ECONOMICS Johnson Hsu July 2104. Transport economics 1.Transport, transport trends and the economy 2.Market structure and competitive behavior in transport.

ECONOMICSECONOMICS

Johnson HsuJohnson HsuJuly 2104July 2104

Transport economicsTransport economics1.1. Transport, transport trends and Transport, transport trends and

the economythe economy

2.2. Market structure and competitive Market structure and competitive behavior in transport marketsbehavior in transport markets

3.3. Market failure and the role of Market failure and the role of interventionin transport marketinterventionin transport market

4.4. Transport economics and Transport economics and government policygovernment policy

Two main types of Two main types of expenditureexpenditure

Capital expenditureCapital expenditure Current expenditureCurrent expenditure

The characteristics of The characteristics of transporttransport

Institutional characteristics, typical road industries organiInstitutional characteristics, typical road industries organised in small owner-sed in small owner-

driver units in competitive, sometimes regulated, markets. driver units in competitive, sometimes regulated, markets. Railways are generally state owned or regulated and monoRailways are generally state owned or regulated and monopolistic. Airlines are often state-owned, but he noted the trpolistic. Airlines are often state-owned, but he noted the trend to private ownership. ‘Ocean transport, especially thend to private ownership. ‘Ocean transport, especially the bulk-cargo business, is mainly in the hands of competitive bulk-cargo business, is mainly in the hands of competitive private owners.’e private owners.’

The role of government. ‘By building and maintaining hiThe role of government. ‘By building and maintaining highways, by establishing air traffic control facilities, by dreghways, by establishing air traffic control facilities, by dredging and damming waterways, and by invoking their powdging and damming waterways, and by invoking their power of eminent domain, government agencies directly or inder of eminent domain, government agencies directly or indirectly provide rights-of-way for most forms of transport,’ irectly provide rights-of-way for most forms of transport,’ says Mohring (1994, p. 1). He adds,says Mohring (1994, p. 1). He adds,

‘‘Transport regulation is still a way of life for a diminishinTransport regulation is still a way of life for a diminishing band of institutionally-oriented economists.’ We discusg band of institutionally-oriented economists.’ We discuss the role of government in the following section.s the role of government in the following section.

The characteristics of The characteristics of transporttransport

Economic impacts. By influencing location decisions Economic impacts. By influencing location decisions and affecting property values, transport has an econoand affecting property values, transport has an economic impact extending outside its own market. Transmic impact extending outside its own market. Transport evaluation studies use a range of methods to meaport evaluation studies use a range of methods to measure economic impact, but there is no general agreesure economic impact, but there is no general agreement on what impact transport has on an economy.ment on what impact transport has on an economy.

Cost allocation. For Mohring (1994, p. ix), transport eCost allocation. For Mohring (1994, p. ix), transport economics comes into its own at this point. It is the woconomics comes into its own at this point. It is the work on cost allocation in the twentieth century that botrk on cost allocation in the twentieth century that both istinguishes transport economics and draws it back h istinguishes transport economics and draws it back towards conventional microeconomic analysis. For Mtowards conventional microeconomic analysis. For Mohring (1994), the key insight is this: a traveller is a coohring (1994), the key insight is this: a traveller is a consumer of transport services and a supplier of an innsumer of transport services and a supplier of an input.put.

Public private Public private partnershippartnership

A contractual arrangement A contractual arrangement between the public and private between the public and private sectors in order to fund large-sectors in order to fund large-scale projectsscale projects

Advantages for Advantages for private sectorprivate sector

An injection of additional resources into An injection of additional resources into transport projects over and above what itransport projects over and above what it would otherwise be able to providet would otherwise be able to provide

A gain in efficiency due to the private seA gain in efficiency due to the private sector’s participationctor’s participation

Access to innovative techniques and leaAccess to innovative techniques and leading-edge technologyding-edge technology

Risk transfer to an organisation with proRisk transfer to an organisation with proven project management expertiseven project management expertise

Potential benefits for Potential benefits for private partnerprivate partner

A higher rate of return than in funding A higher rate of return than in funding the whole of the projectthe whole of the project

An opportunity to apply best practicesAn opportunity to apply best practices Some control over assets and user Some control over assets and user

chargescharges Opportunity for indirect benefits from Opportunity for indirect benefits from

the management of similar projectthe management of similar project

Cost-benefit analysisCost-benefit analysis A technique for assessing the viability of a project, A technique for assessing the viability of a project,

taking into account all of the effects over timetaking into account all of the effects over time The costs and benefits of a road scheme are The costs and benefits of a road scheme are

calculated over the Design Life (usually 30 years). calculated over the Design Life (usually 30 years). The direct costs are construction and maintenance. The direct costs are construction and maintenance. If If the COBA value (see below) is positive but not the COBA value (see below) is positive but not high it is worth pointing out that Highways high it is worth pointing out that Highways Agency construction cost estimates are on Agency construction cost estimates are on average exceeded in outturn costs by about average exceeded in outturn costs by about 30%. 30%. The benefits of the scheme are computed as The benefits of the scheme are computed as the difference in costs deemed to be experienced by the difference in costs deemed to be experienced by society arising out of vehicles driving on the DN and society arising out of vehicles driving on the DN and DS networks. Only two elements of these costs are DS networks. Only two elements of these costs are computed: 1) accident costs and 2) motorist time and computed: 1) accident costs and 2) motorist time and vehicle operating costs (usually the dominant factor)vehicle operating costs (usually the dominant factor)

Fixed Trip Matrix:Fixed Trip Matrix: COBA only works on the assumption of what it callCOBA only works on the assumption of what it call

s a Fixed Trip Matrix. This is a confusing term but s a Fixed Trip Matrix. This is a confusing term but means that at any time in the design life the netwomeans that at any time in the design life the network differences between DS and DN do not change trk differences between DS and DN do not change the motorised trips that are taken, they will merely he motorised trips that are taken, they will merely alter the way those trips assign themselves to the alter the way those trips assign themselves to the network. network.

Thus COBA ignores any Thus COBA ignores any rescheduling rescheduling (the possible (the possible change of time of day when the trip is made), change of time of day when the trip is made), rediredistribution stribution (the change of origin or destination), (the change of origin or destination), mmodal shift odal shift (change to different vehicles or even to a (change to different vehicles or even to a non-road transport form) ornon-road transport form) orgeneration generation (new trips).(new trips).

Once an over all of Once an over all of expenditure for Transport expenditure for Transport

Plan agreed, what decisions Plan agreed, what decisions have to be taken?have to be taken?

How to decide on which motorways How to decide on which motorways to widento widen

Which new bypasses should be consWhich new bypasses should be constructed tructed

Which cities should be selected for Which cities should be selected for public transport improvementspublic transport improvements

Which parts of the rail network shoWhich parts of the rail network should be upgraded or modernised uld be upgraded or modernised

Four main stages in any Four main stages in any cost-benefit analysiscost-benefit analysis

Identification of the costs and Identification of the costs and benefitsbenefits

Enumeration or measurement of Enumeration or measurement of the costs and benefitsthe costs and benefits

Forecasting the costs and benefits Forecasting the costs and benefits over the length of life of the over the length of life of the projectproject

Establishing the net present valueEstablishing the net present value

Appraisal of new road Appraisal of new road schemesschemes

Roads are quasi-public good for which Roads are quasi-public good for which no direct charge is made. no direct charge is made. Consequently, the market mechanism Consequently, the market mechanism cannot be used to allocate resourcescannot be used to allocate resources

Central and local government Central and local government expenditure on roads is invariably expenditure on roads is invariably limited in relation to the many limited in relation to the many projects that are likely to be projects that are likely to be proposed. Priorities have to be proposed. Priorities have to be determineddetermined

The New Approach to The New Approach to Appraisal (NATA)Appraisal (NATA)

The New Approach to The New Approach to Appraisal (NATA)Appraisal (NATA)

The 'New Approach To Appraisal' is the mechanism by The 'New Approach To Appraisal' is the mechanism by which all new transport projects are assessed, and which all new transport projects are assessed, and embodies the issues of sustainability. A new road built embodies the issues of sustainability. A new road built today will not just have to ease congestion, but also today will not just have to ease congestion, but also have a positive effect on the environment. The have a positive effect on the environment. The government introduced NATA in 1997, in order to look government introduced NATA in 1997, in order to look at road schemes under various criteria and to develop at road schemes under various criteria and to develop suitable solutions to particular capacity problems, but suitable solutions to particular capacity problems, but also to prioritise schemes. Each scheme would be also to prioritise schemes. Each scheme would be vetted under cost-benefit analysis against the criteria. vetted under cost-benefit analysis against the criteria. It should be noted that schemes that received It should be noted that schemes that received approval generally received full funding: the approval generally received full funding: the government was not holding back funds if a scheme government was not holding back funds if a scheme had fulfilled NATA objectives. had fulfilled NATA objectives.

The NATA criteria The NATA criteria are: are:

EnvironmentEnvironment : protect and enhance : protect and enhance both built and natural both built and natural

SafetySafety : improve it! : improve it! EconomyEconomy : support sustainable : support sustainable

economic growth and increase economic growth and increase efficiency efficiency

AccessibilityAccessibility : provide access for all : provide access for all IntegrationIntegration : between all transport : between all transport

networks and land use planning networks and land use planning

Multi Modal Studies Multi Modal Studies (MMS)(MMS)

The MMS approach to The MMS approach to appraisal has the following 4 appraisal has the following 4

strands:strands:

Achieving the 5 NATA Achieving the 5 NATA objectives objectives

Achieving local and regional Achieving local and regional objectives of the study objectives of the study

Assessing how the problems Assessing how the problems identified can be ameliorated identified can be ameliorated

Supporting analyses of equity, Supporting analyses of equity, sustainability and practicality. sustainability and practicality.

This sign is indicative of the fact This sign is indicative of the fact that road building is not just what that road building is not just what

the Highways Agency are the Highways Agency are responsbile for.responsbile for.

The following table shows The following table shows the 13 NATA sub-criteria the 13 NATA sub-criteria

used for evaluation of road used for evaluation of road schemes.schemes.

CriteriaCriteria Sub-CriteriaSub-Criteria

Environmental Environmental ImpactImpact

NoiseNoiseLocal air qualityLocal air quality

LandscapeLandscapeBiodiversityBiodiversity

HeritageHeritageWaterWater

SafetySafety --

EconomyEconomy

Journey times and vehicle operating Journey times and vehicle operating costscosts

Journey time reliabilityJourney time reliabilityScheme costsScheme costsRegenerationRegeneration

AccessibilityAccessibilityAccess to public transportAccess to public transport

Community severanceCommunity severancePedestrians and othersPedestrians and others

IntegrationIntegration --

However, the number of GOMMS sub-However, the number of GOMMS sub-criteria, used in the ASTs for MMSs, criteria, used in the ASTs for MMSs,

increases to 21, as shown below. increases to 21, as shown below.

ObjectiveObjective Sub-Objective; AssessmentSub-Objective; Assessment

EnvironmentEnvironment

Noise; Net properties win/lose Noise; Net properties win/lose Local air quality; Concentrations weighted for exposure Local air quality; Concentrations weighted for exposure

Greenhouse gases; Tonnes of C02 Greenhouse gases; Tonnes of C02 Landscape; Score Landscape; Score Townscape; Score Townscape; Score

Heritage of historic resources; Score Heritage of historic resources; Score Biodiversity; Score Biodiversity; Score

Water environment; Score Water environment; Score Physical fitness; Score Physical fitness; Score

Journey ambience; ScoreJourney ambience; Score

SafetySafety Accidents; Present value of benefits σ Accidents; Present value of benefits σ Security; ScoreSecurity; Score

EconomyEconomyTransport economic efficiency; Net present value σ Transport economic efficiency; Net present value σ

Reliability; Score Reliability; Score Wider economic impacts; ScoreWider economic impacts; Score

AccessibilityAccessibilityOption values; Present value of benefits σ Option values; Present value of benefits σ

Severance; Score Severance; Score Access to transport system; ScoreAccess to transport system; Score

IntegrationIntegrationTransport interchange; Score Transport interchange; Score

Land-use policy; Score Land-use policy; Score Other Government policies; ScoreOther Government policies; Score

Three components of Three components of benefits for COBAbenefits for COBA

Value of time savingValue of time saving Accident cost savingAccident cost saving Vehicle operating cost Vehicle operating cost

savingsaving

Economic appraisal of cEconomic appraisal of crossrailrossrail

Value of time saving for current Value of time saving for current public transport users and motoristpublic transport users and motorist

A reduction in crowding and A reduction in crowding and improved journey qualityimproved journey quality

Reduced operating costs for road Reduced operating costs for road users and reduction in accidentsusers and reduction in accidents

Benefits to mobility-impaired Benefits to mobility-impaired passengerspassengers

The cost of crossrail are The cost of crossrail are consist ofconsist of

Capital costs of Capital costs of constructionconstruction

Maintenance costsMaintenance costs Operating costsOperating costs

Four relevant benefits Four relevant benefits for Cross London Rail for Cross London Rail

LinksLinks Job creationJob creation External economies of scaleExternal economies of scale Increase labour force participatiIncrease labour force participati

onon Imperfect competitionImperfect competition

Objective of transport Objective of transport policy in the UKpolicy in the UK

To achieve the best or most To achieve the best or most efficient allocation of efficient allocation of resources in the transport resources in the transport sector.sector.

Integrated transport Integrated transport policypolicy

One that encompasses all One that encompasses all modes of passenger and modes of passenger and freight transportfreight transport

In striving to achieve the ‘best’ In striving to achieve the ‘best’ allocation of resources, the operation allocation of resources, the operation of national transport policy has of national transport policy has focused on three key areasfocused on three key areas

Structure of transport operationsStructure of transport operations Regulation of transport operationsRegulation of transport operations Control of transport infrastructureControl of transport infrastructure

The challenge for transport The challenge for transport was set out in five broad was set out in five broad

goalsgoals Maximise the competitiveness and productiMaximise the competitiveness and producti

vity of the economyvity of the economy Address climate change by cutting COAddress climate change by cutting CO2 2 emissemiss

ions and other greenhouse gasesions and other greenhouse gases Protect people’s safety, security and healthProtect people’s safety, security and health Improve quality of life through reducing traImprove quality of life through reducing tra

nsport’s negative impactsnsport’s negative impacts Promote greater equality of opportunity, in Promote greater equality of opportunity, in

particular through the provision of effiective particular through the provision of effiective access.access.

liberalisationliberalisation Same as deregulation Same as deregulation

HarmonisationHarmonisation Establishing a common set Establishing a common set

of rules and regulations to of rules and regulations to be followedbe followed

CabotageCabotage To collection and delivery of To collection and delivery of

goods or the transport of goods or the transport of people by a truck, plane or people by a truck, plane or other means of transport other means of transport within a country other than within a country other than that where that means that where that means transport is registeredtransport is registered