Appendix A Supporting discussion

A.1 How transport initiatives raise productivity

Productivity benefits directly affect Gross Domestic Product (GDP), a key indicator of economic activity in the economy. They lead to higher wages for workers, higher profits for businesses, lower prices for consumers and higher tax receipts for governments. Where they improve international competitiveness, they lead to a higher exchange rate, which improves the purchasing power of Australians to buy foreign goods and services.

In contrast, non-productivity benefits recognised in CBAs (principally savings in non-work travel time and improvements in environmental or urban amenity) accrue directly to individuals without being recorded in the national accounts (through which GDP is measured).

Productivity is the efficiency with which inputs (labour, capital, raw materials, intermediate goods and services) are transformed into outputs (goods and services) (BITRE, 2014). An increase in productivity is said to occur when the same output can be produced from less inputs or greater output can be produced from the same inputs. Productivity improvements are a source of economic growth and higher per capita income.

NCHRP (2014) lists three dominant ways in which transport improvements raise productivity.

  • Efficiency (cost reduction) effects: Shorter distances, faster speeds and reduced incident delays for travel by workers and freight transport directly lower the prices of inputs to production and costs of distributing outputs.
  • Agglomeration/access benefits: see T3 on wider economic benefits for a discussion of agglomeration benefits.
  • Technology adoption effects: Faster and more reliable trip times can enable adoption of new business operating processes and technologies (just-in-time manufacturing and lean supply chain processing) with more centralised manufacturing and distribution locations, and reduced inventory levels, safety stocks, back up delivery vehicles and loading dock workers.

All three are legitimate in-principle benefits. However:

  • Techniques to measure agglomeration benefits and the value of reliability improvements for road transport are still evolving.
  • With respect to technology adoption benefits, no accepted methods yet exist for measuring them. It is also not clear that their size is significant compared to the cost reduction effects. In addition, they may already be included in estimated benefits where the unit values for time savings and reliability improvements for freight are willingness-to-pay values. When freight consignors are surveyed to estimate their willingness to pay for shorter and more reliable trip times, they would be expected to take into account the value to them of any changes to processes and technologies they could adopt as a result of the transport service improvements.

Consumers’ surplus gains associated with induced travel should be included because they represent gains to businesses.[1]

A.2 Rationale for excluding safety, health, environmental and non-business benefits

Table 2.1 listed the benefits recommended for exclusion from productivity metrics. In each case, there are associated productivity aspects:

  • Forgone income due to injuries and deaths caused by crashes represents lost economic output. This would have to be measured using the human capital approach, not the willingness-to-pay approach. Other costs of crashes (property damage, traffic delays, emergency services, legal costs, correctional services) divert resources from alternative uses, some of which would be production rather than direct consumption.
  • NCHRP (2014, p.22) considers as productivity benefits only the components that directly affect businesses’ costs such as fleet vehicle repairs and insurance costs for personal injury. Reductions in traffic delays associated with crashes would be counted with reliability benefits. From a general equilibrium point of view, a reduction in crashes frees resources for other uses, leading to lower input costs for businesses.
  • Environmental and active travel benefits relating to human health would contribute to productivity — directly by reducing absences from work due to sickness, loss of experience from shortened working lives and improving employee morale, and indirectly by freeing up resources required for medical and hospital expenses.
  • For CBA purposes, commuting is considered to be non-work travel. NCHRP (2014, pp.22 and 45-6) suggests that some commuting costs enter into business costs where employers are paying a wage premium or direct subsidies to compensate workers for excess travel time and expenses. This applies typically for travel to and from large urban centres with congested access and high parking costs, or locations at the fringe of a labour market area.

The above points are noted; however, these benefits are excluded from the calculation of productivity metrics because of the:

  • Difficulty in separating out the productivity components, and
  • Likelihood that they will be quantitatively small compared to the other productivity benefits for most large infrastructure initiatives.

A.3 Warning: non-productivity benefits still matter

The fact that non-productivity benefits do not increase productivity does not mean they are not important. They are important, and this is reflected in their inclusion in the CBA, which remains the most comprehensive and rigorous tool for assessing initiative impacts.

If decision-makers choose to select options or prioritise initiatives on the basis of productivity metrics, rather than the ‘full BCR’, they are implicitly inferring that non-productivity benefits are less important than productivity benefits. They are essentially trading off some non-productivity benefits in order to gain greater productivity benefits, and it is important that they are aware of the trade-offs.

A.4 Productivity metric measures

A.4.1 Present value of productivity benefits ($)

The present value of productivity benefits by itself is one piece of information about productivity benefits. It is also a prerequisite for calculating the other metrics.

A.4.2 Productivity benefit intensity (%)

The productivity benefit intensity is the most informative metric for an initiative considered by itself (not compared with other initiatives) showing the proportion of total benefits that contribute to national productivity. Where improving productivity is a stated objective, the productivity intensity benefit percentage can be helpful as an indicator of the extent to which an initiative is expected to contribute to the productivity objective. This is important for strategic merit tests where alignment between objectives of an initiative and planning objectives is being assessed.

When governments want to explain the value of individual initiatives or entire programs, they could make a statement along the lines of ‘x per cent of initiative benefits will contribute directly to increasing national productivity’.

Productivity benefit intensity should not be used to rank options or initiatives or even make a pairwise comparison. The option with the higher productivity benefit intensity might have the lower absolute value of productivity benefits. The initiative with the higher productivity intensity could have lower productivity benefits per dollar of investment cost.

A.4.3 Productivity BCR

By itself, an initiative’s productivity BCR is not a very useful number. The productivity BCR will always be less than the full BCR counting WEBs, and can be less than one even when the full BCR is above one. It can be used to assess how the ranking of options might change if the decision-maker placed a greater importance on productivity benefits than non-productivity benefits.

The full BCR is used to compare options or initiatives in terms of economic merit. Prioritising initiatives solely by productivity BCR will completely ignore non-productivity benefits and can result in a very different ranking of initiatives.

[1] This is contrary to the advice in NCHRP (2014, p. 45), but NCHRP (2014) takes account of induced travel in another way.