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The Influence of CBA

The fact that the quality of many CBA applications falls short - and possibly far short - of what is specified in textbooks and official guidelines might lead to scepticism about whether politicians are seriously committed to using economic appraisal to guide policy formulation. It may even be the case that CBA is seen simply as a box to tick, perhaps because it is an obligation (COWI 2011). While it would be a mistake to claim that CBA has no influence at all, it would be equally erroneous to claim it is nearly always influential.

Yet, determining the extent of influence is far from straightforward. For example, IEG (2011) find relatively higher returns for World Bank projects for which ex ante CBA had been undertaken. Yet, disentangling the influence of appraisal from other confounding factors is a challenge. Hahn and Tetlock (2008) review evidence of influence of economic appraisal on a number of health and safety regulations in the US. This appears to indicate little effect in weeding out regulations which protect life and limb at inexplicably high cost. Moreover, where influence can be identified it tends to be on formulating the details of a specific proposal rather than using this same economic thinking to inform more broadly what the options are.

The fact that decisions are often inconsistent with, or downplay, CBA can be squared with the reality that, in practice, CBA is only one input to the decision and, in some circumstances, other considerations trump economic thinking (see Chapter 9, this volume). The experience of the London Congestion Charge illustrates how economic considerations are balanced in this way. The scheme requires that those motorists entering the congestion charge zone around central London during designated hours must pay a charge. The cost-benefit case for a charge in London was arguably long-standing (Newbery 2006). However, the (initial) £5 daily charge appears to have been largely politically determined. That is, it was not an amount which would provide Londoners with the maximum net benefits (Santos and Fraser 2006). Even so, the official CBA which accompanied the proposal for the congestion charge showed that it would create benefits in excess of costs. In addition, distributional concerns shaped the formulation of the charge: certain groups are exempted or face a lower charge. Such provisions plausibly entail some sacrifice in the cost-benefit gain. Presumably decision makers surmised that this sacrifice was justified if it helped allay public perceptions about the acceptability of the charge.

In other cases, it may be that decision makers have taken an extreme stance on some of the criticisms of CBA: whether it is sufficiently deliberative in the sense of ensuring groups have some sway over decision making (in addition to having their costs and benefits counted in a CBA) (Turner 2007) or whether estimates of costs and benefits are sufficiently robust to base serious decisions on. The evaluation of London's 'Supersewer' perhaps provides an example of this. This project is a major physical investment in London's sewage system proposed by Thames Water pic, which would be financed by higher water charges for customers. The benefits of this are largely intangible, stemming from a substantial decrease in the wastewater discharges into the River Thames that occur currently. The assessment of this proposal involved two cost-benefit studies. The first found a case on economic grounds by looking only at the costs and benefits to households in the Thames Water region (for example, see Mourato et al. 2005). Even so, the project was rejected by the water sector regulator apparently because of a mix of concerns about the reliability of benefit estimates, the way in which higher water bills might impact on poorer households as well as whether different investment options had been adequately considered.

A second CBA study (of the same project) was undertaken a few years later. Notably, this re-valued the intangible benefits on the basis of new ecological data as well as looking at benefits to people beyond the Thames region (given the cultural significance of the River Thames). While this second study found the cost-benefit case lacking if only Thames Water customers were considered, if benefits to people living beyond that area were included, the project was justified. This time around the project gained the necessary political support and was approved. What circumstances changed between these two studies is a matter of speculation. However, it would be difficult to sustain the argument that the primary reason was that the second CBA was simply better and more credible (although, to confound matters, it possibly was). More generally, while there is genuine complexity in undertaking a full CBA, it is probably more likely that such concerns often provide a flag of convenience behind which other (more political) motives might hide.

In the case of London's bid to host the 2012 Summer Olympic Games, the decision to bid was essentially political (although presumably sporting criteria also played some part) and economic analysis largely an afterthought. Yet, the cost of London 2012 was comparable with many large infrastructure investments (and indeed was probably more than twice the likely cost of the London Supersewer project). Indeed, the evident costs of London 2012 did necessitate some search for evidence; but with the political onus to prove that the Games must surely be value for money. Interestingly, nowhere in this defence was there any consideration of the economic assessment of benefits that had been undertaken by the organizations responsible for the bid (see Atkinson et al. 2008 and Blake 2005). There was also an equally pressing wish to show that the benefits would be evenly distributed across the UK. This was important because the costs of paying for the Games are likely to be evenly spread across UK taxpayers .

The case of London 2012 is somewhat exceptional as a policy venue. Yet the way in which economic assessment has (and has not) influenced policy formulation in a venue with a more deep-rooted tradition of using CBA is just as interesting. The HS2 project is a proposed transport investment linking London with the Midlands and North of England by high speed rail. CBA formed part of the official case for the government's financial support for this wholly new rail infrastructure and purchase of required new rolling stock. This economic case, it appears, is fairly marginal: a finding to put in the context of the general ex post experience elsewhere of lower benefits and/or higher costs than anticipated ex ante (de Rus and Nash 2007). There has been significant scrutiny of the official CBA of HS2, not just restricted to the likely rising financial cost of the project. Discussion has also focused on costs which were left out; particularly the landscape changes and biodiversity losses that the new infrastructure may cause. Debate has also surrounded the estimation of time savings for business travellers that a faster train service provides. What is interesting here is the way in which cost-benefit arguments have contributed to shaping this debate and that, moreover, the economic content of this debate has not been the sole preserve of technical experts. Whether this is genuine influence or whether - given CBA's prominence in the venue of transport policy - this is the way that arguments 'must' be couched to be heard is another matter.

As Hahn and Tetlock (2008) note, policy decisions are by their very nature political. It is probably also the case that this is more overt in some policy venues than others. Discussions about the influence of CBA clearly need to consider its 'political economy' (see Chapter 9, this volume). That is, rather than merely choosing what is best for social wellbeing as assumed in CBA textbooks, governments and their constituent decision makers are faced with political realities that necessitate the reconciliation of conflicting, or satisfying of particular, interests. Favouring CBA might not be the best way of serving those ends (Pearce et al. 2006). In this sense, decisions which have already been made - and the need to justify those decisions - end up constraining the analysis and the evidence (IEG 2011). Undertaking a thorough CBA from the outset of the policy formulation process might strike decision makers as politically risky. Put another way, CBA might provide a different answer to the one that a policymaker wants; something that David Pearce (1998) refers to as CBA removing flexibility in politics.

Another way in which these political economy considerations might be important is in explaining, in part, apparently technical phenomena such as appraisal optimism. This has been explored by Florio and Sartori (2010) in the context of the EU appraisal of the Structural and Cohesion Funds discussed earlier. The problem here arises because in making its decision to approve financing for projects, the EU is reliant on the information (about costs and benefits) that it receives from those in eligible regions proposing the action. This might be a regional or national authority which in turn could be using information provided by private agents (for example, a contractor of some description). COWI (2011, p. 13) illustrates the incentive problem starkly here in the following quotation from a Member State representation, suggesting that appraisal is: 'a matter of making the financial analysis look as bad as possible in order to increase the funding need, and to make the economic analysis to look as positive as possible in order to justify the public funding'. There is an increasing suspicion that such incentives could explain a lot of what were previously thought to be simply technical-analytical shortcomings. De Rus (2011) is particularly concerned about rail projects: demand forecasts always seem too high and cost forecasts always seem to be too low, viewed from an ex post perspective. Forecasting is undoubtedly challenging and so may result in technical errors being made. However, strategy possibly plays its part as well.

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