News

Wider economic benefits (WEBs) are increasingly being estimated in the economic assessments of infrastructure projects. During the last two decades, researchers and practitioners have developed new approaches to assess economic impacts derived from transport infrastructure projects, expanding the range of benefits considered in cost-benefit analysis (CBA). Applying the conventional CBA methodology, which focuses on the direct user benefits, such as the value of travel time savings, generalised costs savings, and environmental externality costs saving, can omit potential WEBs. Such benefits include expanded economic development opportunities and productivity improvements resulting from major projects.

Some infrastructure projects, particularly transport projects, can stimulate new economic development, increasing the density of businesses and workers in an area. This can boost innovation and productivity through knowledge transfer and greater specialisation, among other mechanisms. WEBs can arise due to major projects because new economic hubs or clusters are created. This is one of the goals of Brisbane’s Cross River Rail project in Brisbane, Australia, for example. The hope is that the project creates new economic activity centres in places such as Dutton Park and the RNA Showgrounds.

Adept Economics Director Gene Tunny ran a workshop on WEBs for Indonesian Government officials attending a University of International Development (UQIQ) short course on infrastructure financing in March 2022. Following this workshop, Gene spoke with his Adept Economics colleague Arturo Espinoza Bocangel about WEBs on his Economics Explored podcast. You can listen to the conversation between Gene and Arturo via Google Podcasts, Apple Podcasts, Spotify, and Stitcher, among other podcast apps. A transcript is available via the Economics Explored website. Further information regarding WEBs is provided below.

Main sources of wider economic benefits

Anthony Venables, an economics professor at the University of Oxford, indicates that a better transport project that increases proximity among economic agents and triggers relocation of economic activities will cause potential sources of positive wider economic impacts catalogued as wider economic benefits (WEBs) through three main mechanisms (Figure 1). The first mechanism is economic density and productivity, the second is induced private investment and associated land-used change, and the third is employment effects. 

Figure 1.  Transport improvements’ effects

Source: Venables (2016, p. 7). Modified by Adept Economics.

The first is related to the economic density and its positive impact on productivity. Scale and density create an environment where firms and employees can develop highly specialised products, services and skills. One possible effect occurs when a transport improvement reduces the costs of economic interactions among firms, workers and consumers, becoming more spatially concentrated. The second is investment and changes in land use. The investment response is driven by the direct user-benefits experienced by residents, employees and companies. This will lead to changes in traffic flows and wider economic benefits such as a transport improvement, fostering new residential developments or acting as catalyst to induce private investment in large commercial developments. The third is related to labour market’s effects. On the supply side, better transport may make it easy for people to get work and may reduce discouraged worker effects. On the demand side, two effects may occur: more job creation in one area, offset by some losses in other places as some firms relocate.

International approaches to estimating WEBs

The UK Department for Transport provides methodologies to assess WEBs, using different approaches to classify WEBs. The identified WEBs include induced development, employment effects, and productivity impacts. On the other hand, Australian Transport Assessment and Planning Guidelines (ATAP) identified and provided methodologies for WEBs such as agglomeration economies, improved labour market and tax impacts, output changes in imperfectly competitive markets, and change in competition (Table 1).

Table 1. WEB’s typology

Source: Australian Transport Assessment and Planning Guidelines and UK Department of Transport Transport Analysis Guidance.

Despite those differences in classifying WEBs, there is a common recommendation about incorporating them in a CBA. That is, considering that these projects have different stated objectives and will trigger different private sector responses, the appraisals must be designed to be context-specific. For example, the UK Department for Transport (2019) points out that the economic impacts of transport projects are context-specific because the type and magnitude of impacts will depend upon the scheme type and local attributes, such as workforce skills and the availability of land for development.

Internationally, the development of transport appraisal guidelines is ongoing. Hence, incorporating wider economic impacts in CBA is still challenging with inherent risks. According to Professor Venables, expanding the set of studied mechanisms creates potential risks about misleading arguments, and even the effects can be overvalued. 

Moreover, a survey (Brevik et al., 2017) that reviewed guidelines to incorporate WEBs from different countries mentioned that there is little international consensus on the choice of appropriate methods to measure WEBs. They reviewed 23 countries’ transport appraisal guidelines identifying five main categories of WEBs with 12 sub-categories, and in some cases, with sub-sub categories. There are some caveats to be considered: many types of WEBs are not well-founded theoretically or empirically; the same type of WEB can be justified and treated different across countries’ guidelines; if the applied method is not specified correctly, different kinds of WEIs may overlap with each other and/or used benefits in conventional CBA; and most guidelines have a restrictive attitude towards calculating WEBs and require specific conditions to apply if WEBs are to be calculated.

WEB’s applications in Australia

In Australia, the ATAP has developed a guide to incorporate WEBs into conventional CBAs, indicating that CBA results should be presented in two parts: without and with land-use benefits and WEBs. The WestConnex’s economic appraisal followed that guideline which has a benefit-cost ratio (BCR) of 1.71 (excluding WEBs) and 1.88 (including WEBs). The estimated wider economic benefit is $2,134 million (present value), representing 9.6% of the total gains under the conventional CBA appraisal. The WEBs for this project involve the ability of businesses to access other businesses (agglomeration economies) and increased labour supply benefits. The agglomeration impacts were calculated as the incremental change in the effective density metric (i.e. the mass of economic activity) across the modelled area, resulting from changes in the respective accessibility of firms and workers. Labour market deepening benefits arise from a reduction in the costs of commuting, encouraging more people to get jobs, and it was calculated as the additional tax revenue resulting from more people choosing to work as a result of better access to employment, resulting from the project. 

A major infrastructure project in Brisbane, Queensland, is the Cross River Rail subway system. Building Queensland estimated that the project has a BCR of 1.41. The total benefit is $1,877 million (present value), excluding WEBs. The wider economic benefits estimated are $1,209 million (present value), representing 64% of the total gains under the conventional CBA appraisal. The project’s assessment identified three WEBs: agglomeration economies, labour market deepening and output change in imperfectly competitive markets.

Conclusion

Despite a lack of international consensus on the choice of appropriate methods to measure WEBs, an increasing number of business cases for infrastructure projects are incorporating WEBs into CBAs, especially those megaprojects that may have significant economic impacts beyond the traditional economic evaluation. However, arguably it is necessary to do more research about WEBs to standardise the estimation methodology to have a strong theoretical background and rely on robust empirical evidence. Otherwise, there is a risk that WEBs could be used to overstate the benefits of proposed projects and support the approval and funding of unviable projects. Any WEBs estimated in a CBA should be thoroughly researched and justified and conservative assumptions should be used. 

References

Brevik,  P., Løvold, K., and Hansen, W. (2017). A review of guidelines for including wider economic impacts in transport appraisal. Transport Reviews, 37(1), 94–115.

Venables, A. (2016). Incorporating wider economic impacts within cost-benefit appraisal. Discussion Papers (International Transport Forum), 2016-05.

Published on 26 April 2022. For further information please get in touch with us via contact@adepteconomics.com.au or call us on 1300 169 870.