Exploitable results
The appraisal methodology developed has been tested in four case studies. The Heatco methodology has been applied and compared with the national methodologies and outputs. The outcome can be judged as positive, since the Heatco methodology was successfully applied in all four cases. No major difficulties were reported on scientific, methodological or technical problems related to the application of Heatco.
The most important differences between national and Heatco guidelines are:
- market prices used in some national appraisals vs. factor costs recommended by Heatco;
- the choice of the social discount rate;
- the duration of the appraisal period.
In addition, a set of monetary values for noise annoyance were identified based on a number of contingent valuation studies in different countries with different geographical, cultural and traffic conditions, as well as for travel time saving.
In order to develop a harmonised 'state-of-the-art' approach for assessing European infrastructure projects, a comparison and analysis of the current practices in project appraisal in Europe was required. Similarities between countries make harmonisation easier, while differences make it more difficult. In general it can be concluded that the main challenges to the development and use of harmonised guidelines are:
- significant regional differences in the approach to and tradition for transport project appraisals;
- the appraisal framework for road is far more developed than that for air, inland waterways and sea transport;
- lack of consensus on which elements to include in the cost-benefit analysis (especially environmental effects);
- lack of consensus on approaches to valuation;
- the significant range of values used (e.g. for safety).
The current EU practice is that of no institutionalised evaluation approach, let alone harmonised. Various advantages as well as drawbacks of harmonisation have been identified. Advantages include a high network value of standardisation, transparency, time saving for decision-makers, and less borders. However, constraints exist:
- maximum support from member states is needed to make harmonised evaluation work;
- the European financial budget is relatively low and rent seeking should be avoided;
- any evaluation standard will be hard to change;
- issues exist where harmonisation might harm cultural identity or where the subsidiarity principle is violated.
After evaluationg strengths and weaknesses of Multi-criteria analysis (MCA) and Cost-benefit analysis (CBA), Heatco decided to use CBA on the condition that indirect effects must be included in the analysis.
Another important issue was that of the treatment of equity. It has been found that is better to take economic utility theories as reference rather than to make political choices ingredients of the assessment, as well as is better to limit ourselves to prescribing the format for presentation of equity results rather than to prescribe methods for evaluation of equity score, which is more appropriate in guidelines for (comprehensive, or full) CBA.
Finally it was necessary to address the issue of whether to take local, national or EU values for those indicators and prices that are to be included in the analysis. Standardisation and hence using EU-wide values has clear advantages in terms of transparency, but might be far from actual individual preferences. In any case, it is important to indicate how proposals for the use of values and preferences are located on the trade off curve. Heatco recommendation is to use local values as much as possible.
Based on current practices and latest thinking the Heatco team has identified elements of a consistent framework for project appraisal at EU-level:
general issues (incl. non-market valuation techniques, benefit transfer, treatment of nonmonetised impacts, discounting and intra-generational equity issues, decision criteria, the project appraisal evaluation period, treatment of future risk and uncertainty, the marginal costs of public funds, producer surplus of transport providers, the treatment of indirect socio-economic effects);
value of time and congestion (incl. business passenger traffic, non-work passenger traffic, commercial goods traffic time savings and treatment of congestion, unexpected delays and reliability);
value of changes in accident risks (incl. accident impacts considered, estimating accident risks, valuing accident costs);
environmental costs (incl. air pollution, noise, global warming);
costs and indirect impacts of infrastructure investment (incl. capital costs for the infrastructure project, costs for maintenance, operation and administration, changes in infrastructure costs on existing network, optimism bias, residual value).
Based on the review of existing practices, further analysis and consultation of relevant stakeholders from EU Member States and Switzerland in two workshops a consistent methodological framework for project appraisal was developed. Apart from being used for Trans-European Transport Network (TEN-T) projects, it might also be used for other transnational projects to ensure consistency across borders and the application of the state of the art methods. It is not the intention of Heatco's proposal for harmonised guidelines to stipulate methods and values for national projects, however in the long run these guidelines might help to achieve a more harmonised approach also for national appraisal methods.
When carrying out a CBA, the Heatco project recommends to follow these general principles:
- To estimate the costs and benefits of a project, one has to compare costs and benefits between two scenarios: the 'Do-Something' scenario, where the project under assessment is realised, and a 'Do-Minimum' scenario, which needs to be a realistic base case describing the future development. If there are several project alternatives, one has to create a scenario for each alternative and compare them with the 'Dominimum case'.
- The use of NPV (net present value) to determine whether a project is beneficial or not is recommended. In addition, depending on the decision-making context and the question to be addressed, BCR (benefit cost ratio) and RNPSS (ratio of NPV and public sector support) decision rules could be used.
- The use of a 40 year appraisal period, with residual effects being included, as a default evaluation period is recommended. Projects with a shorter lifetime should, however, use their actual length. For the comparison of potential future projects, a common final year should be determined by adding 40 years to the opening year of the last project.
- For the assessment of (non-probabilistic) uncertainty, a sensitivity analysis or scenario technique is more appropriate. If resources and data are available for probabilistic analysis, Monte Carlo simulation analysis can be undertaken.
- It is recommended to adopt the risk premium-free rate or weighted average of the rates currently used in national transport project appraisals in the countries in which the TEN-T project is to be located. The rates should be weighted with the proportion of total project finance contributed by the country concerned. In lower-bound sensitivity analyses, in order to reflect current estimates of the social time preference rate, a common discount rate of 3 % should be utilised. For damage occurring beyond the 40 year appraisal period (intergenerational impacts), e.g. for climate change impacts, a declining discount rate system is recommended.
- At minimum, a 'winners and losers' table should be developed, and presented alongside the results of the monetised CBA. Distributional matrices for alternative projects might be created and compared amongst each other. Additionally stakeholder analyses should be undertaken as well. It is recommended to use local values to assess unit benefit and cost measures.
- If impacts in transport project appraisals cannot be expressed in market prices, but are potentially significant in the overall appraisal, it is recommended that - in the absence of robust transfer values - non-market techniques to estimate monetary values should be considered. It is also recommended that the choice of technique used to value individual impacts should be dictated by the type of impact and the nature of the project. However, Willingness to pay (WTP) measures is preferable to cost-based measures. Values should be validated against existing European estimates.
- Value transfer means the use of economic impact estimates from previous studies to value similar impacts in the present appraisal context. Value transfers can be used when insufficient resources for new primary studies are available. The decision as to whether to use unit transfers with income adjustments, value function transfer and/or meta-analyses will depend on the availability of existing values and experience to date with value transfers related to the impact in question.
- It is recommended, at a minimum, that if impacts cannot be expressed in monetary terms, they should be presented in qualitative or quantitative terms in addition to evidence on monetised impacts. If only a small number of non-monetised impacts can be assessed, sensitivity analysis may be used to indicate their potential importance. Alternatively, non-monetised impacts may also be included directly in the decision-making process by explicitly eliciting decision maker's weights for them visà-vis monetised impacts.
- It is recommended that if indirect effects are likely to be significant, an economic model, preferably a Spatially Computable General Equilibrium (SCGE) model, should be used. Qualitative assessment is recommended, if indirect effects cannot be modelled due to limited resources (high costs for the use of advanced modelling), insufficient availability of data, or lack of appropriate quantitative models or unreliable results.
- Our recommendation is to assume a marginal cost of public funds of 1, i.e. not to use any additional cost (shadow price) for public funds. Instead, a cut-off value for the RNPSS of 1.5 should be used when relevant.
- It is recommended to estimate (changes in) the producer surplus generated by changed traffic volumes or by the introduction and adjustment of transport pricing regimes.
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