ECONOMIC DEVELOPMENT QUARTERLY
TAKING A BIGGER PICTURE APPROACH
TO EVALUATING ROAD PROJECTS IN
REGIONAL AND REMOTE AUSTRALIA
BY ROGER GIBBINS AND SASHA LENNON
The tool most often applied to evaluate the economic
and community benefits of road infrastructure
projects is cost-benefit analysis (CBA). While this
delivers positive results for high volume roads in
urban areas, it is often the case that proposals in
Australia’s rural and remote regions tend to ‘not stack
up’. The fundamental reason for this is that the road
infrastructure benefits that are normally measured
(e.g. aggregate travel time savings, accident cost
savings, vehicle operating cost savings, etc.) rely on
high traffic volumes to justify the capital and ongoing
costs of building or upgrading a road.
In this article it is argued that traditional approaches
to project assessment tend to downplay the
importance of what have become known as wider
economic benefits or ‘WEBs’, which refer to the
economic productivity improvements to be derived
from investment in critical regional and rural
infrastructure projects.
Based on the authors’ experience assessing the
economic and community benefits of major road
infrastructure projects – most recently, the proposed
sealing of the Strzelecki Track in Outback South
Australia - it is argued that, to better inform the
‘business case’ for investing in regional and remote
Australia, these wider economic benefits should in
fact be the focus of project evaluations, and not just
a ‘second-order add-on’.
Accepting that the principal purpose of building
roads is the wider economic benefits they generate,
it follows that the emphasis of evaluations of road
projects in remote and regional areas should switch
to estimating the value of the ‘productivity dividend’
delivered to the regional economy concerned. Only
then can road funding be programmed and priorities
set on a sound basis.
COST-BENEFIT ANALYSIS (CBA)
This article focuses on the role that wider economic
benefits can play in the application of cost-benefit
analysis techniques. An understanding of CBA is
therefore a necessary precursor to the use and
application of data to estimate wider economic
benefits.
CBA is the industry standard evaluation tool for
assessing the economic benefits of road projects.
Application of this tool requires an understanding
of some micro-economic theory (e.g. ‘consumer
surplus’), the concepts of ‘opportunity cost’ and
‘shadow pricing’ as well as ‘discounted cash-flow
analysis’ (DCF).
CBA estimates the stream of societal costs and
benefits associated with a project relative to a ‘base
case’, that is, the scenario that will unfold without
the project. The costs and benefits are expressed in
‘present value’ (PV) terms (by applying the discount
rate) and the benefit-cost ratio is the PV of benefits
over the PV of costs. If the ratio is greater than one,
the project is ‘worth doing’.
It is standard practice that a CBA applied to
transport projects usually takes into account:
• Travel time costs (TTC);
• Vehicle operating costs (VOC); and
• Accident costs.
VOL.11 NO.1 2018 | 14