Appendix E Economic analysis overview

At a glance

  • Several types of economic analysis are recognised and discussed throughout the ATAP Guidelines.
  • This part of the Guidelines provides a brief overview of those types of analysis and recommends when they should be used in transport planning and assessment.
  • The primary type of economic analysis discussed in the Guidelines is cost-benefit analysis (CBA).
  • A range of other types of economic analysis that complement CBA are briefly discussed here.

E.1 Introduction and definitions

Several types of economic analysis are recognised and discussed throughout the ATAP Guidelines. The notes below provide a brief overview of those types of analysis and recommends when they should be used in transport planning and assessment.

It is important to distinguish from the start the different types of focus considered in the economic analyses:

  • Economic efficiency effects – relate to the changes in the overall level of national wealth/social welfare/wellbeing[1] resulting from an initiative
  • Distributional effects – relate to how the changes are distributed (geographically, across sectors of the economy, across groups of people and organisations, and the associated equity outcomes)
  • Effects on economic activity indicators – relate to changes in specific measures of the state of the economy (Local, State/Territory, National), and typically include gross domestic product, gross state product, employment, wages and profits.

Each of these considerations are important in decision-making.

The types of economic analysis discussed in ATAP are as follows:

  • Cost-benefit analysis (CBA): Assesses all the benefits and costs of an initiative, and the resulting net benefit/cost (benefits less costs). It is a type of economic efficiency analysis. CBA is widely recognised by government bodies around the world as the most relevant type of economic analysis for determining the net worth of an initiative–that is, does it increase or decrease our national wellbeing overall. See ATAP Part T2 of the Guidelines.
  • Wider economic benefits (WEBs): A more recent type of economic efficiency assessment that is an extension of conventional CBA. It estimates benefits that can, in-principle, be legitimately included in a CBA (in addition to the standard benefits) because they represent changes in economic efficiency. However, until recent times, they have been excluded from CBA practice because of difficulties in estimation (parameter values not based on Australian data, and poor implementation by practitioners). Note that these effects can sometimes be negative (wider economic disbenefits)[2]. See ATAP Part T3 of the Guidelines.
  • Partial equilibrium analysis: Most transport CBAs and WEB assessments are undertaken (appropriately) as partial equilibrium analyses. A partial equilibrium analysis is an economic analysis that treats the sector of the economy or market or infrastructure of immediate interest as operating in isolation from the rest of the economy, omitting the economy-wide effects (in contrast to economic impact assessment and CGE analysis – see below). It is therefore a ‘partial’ or ‘limited’ or ‘bound’ analysis of the problem. For the vast majority of transport assessments, partial equilibrium analysis is considered suitable because it is a good approximation of the results that would be obtained if an economy-wide assessment was undertaken. In transport, examples of partial equilibrium analyses are assessments of effects of initiatives on an individual transport mode, or two modes and their interaction such as car and public transport.
  • Economic impact analysis: A form of economy-wide analysis that traces the effects of an initiative throughout the economy. It considers the gains and losses by industry sector, region and factor markets (labour and capital), and the effects on employment and gross domestic, state and regional product. It uses input-output (I-O) analysis as its foundation. It treats labour and capital costs as stimuli rather than opportunity costs (as in CBA) so does not indicate the net benefit/gain of an initiative. It also does not reflect the demand and supply constraints that exist in an economy. I-O models are available at the national level and for many states and territories. Speaking to Treasury Departments is a good starting point.
  • Computable general equilibrium (CGE) analysis: Another form of economy-wide analysis that traces the effects of an initiative throughout the economy. CGE analysis and associated modeling is the most technical and complex analysis of those discussed here and is more sophisticated than economic impact analysis. Taking input-output data as its foundation, it builds in demand and supply relationships and constraints, plus representation of all sectors, resources and players in the economy. Its use is only required for assessing a transport initiative that is of such a scale that it will influence prices (of goods, services and factors of production) in the rest of the economy. In those circumstances, it is wise for the CGE analysis to be a complement to a partial equilibrium CBA. CGE models are available at the national level and for many states and territories. Speaking to Treasury Departments is a good starting point. CGE assessment is considerably more expensive and complex to undertake than partial equilibrium analysis. The ATAP Guidelines will develop guidance on using CGE assessment in 2018.
  • Productivity metrics: Productivity metrics highlights the subset of components of the CBA that specifically quantify productivity effects of a transport initiative, such as savings in travel time and vehicle operating costs and reliability improvements that accrue to business cars and freight vehicles. See ATAP Part T4 of the Guidelines for further details.
  • Equity effects: This assessment focuses on the identification of the gainers and losers from an initiative. It complements a CBA, with equity effects being reported separately to the CBA results (which indicate economic efficiency). See ATAP Part T5.[3]
  • Cost effectiveness analysis: Cost-effectiveness analysis compares the relative costs of alternative courses of action for achieving a given outcome. It is applicable to situations where the analyst is unable or otherwise constrained to monetise the major benefit(s). This is often the case in the areas of health and defence. A transport example is the case where a decision is taken to replace a bridge without formally estimating the associated benefits. Instead a comparison of the associated costs is used to indicate the least costly solution.
  • Strategic economic assessment: This assessment is undertaken in the ‘policy choices and system planning’ phase of the ATAP Framework (see Part F0.1) and may be applied at any of the planning levels (jurisdiction, market, network, corridor, area, route, link). It can involve deficiency assessments, economic warrant assessments, and may involve the use of CBA applied at network, corridor or areas levels.
  • Problem economic assessment: Step 2 of the ATAP Framework consists of problem identification and assessment. Economic analysis can form a key part of that assessment, allowing the economic costs of the identified problems to be documented and used in justification and prioritisation across problems.

Table 6 provides a quick visual summary.

Table 6: Features of types of economic analysis
Relevant effects Component Type of analysis
Net benefit/efficiency of project CBA (including use of productivity measures) Partial equilibrium analysis
Distributional (equity) effects on stakeholders/sectors/regions Distributional / equity assessment, CGE Partial or general equilibrium analysis
Agglomeration benefits WEBs (CBA subset) Partial equilibrium analysis
Whole-of-economy measure of project stimulus impact. Impacts on sectors and regions. Economic Impact Analysis Input-output analysis
Whole-of-economy impacts. Impacts on sectors and regions. CGE General equilibrium analysis
Primary benefits can't be monetised Cost effectiveness assessment Cost analysis

E.2 Which form of analysis to use

The recommended approach is as follows:

  • Undertake strategic and problem economic assessments as part of the strategic planning stage (see ATAP Part F0.1 for guidance)
  • Undertake a CBA based on partial equilibrium analysis to estimate the net benefit/gain of the proposed initiative (see ATAP Part T2 for guidance)
  • Include WEBs in the CBA only for the type of initiatives where WEBs are likely to be of relevance and of sufficient scale (see ATAP Part T3 for guidance, including instructions for how WEBs should be reported separately from conventional benefits).

A CBA undertaken in this manner is considered the primary indicator of the net worth and value for money of an initiative.

The CBA should be complemented by the other economic analyses as and when deemed necessary:

  • Equity impacts assessment to highlight who gains and loses
  • Productivity metrics assessment to highlight the productivity effects within the CBA
  • Economic impact assessment to highlight the impacts and stimuli across the economy by industry sectors, and labour and capital, including employment effects.

Where an initiative is so large that CGE assessment is considered worthwhile, the CGE assessment should complement the partial equilibrium-based CBA. Judgment by economic specialists is required to determine when a CGE assessment is required. Note that the CGE assessment does not identify and estimate additional benefits not already covered by the CBA and WEBs assessments. A CGE assessment would only identify additional benefits or disbenefits in situations where large economic distortions existed in other sectors of the economy (e.g. large tariffs, quotas, subsidies). That is not the case in Australia. As discussed above, distortions within the transport sector, such as lack of congestion pricing and subsidised public transport, are accounted for within a rigorous partial-equilibrium-based CBA.

Once all the relevant types of economic analysis have been undertaken, they should be consolidated into a Business Case with other required information (see ATAP Part F4).

E.3 Land use – transport interaction

Where a major interaction occurs between transport and land use as a result of an initiative, integrated transport and land use interaction models should ideally be used. ATAP Part T1 Section 3.5 discusses such models, and Part F0.2 Section 6.5 discusses the need for integrated assessments, including economic analyses. Research is also starting to consider how elements of CGE models can be adapted to model complex urban systems, including interactions between transport and land use, location decisions by households and firms. However, this type of assessment and models are complex and their use is still limited in practice. While they have the potential to add further rigour to the CBA of urban transport and land use initiatives in future, these developments are currently outside the scope of the ATAP Guidelines.

[1] Where national wealth/social welfare/wellbeing include all aspects of life–economic, social and environmental.

[2] Which has led the UK DfT recently switching to the term wider economic ‘impacts’ to account for both positive and negative WEBs. The ATAP Guidelines have retained the word ‘benefits’ because it has now become accepted in domestic practice.

[3] Technically, equity effects can be combined into the CBA results by weighting benefits and costs in accordance with how they impact on people (for example see section 7.3 of DFA (2006)). This is a form of adjusted CBA (see ATAP Part T2 Chapter 12). Such an approach is, however, rarely used in practice and is not advocated here. The ATAP guidelines prefer CBA and equity results be presented side by side rather than being combined by ‘equity’ weights (see section 7.5 of DFA (2006)). There are exceptions. One way in which judgements about equity are incorporated into CBAs are use of equity values of time whereby the same value of travel time savings are attributed to all members of the society regardless of the fact that the values vary with peoples' income levels. Productivity metrics assigns a zero weight to benefits that do not enter to GDP.