The Transport Economic Efficiency Sub-Objectives
TAG Unit 3.5.2

April 2004

The two transport economic efficiency sub-objectives are identical in concept and method of calculation and are therefore covered together in this TAG Unit.

The purpose of the Transport Economic Efficiency (TEE) table (provided as Table 1) is to summarise and present transport user benefits⁽¹⁾ . Transport User Benefit Calculation (TAG Unit 3.5.3) provides further information about the nature of the user benefit calculations.

The TEE table presents the net user benefits disaggregated by group (i.e. consumers on the one hand and business, including transport operators, on the other), by mode of transport and by impact (time, vehicle operating costs, etc). All the impacts in the TEE table are usually expressed in money terms. (Note, however, that impacts on pedestrians, cyclists, equestrians and others may be presented as qualitative scores based on an analysis of quantitative factors - see Impacts on Pedestrians, Cyclists and Others (TAG Unit 3.5.5).) The table aggregates the results for each group to provide the information needed for the Appraisal Summary Table (AST) - see Transport Appraisal and the New Green Book (TAG Unit 2.7). A TEE table should be completed for each option and, in common with the AST, the TEE table should show the change brought about by the option relative to the do-minimum case.

All entries in the TEE table should be Present Values - that is, streams of costs and benefits occurring over the appraisal period should be discounted to the Department's standard base year using the Department's standard discount rate. This implies that benefits received far in the future are given less weight than benefits received today, in line with social preferences. Further discussion of the process of establishing Present Values of Benefits is provided in Cost Benefit Analysis (TAG Unit 3.5.4).

In the TEE table, costs should appear as negative numbers while revenues, grants and subsidies should appear as positive numbers.

The following text discusses the calculations required for the main groups of user represented in the TEE Table (and in the TEE row in the AST).

The calculation of transport user benefits is based on the conventional consumer surplus theory. Consumer surplus theory is discussed in Transport User Benefit Calculation (TAG Unit 3.5.3), where the following topics are covered: the use of consumer surplus theory for the assessment of user benefits; and the disaggregation of user benefits by mode and by the components of perceived cost. It is important to note that the phrase 'user benefits' is used here and in the TEE table to denote user benefits net of the costs incurred by users. The following paragraphs outline what is required for the TEE table and discuss key parameters to be used in the assessment.

For the main groups of user, both personal travel and freight movement are accommodated within the TEE table (impacts on non-motorised travel should be included under 'other'). If the option is predicted to affect both these parts of the transport sector then all the relevant boxes of the table will need to be completed. This will usually be the case and if options are developed which are reported as having no impact on goods vehicles or freight within the TEE table, this should prompt a reassessment of whether the full implications of the option have been identified. For example, public transport priority measures in urban areas may have knock-on impacts on freight if the peak-hour car and freight traffic congestion on the network is either significantly reduced or significantly increased as a result. These effects should be open to analysis through the transport model, whose outputs for goods vehicles as well as passengers and private vehicles should be taken forward into the user benefit calculations.

The benefits estimated for both personal travel and freight are attributed to changes in travel time, vehicle operating costs and user charges (including fares, tolls and tariffs). In all of these cases, if an option leads to a benefit to users of the transport system, then the impact should be recorded as a positive amount. For example, if benefits attributed to consumers' travel time savings are valued (after discounting) at £35 million, then the figure of £35 million would be entered into the TEE table in the cell for 'Consumers: User benefits: ALL MODES TOTAL'. Conversely, disbenefits to transport users should be recorded as a negative amount. So, for example, if the strategy is also attributed a small overall disbenefit of £3 million to consumers' vehicle operating cost changes, the entry in the 'Consumers: User Benefits: ALL MODES TOTAL' cell would be -£3 million. Where impacts on non-motorised travel have been assessed using qualitative methods, they should not be disaggregated - the overall qualitative score should be entered in the rows headed 'NET CONSUMER BENEFITS' and 'NET BUSINESS IMPACT' under the 'OTHER' column.

The sub-totals for Consumers and Business give an indication of the distribution of gains (and, potentially, losses) from the option. Efficiency gains in the freight sector will be of particular interest to manufacturing industries and to all forms of business for whom the efficient shipment of inputs or outputs has an impact on costs or performance. More efficient travel will benefit consumers travelling for a whole gamut of reasons - such as education, shopping, leisure or on personal business - and will contribute to reducing the travel component of business costs and to opening new market opportunities.

• changes in travel time;
• changes in user charges, including fares, tariffs and tolls; and
• changes in vehicle operating costs met by the user (that is, for private car and goods vehicle transport).

It should be noted that the travel time to be included here is the expected travel time (that is, the statistical mean taken from the range of actual or predicted travel times). Changes in the variability of travel time (which have been shown to be extremely important for freight users in particular) are dealt with separately under the reliability sub-objective - see The Reliability Sub-Objective (TAG Unit 3.5.7) and should not be reported in the TEE table nor included in the Consumers or Business rows in the AST.

Values of time. An important factor in the assessment of the transport options is the impact on the time spent travelling, for both personal travel and freight. In order to include these impacts in the estimation of user benefits, it is necessary to put a money value on time savings. In the appraisal process, the general premise is that the value of resources used or saved is reflected in their market prices. This is the principle underlying the valuation of working time savings. However, in the case of non-working time savings, in general there is no market in which time can be traded for money, and therefore no directly-observable market price exists. Instead, values are derived from users' willingness to trade money for time, obtained from either revealed preference (RP) or stated preference (SP) surveys.

The values of time and the factors for uprating them which are given in Values of Time and Operating Costs (TAG Unit 3.5.6) should normally be adopted.

Transport Supply Costs. Those costs which are incurred by the individual traveller and are therefore included in the perceived generalised costs of travel feature in the traveller benefits/disbenefits derived from the change in consumer surplus. More specific guidance on the costs which should be included in the TEE table can be found in The Treatment of Costs (TAG Unit 3.5.9).

For the calculation of user benefits, the private vehicle fuel and non-fuel operating cost models specified in Values of Time and Operating Costs (TAG Unit 3.5.6) should be used. Separate parameters are specified for cars, light goods vehicles, and two classes of other goods vehicles. All of these include allowances for car and goods vehicle purchase.

As for values of time, the parameters for perceived costs should be used, for both fuel and non-fuel related costs.

In working time, the perceived cost of fuel is the cost perceived by businesses. Businesses are generally viewed as perceiving costs in the factor unit of account as most business costs are free of indirect taxation because they can claim the tax back. However, businesses cannot reclaim fuel duty and therefore the perceived value of fuel in working time is equal to the resource cost plus fuel duty. In non-working time, the perceived cost of fuel is the cost perceived by the individual consumer. Consumers perceive costs in market prices and therefore the perceived value of fuel in non-working time is equal to the market price.

The perceived cost of the non-fuel related costs differs for work and non-work time. In the case of time during work, the perceived cost is the cost perceived by businesses and is therefore equal to the resource cost. In the case of non-working time, the perceived cost is the cost perceived by the consumer and is therefore equal to the market price.

In addition to the costs of owning and operating private vehicles, road users may also incur charges for the use of infrastructure. Where tolls or congestion charges are considered, they should be treated as perceived costs incurred by road users. Where significant changes in parking charges are envisaged as part of an option, they should be treated in the same way.

For public transport users, the transport supply costs to be used in the calculation of user benefits are those actually incurred by users. These are the fares and other charges paid by users of public transport. All other costs of public transport supply are incurred by operators or providers and are taken into account in the calculation of impacts on private sector provider impacts in the TEE table (or in the calculation of the Public Accounts PVC - see The Public Accounts Sub-Objective (TAG Unit 3.5.1)).

Costs to existing transport users due to the construction of a project and costs (or benefits) to users arising during future maintenance should be recorded in the TEE tables where they are likely to be significant.

For options affecting inter urban road users, the Department's QUADRO program should be used. For options affecting urban road users, delays to traffic resulting from construction and/or future maintenance may be estimated by using the same congested assignment package as used to predict the overall traffic effects of the scheme. Models may also be useful for options affecting public transport users if significant diversion is expected during construction and/or future maintenance. In other cases, simplified approaches to the estimation of delays to public transport users may be sufficient. The TUBA program may be used to value delays to road and/or public transport users, using standard economic parameters.

In some circumstances, it may be sufficient to use a simplified approach, based on evidence of unit costs per kilometre from other schemes. For road user delays, unit costs will vary with traffic levels, and thus it will be important to demonstrate that they are appropriate for the option being considered.

For options affecting public transport, the impact on operators' revenues should also be considered. For heavy rail, estimates should be based on the compensation regime between the train operators and infrastructure authority, typically Network Rail.

Where not explicitly quantified in the modelling approach, the costs or benefits to pedestrians, cyclists and others should be assessed using the method set out in Impacts on Pedestrians, Cyclists and Others (TAG Unit 3.5.5). This method is broadly similar to the more formal consumer surplus approach in that it is based on an assessment of the total change in 'person-minutes' of the journey times of pedestrians and other non-motorised travellers. The method is designed to produce a qualitative score on a seven point scale. This should be entered in the 'NET CONSUMER BENEFITS' and 'NET BUSINESS IMPACT' boxes under the 'OTHER' heading on the TEE worksheet, but no adjustment should be made to the overall estimate of user benefit or disbenefit transferred to the AST. However, where these benefits are significant, a comment should be included in the Qualitative column of the AST.

Impacts on private sector transport providers are recorded in the TEE table, where rows are provided to record changes in: operating costs; operator revenues; investment costs; and public sector grant and subsidy. A comparable set of rows is provided in the Public Accounts table for public sector providers (local highway authorities or the Highways Agency, for example) - see The Public Accounts Sub-Objective (TAG Unit 3.5.1).

The question of whether a provider of transport should be regarded as private sector or public sector is a matter for consideration. Advice on default assumptions is given in Supporting Analysis (TAG Unit 3.8). These assumptions may be changed where appropriate.

Transport providers are broadly defined to include operators of services and providers of infrastructure. Furthermore, the example disaggregations by mode are fairly broad: 'Road infrastructure', 'Bus and coach', 'Rail' and 'Other'. For the rail mode, the column heading is simply 'Rail', so that any additional operator costs due to the option can be reported in this table without the need to allocate shares of those costs between the track authorities and service providers (through Network Rail Track Access Charges, for example).

Revenues are related to the user charges used in the first section of the table, since user charges (fares, tolls and so on) represent money transfers from users to operators which become revenues from the operator's point of view. However, this does not mean that the economic benefit of changes in user charges is the same to the traveller and the operator. In fact, for travellers, the economic benefit of a change in charges is the resultant change in their consumer surplus. For those who do not change their behaviour, the change in consumer surplus is the same as the change in money paid, but for those who do change their behaviour, this is not the case. For operators, however, the economic benefit of a change in charges is simply the change in net revenue received. Therefore, the values for User Charges under User Benefits and the values for Revenues under Private and Public Sector Providers will usually not be equal in size.

Changes in operator revenues should be calculated by subtracting total operator revenues in the do-minimum from the corresponding do-something value, taking account of any changes in the numbers of journeys: (T¹M¹1 - T⁰M⁰). Where there are significant public sector revenues (from tolling, for example), a comment should be included in the Qualitative column of the AST. Note that, if the option leads to an increase in revenue, then that should be recorded as a positive amount in the TEE table.

Investment and operating costs. Advice on the treatment of investment and operating costs in the Public Accounts table can be found in The Treatment of Costs (TAG Unit 3.5.9). Investment and operating costs should always be recorded in the TEE table as negative amounts.

Grant/subsidy. Advice on the treatment of grants and subsidies in the TEE table can be found in The Treatment of Costs (TAG Unit 3.5.9). Grants and subsidies should always be recorded as positive amounts in the TEE table.

The results of the TEE appraisals should be presented in the Business Users and Providers and Consumer Users rows of the AST as follows.

• The Qualitative column should record any special considerations and any simplifications adopted in the analysis.
• The Quantitative column should identify the expected source(s) of the benefits of the proposal and provide appropriate quantitative indicators. Indicators should be chosen to reflect the magnitude of the effect and the numbers of users. For a highway scheme which only benefits road users, this could be the total vehicle hours saved, and the opening year peak and inter-peak journey time changes in minutes. For proposals where some of the beneficiaries would be (or become) rail users (rail service frequency enhancement, for example), the indicator could be opening year change in numbers of travellers per day. Care should be taken to ensure that indicators are broadly comparable between modes. In general, the mode(s) most affected by the proposal should receive the most attention. All options that have an impact on road congestion must include an estimate of the total vehicle hours saved (or added) by the option in the opening year. This indicator provides a measure of the extent to which the option contributes to the Department's congestion target. The Treatment of 10 Year Plan Targets in Multi-Modal Study Recommendations is covered in Supporting Analysis (TAG Unit 3.8).
• The Assessment column should show the Present Values of Benefits for Business Users and Providers and Consumer Users as calculated in the TEE table. These will be in £m in prices in the Department's standard base year using the Department's standard discount rates.

Analysis during the early stages of option development. Carrying out a full TEE appraisal to provide the results outlined above will require significant effort. In particular, the estimation of present values for the Assessment column of the AST will usually require repeated runs of the transport model to enable the estimation of a stream of benefits. During the early stages of option development, this level of detail may not always be necessary. Satisfactory conclusions may be drawn on the basis of forecast year benefits instead of present values of benefits. However, final decisions should always be based on full analyses leading to Present Values of Benefits if the results are to provide sufficient information to enable robust decisions to be made.

So that the TEE appraisals may be conducted on a comparable basis across all studies, the Department has prepared prepare standard software to estimate User benefits for all modes, called TUBA. This software also estimates Public and Private sector provider revenues and Government indirect tax revenues, as discussed above, for input to both the TEE and Public Accounts tables. This software is to be used for all Multi-Modal Studies. Additional software, suitable for the appraisal of some highway schemes is also available - see below.

For highway schemes, the quantitative entries noted in paragraph 1.6.1 may be taken direct from the traffic model. Two kinds of information are required: total vehicle-hours saved; and peak and inter-peak journey time savings. Both should be estimated for the project opening year.

The estimate of total vehicle hours is intended to provide an indicator of the extent to which the project will contribute to the Government's target to reduce road congestion. This target is focussed on the inter-urban trunk road network and on large urban areas. Thus, for trunk road projects, the calculation should be restricted to the hours saved on the trunk road network. Projects in large urban areas may take account of the hours saved throughout the modelled network. Where projects do not fit into either of these groups, a note should be made in the AST's Qualitative column. Where possible, estimates should include hours saved in all 8760 hours of the year.

The estimates of peak and inter-peak journey time changes provide an indicator of the extent to which congestion will be relieved for those using the scheme itself. For trunk road schemes, values should be calculated for trunk road users only.

As is now standard, the TEE appraisal should be undertaken using the method of willingness to pay and should be presented in the market prices unit of account. They may be calculated using either TUBA (for fixed or variable matrix cases, including cases where URECA would have been used in the past) or COBA11 (for fixed matrix cases).

The outputs produced by COBA11 are consistent with the method of willingness to pay and are presented in the market price unit of account. Note that COBA also produces results in the factor cost unit of account - these should not be used in either the TEE table or the AST.

Table 2 in this TAG Unit is a modified version of the standard TEE table that will be suitable for many highway projects. Note that money values associated with accidents should not be included anywhere in the TEE table, or in the TEE calculations. Furthermore, if QUADRO outputs are used for the estimation of user benefits during construction or maintenance, accident costs should be removed from these QUADRO outputs. The costs and number of additional/reduced accidents caused by road works should be added to the AST under the Safety objective.

The QUADRO4 computer program may be used to produce values for delay during construction or during future maintenance. The QUADRO4 program will provide results that are fully consistent with those produced by COBA11.

The assessment programs TUBA and COBA11 allow the user to input estimates of 'delays during maintenance' and 'delays during construction'. Both programs assume these are all time benefits/disbenefits and do not attempt to allocate these to vehicles types. This is an approximation, but it may be considered adequate in some instances.

Further advice on the TEE appraisal of major highway schemes can be found in Detailed Guidance on Major Scheme Appraisal in Local Transport Plans (TAG Unit 3.9).

1.9 Transport Economic Efficiency Appraisal of Major Public Transport Schemes

Advice on the TEE appraisal of major public transport schemes can be found in Detailed Guidance on Major Scheme Appraisal in Local Transport Plans (TAG Unit 3.9).

Table 1: Economic Efficiency of the Transport System (TEE)

Notes: Benefits appear as positive numbers, while costs appear as negative numbers.
All entries are discounted present values, in 2002 prices and values.

Table 2: Economic Efficiency of the Transport System (TEE) for the Appraisal of Major Highway Schemes

The following documents provide information that follows on directly from the key topics covered in this TAG Unit.

3 References