1.3 Transport and the economy:
Quantifying the economic impact of transport investment

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Transport planners and economists in the UK and elsewhere have a long history of quantifying and valuing the impact of transport investment on economic, social and environmental outcomes. The work largely follows two distinct but inter-related approaches:

(a) Cost-benefit analysis quantifying the direct impacts of transport investment on transport-users and non-users, largely by considering changes in journey times and costs.

(b) Gross Value Added and productivity-based methods that seek to directly measure the impact of better transport connectivity on economic output and wages.

Appraising the potential economic impacts of transport investments requires consideration of what impacts are ‘net additional’ at a national level and what impacts are simply the result of displacement of economic activity.

The Department for Transport’s (DfT’s) approach to programme and project appraisal is firmly based on cost-benefit analysis with the option to incorporate aspects of productivity-based methods when investments are likely to lead to a possible reduction in ‘market failures’ and/ or involve the relocation of economic activity and changes in land-use.

The scale and scope of the economic, social and environmental impacts of transport investment are clearly context specific, varying by the type, scale and location of the intervention.  It is therefore important to develop an ‘economic narrative’ that provides context-specific evidence about the local economy and a summary of how potential transport interventions might enable economic growth. This narrative needs to:

  • Identify the expected economic impacts and describe of how these achieve the economic objectives.
  • Justify why these impacts are expected to occur on the basis of economic theory and context specific evidence.
  • Identify the welfare change associated with these impacts arising, for example, from market failures.
  • Justify the methods to quantify and value the impacts.

The starting assumption is that the potential economic impacts of an intervention are captured by user and non-user benefits, with wider economic productivity impacts justified on a case-by-case basis.

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Key takeaways

Investing in new transport connectivity across modes can generate a wide range of economic benefits, as well as environmental and social benefits.

Before making investment decisions, local decision-makers need to understand the nexus between transport and the economy so that they can make the right choices. For example:

  • How important to local economic growth is investing in better transport links relative to investing in ICT, housing or skills?
  • Is it better to improve transport links within urban areas or between urban areas and with international gateways?

The relationship between transport and the economy is complex and context specific, with some industry sectors relying more than others on good transport links.

A recent review commissioned by the Department for Transport provides an important discussion of the issues and evidence on the relationship between transport investment and economic performance.

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2.1 Introduction