Transport Investment, Transport Intensity and Economic Growth

1. Transport Investment, Transport Intensity and Economic Growth SACTRA, 1999 Standing Advisory Committee on Trunk Road Assessment and Implications for the World Bank

2. Four questions to be addressed by project appraisal • What is the rationale for the intervention? • What are the net benefits, calculated using the best conventional CBA and assuming a perfectly competitive economy? • What are the total economic impacts of the intervention? • What is the pattern of gains and losses?

3. Issues covered by SACTRA • Impacts of transport on the economy • Linking mechanisms between transport and the economy • Transport intensity of the economy • Implications of transport/economy linkages for project appraisal • Current appraisal practice • Recommendations for improved appraisal

4. Transport and the economy How can transport influence economic performance? • Reorganization or rationalization of production, distribution and land use; • Increasing the catchment area of labor markets, hence reducing labor costs; • Other increases in output resulting from lower production costs; • Stimulation of inward investment; • Unlocking inaccessible regions for development; • Multiplier effects of growth on more growth.

5. Two types of model are available to analyze transport linkages to the economy – Land use transport interaction models (LUTI) and macroeconomic models such as Computerized General Equilibrium Models (CGE). Transport and Economy linkages

6. Transport intensity • UK is concerned about reducing the transport intensity of the economy, that is the total transport demand (ton km plus pass km) per million $ of GDP. Evidence is that this has increased significantly over the last twenty years or so, but there has been a reduction in ton km more than compensated for by an increase in pass km. Year to year variations have been large and difficult to explain.

7. Does conventional CBA cover economic impacts? • Under assumptions of perfect competition throughout the economy, the estimated costs and benefits to transport users and non-users could give a full and unbiased estimate of the total economic impact of a project. • But it would not indicate the incidence of the net benefits as the initial recipients could be different to the final recipients • Difficulties in correctly specifying the demand functions to include broader impacts

8. Implications for Project Appraisal (i) • Little empirical evidence of broader impacts, and what there is is contradictory. Some indicates significant impact on rates of economic growth, most suggests that there is some impact but that it is small. • The state of the art is poorly developed, and the results do not offer convincing evidence of the size, nature or even direction of regional and local impacts • Any generalizations about the impacts are subject to strong dependence on specific local circumstances and conditions

9. Implications for Project Appraisal (ii) Imperfections in the economy: • Price levels for goods and services which differ from their resource costs if there are distortions caused by imperfectly competitive product, labor or other markets; • External costs, such as congestion and environmental damage, both in the transport and other sectors of the economy, which are not included in the prices charged for products and services.

10. Implications for Project Appraisal (iii) • If these imperfections exist, the initial value of “transport” impacts will not be the same in total as the final “economic” impacts. Even a ‘fully specified’ CBA would still miss some wider economic effects. • These wider effects could be positive or negative. There is no basis for judging whether the positive cases are more or less frequent than the negative cases.

11. Spatial distribution effects Two issues – inclusion and direction • There is no guarantee that the geographic limitations of conventional CBA will include all the wider economic impacts, especially the negative effects away from the direct area of influence • Transport projects are often aimed at increasing accessibility to remote regions. But since roads are two way, they can have a detrimental rather than beneficial impact by subjecting industries previously protected by inaccessibility to more efficient producers at the “other end” of the road

12. Some considerations • If we assume perfect competition in the transport using sectors of the economy, a correctly specified benefit estimate will include all the effects on the economy; • Not all aspects of economic welfare (eg the benefits of leisure travel to the individual) are included in GDP; • Under conditions of imperfect competition, even correctly specified benefit calculations might over or under estimate the true effects on the economy; • Conventional CBA does not identify the actual gainers and losers from the investment being evaluated. • Correctly specifying the demand curve in benefit estimates is almost impossible.

13. Four Conclusions (i) • Models for appraising the wider economic impacts on the economy, including the distribution of benefits, involve many difficult questions the answers to which are not obvious or capable of resolution in the foreseeable future, although some important linkages have been identified. Further development of LUTI and CGE models is needed. • At this stage, the evidence suggests that a fully specified cost benefit analysis will often provide a good approximation to the size of total economic impacts.

14. Four Conclusions (ii) • However, the wider economic impacts should still be considered because there are many cases when the conventional cost benefit analysis may be seriously in error and because the distributional effects also need to be known. • Economic Impact Reports should be produced for all schemes, to go alongside the traffic, environmental and economic evaluations already undertaken.

15. Guidance on Economic Impact Report Stage 1 December 2001 DTLR 76 Marsham Street London SW1P 4DR Use project impact on an Accessibility to Jobs index Provide a description of the economy of the region to be impacted by the project, particularly resources available and access to markets Provide a profile of the population, indicating skills available and business knowledge Indicate any labor and other constraints on economic growth that might be available in adjacent regions Indicate other interventions needed to provide context for growth Indicate potential negative accessibility impacts Guidance on the Economic Impact Report

16. ADB - Distribution of Project Effects 1 • Project sustainability is strongly affected by who benefits, and by how much, relative to who pays. • One form of distributive analysis considers the distribution among operators, customers, and government, and how it is affected by different charge levels. This first step disaggregates the financial impact of the project on the main six beneficiary groups: • the owners of project operating entity, • those working in the project, • the government, • the consumers of project outputs, and • those providing material inputs to the project, and • lenders to the project.

17. ADB - Distribution of Project Effects 2 • A second form of distribution analysis considers the distribution of net benefits among beneficiary groups according to their income level. A particular focus on net benefits going to the poor is pertinent to public utility projects that often focus on or at least include the least well-off. • For road sector projects, the benefits to different final users can be broken down among users with different income levels. Such statements, showing the distribution of financial benefits, can be the basis of assessing the division of benefits between the poor and non poor

18. Considerations for the World Bank • Is conventional CBA deficient in addressing our project Development Objectives, and if so do we need to change or add to the way we currently undertake CBA ? • Do we need to comply more with the Guidelines for Economic Analysis of Investment Operations? • Do we need to improve our analyses of the distribution of benefits to different income groups? • Is there a need to provide something like an Economic Impact Report as part of a transport strategy that provides the framework for our investment projects? • If any of the answers are Yes, how should be go about implementing any changes?

19. What are we doing to address these issues? • Less ambitious Project Objectives • Economic Evaluation Notes on difficult topics – including Demand Projections and Distribution of Benefits • Research: Social Rate of Return on Infrastructure Projects • Research: Infrastructure, Productivity and Economic Development (India) • Research: Pilot studies of the impact of transport investment on economic growth (China) • Evaluation: Include distribution of benefits in economic evaluation of some projects. Could be expanded

20. Some suggestions for further action • More country studies of the impact of transport investment on economic growth, perhaps to be included in Sector Strategies; • More reviews of social and economic impacts of specific projects (such as Morocco, Socioeconomic Influence of Roads, 1996) • More analysis of competitiveness in the transport sector, for example the structure and regulation of the trucking sector that can have an important influence on the distribution of project benefits. • Include distributional analysis of benefits in the (as for ADB and as indicated in Economic Evaluation Note 20)