Pitfalls and solutions in the application of spatial computable general equilibrium models for transport appraisal

This paper discusses how to fine-tune spatial computable general equilibrium (CGE) models to allow an accurate assessment of indirect effects of major infrastructure projects, through the example of the new Dutch CGE model RAEM. The use of spatial equilibrium models for assessing the economic impacts of transport projects is one of the key items on the research agenda for project appraisal in the Netherlands. These models are particularly suitable to analyse indirect effects of transport projects through linkages between the transport sector and the wider economy (i.e. the transport using sectors). Potentially, according to the literature, these impacts can turn out to be up to 40% in magnitude of the direct impacts. There is, however, no general indication that indirect effects are always of this magnitude - this has to be proven on a case-by-case basis. This paper discusses how to fine-tune spatial computable general equilibrium (CGE) models to allow an accurate assessment of these indirect effects. Following recommendations from the UK SACTRA and the Dutch OEEI programmes, we have recently developed a new spatial CGE model (RAEM) for the Netherlands tailored towards applications in transport project appraisal. After two applications of the multisector RAEM model to major Dutch transport infrastructure schemes, a number of lessons have emerged with respect to the applicability of such models to transport appraisal. These lessons concern, in broad terms, the specification of the relations between the transport system and the spatial economic system of production, consumption and, trade. More specifically, they have to do with the specification of transport costs in a spatial CGE framework, the problem of locational boundedness of economic activities and the modelling of the labour market; i.e. the effect of passenger transport infrastructure on commuting and migration. Thus, conventional specifications of spatial equilibrium models can lead to problems in project appraisal in terms of inaccuracies in the assessment of impacts. After discussing the general background of spatial equilibrium models we will discuss the pitfalls in CGE applications for transport project appraisal and propose alternative specifications.