Addressing Transport Challenges – Part 4 Decisions
Decisions is the fourth article in this series on addressing transport challenges, here I outline a systematic approach to evaluating transport proposals and presenting a business case to decision-makers.
The decision-making process involves selecting the intervention or package of options that is expected to deliver the best outcome for the investment required, and within resourcing, political and institutional context and constraints.
The preferred option has to provide value for money, which means be cost-effective, practical and acceptable.
There are three different forms of assessment – socio-economic valuation of benefits and costs; qualitative assessment of impacts; and financial assessment of cash flows. Here I will focus on the first two.
Value for money is an important concept in assessing the benefit from resources invested. It not only considers capital and operating costs, but also quality, fit for purpose, timeliness and convenience. Value for money is not just about lowest cost.
Demand for transport refers to the number of user (in terms of people and freight) who want to use a transport facility or service, at any given price.
Potential demand depends on the level and quality of service, and price, compared to alternatives. We saw in a previous article that transport is a derived demand. Elasticity of demand measures the level of demand resulting from changes in price.
Benefit-Cost Analysis or BCA refers to the ratio of the present value of the benefits compared to the present value of the costs. The decision criteria for selecting a viable option is that benefits should exceed costs and the best option has the highest benefit-cost ratio.
Present value is determined by considering the time value of money, translating future costs to a common base year.
Net present value or NPV is another measure of the viability of a proposal, calculated from the present value of the benefits less present value of costs. If the NPV is greater than zero, then the proposal is worth investing in and the highest NPV is the best option, being an economically efficient use of resources.
Multi-Criteria Analysis or MCA is a robust approach to cut through large amounts of complex information and provide a open, explicit and comprehensive way of presenting an assessment.
MCA provides a mechanism to present not just monetary, but also quantitative and qualitative assessments, hence more comprehensive than a BCA, which only considers those aspects that can be valued in monetary terms. MCA should incorporate the BCA.
A MCA is a very useful way to summarise a comparative assessment of options for community consultation and for investment decision-makers.
A number of commentators have been overly critical of the MCA process, but I strongly disagree with their arguments. In my view BCA analysis can be just as readily criticised because of the assumptions the analysis is based on, which may not be obvious to a lay reader.
A professional approach to MCA I believe provides a much richer, more robust and readily understood presentation of the benefits and costs.
Three Levels of Assessment
Best practice approaches to investment decisions generally involve a three stage process, distilling a number of potential options down to a preferred option.
The first stage checks strategic alignment with government and transport objectives.
The second stage reviews those options that passes the first stage, by subjecting to a preliminary (or rapid) analysis of benefits and costs.
The third stage involves a detailed assessment, preferably using a combination of BCA and MCA of a limited set of preferred options, generally two or three at most.
Having determined the preferred option by progressing through the three levels of assessment, then a business case is prepared and presented to the requisite decision maker.
The Five Case Model developed by the UK Department for Transport, and taken up by the New Zealand Transport Agency, is a best practice approach covering five aspects:
- strategic fit with policy objectives
- economic value for money
- financial affordability (ie is it in the budget?)
- achievability – can it be delivered?
- commercial viability (where relevant).
It is important for transport professionals to understand all the critical aspects of how to undertake a systematic approach to evaluating transport proposals and presenting a business case to decision-makers.
- Key terms to understand in assessment include: demand, elasticity of demand, value for money, time value of money, and net present value
- Two main approaches to assessment are benefit-cost analysis and multi-criteria analysis
- Assessment of a transport option requires, at a minimum, consideration of a base case and project case
- Analysis of monetised costs requires determination of a net present value, while non-monetised impacts can be assessed using a qualitative approach
- Multi-Criteria Analysis allows comprehensive consideration of impacts and incorporates a Benefit-Cost Analysis
- Three levels of analysis enable options to be filtered down to the preferred option with increasingly detailed analysis
- The five case business case model – considering strategic, economic, financial, management and commercial aspects – is best practice in presenting an investment proposal.
See other articles in this series:
- Addressing Transport Challenges – Part 1 Strategy
- Addressing Transport Challenges – Part 2 Analysis
- Addressing Transport Challenges – Part 3 Instruments