A Scottish Transport Appraisal Guidance (STAG) Appraisal consists of 5 components - Economy, Environment, Safety, Integration and Accessibility and Social Inclusion. The reporting of these criteria is a mix of quantitative and qualitative information.
The Economy component comprises a Transport Economic Efficiency analysis (TEE) , which captures the benefit, measured in terms of Economic Welfare, to the economy as a whole, of a project and an Economic Activity and Location Impact study (EALI) which, broadly speaking, measures the distributional effect of the project, in terms of employment and income.
The TEE results are reported in terms of a Net Private Benefit (NPB) figure, which is the discounted sum of the benefits and costs to the private sector, which is used in conjunction with the net cost of the project to the public sector (PSC) and monetised safety and environmental benefits, to calculate a Net Present Value. On the other hand the EALI results, whilst containing quantitative aspects, are not generally summarised in terms of a single number.
To clarify, the Net Present Value of a project (NPV) is the discounted sum of all future benefits less the discounted sum of all future costs over the appraisal period. In a world with no constraint on investment funds, there would be a strong case for taking forward all projects with a positive NPV.
Suppose that a policy maker is faced with two projects both of which have a NPV of £50m. The difference is that one project (Project A) costs £10m and the other (Project B) costs £100m. It is fairly obvious that, all other things being equal, Project A is a "better" project. The BCR is a way of presenting this intuitive concept in a formal manner.
The Benefit/Cost Ratio (BCR), as arising from the Transport Economic Efficiency (TEE), monetised safety and environmental benefits, and Public Sector Cost (PSC) components of a STAG Appraisal, is currently defined as:
where the Present Value of Costs (PVC) is the Public Sector Costs measured 60 years and then discounted. The BCR, as defined here, is an estimate of the value of the benefit for every £1 of public expenditure on a project/scheme and is therefore a strong indication of the value for money of different options within a scheme. Thus, a BCR greater than 1 represents "value for money" to the public sector. In terms of the example above, project A has a BCR of (50+10)/10 = 6 and project B has a BCR of (50+100)/100 = 1.5. Project A is "better" value for money, in pure economic terms.
It is important to reiterate that as currently calculated and as presented above, the BCR represents the benefit of every £1 of net public expenditure on a project. The BCR as calculated in this manner could be termed the BCRG. This is in contrast to the BCR figure calculated under previous (pre-2003) guidance that was given by the ratio of the future sum of all the future costs and benefits except investment costs to the discounted sum of investment costs and represented the benefit to society of (society as a whole) spending £1 on a project.
The cause of this change is, primarily, the shift to Willingness To Pay calculus introduced in NATA and the resultant distinction of net costs to government. The basic principle of the willingness to pay (WTP) approach, introduced following the Sugden report of 1999, is to arrive at a money measure of the net welfare change for each individual that is affected by the project under consideration and to add these changes up.
As an example, suppose the government pays a subsidy to a rail operator and this subsidy increases under an option being appraised. This increased subsidy is a benefit to the operator within this option but an increased cost to the Government. By counting the subsidy as both a benefit and a cost, the impact, in the CBA, of the change in the level of the subsidy is neutral overall. Quite correctly, it does not alter the NPV of the project as it is simply a transfer of money from one part of the economy to another.
The former system used a calculus of social costs and benefits. The principle of this system is to seek to measure the value of the resources used by and benefits created from a project. Transfer payments, such as the subsidy above, are excluded at the outset.
The two approaches, in theory, give exactly the same result in terms of NPV but the WTP approach has the advantage that it provides more information, as the outcomes of a project are disaggregated into impacts on different economic groups. The difference between the two methods, per se, is simply a matter of presentation.
However, this change in presentation has had an impact in that it was the main force behind the switch to using the BCR to government measure rather than BCR to society that was used previously. It is worth noting that these two measures are distinct from each other and that there is no clear relationship between the two.
The BCR should also take account, in principle, of the distortionary impacts of general taxation on the economy. This principle, known as the Social Opportunity Cost of Exchequer Funds or SOCEF, or more generally as the Marginal Social Cost of Public Funds (MSCPF), might imply a 30% uplift to expenditure costs. Applying the SOCEF criteria would mean that any projects or expenditure with a BCR of less than 1.3 would not be value for money. The current Green Book does not however require the SOCEF to be applied, so any expenditure with a BCR over 1 might be considered as worthwhile pursuing.
Additionally, the calculation of Wider Economic Benefits (WEBs) may be included as a sensitivity. An additional NPV and BCR figure (NPV web and BCR web) may be reported.
The BCR is however, only an indication. In the context of the STAG Appraisal, the Economic Activity and Local Impacts (EALI) measures and Wider Economic Benefit (WEB) measures, where appropriate, need to be considered within the Economy criteria, as well as the impacts of the project in terms of Safety, Integration, Accessibility and Social Inclusion and the Environment. At present these impacts are not monetised and must be considered separately. It should be noted that previously the Accidents sub-criterion was monetised and included in the TEE analysis in terms of reductions (or increases) in accidents; this is no longer the case.
Following the move towards monetisation of other impacts, the decision has been made to collate monetised impacts across criteria into a single figure, which will be the BCR. This represents a continuation of previous guidance which included monetised values for Safety as part of the BCR.
The BCR of an option summarises the overall impact of its monetised elements and compares them to the option costs. Individual Monetary Impact Ratios (MIRs) should be calculated for Economy, Safety and the Environment, and used to inform the BCR.
As well as being presented under the relevant criterion in the Part 2 ASTs, the monetary value of safety, environmental, and economic benefits should be used to calculate Monetary Impact Ratios, and included in the Cost to Government AST, using the following formulae:
Where PV stands for present value and indicates that values have been discounted over a 60 year period, and PV Costs is the present value of the cost of the option overall, not just those costs associated with safety or environmental, or economic improvements. Further guidance on how to calculate present values is given in Section 9.5 - Appraisal Parameters.
Note that the environmental benefits should include all monetised benefits reported against the Environment Criterion, that is, benefits associated with Physical Fitness as well as monetised carbon benefits.From the definition of the MIRs, it follows that the BCR can also be calculated as:
Practitioners may use either method to calculate the BCR in the AST. However, as described below, the BCR and the individual MIRs should be presented together in the Option Summary Tables.
Following the inclusion of WEBs (See Section 9.3), a secondary MIR, MIRWEB, may be calculated that incorporates these impacts.
Where a MIRWEB is reported, it is sensible to report the option's new BCR:
or
A direct comparison of only the BCR of different projects is not a particularly useful exercise. A higher BCR, for example 5.75 as opposed to 4.59, does indicate that the 5.75 project is higher value for money to government in pure economic terms but does not take into account the other, non-economic objectives which may vary significantly between projects.
Additionally, WebTAG guidance explicitly states that the BCR to government is "of limited value when projects (road user charging for example), result in significant revenues accruing to public accounts".
The Department for Transport (DfT) categorise a calculated BCR into one of four value for money (VfM) categories and allow non-monetised factors to shift an option between categories. This is primarily done for the purpose of reporting results to Ministers. It should be noted that this way of presenting information has been discussed in Scotland and the approach rejected.
The issue raised in Section 12.6 over the impact of indirect taxation may be mitigated by the definition of an additional measure - the Benefit Cost-Ratio to funding agency, BCRFA. This measure is defined as:
where the cost to funding agency is relatively self explanatory but in this particular case would be calculated as the cost to government excluding any indirect taxation raised It should be noted that the use of this measure is still consistent with the Green Book.
Table 12.3: Calculation of Headline Indicators
| Calculation within table | Explanation | |
| User benefits (TOTAL) | A | Comprises time savings, vehicle operating costs etc. |
| Capital costs Raw | B | |
| Optimism Bias | C | Level of applied optimism bias uplift |
| Capital costs (+OB/Con) | D=B(1+C) | |
| Operating costs | Private sector operating costs | |
| New project | E | |
| Bus | F | |
| Revenues | Private sector revenues | |
| Bus | G | |
| Rail | H | |
| OSP | I | |
| Grant/Subsidy | J (=P+R) | Any subsidy from local and/or central government |
| NET | K=D+E+F+G+H+I+J | Net private sector (non-user) impacts |
| Net Private Benefits (TEE) | L=A+K | |
| Monetised value of safety benefits | M | |
| Monetised value of environmental benefits | N | |
| Present Value of Benefits | O=L+M+N | |
| Costs to government | ||
| Local Government | ||
| Grant/Subsidy payments | P | |
| Revenues | Q | |
| Central Government | ||
| Grant/Subsidy payments | R | |
| Indirect Tax | S | |
| Revenues | T | |
| PVC | U=P+Q+R+S+T | Total cost to government |
| NPV | V=O+U | Net present value |
| MIR (Economy) | L/U | Economic benefit to cost ratio |
| MIR (Safety) | M/U | Monetised safety benefits |
| MIR (Environment) | N/U | Monetised emissions benefits |
| BCR | (V+U)/U | Total monetised impact |
| Cost to Funding Agency | W=U-S | Cost to Funding Agency |
| BCR (Funding Agency) | (V+W)/W | Benefit cost ratio to funding agency |
| WEB | Y | Wider Economic Benefits (See 9.3.6) |
| MIR (WEB) | (L+Y)/U | Benefit cost ratio including wider economic benefits |
| BCR (WEB) | (O+Y)/U | Total monetised impact including wider economic benefits |
Thus there are 8 headline indicators:
All of these measures should be reported (where appropriate). However, the BCR and the NPV are considered to be the key indicators and are the only measures that should be reported in isolation.
To take account of the new indicators, which are quite numerous and therefore could result in a confusing presentation, a Option Summary Table (OST) should be produced for each of the options which completes the Part 2 Appraisal, and be presented in the main report as opposed to the appendices. This should briefly describe the option and use the Government seven point scale to rank the performance of the option against:
A descriptive assessment of the scheme's contribution toward the Government's Strategic Objectives for Scotland should also be provided. However, due to the degree of overlap between the STAG criteria and the Strategic Objectives, the seven point scale should not be used, as this will lead to unnecessary duplication of information.
A suggested template for an OST is given in Section 14.2, the STAG Report.
