In previous articles, I outlined the steps in addressing transport challenges:
- Role of strategy in solving everyday transport challenges
- A systematic approach to analysing complex transport challenges
- How to select a solution to solve transport challenges
The next step is getting a decision on resourcing – 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 are 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 assessments: socio-economic valuation of benefits and costs; qualitative assessment of impacts; and financial assessment of cash flows or funding. 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. So, value for money is not just about lowest cost.
Demand for transport refers to the number of users (to move 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 demand resulting from changes in price.
Benefit-Cost Analysis
Benefit-Cost Analysis (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 are that benefits must exceed costs, and the preferred option has the highest benefit-cost ratio. This is the preferred approach by most funders, but has its limitations.
Present value is determined by considering the time value of money, translating future costs back 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 costs. If the NPV is greater than zero, then the proposal could proceed and the highest NPV is the most preferred, being an economically efficient use of resources.
The challenge is that some benefits are difficult to value in monetary terms, especially for other than road projects, particularly those with large traffic volumes and high levels of current congestion. The benefits of investment in walking and cycling, traffic management and public transport are more difficult to quantify, and this is also the case for many regional and remote projects with low traffic volumes.
Multi-Criteria Analysis
Multi-Criteria Analysis (MCA) is a robust approach to cut through large amounts of complex information and provide an open, explicit and comprehensive way of presenting an assessment.
MCA provides a mechanism to present not only monetary but also qualitative assessments, hence are more comprehensive than a BCA, which only considers those aspects valued in monetary terms. MCA incorporates a BCA, so doesn’t replace but adds to the analysis.
MCA is a very useful way to summarise a comparative assessment of options for community consultation and for investment decision makers.
Several commentators have been overly critical of the MCA process, but I strongly disagree with their arguments, as there are robust ways of undertaking MCA. BCA analysis can be just as readily criticised because of the assumptions the analysis is based on, which are often not transparent or obvious to the lay professional reader. Consider the demand forecast models, for example, what assumptions were made and on what basis.
A professional approach to MCA provides a much richer and more robust presentation of the benefits and costs.
Three Levels of Assessment
Best practice approaches to investment decisions involve a three-stage process, distilling several potential options down to a preferred option.
The first stage checks strategic alignment with government/community and transport objectives. The second stage reviews those options that pass the first stage by subjecting to a high-level preliminary analysis of benefits and costs. The third stage involves a detailed assessment, preferably using a MCA of a limited set of preferred options.
Business Case – Five Case Model
Having determined the preferred option by progressing through the three levels of assessment, then prepare and present a business case 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 and others, is a best practice approach covering five aspects:
- Strategic fit – how does it fit with policy objectives?
- Economic value for money – do benefits exceed costs?
- Financial affordability – is there funding? Is there a budget?
- Achievability – can it be delivered?
- Commercial viability – is there capacity/interest in the industry?
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 Concepts
- Key terms to understand in assessment include: demand, elasticity of demand, value for money, time value of money, and net present value
- 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 assessing non-monetised impacts 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 – strategic, economic, financial, management and commercial cases – is best practice in presenting an investment proposal.
To learn more, check out the online course Addressing Transport Challenges.
I think, we should strive NOT to confuse and potentially mislead practitioners. Complex problems require deeper understanding and analysis. Analysis is a mathematical term. BCA, most commonly expressed as CBA from its beginnings in the Welfare Analysis literature, is a mathematically based method that greatly helps in evaluating proposals of many of our endeavours. If need be, it has the capability and flexibility to incorporate qualitative assessments or extensions of impacts. And carefully (preferably mathematically) evaluated weighted impacts, too. A carefully designed and executed MCA “assessment”, however, can be used for a broad ASSESSMENT of complex concepts/problems in order to better inform subsequent robust evaluations, i.e. a BCA (for example, the ESDthink tool we developed for Austroads at the Australian Road Research Board (ARRB).
My experience in peer reviewing numerous transport business cases is that many ‘practitioners’ are not as rigorous or thoughtful about BCA as we would like!
Weighting of criteria, a slippery Road to pretending mathematics should choose your risk appetite or make a single judgement for trade offs. Hiding behind an arbertary factor is very poor decision making. Sure use some form of mca, but adding them all up is basically wrong.
It depends how weighting is carried out – and I tend to agree that a single MCA number is not ideal. But relying on benefit-cost analysis can be pretending mathematics too – it depends on how robust are the inputs.