Policy instruments (1) - Transport Policy and Planning in Great Britain - page 199

12.6 Investment appraisal and cost-benefit analysis
In the previous chapter we noted that one way of steering decision-making is for the
Government to establish overarching objectives and priorities and then to translate
these into particular objectives and targets for individual Departments.
If pursued in isolation a drawback with this approach is that it does not take
account of the relative effectiveness of different avenues of spending, whether this is
measured in terms of the use of public money or in terms of resources employed within
the economy as a whole. Because both are in short supply any proposed investment has
an 'opportunity cost' which is the value of the benefits which are being forgone by not
investing in the next best alternative. From an economic point of view it does not make
sense to pursue a particular investment programme if greater benefit could be derived
from the same resources directed differently. Rather the ideal is to achieve an 'efficient'
allocation, i.e. one in which no possible alternative would offer any additional benefit.
To assist with this dimension of decision-making, techniques of cost-benefit analysis
(CBA) are employed. The principles of CBA can be applied to any type of intervention
but are discussed here in the context of major investment proposals. CBA can be used
to provide evidence of the cost-effectiveness of spending both between and within
policy sectors. It can also be used to assess the merits of individual schemes and to aid
the process of prioritising proposals seeking funding from a particular budget (22.6).
CBA has a long tradition in transport planning. The development of techniques in
this field was an important factor in gaining Treasury backing for large-scale transport
investment in the 1960s and has remained central to the credibility of the Department
of Transport's programme ever since.
The Treasury's definition of CBA is
Analysis which quantifies as many of the costs and benefits of a proposal as
feasible, including items for which the market does not provide a satisfactory
measure of economic value.
(quoted in DfT Transport Analysis Guidance (TAG) unit 3.5.4)
The ability to quantify impacts in terms of their monetary value is a pre-requisite
for inclusion in CBA. The fact that monetisation can be applied to savings in journey
time and costs which are often the main consequence of transport interventions
explains the core role of CBA in appraisal. However such interventions can also have
significant impacts on items which are not monetised. Equally some interventions may
be targeted at these other items (though their net economic impact on journey times
etc. will also need to be identified). In such situations the Department acknowledges
that
[CBA] does not provide a good measure of value for money and should not be
used as the sole basis of decisions …. Impacts not included in monetised cost-
benefit analysis must be taken into account in assessing overall value for money.
(ibid. paras 2.1.3 and 2.1.5)
Concern that the ability to monetise certain types of impact and not others might
prejudice the overall assessment of schemes was the key reason for changing to the
comprehensive presentation of impacts in NATA. However the distinction between
'value for money' (in the limited sense of the results of CBA) and overall value for