Capturing the neglected value of infrastructure investment - a UK perspective

Investment in infrastructure is universally agreed to be a primary ingredient in the facilitation of economic growth and/or diversification, irrespective of where in the world such investment takes place. However, what is often missed from this conversation is that the appraisal systems put in place to estimate future ‘value’ or ‘benefit’ for money invested are so typically rigid that local and regional socio-economic circumstances are effectively removed from the calculation. I write this blog from a UK perspective, having particular regard to the rigorous and world-renowned appraisal methodologies speer-headed by the Department for Transport which have been developed and refined over many years to measure the relative costs and benefits of wide ranging transport proposals. Whilst these methodologies are sound for the purposes for which they have become established, they remain timid in terms of addressing the broader and less direct benefits and costs of infrastructure investment.

Academic and empirical research has demonstrated that the impact of transport improvements are wide-ranging, especially for major projects.  These benefits or positive impacts can be largely summarised as being:

  • User-benefits:  measured in terms of savings in time, vehicle operating costs and other positive values measured by ‘generalised travel cost’. This element forms the major component of the benefit:cost ratio for DfT’s consideration in terms of value-for-money appraisal.
  • Productivity effects:  agglomeration benefits measured largely by the effects of enhanced accessibility on economic clustering, specialisation and labour market efficiencies.
  • Investment and employment:  evidence suggests strongly that improved transport accessibility is considered as one factor amongst others as a critical variable in the location decision of businesses.  This measurement is selective in what can and cannot be quantified in the cost:benefit analysis.

The value capture mechanisms of investment and employment effects are by far the least well developed and accepted in terms of appraisal methodology.  Indeed, it is my opinion that appraisal systems need to be extended and made more flexible to embrace fully the impact of infrastructure investment on location decisions alongside dependent land-use changes, regeneration and place-making effects.  It should be highlighted that, for some infrastructure schemes, these ‘neglected’ benefits can be substantial in terms of:

  • adding significant value to investors in terms of secured future return. Should investors attract a premium for maximising social and economic impact in their plans and designs?
  • generating notable uplift on the social value of schemes that otherwise are not assessed. Providing political acceptance in terms of value and impact.
  • creating fertile ground for viable JVs between the public and private sectors based on the maximisation of private and public sector gain.  Blending public and private sector objectives to the overall benefit of scheme users, communities and local economies.

There are many challenges to putting in place appraisal techniques which objectively and fairly assess the relative benefits and costs of infrastructure proposals.  These include the problems of:

  • defining the benefits of a proposed infrastructure scheme – benefits are potentially extremely varied depending on local circumstances and scheme characteristics.
  • establishing a sound counterfactual – in other words, a scenario which measures what would have happened in the absence of the (infrastructure) scheme being built.
  • providing evidence that the effects of proposals are net additional to national economies.

The main challenge, however, is to overcome the existing constraint that all schemes are assessed in isolation of their local economic and political context.  

It’s universally agreed that investment in infrastructure is a primary ingredient in the facilitation of economic growth and/or diversification, irrespective of where in the world such investment takes place.  So often, no systems are put in place to estimate the future ‘value’ or ‘benefit’ for money invested or they are so rigid that local and regional socio-economic circumstances are effectively removed from the calculation.

Here is set out our approach to advising Governments, investors and scheme promoters which builds an evidence base and narrative that fully embraces local factors which sit along-side robust estimates of additional value capture.  We consider that a straight-jacket approach to value estimation will continue to simply reinforce market forces, do little to re-balance the economic geography of countries and prevent investors from making healthy returns whilst also delivering tangible social benefits.

In order to capture the benefits which appraisal systems have largely neglected to date, we consider it imperative for business case assessments to:

  • set out a clear local economic context which describes issues such as previously lost inward investment and market failure alongside critical sectoral, labour market and economic performance data and forecasts.
  • focus on additionality and displacement effects at a metropolitan or regional level for localities which are acknowledged as being priority policy areas for economic investment and growth.
  • set out a clear path for future potential land-use changes and spatial distributional impacts.
  • consider and acknowledge the complementary effects associated with other physical and social projects in the area.
  • embrace the disclosure of various economic and financial scenarios used to test and explore optimum solutions.
  • establish an economic and financial modelling framework based on user-benefit calculations which flexibly allow local and regional effects to be captured and factored into cost:benefit measurements.

With these assessments in place, a clearer picture will develop to enable infrastructure investors to make better decisions and help move projects forward.

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