Marko Nokkala

3. Forecasting the impacts of road investments

3.1 Methodology and data

The project “OPTILI” at VTT (Nokkala 2001) is focusing on creating a model to forecast future changes in the Finnish transportation system. Although presently still running, the project has already produced regional input-output tables for three regions in Finland: growing centres (Region 1), stable regions (Region 2) and stagnating regions (Region 3). Most of the current trade flows between Finland and Russia run through the growing centres or stable regions. The matrices for Regions 1 and 2 will be used to assess the impact of proposed changes in infrastructure investment in the regions where links in the border trade exist.

However, in the analysis certain limitations must be taken into consideration. First of all, there is a consistent problem with the linkage of foreign trade and regional input-output data. In this study, the main interest is to show how the trade flows influence the regions through which they are being carried. More specifically, of interest is the demand for additional transport network facilities, which is likely to generate regional growth. In the regions classified as stable growth regions, these investments can bring along significant economic growth through job creation and subcontracting.
This study will be limited in scope in terms of dealing with the data problems, although the problems are listed here. In input-output analysis, the following constraints usually apply:

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  The setting for policy experiments is static, i.e., it does not allow for dynamic multi-period approach, which, especially in the case of road investments, would be beneficial.
  
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  The policy analysis are carried out ceteris paribus, i.e., other things remain constant. This means that simultaneous changes in other policies are not taken into consideration.
  
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  Fixed multipliers assume certain relationships between sectors of production, which could change if considerable investments take place.
  

Regarding the expenditure data used in this study as a basis for policy analysis, data is presented in section 5.1, but it has been treated in a way applicable to the three-region model used in this study. Effects of policies are only analysed in the regions 1 and 2, due to the fact that these are regions, which would benefit from the road investments to support Finland-Russia trade.

3.2 Investment theory in investment decision making

Looking at the main European networks, we find that Finland is isolated from some of the main networks in Europe. How is Finland linked to European transport network and how these connections can be utilised in development of Finland-Russia trade? In the European scale, Finland is part of the Nordic zone, which means that the special circumstances of the Nordic climate and location have been taken into consideration, when support schemes have been designed. However, the Nordic zone has other implications as well. Finland has long border with Russia, which is expected to be one the fastest growing economic regions over the following decades.

As the investment theory states, available funds should be invested according to expected return of the project, risk-adjusted whenever possible. Regarding road investments, when directed to public use, the returns on investment tend to be at reasonable level, although there is a question of opportunity cost of investments. The issue of salvage value of road investments is also of interest, as there is generally no market for road investment after the technical and economic calculation periods have passed.
In investment theory, the fundamental assumption is that every investment is an asset held by someone (Sharpe 1987). The asset as a road investment is, as already described above, of a fixed nature. However, regarding risks involved, the road investment, financed by the government, bears a little risk, assuming the traffic generated meets the defined criteria. This can be ensured by other policies, not necessarily those of the transportation authorities, aimed at promoting sectors and businesses that can utilise the investment. In addition, the social benefits can reduce risks: increased safety, improved driving conditions etc. These considerations must be kept in mind, when assessing the benefits from road investments.

3.3 Scenario technique

Scenarios of transport development between Finland and Russia are based on scenario technique. The scenario approach has become an important sub-section in the futures research since the 1980s (see e.g. Vapaavuori 1993). Mannermaa (1993) divides the futures research into three approaches: descriptive research, evolutionary research, and a scenario paradigm. Schwartz (1998, p. 4) defines a scenario as a tool for ordering ones perceptions about alternative future environments in which ones decisions might be played out. Scenario planning is about making choices today with an understanding of how they might turn out tomorrow. Scenarios can be regarded as images of the way the world might turn out in the future, with conceivable future surroundings of the social and/or economic entity in question included in these scenarios. These images can help decision-makers recognise and adapt to changing aspects of the present environment (with the consideration of society, economy, industries, agriculture, etc.) in a world of great uncertainty. Hence, the scenario approach has the potential to increase the relevance of scientific studies to policy-makers.

Policy analysis is often ex-post. The planning of policy reforms, however, calls for ex-ante evaluation of the expected effects of policy instruments. Actual research on future developments is always very difficult: There is no data available and there are many unknown factors. Instead of trying to find ways to remove or reduce this inevitable uncertainty, scenarios can be employed to study the future developments with foresight, rather than by means of traditional forecasts or projections of past developments (Hamsvoort and Rutten 1996).
Concerning its applications, the scenario approach has its origins in the U.S. military circles, and it has then been popularised by large industrial organisations in their strategic planning. Hamsvoort and Rutten (1996) point out that scenario approach has also become popular in public administration. In agricultural economics, this approach is still seldom applied, although its ability to deal with future uncertainty should have been an essential advantage in e.g. agricultural policy studies. Groot et al. (1994), Hamsvoort and Rutten (1996), and Wennerholm (1996) are rare examples of scenario applications in agriculture, agribusiness, and related policy.
Obviously, an important part of any planning is that new, essential knowledge is developed well in advance before the final decision has to be made. Often, planning in a short or intermediate time horizon, i.e. up to 5 years, can rely on so-called internal expertise of, for instance, a firm, underpinned by existent historical data and conventional analyses of e.g. market, economic, and demographic trends in certain regions. However, as the planning span is extended to cover more than 5 years, more factors have to be taken into account. These factors can be, for example, changes in the general values of society, technological development, exchange rate fluctuations, international competition, and political development. Thus, planning and decision-making become much more complicated and difficult, due to uncertainty and increasingly incomplete and asymmetric information.
In the scenario approach this situation is dealt with by a study and a combination of different factors, trends and driving forces in a systematic way in an attempt to establish a holistic view of the future. The potential forces that could cause a certain practice to change are called the driving forces. They usually fall into five major categories (Schwartz 1998, 105-106):

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  society
  
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  technology
  
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  economics
  
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  politics and
  
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  environment
  

Scenarios are neither ‘final statements’ nor ‘snapshots’ of the future. On the contrary, in the latter case historical and background information is needed and driving forces, relevant agents, agreements, positions and time points should be specified while developing scenarios. Thus, well-developed scenarios can be used to open and generate discussion within societies, organisations, industries and firms, and make decision-makers more aware of and able to use available information, when facing future developments.