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EVALUATION OF TRANSPORT PROJECTS

IN THE EUROPEAN INVESTMENT BANK

Mateu Turr1

1. Background

The European Investment Bank (EIB) is the European Union (EU) lending

institution for the financing of projects of common interest to its member countries.

It provides long-term loans, adapted to the specific needs of the project, that would

not be provided by the commercial banking sector. The EIB is thus

complementary to other funding sources. To ensure this, the Bank does not

finance beyond 50% of the project investment cost. Even so it often provides a

critical support for structuring the finance of major projects. Over the last decade,

the EIB has become the international financial institution (IFI) with the highest

turnover. In 1999 it signed loans for some 32 billion EURO, 87% of them inside

the EU, where it finances around 2% of all investment.

The EIB is owned by the EU member countries, whose representatives sit on the

Board of Directors, which approves the main policy lines and the individual loans.

The Bank is being used to foster EU policies and, in particular, regional

development, but also receives specific mandates to facilitate EU action in certain

domains and countries. The last mandate, for instance, refers to activities in the

Balkan region. One key area of activity is the improvement of communications

between member countries and between the EU third countries. In the past few

years the reference for such activity has been the development of trans-European

networks (TENs). The EIB has contributed in particular to the realisation of

transport networks, although telecommunications and energy networks have also

been supported considerably.

1 Senior Economic Advisor in the Projects Directorate of the European Investment Bank. The paper is

based on his personal experience in transport project evaluation in the EIB, but does not reflect, inany way, an official position of the Bank.

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The focus of this paper will be transport infrastructure, which represents more than

40 % of all individual EIB loans2. Table 1 indicates their distribution in the various

sub-sectors.

Table 1. EIB activity in the transport sector in the EU

(in million EURO, current)

Finance contracts signed

1995 1996 1997 1998 19991995-99

Exceptional projects 400 733 514 520 1736 9089

Railways 2150 1125 1873 2202 547 2714

Roads, motorways 2322 2310 2425 1760 3605 12422

Airports, air traffic control 271 195 600 670 834 2611

Aircraft 195 32 704 498 1182 2569

Ports 348 33 35 91 49 555

Urban transport 532 386 901 814 974 3607

Other (e.g. intermodal centres) 5 43 13 0 0 61

TOTAL 6224 4856 7064 6556 8926 33628

The EIB plays an essential role in the financing of most major transport projects in

Europe. Table 2 reflects the loans devoted to the creation of the trans-European

transport networks and to the development of pan-European corridors. The EIB

has contributed to finance, on average, 30% and 40% respectively of project

costs.

The Projects Directorate of the EIB carries out a thorough evaluation of the

projects requesting finance in order to support only those responding to its

eligibility criteria3

and to rigorous quality requirements. The Banks engineers andeconomists analyse critically the documents presented by the promoter of the

project. This information is used to establish the project definition and costs and to

ascertain the justification of the project. The economists focus particularly on the

planning context, the demand for the project and its economic and financial

2 Individual loans are given to projects of a certain size. Global loans, for small projects, through

intermediary banks, represent 30% of the activity of the Bank.

3 Regional development and improvement of the communications needed for the implementation of theSingle Market are the eligibility criteria more frequently applied to transport projects.

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profitability. The time EIB economists devote to such an exercise varies according

to the difficulty of the project, but in most cases it does not exceeds 10 working

days. These extremely tight conditions imply that the analysis has to concentrate

on the critical issues. The quality of documents produced by the promoter is thus

fundamental for performance.

Table 2. EIB activity in TENs and pan-European corridors

(in million EURO, current)

Finance contracts signed

1995 1996 1997 1998 1999 1995-99

ESSEN PRIORITYPROJECTS & RELATED 1603 1189 1751 1142 1616 7301OTHER TRANSEUROPEAN

NETWORKS PROJECTS 2216 2316 3192 3273 4361 15538Road network 833 1409 1191 1368 2256 7057

Rail network 857 674 1332 1242 1461 5566

Seaports 299 32 35 91 55 512

Airports (*) 139 190 621 550 589 2089

Other 88 10 13 22 0 133

TOTAL EU 3819 3504 4943 4415 5977 22658

PAN-EUROPEANCORRIDORS (projects in

CEEC) 270 553 427 1357 1321 3928TOTAL 4089 4057 5370 5772 7298 26586

(*) Includes Heathrow Express Link

The standard economic evaluation procedure used in the EIB for most transport

projects is cost/benefit analysis (CBA). A relatively simple spreadsheet model is

sufficient initially to ensure that the project is sufficiently robust to fulfil EIB quality

criteria, but more detailed reviews may be required in margin cases. The cost

estimates of the promoter may need modifications to produce realistic investment

costs. Operating and maintenance costs rely either on the promoter's figures or on

Bank estimates drawing on past experiences with similar projects. Regarding

benefits, those included in the CBA are user benefits limited, in general, to travel

time savings, reductions in vehicle operation costs (VOCs) and safety

improvements and, where appropriate, some quantified environmental impacts.

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The result of the analysis is normally presented in terms of an ERR and,

sometimes, of a NPV.

This approach is probably the best suited to the needs of the Bank as it tends to

be conservative and easy to communicate to other Bank services (e.g. Operations

or Credit Risk Directions) and to its Management Committee and Board of

Administrators. The main objective of the evaluation is to ascertain whether a

project is economically justified or not. The Bank does not normally need to

establish priorities between projects and a precise profitability estimate is

therefore often unnecessary. The "minimum profitability" approach works well in

most circumstances. Fine tuning may be justified, though, where this "minimum"

value is low and there are doubts about the quality of the project. In these cases a

more detailed CBA is performed and the evaluation expanded to cover aspects

not adequately dealt with in the standard analysis, in particular environmental

effects.

The EIB is thus a main recipient and practitioner of socio-economic analyses of

transport projects. This paper aims to outline some critical issues in the EIBs

economic appraisal in order to raise awareness of researchers, and transport

economists in general, of the need to adapt and improve the evaluation methods

for transport investments.

2. Critical questions in cost/benefit analysis

There is a substantial amount of practical issues in CBA of transportation

investments that need clarification. Only some of them, deemed to be particularly

relevant for the EIB's activities, are discussed in this note. They are especially

related to recent developments that are changing the traditional evaluation context:

the TENs policy, which requires to look at the European component of transport

projects; the increasing number of privately financed projects; the re-structuring of

the rail sector, involving trade-offs between infrastructure and service operators

that were not considered in the past; and the acceptance of the multimodal

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approach as the best suited to transport planning. There is actually a perception

among transport economists that the CBA model is in crisis and does not respond

well to the requirements of present day decision-making.

These are some of the identified problem areas :

a) CBA is used to analyse costs and benefits accruing to society. For an

international organisation the definition of the affected society is not obvious. The

approach adopted by the EIB is to avoid distinctions based on nationality or

geographical factors. This is logical in the EU context, but not so obvious for

projects with important impacts outside the Union (for instance, the Galileo global

positioning and navigation system) or located in third countries.

b) A key factor of CBA is the selection of the reference case, usually a "do nothing"

alternative. Normally the project presented to the Bank is compared to this

reference case. If the investment gives a sufficient ERR, the project is usually

accepted. However, other options might provide better returns on investment. A

practical example is the case of a motorway designed with a 3x3 section (which

gave an acceptable ERR), while the 2x2 solution would have given a much higher

rate of return. This problem is not theoretical, because it has strong implications

regarding the role of the EIB to ensure optimum use of resources and has special

relevance in project financing.

c) CBA is supposed to use resource values. The transport market is severely

distorted, however, and many assumptions about values and even willingness to

pay that are valid in other sectors (i.e. industry, energy) cannot be taken for

granted here. Subsidies and taxes distort tariffs and operating costs; most

infrastructure pricing policies (i.e. tolls) are politically defined and produce peculiar

demand patterns; externalities are relatively more important than in most other

sectors; etc. As transport is slowly moving towards more competition and fair

pricing (i.e. the internalisation of externalities), the demand, but also the

perception of the value of transport services, may change substantially. The long-

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term evolution of some critical elements of CBA is poorly perceived and it is not

incorporated into the analysis.

d) The time horizon used in the evaluation can affect the results, and its relation with

the residual values must be consistent. This point can be quite relevant in projects

showing low returns, which are, in fact, those requiring more detailed analysis.

Regarding residual values, it must be stressed that the "alternative use" of the

facility can be an important factor in its profitability. A reclaimed area in a port

located near the centre of a major city has an intrinsic value, while some projects

may require investments, at the end of their lives, to revert the land to the original

conditions.

e) Several aspects in the investment costs present problems of definition. A very

important one is the valuation of land, as the price included in the investment, often

resulting from an expropriation procedure, hardly represents the real value for

society as a whole4. Other topics requiring clarification are: the cost of labour and

its relation to unemployment rates; the treatment of taxes (on labour, petrol, VAT,

etc.) which are basically a transfer; the treatment of foreign currency in developing

countries; the impact of the investment on the country's macro-economic

conditions; and so on. Some of these questions can be included in a more

general one: are "shadow prices" acceptable and, if so, under which

circumstances?

f) The issues which are most critical for the final results of the CBA are those related

to user benefits, but some theoretical issues have not been properly clarified yet. In

the debate about the adoption of "market" or behavioural values versus social

values, the need for consistency has imposed a normative approach n the EIB.

This has raised the problem of the harmonisation of key parameters (travel time

savings, accidents) in different contexts, which has been solved in a pragmatic

way5. Another issue that is increasingly relevant, in particular in the context of high-

speed trains, is the introduction in the evaluation of variables (comfort, reliability,...)

4 In a few years, with air pollution problems becoming less relevant with the use of new types of

engines, the problem of land occupation by new infrastructures may appear at the top of the green

agenda.5 See Vilain, P. (1996).

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that are difficult to quantify but are extremely relevant in users behaviour. A related

area where clarification is also needed is the treatment of benefits occurring to

generated and induced traffic, as current measures of consumer and producer

surplus are excessively rough, particularly when the project induces important

modal shifts.

g) Demand forecasts determine the benefits of a project. Forecasts are particularly

important for the Bank when project risks are involved, but they are also a critical

input in CBA. Should scenarios, elasticities, etc. be consistent across the projects

evaluated by the EIB? How can consistency be guaranteed? How will network

effects be properly taken into account? This aspect is relevant when these effects

are not perceived by the project promoter or even by the societies (i.e. countries)

in question. The point is especially critical to justify the TENs concept and requires

further study.

h) Conventional CBA does not take into consideration redistribution effects that may

be important not only for the feasibility of the project, as they may mobilise political

opposition, but also in terms of some broader social objectives (regional

development, recovery of decaying urban areas, etc.)

i) Some benefits of transport projects lack a solid theoretical justification. In

particular increases in land value (which, in some urban projects have proved

essential to justify them) and certain producer benefits should be studied in depth.

The treatment of conflicting producer benefits is a central question in the evaluation

of rail projects under the separation of infrastructure and service operators being

enforced by Community legislation.

j) The various transport modes have traditionally been using different evaluation

methodologies. In some cases, such as airports, based on regional effect

considerations that are practically excluded in road and rail projects. The

multimodal approach requires a consistent methodology that has not been

properly developed in spite of some interesting research on the subject6.

j) Direct externalities, those produced by a user on other users, primarily due to

congestion, have always, at least in theory, been taken into account in EIB

6 See University of Leeds et al (1998).

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analyses. However, congestion impacts are not well known and the valuation of

marginal benefits/costs (time, comfort, reliability...) at average values is

questionable.

k) Indirect externalities, those occurring to outsiders, have seldom been taken into

account in a quantitative way. The monetisation of environmental impacts, the

effects of geographical and inter-generation redistribution of costs/benefits, or the

logic of applying to non-economic factors the same discounting procedures as for

economic values (including them in the CBA) are only a few examples among the

numerous themes needing study to improve appraisal procedures. An Evaluation

of Environmental Effects (EEE), separate from CBA7, has been proposed for

systematic use in the EIB8 and is being tested for some road projects.

l) Socio-political effects will become increasingly important in future evaluations. The

determination of acceptable objectives (regional development, employment, social

cohesion, macro-economic effects,...), the identification of a project's contribution

to such objectives and their valuation avoiding double counting are difficult

questions that require discussion.

3. A socio-economic evaluation framework

The last point opens up the most fundamental criticism of CBA, because it has

great difficulties in covering the aspects that go beyond purely market related

objectives. Short term economic growth is not the only goal of our modern

societies and CBA is ill equipped to deal with long-term and political issues. In

particular, redistribution effects can only be introduced in CBA in very complex

ways. Multicriteria analysis (MCA) has not yet produced a definitive solution to themany problems of multi-objective evaluation, but it seems, up to now, to be the only

potential solution for adequate decision-making. However, simple methods of

MCA cannot properly handle the complexity of many transport projects and

7 See Turr, M. (1999).8 It is necessary to distinguish the EEE from the Environmental Impact Assessment (EIA), which is a

legal requirement for most projects of a certain size in the EU. Compliance with EIA is systematically

checked in EIB appraisals. The EIA is conceived to cover all aspects related to projects, but very

often, in practice, the emphasis is placed in the short-term effects due to the construction of theproject and the information provided is insufficient for a proper EEE.

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complicated methods tend to make the process a "black box" where the issues

lose their visibility and strength. Open Appraisal Summary Tables as lately

proposed in the UK are, on the other hand, extremely dangerous in the hands of

non-experts (i.e. decision-makers).

A new approach should be found that would be more suitable for the present

challenges of European society. Current cost/benefit analysis techniques cannot

adequately cover all the concerns of the EIB in socio-economic project appraisal.

Certain aspects, such as promoting innovation; fighting unemployment and social

and environmental degradation; mitigating social and regional inequalities;

enhancing the process of European unification; facilitating the integration of

neighbouring countries (with specific political and strategic considerations for

accession countries, for the Balkans, for the Mediterranean region) and the long-

term economic and social development of the Third World; or other general

objectives with diffuse economic impacts should be seen as defensible aims of

the EIB's activities and a measure of their achievement incorporated in its project

appraisal procedures.

A new evaluation framework is being developed, based on a triangle of goals:

competitiveness, sustainability, cohesion. These goals are becoming the focus of

European transport infrastructure policy and can be introduced into project

appraisal as follows:

a) Competitiveness for the European economy is directly linked to economic

efficiency in the use of resources. To ensure that European products can

adequately compete in the world markets and that European producers and

consumers benefit from the best conditions available, transport services must be

as cheap, fast, reliable, secure and comfortable as possible. Efficiency means the

most adequate balance of these qualities and implies the best use of existing

capacities and of the comparative advantages of the different transport modes.

To ensure efficiency at the project level, making sure that the best alternative has

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been chosen, improved CBA techniques should be sufficient. But efficiency must

also be ensured at the network level, because there are many global effects that

cannot be effectively comprised in the evaluation of individual projects.

b) Sustainability is becoming an increasingly important political goal. Transport

puts a heavy weight on the total consumption of energy, contributes massively to

some of the air pollutants (NOx, hydrocarbons, CO, lead, etc.), the greenhouse

effect and noise pollution and also carries a heavy toll in deaths, injuries and

material damages caused by traffic accidents (a part of which are not suffered by

the transport system users). Environmental issues are now high on the political

agenda, but there is no clear methodology to appraise them and, in particular, to

compare them with efficiency criteria. The EIB is now ensuring compliance with

EU regulations and provides indicators of the projects impacts. In some cases

direct valuations (for instance, for environmental costs avoided due to the transfer

of freight from road to rail) or indirect ones (required value to reach an acceptable

rate of return) are included in the appraisals. There is still a need, however, to

adopt a clear philosophy regarding the environmental effects of transport and

define procedures to incorporate them in project appraisal. The White Book of the

Commission on fair and efficient pricing provides some basic lines of thought on

the matter, but they need refinement and development to make them applicable. A

separate EEE, in which the most important environmental effects of a project will

be given a monetary value in specific years, should provide, in the near future, a

good indication of the projects environmental value.

c) Cohesion is an ill-defined concept that permeates the literature on European

integration. Here it is given a double interpretation. The first one is rather

straightforward: Cohesion aims at the provision of a sufficient level of opportunities

for all European citizens. The term has applications in different fields (i.e. related

to race, sex, age, etc.) but, regarding transport, the main interest lays in the

provision of spatial cohesion, or adequate access to opportunities. Cohesion

has been used in transport fundamentally to justify the endowment of infrastructure

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to peripheral and landlocked regions. It should be qualified to incorporate service

levels. The connectivity indicator ICON9 is being used in the EIB to analyse the

impact on changes produced by a project on the accessibility to the space of

flows of the various locations affected. ICON seems the best indicator available

to show spatial impacts and can be used to assess quantitatively the regional

development potential of the project. The cohesion policy should also be extended

to the urban and metropolitan transport systems, where accessibility is extremely

relevant for the renewal of decaying areas.

Possible criteria for the evaluation of the Community Interest of TENs

projects

Efficiency

Results of harmonised Cost-Benefit Analysis (CBA)

Minimum internal rate of return (reference rate: 5%)

Cost/benefit ratio (positive at 5% discount rate)

Sustainability

Results of Evaluation of Environmental Effects (EEE)

Cohesion

Provision of minimum levels of accessibility to the basic networks (ICON)

Job creation

Effects on social cohesion: on decaying urban areas, on deserted rural areas

European competitiveness in world markets

Integration effects: benefits to long-distance traffic, in particular international and

specifically trans-border and links with CEEC and Mediterranean countries

The second, more political, meaning of cohesion is at the basis of the

development of the new TENs policy. It refers to the integration of European

nations with the goal of fostering synergies and reducing conflict. The

reinforcement of the Single Market and the advancement of political union require

additional international trade and personal contact. European mobility patterns

are still clustered inside national borders and differ substantially from those of the

USA, a comparable area with a high level of integration. Transport infrastructures

and services promoted by the TENs policy aim at facilitating international mobility.

9 See MCRIT (1995).

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However, their global long-term economic and social consequences are very

difficult to foresee and at present it is impossible to introduce them in a

conventional evaluation. The fact that a project belongs to an integrated EU policy

should be considered, however, as a positive factor in its evaluation. This

cohesion policy might be extended to third countries, with different levels of

commitment depending on their prospective status as future Members of the Union

or of EFTA, their geo-strategic interest (i.e. the southern Mediterranean countries)

or their traditional ties with Europe.

4. Specific research areas of project appraisal of interest to the Bank

The presentation has outlined the weight of the EIB in the development of transport

infrastructure networks in Europe and its role in ensuringe that the projects

endorsed fulfil some minimum criteria regarding a still poorly defined concept of

European interest. It has focused on the difficulties in carrying out this role, due in

part to methodological and practical problems in project appraisal. Some of them

could be solved through developments in information technology, which is rapidly

advancing in operational applications, but is lagging behind in the planning and

evaluation fields. Geographic information systems and global navigation and

positioning systems, in particular, are areas of potential and their applications

would be supported by the EIB. These are areas more of indirect concern to the

EIB. There are, however, some basic, more theoretical issues that need

clarification, especially if the multimodal approach and the European perspective

are to be introduced. Among them the following are particularly relevant:

?? The economic value of investment and operating costs (land, energy, etc.).

?? Harmonisation of the key parameters in the valuation of benefits of transport

projects.

?? The treatment of congestion and marginal values.

?? The definition and measurement of network effects and their application to

investment programming, project evaluation and project finance structuring.

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?? The introduction of externalities in the evaluation and development of an

Evaluation of Environmental Effects methodology.

?? Definition and quantification of cohesion objectives and provision of measures to

be applied in the evaluation of the European interest of a project.

Conclusion

The EIB is a main recipient and producer of economic evaluations of transport projects.

The appraisals that are being carried out are in line with state of the art practice, but this

does not provide an adequate answer to many questions, old and new, that should be

answered relatively quickly to ensure adaptation to the present changing context. Some

suggestions on areas of research for transport economists have been presented.

Bibliography

?? Boiteux, Marcel et al. "Transports: pour un meilleur choix des investissements",

La Documentation franaise, Paris, 1994.

?? European Commission White Paper Fair payment for infrastructure use: a

phased approach to a common transport infrastructure charging framework in the

EU", E.C. July 1998.

?? MCRIT/INRETS UTS Study. Urban Territorial Strategies linked to Trans-

European Transport Networks, DG VII, European Commission, Brussels, 1995.

?? Rothengatter, Werner Evaluation of infrastructure investments in Germany,

Transport Policy, Vol. 7, 1, January 2000.

??

Turr, Mateu Going trans-European. Planning and financing transport networksfor Europe, Pergamon, Elsevier Science, Oxford, 1999.

?? University of Leeds et al. EUNET. Socio-economic and spatial impacts of

transport, DG VII, European Commission, Brussels, 1998.

?? Vickerman, Roger Evaluation methodologies for transport projects in the United

Kingdom, Transport Policy, Vol. 7, 1, January 2000.

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?? Vilain, Pierre Harmonising Parameter Values in Transport Project Appraisal:

The Values of Time and Safety, PJ Papers, European Investment Bank,

Luxembourg, 1996.