NZTA's over reliance on Benefit Cost Ratio
Benefit Cost Ratio (BCR) - also referred to as Cost Benefit Analysis (CBA)
NZTA relies on BCR as its measure of value for money efficiency. This is an economic assessment where all impacts are monetised (including environmental, social, health, etc.) in order to come up with a single number answer. A BCR greater than 1 is regarded as providing a positive return on investment.
However there is much criticism of BCR, as an overly simplistic approach of making trades-offs based on subjective valuations (eg: travel time saving for motorists Vs climate change).
This UK Transport Planning Society report "Transport Planning for a sustainable future" advises at page 43:
This approach has been subject to significant criticism by the transport planning profession for a number of years. The key issues are:
• Use of social cost benefit analysis (CBA) rather than cost effectiveness against objectives: this long running challenge to CBA points to the weaknesses of basing Government decisions on people’s willingness to pay and the willingness of others to be compensated173. There are also three practical criticisms: first that not all relevant impacts can be measured precisely; second that of those that are measured not all can be given a price; and third that even the existing impacts which are monetised use inconsistent methods of valuation. The result has been undervaluing of key impacts, in particular health, climate change, social balance and local environments.
This DTU paper "Multi-criteria decision analysis for use in transport decision making" states on page 22:
"There are of course also problems associated with the CBA method.
Firstly, it is difficult to maintain consistency between the theoretical assumptions of the method and the practical application of it, due to the fact that there may be problems involved when estimating unit prices for non-marketed impacts such as travel time savings, emissions, safety, etc. In practice, therefore, compromises are often made on the valuation of such non-marketed impacts, implying that the resulting unit prices are inherently of a subjective nature – without such subjectivities being visible in the evaluation. This is a problem with the CBA method since the presentation of a single evaluation measure thus implies a “false air of objectivity”.
Secondly, there are impacts for which it is difficult or even impossible to estimate unit prices. These are especially impacts of a more long-term and/or strategic nature.
Thirdly, an important philosophical and moral problem in the evaluation of long term impacts is that of the present generation valuing an impact which they may not live to experience. This means that they are valuing such impacts on behalf of the future generation(s).
The final problem with CBA to be mentioned here is that although the method rests on the aggregation of individuals’ willingness to pay, no actual payment takes place and no actual redistribution of money results. Hence, the socio-economic optimum resulting from the CBA could be argued on equity grounds as being somewhat hypothetical.
BCR is used by profit-seeking businesses who have the overriding focus of maximising shareholder wealth. BCR inappropriate for use by Government agencies required to provide services for the public good with multiple priorities.
NZTA failed to recognise there could be any problems with using the BCR calculation: "There is nothing in the “efficiency” principle to suggest the relevant BCR calculation should be anything other than a standard BCR calculation." (Legal submissions, para 262)
We recommend that BCR as currently applied usiing NZTA's Monetised Benefits and Cost Manuel is replaced by MCA (also referred to as MCDA) as this much better suited to identifying the win-win solutions required for solving NZ's transport issues. Per the two reports referred to above, BCR should be used to as a measure of cost effectiveness against objectives within the MCA.