1. Step 1: Specify the initiative and analyse options

Steps

1.1 Describe the initiative.

1.2 List the objectives the initiative will achieve.

1.3 Check whether the initiative is properly scoped.

1.4 Consider whether the initiative should be staged.

1.5 Identify constraints that could inhibit the initiative from proceeding.

1.6 Specify the Base Case.

1.7 Identify and analyse options.

1.8 Consider pricing assumptions (where applicable).

1.9 Consider private sector funding.

1.10 Is a financial analysis needed?

1.1 Describe the initiative

Describe the initiative, including its location, physical characteristics, function, estimated cost, timing and main benefits. At the detailed appraisal stage, describe the initiative in much greater detail than at the rapid appraisal stage.

1.2 List the objectives the initiative will achieve

It is important to show that the initiative will contribute to achieving government transport system objectives. As discussed in Part F3 of the Guidelines, this alignment is demonstrated through the Strategic Merit Test (SMT).

Part F1 of the Guidelines discusses transport system objectives. At the broadest level, these objectives are likely to include promoting:

  • Economic efficiency
  • Economic development and trade
  • Environmental amenity and sustainability
  • Safety
  • Security
  • Accessibility, social cohesion and equity.

If the SMT shows that an option or initiative does not align well with the transport system objectives, it should either be dismissed at that stage or re-scoped until it does achieve strategic alignment.

Practitioners may also choose (optional) to create initiative-specific objectives that are consistent with and support the transport system objectives. The CBA can assist to clarify initiative-specific objectives. After the results of the CBA become available, practitioners should look at the relative sizes of the different benefits to see if they correspond with the stated objectives. For example, it would be expected that for a initiative aimed at relieving congestion, the bulk of the benefits would be savings in travel time and vehicle operating costs.

1.3 Check whether the initiative is properly scoped

If the initiative consists of discrete or separate components, each one must be justified as if it were an independent initiative. (See Chapter 5 of Part F3 and NGTSM 2006Volume 5, Section 2.2.11 for a discussion on relationships between initiatives). Where the impacts of a series of initiatives are closely interdependent, consider grouping the initiatives together and then treating them as a single initiative.

Only combine initiatives when a single initiative, implemented by itself, produces little or no benefit until another initiative (or initiatives) is completed. In other words, there has to be significant synergies between the initiatives. To test this, there are said to be significant synergies if the NPV of the group of related initiatives, assessed together as though they were a single initiative, is significantly greater than sum of the NPVs of the initiatives assessed individually.

If there are few, or no, synergies between initiatives, they should be appraised separately.

1.4 Consider whether the initiative should be staged

Breaking an initiative into stages can make financing easier, by spreading funding needs over time, and can reduce risks by providing opportunities to delay or cancel later initiative stages.

1.5 Identify constraints that could inhibit the initiative from proceeding

The next step is to identify any major constraints and show that the initiative is feasible given these constraints. The Strategic Merit Test template in Part F3 of the ATAP Guidelines asks for this information.

Many options can be ruled out quickly because they fail to satisfy constraints. Constraints may involve technical, environmental or public acceptability considerations.

1.6 Specify the Base Case

The proposal should specify the Base Case, including any significant assumptions about actions that need to be undertaken in the Base Case, and other future events that affect benefits or costs. A CBA is always a comparison between a Base Case (without the initiative) and a Project Case (with the initiative). Text Box 1 provides supporting background discussion on the Base Case.

The Base Case consists of a ‘real world assessment’ (IA 2017) of what would be done in the absence of the Project Case being implemented. A do-minimum Base Case is preferred, and should:

  • Include ongoing maintenance of associated assets for structural integrity and public safety (this also applies to a do-nothing base case)
  • Include a ‘minimum’ level of intervention (based on existing capacity) to manage the problem. It could maintain the existing level of service over the appraisal period if possible (i.e. prevent the problem from getting worse), or at least minimise the rate of degradation in service level (i.e. minimise the rate at which the problem gets worse)
  • Be of modest cost (If the cost is too high, the option should be treated as a project case option)
  • Not include significant asset augmentation or enhancement to meet incremental demand beyond the capacity of the existing infrastructure. However, include modest spending to improve the effectiveness of existing assets, such as minor road intersection improvements or minor improvements on a rail corridor such as fixing a signalling system.
  • Adopt the option that is most effective at maintaining level of service at least cost (if several options fit the do-minimum definition).
  • Include relevant initiatives elsewhere in the network (see below for more detail) where funding for those initiatives is approved, committed or expected in the absence of the proposed initiative being appraised.

Relevant initiative`s elsewhere in the network

Clearly specify what assumptions are being made about relevant future initiatives elsewhere in the network to address other problems (i.e. initiatives that will affect costs and benefits of the initiative being appraised). Such initiatives are not part of the proposed initiative being appraised but can affect (via network effects) benefits and costs of the latter and CBA results. The benefits of the initiative being assessed can be increased as well as decreased, by the implementation of other initiatives elsewhere in the network (increased where the other initiatives are of a complementary nature and decreased where they are of substitutable nature—see discussion in APAP Part F3 Appendix A).

These assumptions must be identical in both the Base Case and the Project Case, and be reflected as such in the demand modelling. The only difference between the Base Case and Project Case is therefore the initiative being appraised (and its do-minimum alternative in the Base Case).

ATAP acknowledges that two approaches are used around Australia for recognising initiatives elsewhere in the network:

  • The committed expenditure approach: Include in the Base Case and Project Case only future initiatives that are committed and funded. IA (2017) requires this in submissions to it.
  • The planning reference case approach: Specify a ‘planning reference case’ of initiatives across the transport network for the entire appraisal period—reflecting strategic planning. Reflect realistic future funding in the reference case—requiring liaison with Treasury Departments on future funding envelopes.

If there is uncertainty about initiatives elsewhere in the network proceeding, or their timing:

  • Undertake the main CBA assessment assuming the most likely scenario, which includes committed and funded projects; and then
  • Undertake sensitivity tests with alternative assumptions, including potentially different funding envelopes.

One-off events

One-off events such as Olympic or Commonwealth Games could also affect benefits and costs of initiatives. These developments are equally relevant to, and should feature in, both the Base Case and Project Case. Where there is some uncertainty about a one-off event, make the CBA calculations with and without the assumption, as a sensitivity test or as part of the risk assessment (see Chapter 11).

Box 1: The Base Case

A CBA is a comparison with and without the initiative—not before and after. Specifically, a CBA compares two situations over the appraisal period:

  • Base Case—without the proposed initiative, and
  • Project Case—with the initiative (doing something to reduce the observed problem).

The Base Case has also been described as:

  • The scenario in which current arrangements are maintained (Productivity Commission 2014)
  • The ‘business-as-usual’ or ‘keep safe and operational’ situation (IA 2017)
  • What would happen if the current arrangements were to continue (DFA 2006).

Benefits of a well-specified Base Case

A well-established Base Case provides an unbiased fundamental foundation for problem definition and CBA of prospective initiatives and options. An incorrectly specified base case can lead to poor estimates of both benefits and costs, which potentially renders the analysis speculative at best and redundant at worst (IA 2017).

Choice of Base Case

The choice of Base Case can significantly influence the outcome of the CBA. The two most commonly discussed options for the Base Case are the ‘do-nothing’ and ‘do-minimum’ options (DFA 2006, Productivity Commission 2014, IA 2017). These are not the same thing—the former does nothing to address the problem, while the latter does a minimum to manage the problem. The do-minimum option is the preferred approach because:

  • There is usually a do-minimum option that could be used to manage the problem in the absence of the initiative
  • If solving the problem is a priority, doing even a minimum will usually be expected
  • Where a reasonable do-minimum exists, a do-nothing can artificially inflate the CBA results.

If a thorough investigation of do-minimum options shows there are no do-minimum interventions available because they have all been implemented, then the do-nothing option must be accepted as the only possible Base Case.

1.7 Identify and analyse options

See Part F3 of the ATAP Guidelines for guidance on the generation and assessment of options.

Always use the NPV, or incremental BCR, to choose between options on economic grounds - never the BCR or internal rate of return (see Sections 11.3 and 11.6).

1.8 Consider pricing assumptions (where applicable)

Specify any assumptions about charging for infrastructure usage. See Section 5.7 on developing pricing assumptions.

1.9 Consider private sector funding

Show that consideration was given to private sector funding for part, or all, of the initiative.

1.10 Is a financial analysis needed?

State whether a financial analysis is required. Financial analysis is required when the initiative generates revenues and/or involves a public private partnership (PPP). It demonstrates the impact of the initiative on the financial performance of the entity that will own the initiative.