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An Investment Policy for Transport
Page 98
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WHILST it was recognized that investment was spending for the future and that the decision originally taken only had its effect in the future, the implications were not always apparent. Some predictions were no doubt better than others and it was worth spending considerable effort to improve them. But there was no possibility of removing the element of risk and uncertainty.
This was stated by Mr. D. L. Munby, M.A., Reader in the Economics and Organization of Transport. University of Oxford, when delivering a paper to the Institute of Transport in London on Monday entitled "Investment in Road And Rail Transport."
Reliance on Judgment
In dealing with the general principles of investment Mr. Munby added that there was no escape from reliance on broad commercial judgment of predictions. No computer, statistician, or economist could take the place of the business man. The business man was tested by the results he achieved, and these often turned out badly in spite of accurate forecasts, or conversely often turned out well in spite of wildly false assumptions. Factors that it is right to consider today in deciding for tomorrow may, in the event, prove to be overshadowed by factors which it would have been hopelessly unwise to have taken into account.
If the future was uncertain, Mr. Munby said, the past was irrelevant except in so far as it left a given set of conditions today. All the capital stock inherited from the past was only of relevance in so far as it provided limits and opportunities today.
Investment and Replacement Taking a number of .specific points relative to investment, Mr. Munby declared that there was no distinction in principle between new investment and replacement. The same considerations affected both and the same criteria should be used in deciding on both. In practice, as a matter of administrative convenience, it may be desirable to separate those decisions in an industry where technical, rather than economic, criteria were decisive for replacement. But they rarely were. It was always possible to scrap a newly built asset, and often desirable. On the other hand, assets rarely provided a constant stream of' output at constant cost until they suddenly disintegrated,
Even more rarely would such
conditions be combined with both constant demand for this output over the life of the asset, and failure of technical progress to produce any alternative asset to compete with the original. Even if a technical life for an asset serves as a useful rule of thumb, it is only a first approximation to the basic economic decision. All investment decisions involve consideration of changes in costs and revenues deriving in the future.
When comparing a new investment project with an alternative involving replacement of existing assets, account has to be taken of the time at which the existing assets would, in reality, be replaced. Previous equipment costs in no way affected costs today, Mr. Munby said, except in so far as they affected the equipment that was in existence today. They were neither relevant to today's charging policy (if the aim was to make profits) nor to today's investment decision.
Earning Power
No one invested in an asset unless he expected to be able to tarn enough both to replace the asset at the end of its economic life, and to cover interest and profit in the capital invested in it. In the long run, if such assets were to be used, they must earn enough to cover their replacement cost plus interest and profit.
The fact that money may be available in depreciation accounts should not normally affect the criteria used for investment. In both cases the test was what could be earned on other projects. Borrowing should not be embarked upon if one could not find projects which would earn more than the cost of the money borrowed. Nor should one reinvest money in one's own business if a higher return could be obtained by investing outside. Depreciation funds were not sums which were licensed to be invested in foolish money-wasting projects.
After dealing with investment criteria for railways Mr. Munby dealt similarly with the roads. The problem of investment in roads was that there was no direct charge for the use of the roads, though petrol and vehicle taxes might be regarded, in part at least, as a payment for their use. But there were no receipts which could be regarded as a return on capital expenditure on the road system. Gain from road investment had therefore to be measured in some way other than an ordinary commercial investment, if it could he measured at all.
Dealing first with the national income approach. in principle any capital investment should be undertake. outlay produced an increase national income which was sui large when measured in terms appropriate rate of return. In considering the increase in reed( the investment, the increase national income over time ha( considered, which may be compli changes in distributioh.
Benefits and Losses Overlo Mr. Munby then went on to the London-Birmingham motor tenon. Whilst acknowledging ti eering work done by the Road I Laboratory in the measuren benefits for investment in roa Munby said that exaggerated might be made for the result studies if the inevitable limits available material were not um Whilst the study made by th( rightly considered that the benef only accrue to users of the IT (and existing routes), with a h glance at the problem of those I the side of roads, Mr. Munby cc that it did not include all the ben losses. The main omissions wer to take account of the losses of the railways from whom tra diverted, and the failure to alloy benefits to traders of faster h their goods.
Real Saving on Time
In this study relative to sa journey times by use of the m it was contended that the road • industry was so flexible that unlikely that vehicle operators unable to take full advantage c lilies resulting from time savin Mr. Munby was not convinced t on average, such savings as 1 minutes. could be usefully used was a rich field for study of tl operations of hauliers to asce savings which had actually been following similar alterations, changes in the speed limit.
Relative to a comparison of rail investment, Mr. Munby ci that this was more import: endeavouring to work out . method for either. There sit( alternatives. Returns on road ir could be calculated in the sam the return on railway investmcr natively returns on rail investm, be calculated in the way pros road improvements or thirdly s method could be evolved appl both.