Presentation by Lorenzo Casullo, OECD International Transport Forum, at a RIA workshop for the transport infrastructure regulator of Peru (OSITRAN) which took place in Lima 20-22 February 2017. Further information is available at www.oecd.org/gov/regulatory-policy/

1. COST BENEFIT ANALYSIS IN
THE TRANSPORT SECTOR
Lorenzo Casullo - Economist and Policy Analyst
International Transport Forum at the OECD
Lima, February 2017

2. Costs, benefits and transport decisions
o Cost-benefit analysis (CBA) is the main framework used for the
assessment of socio-economic benefits of investment, especially in
North America and Europe since the 1990s
o The theoretical foundation of CBA lies in the Pareto Improvement
principle and social welfare maximisation
o In practice, CBA involves assessing all costs and benefits and
evaluating the aggregate impact on welfare in monetary terms;
different from profitability/financial viability of the project.
o Today, both transport policies and projects require an impact
assessment, the main component of which is CBA

3. Why is cost-benefit analysis important?
o Socio-economic assessments are crucial to understand whether:
• A project is viable or should be rejected
• Different project elements are appropriately selected
• A project is of high or low priority within an overall program
• The timing of the project is correct
o To allow proper comparison of options, an objective, uniform
framework is important
o Ultimately CBA is about ensuring value for money and efficiency
of public spending
o Important guiding principles in the presence of competing
demands for funds and limited public budgets

4. CBA in practice
Key components:
• A time horizon or planning period (T), usually expressed as a number of years;
• Estimated costs (C) over that period (including operating and capital costs and
possibly social costs);
• Estimated benefits (B) over that period (expressed in terms of monetary benefits
for operators, users and society as a whole);
• A discount rate (r) to convert future values to present day values representing
the opportunity cost of investment

5. Example 1 / CBA in the UK transport
“business case”
o UK example - all major transport project proposals need to show
business case with 5 components:
1. Fit with overall policy objectives – strategic case
2. Value for money - economic case
3. Commercially viability - commercial case
4. Financially affordability - financial case
5. Achievability - management case
CBA is done here

6. Effects on welfare
and economy
Other resource benefits from:
• More productive jobs
• Increased labour supply
• Induced property development
• Increased competition
Investment in transport
Average
travel
time
Transport
improvements
$ cost Reliability Comfort Resilience Access
Direct resource benefits
• Travel time savings (wage benefit)
• Fuel and operating cost savings
• Agglomeration benefits
Welfare benefits
• Leisure/commute time savings
• Reliability benefits
• Comfort benefits
• Safety benefits (life and injury)
• Environmental benefits
Location changes:
• Housing
• Business activities
• Jobs and commutes
Flow-on and final
effects on economy
Business
&
freight
Leisure
Travel to
work
Transport users
affected
Major effects in CBAKey: Minor effects in CBA Effects (usually) not captured in CBA
Transmitted economic effects
• Employment
• Output / GDP
• Productivity and wages
• Profits
• Land and property value/rents
Standard CBA scope
Market imperfections

7. CBA applied to policy measures
o CBA should enter the policy-making process as part of RIA
o Quantitative assessments of impacts give policy makers clear, like-for-
like comparisons of different options – including no intervention
o But CBA is just one of the impact assessment tools available (also BEA,
CEA, MCA) and should only be used when some conditions are met…
CBA

8. CBA – a word of caution
Important factors to consider for effective CBA in transport:
1. Good data availability covering the period before the intervention to minimise
measurement problems
2. Sophisticated enough methods to forecast and evaluate future costs and
benefits, including non-market valuation
3. Total/net welfare benefits ignore distributional effects; additional analysis may
be needed including how to compensate losers
4. Mismatch between what CBA measures (social welfare) and national political
priorities (economic effects)
5. Limited coverage, when important impacts cannot be monetised and risk being
ignored in the final decision

9. Example 2 / Japanese rail privatisation ex-
post assessment
o Ex-post impact assessment (2005) of rail privatisation (1987)
o Based on 2000 data for the Tokyo Metropolitan Area and
comparing consumer and producer surplus under private rail
with a baseline scenario of continued public ownership
o Selection of year and geographic location to maximise
availability of data from different sources
o Assumptions of status quo: efficiency, pricing, quality…
o Results: privatisation had been the appropriate policy choice
and total welfare benefits were 251 billion Yen in Case 1, and
in 80.6 billion Yen in Case 2.

10. Concluding remarks
o Better decisions on both transport policies and projects
require an impact assessment, the main component of which
is CBA
o Quantification of costs and benefits, where possible, adds
elements of objectivity and comparability to the assessment
of options
o To get CBA right:
• Data
• Skills
• Experience
o Learning process that is strengthened by ex-post validation
over time