BY ROGER GIBBINS AND SASHA LENNON
The tool most often applied to evaluate the economic and community benefits of road infrastructure projects is cost-benefit analysis (CBA). While this delivers positive results for high volume roads in urban areas, it is often the case that proposals in Australia’s rural and remote regions tend to ‘not stack up’. The fundamental reason for this is that the road infrastructure benefits that are normally measured (e.g. aggregate travel time savings, accident cost savings, vehicle operating cost savings, etc.) rely on high traffic volumes to justify the capital and ongoing costs of building or upgrading a road.
In this article it is argued that traditional approaches to project assessment tend to downplay the importance of what have become known as wider economic benefits or ‘WEBs’, which refer to the economic productivity improvements to be derived from investment in critical regional and rural infrastructure projects. Based on the authors’ experience assessing the economic and community benefits of major road
infrastructure projects – most recently, the proposed sealing of the Strzelecki Track in Outback South Australia – it is argued that, to better inform the ‘business case’ for investing in regional and remote
Australia, these wider economic benefits should in fact be the focus of project evaluations, and not just a ‘second-order add-on’.
Accepting that the principal purpose of building roads is the wider economic benefits they generate, it follows that the emphasis of evaluations of road projects in remote and regional areas should switch to estimating the value of the ‘productivity dividend’ delivered to the regional economy concerned. Only then can road funding be programmed and priorities set on a sound basis.
COST-BENEFIT ANALYSIS (CBA)
This article focuses on the role that wider economic benefits can play in the application of cost-benefit analysis techniques. An understanding of CBA is therefore a necessary precursor to the use and application of data to estimate wider economic benefits.
CBA is the industry standard evaluation tool for assessing the economic benefits of road projects. Application of this tool requires an understanding of some micro-economic theory (e.g. ‘consumer surplus’), the concepts of ‘opportunity cost’ and ‘shadow pricing’ as well as ‘discounted cash-flow analysis’ (DCF).
CBA estimates the stream of societal costs and benefits associated with a project relative to a ‘base case’, that is, the scenario that will unfold without the project. The costs and benefits are expressed in ‘present value’ (PV) terms (by applying the discount rate) and the benefit-cost ratio is the PV of benefits over the PV of costs. If the ratio is greater than one, the project is ‘worth doing’.
It is standard practice that a CBA applied to transport projects usually takes into account:
- Travel time costs (TTC);
- Vehicle operating costs (VOC); and
- Accident costs.
Generally, a project will deliver savings in these cost areas and these are the main benefits to road users. In addition to these direct costs and benefits there are potential costs and benefits to external
parties termed ‘externalities’. Externalities that are often included in a transport project CBA include:
- Air pollution;
- Greenhouse gas emissions;
- Nature and landscape impacts;
- Urban separation; and
- Downstream effects.
A number of manuals provide guidance on monetising these costs and benefits (for example: Austroads (2014), Updating Environmental Externalities Unit Values).
It is often argued that there are benefits of road projects that are seldom given sufficient weight, such as benefits that flow from greater choice in access to housing and to jobs and recreational opportunities. But it can be argued that these are to a large extent captured in the travel cost savings that are a measure of ‘willingness to pay’ for the new road or road upgrade.
EVALUATING WIDER ECONOMIC BENEFITS (WEBS)
To capture the true value that a major road infrastructure investment will have for a regional economy and community, it is necessary to consider the wider economic benefits (WEBs). Examples of WEBs include: (1) benefits to firms; and (2) benefits to consumers.
Benefits to firms:
- Agglomeration benefits in cities (e.g. proximity enhanced communications).
- Enhanced competition between firms.
- Increased output in the economy.
- Enhanced labour supply.
Benefits to Consumers:
- Improved access to jobs.
- Improved education outcomes.
- Improved community health outcomes.
- Improved access to cultural, social and recreational development activities.
Taken together these benefits all relate to the concept of ‘productivity’.
Productivity measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is considered a key source of economic
growth and competitiveness, and one of the most widely used measures of productivity is Gross Domestic Product (GDP), or at the regional level, Gross Regional Product (GRP) per hour worked. To take account of the role of capital inputs, a measure is the flow of productive services that can be drawn from the cumulative stock of past investments (such as machinery and equipment).
After computing the contributions of labour and capital to output, the so-called ‘multi-factor productivity’ (MFP) effect can be derived. MFP measures the residual growth that cannot be explained by the rate of change in the services of labour, capital and intermediate outputs, and is often interpreted as the contribution to economic growth made by factors such as technical and organisational innovation.
When a road in a regional or remote area is built, or upgraded (e.g. sealed) the various industries that operate in the area receive a productivity dividend due to:
- Reduced travel times and vehicle operating costs (including fuel, emissions and maintenance costs), particularly for heavy vehicles;
- Improved travel time reliability for freight (including, for example, gas, beef and cattle), by reducing the frequency and duration of road closures and providing safer opportunities for overtaking slower moving vehicles;
- Reducing the frequency and severity of crashes associated with overtaking, fatigue and the uneven road surface;
- Improving access for high productivity freight vehicles; and
- Attracting tourist visitation and spending, particularly drive tourism.
It is stated by Austroads (2016):
“The rationale for remote and regional roads is typically related to improving accessibility to a particular region, leading to associated improvements in wider social and economic outcomes”.
This means travel time and vehicle operating cost savings are often not the primary reason for investing in remote and regional roads. Accepting that the principal purpose of building roads is the WEBs they generate, it follows that the emphasis of evaluations of road projects in remote and regional areas should switch to estimating the value of the productivity dividend delivered to the regional economy. The question is – how can this be achieved?
A METHODOLOGY FOR ESTIMATING WEBS
In order to reliably estimate the WEBs generated by a road project the following steps are recommended:
Step 1: Document the Output of Industry Sectors – Data on output by industry sector is available from the Australian Bureau of Statistics (ABS), or alternatively from the web-based product ‘REMPLAN Economy’.
Step 2: Estimate Output Uplift for Industry Sectors – This step should focus on the key sectors, which in many regional and remote areas are agriculture, mining, transport and tourism. Estimates may be informed by case studies and supply chain analysis to identify the factors of production that can be affected to deliver a productivity uplift.
Step 3: Model the Multiplier Effect – Uplifts in outputs in key industry sectors will have a multiplier effect in the regional economy. From a direct increase in output there will be an increase in the demand for intermediate goods and services. These ‘industrial effects’ include multiple rounds of flowon effects, as servicing sectors increase their own output and demand for local goods and services in response to the direct change to the economy. The increases in direct and indirect output would typically correspond to the creation of jobs in the economy.
Corresponding to this change in employment would be an increase in the total of wages and salaries paid to employees. A proportion of these wages and salaries are typically spent on consumption and a proportion of this expenditure is captured in the local economy. Total output, including all direct, industrial and consumption effects can then be estimated.
This modelling can be done by reference to the Australian Bureau of Statistics’ input-output tables, but these are somewhat static and dated. REMPLAN Economy Software provides a menudriven model to make these estimates.
Figure 1. A Methodology for Evaluating Wider Economic Benefits
Step 4: Estimate Value-Added – The productivity dividend for a region is measured in terms of ‘valueadded’ where this is defined as follows:
Value-Added data represents the marginal economic value that is added by each industry sector in a defined region. Value-added can be calculated by subtracting local expenditure and expenditure on regional imports from the output generated by an industry sector, or alternatively, by adding the wages and salaries paid to local employees, the gross operating surplus and taxes on products and production. Value-added by industry sector is the major element in the calculation of Gross Regional Product / Gross State Product / Gross Domestic Product.
(Source: REMPLAN Economy Software, December 2017)
Again, REMPLAN Economy Software provides a menu driven model to provide an estimate of valueadded.
Step 5: Cost-Benefit Analysis including WEBs – The traditional variable in the cost-benefit analysis (e.g. savings in travel time, vehicle operating costs and accident costs) can still form the basis of the
CBA but the estimate of value-added to the regional economy can be added to the benefits side of the equation.
According to the Queensland Department of Transport and Main Roads (2011), “International experience suggests that these wider economic benefits for transport projects add between 10%
and 40% to the conventionally measured benefits”. However, this relates to urban projects where the direct benefits measured by conventional means are significant. In rural and remote areas, the aggregate of direct user benefits is lower so the relative significance of the WEBs is greater.
A CASE STUDY – SEALING THE STRZELECKI TRACK
In early 2018, SC Lennon & Associates prepared a report on behalf of Regional Development Australia Far North (RDAFN), the Outback Communities Authority (OCA) and The Flinders Ranges Council, which estimates the regional economic benefits of sealing the Strzelecki Track, a 472-kilometre unsealed regional road that links the towns of Lyndhurst to Innamincka in the north east of South
The Strzelecki Track is a vital supply link for major oil and gas facilities in the Cooper Basin and is an essential transport corridor for outback communities, tourism and pastoralists. Situated in the Outback Region, the Strzelecki Track provides a link from Adelaide into south-western Queensland via Port Augusta and the towns of Quorn and Hawker (which is just south of the Ikara-Flinders Ranges National Park) in The Flinders Ranges Council area.
Tourism, mining and pastoralism are three ‘key industries’ providing strong prospects for Outback South Australia’s economic growth and development based on existing comparative and competitive advantages and opportunities to diversify the region’s economic activity. The assessment of the wider economic benefits of sealing the Strzelecki Track focussed on these three key industries.
The Strzelecki Track, if sealed, would provide a vital piece of enabling infrastructure to support the growth and development of tourism activity in the Outback region and beyond. Regional and remote communities could benefit from the income generated from drive tourists (on stopovers), as those passing through often buy local tourism products and services, and basic travel necessities like fuel, food and other supplies. Drive tourism provides a number of benefits to businesses, including: opportunities for new business start-ups; increased demand for new products and services; opportunities for business collaboration; and additional income and employment.
The analysis undertaken by SC Lennon & Associates using REMPLAN Economy Software shows that when the proposed sealing of the Strzelecki Track is complete, and after allowing three years for ‘ramp-up’, there is a potential for an uplift of $7.1 million per annum in visitor spending in year 1 as a direct result of sealing the road. This is expected to increase to around $17.4 million per annum after a further 7 years (i.e. in Year 10 – expressed in present values).
In addition to the estimated economic benefits to the tourism industry, estimates were made on the economic uplift to other keys sectors – namely mining, the beef cattle industry and the road freight
industry – from sealing the Strzelecki Track, based on the productivity enhancements that the project could deliver.
The analysis of wider economic benefits revealed that sealing the Strzelecki Track has potential to deliver a ‘value add’ to the economy in the order of $87 million in year 10 after a ramp-up period. If this is projected out over 40 years and discounted at a rate of 5% per annum, the present value of the benefit stream is $1.4 billion. Given the nature of the assumptions that have had to be made, the tolerance should be around +/- 30%. Hence the range is between $1.0 billion and $1.8 billion. In a separately-commissioned cost-benefit analysis of sealing the Strzelecki, the South Australian Government Department of Planning, Transport and Infrastructure estimated the present value of direct transport benefits (from travel time savings, accident cost savings and vehicle operating cost savings) to be $1.3 billion. Hence, consideration of the wider economic benefits, as summarised above, has a potential to double this figure to between $2.3 billion and $3.1 billion.
CBA when applied to evaluating road projects in rural and remote areas only tells part of the story. The technique focuses on direct user benefits and externalities but it tends to under-value the real purpose of building roads in rural and remote areas, which is to underpin the productivity of the regional economy, not to mention social cohesion in these areas.
There exists a sound methodology for estimating wider economic benefits in terms of the productivity dividend associated with a road project in rural and remote areas. In so doing, as demonstrated by the example of the Strzelecki Track, the true value of the productivity dividend delivered to the regional economy can be assessed and articulated. Only then can road funding be programmed and priorities
set on a sound basis.
Austroads (2016), Reforming Remote and Regional Road Funding in Australia
Austroads (2014), Updating Environmental Externalities Unit Values Queensland Government, Department of Transport and Main Roads (2011), Cost Benefit Analysis Manual
REMPLAN (2017), Economy Software, December 2017
SC Lennon & Associates (January 2018), Economic and Community Benefits of Sealing the Strzelecki Track, prepared on behalf of Regional Development Australia Far North, The Outback Communities
Authority and The Flinders Ranges Council, http://www.rdafn.com.au/ publications
ABOUT THE AUTHORS
Sasha Lennon (B.Ec., Grad. Dip. Advanced Economics, M.Journalism, ACEcD) is a Brisbane-based consultant specialising in economic development strategy and policy formulation. He is the Director of SC Lennon & Associates Pty Ltd. Go to www.sashalennon.com.au.
Roger Gibbins (Grad. Dip. Economics, M.Urban Planning, Dip. Applied Science (Town Planning) is a Melbournebased freelance consultant specialising in economic impact assessment and business case preparation. He is an Associate with SC Lennon & Associates Pty Ltd.