The Measurement of Indirect Effects in Project Appraisal



The Measurement of Indirect Effects in Project Appraisal

Authors

Tunde Voros, Szechenyi Istvan University, Mattias Juhasz, Szechenyi Istvan University, Krisztian Koppany, Szechenyi Istvan University

Description

Project appraisal is facing an increasingly significant problem concerning the measurement of indirect economic effects. This paper aims to investigate the accurate way of quantifying such benefits via a case study.

Abstract

Current economic conditions have made remarkably important to choose the most profitable development projects that best support economic growth. Therefore, ex-ante project appraisal plays a more and more significant role in decision making. However, direct effects of a certain project can fairly be measured, accurately capturing indirect effects faces huge challenges. Cost-benefit analysis (CBA) and economic impact analysis (also known as Gross Value Added – GVA approach) are widespread methods in project appraisal both having different perspectives, thus different deficiency as well. CBA is said to be a robust framework, although, it is not able to incorporate all the benefits, especially indirect ones. Whereas economic impact analysis estimates the change in total economic activity using multipliers provided by input-output models but the assessment of costs, social benefits and externalities are not included.
The appropriate measurement of indirect economic impacts in project appraisal is being widely discussed among professionals, though, consensus is still to be reached. Notwithstanding, several uncertainties distort valuation impeding accurate decisions.
This paper first aims to further investigate theoretical questions concerning the accurate measurement of wider economic impacts avoiding double-counting. In transport appraisal CBA takes prices equal or a broadly approximate to marginal social cost, since the underlying assumption holds that perfect competition prevails on the secondary markets. That is, CBA conceptually excludes the appraisal of secondary markets from transport analysis. However, arguments exist suggesting the reconsideration of the approach in order to enhance the measurement of indirect effects, which is crucial in valuating benefits of projects supporting economic growth.
Second, this study attempts to review the different approaches in practice regarding the appraisal of indirect effects caused by transport projects. While in many countries the concept of CBA is dominant, elsewhere the GVA approach has been given the priority, such as recently in the UK. Moreover, in Hungary many analyses mix the two technics together, however, applying multipliers in cost-benefit analysis yields substantial impact on the benefit-cost ratio, thus crucially influencing decision making.
Finally, a Hungarian case study is presented focusing on the appropriate measurement of wider economic impacts applying cost-benefit analysis and economic impact analysis (GVA) as well. The empirical findings concentrates on the quantitative and qualitative differences between the two technics. Nonetheless, results can be compared to findings of other studies.

Publisher

Association for European Transport