allowable benefit (Martin and Wohls
terminology)for the old road is OAXV o and for the new road OBYV n . When the
difference between these perceived benefits and costs, that is benefits and costs
not included in the demand and price curves, a statement of the value of the
project is obtained.
In disallowing the consumer surplus, as proposed by Martin and Wohl, that
private companies cannot capture, the investment in a public road project is made
commensurate with private investments and many of the early transport policy
goals of uniformity and competition across modes is achieved. There remains,
however, the problem of valuing the generalized costs of items travelers value
when making the trip-travel time, crashes, comfort, pollution ownership of cars
and so forth.
6 It is (incorrectly but for clarity) assumed here that the price-volume
curve (Martin and Wohl, 1967) coincides with the average variable
costs. For full treatment, Lee, D (1999) Transportation Planning and
policy Analysis: General theory of highway Project Evaluation, U.S.
Department of Transportation, Volpe National Transportation Systems
Center, Cambridge, MA, (draft).
But, it is possible to view the vertical axis as the price charged for trips,
fig. 4. The relationship of willingness to pay and travel volume is shown, holding
other attributes constant on other axes (not shown). The allowable monetary
benefits simply are the revenue stream from the users (of the road network). This
does not mean that other generalized benefits do not exist, or are ignored, only
that the demand curve truly represents the willingness to pay for the benefits
really offered-and not only imputed- in other dimensions.
This approach to evaluating transport projects would truly achieve the
goals of desirable transport policy:
Uniformity of national transportation policy across modes
Actions subject to economic analysis of benefits and costs
Users and those who benefit from actions would pay
Greater reliance on the private sector
Cost-effective use of the transportation system to pursue non-
transportation goals.
However, several new challenges emerge to implement this approach in
practice. Before outlining these challenges other reasons that make the use
of theoretical benefit-cost analysis unsatisfactory are discussed.
8 Talvitie A/ (1977) Things Planners Believe In, and Ting They Deny,
Transportation Volme 24 No. 1, pp.1-31 Kluwer Academic Publishing,
the Netherlands.
Program Development
Program development includes organizing projects and initiatives into
logical program categories from several perspectives, such as project type
(program area), policy objective, and scale. For example, a program structure
might organize projects by type: capacity expansion, maintenance, and operations.
It is desirable that the criterion, e.g. minimization of total transport costs, is the
same for trade-offs between project types. Projects might also be organized
according to policy objective, such as mobility, safety or environmental
preservation. This allows examination of competition for funds among alternative
service and system improvements while ensuring that the appropriate overall
focus of investments is maintained. Allocation of resources by policy objective,
often related to equity issues and keenly dependent on the views of the affected
interests, requires more sensitive indicators than benefit-cost analysis.
18 Http://www.odot.state.or.us/tdb/planning/corridor/
21 Http://www.worldbank.org/html/fpd/transport/road/rffnds/rf_all.html
Cash management is important for read administrations whose funds come from a
road fund or loans. Various software packages are available to assist with
financial planning revenue forecasting, and cash management. An overview of
financial planning methods and software is available.22
6. Conclusions
Paraphrasing Heggie, manage roads like a business, not lie a
bureaucracy is the main idea is this paper; a far-reaching idea also championed
by Gabriel Roth.25 Organization, management, financing and mode of program
delivery do affect road system performance. Significant efficiency gains and
increases in level of service to the customers are possible by reorganizing the road
administration, soliciting customer input and by enganging the private sector in
many ways for finance and service delivery. A host of options are available.
Applied singly, they are an occasion of satisfaction; together they represent a
paradigm shift. Several important themes of this paradigm shift were focused in
this paper. They are recapped briefly.
The first set of issues dealt with the strategic management and organization of the
road administration. The leadership, the ability to communicate with a large
number of people and firms so that everyone feels heard and reflected in the plans,
the skills to re-engineer the organization to accomplish its goals and monitor
performance in order to improve and change, and the technical capacity to be
innovative in all aspects of roads and highways are the most important attributes
of the management.
The second set of issues dealt with money. Commercialized road
administrations receive income for the service they provide. This income
constitutes the budget constraint that the Road Board also can leverage to obtain
loans to implement productive road projects quickly. For the most part extant
Road Funds are sourced from the fuel tariff. In the future this must change.
Technological development to collect fees from road users on arterial and
collector streets has a high priority. Setting road user prices and the regulation of
the commercialized road administration are problems in which there is only
limited experience. Again, I do not pretend to have answers to these tough issues,
but by iterative process, grounded on good performance indicators and
participation satisfactory answers can surely be found. The most provocative
proposal may be to require the user charges to be large enough to also pay interest
on the capital employed. These interest payments are all the more appropriate
because in many countries the initial road capital was created by subsidies to road
users. Years ago, when road investments were made, road users did not have to