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Review of the Rural Petrol Stations Grant Scheme Final Report

6 ECONOMIC BENEFITS

Introduction

This chapter draws on findings from the business and customer surveys to estimate the economic impacts of the closure of a rural petrol station. As with other analyses for this study, our focus here is on the effects of a single site closure. The closure of a large proportion of petrol stations in a region may have different effects to those quantified here but is not a circumstance felt to be especially pertinent to the current grant funding applications.

Value for money assessment

In this section, we review the estimated value for money of RPSGS awards to date.

Overview of approach and methods

In looking at outputs and outcomes it was necessary first to separate these into cases where the funding was to enable filling stations to continue to supply petrol and diesel from those providing LPG. This reflects the fact that each element of the overall scheme has very different objectives, such that combining these would give very misleading conclusions. This chapter focuses on those stations where the works were for petrol and / or diesel supply and here they will be referred to simply as petrol (stations or projects).

The aim in this part of the evaluation is to make a quantitative assessment of the success of the petrol station element of the scheme in terms of value for money - in broad terms, did it deliver its planned outputs and outcomes efficiently and effectively? In order to address this it was first necessary to define the quantitative outputs and outcomes, which we sought to derive from the objectives of the scheme.

The objective of the rural petrol station scheme is to ensure there is a sustainable and accessible network of supplies of petrol and diesel throughout rural Scotland. Sustainable here relates primarily to the viability of the businesses providing these services and this is considered further elsewhere. In considering the concept of an "accessible network" we took the view that the best success indicator related to an outcome would be defined in terms of travel time and cost in accessing fuel supplies, and hence that the scheme could be tested in terms of the costs of the projects funded by the scheme compared with the benefits to travel time and costs.

This test is consistent with the way other transport projects are appraised, where a key part of the appraisal considers time savings and savings in vehicle operating costs to people using the transport project. In our evaluation we also took account of:

• environmental benefits, using a quantification technique in order to provide an economic value of these benefits;
• cost to Government, where changes in fuel duty and VAT receipts are now considered in line with the guidance in the Treasury Green Book and in STAG;
• social benefits, in line with the accessibility criterion in STAG.

However, we did not calculate accident savings arising from reduced travel due to better access to fuel (compared with the counterfactual case of fewer petrol stations).

In looking at outputs, the primary output is the provision of successful projects "on the ground". In considering how and how efficiently these were provided, our approach was to try to identify the net additional outputs from the scheme. Once the additional outputs are identified, we were in a position to consider the outcomes which followed as a consequence of the additional outputs - that is, only non-LPG petrol stations where the projects themselves (outputs) are additional deliver outcomes in terms of time savings, vehicle operating costs and environmental benefits.

The approach has involved first a detailed review of our case studies and then adopting a robust approach in translating the case study findings to the total activities of the scheme.

Petrol stations - additionality and deadweight

As discussed in section 4, we found that for petrol works there was quite a high level of deadweight, with 34% of funds used found to represent deadweight funding. Accordingly when examining the impacts (benefits) we have:

• identified petrol stations where funding of works were additional - that is, where without the grant the station would have closed; and
• considered the benefits from the additional stations only.

We have first looked at the costs of the additional stations only, as this indicates the potential benefits to costs of the scheme had it been possible to apply additionality tests rigorously. Subsequently we have allowed for deadweight in the costs and then, in line with the Green Book on appraisal, we have also allowed for costs to government, which arise because the scheme saves people driving and hence reduces revenues to the Exchequer from fuel duty and VAT.

Estimation of the benefits

The approach adopted for the principal analysis of the economic impacts is very similar to that used in the appraisal of transport economic efficiency (known as TEE), which forms an important element in STAG. This is based on:

• time savings to business and leisure travellers - in this case the extra time required to travel to a less convenient petrol station; and
• vehicle operating costs (VOCs) which are also incurred when having to make longer journeys.

The values of time and VOCs used here are those set out in the most recent Transport Economics Note (TEN). However, we have used our own estimates of speeds on rural roads and of vehicle occupancies. In keeping with transport appraisal practice, the analysis shows the gains to society as a whole - that is, it includes tourists and day visitors as well as "local" residents.

From the surveys, we have estimates of how much further people would have to drive to reach the next most suitable petrol station if the preferred one were to close. This has been adjusted downwards (by a factor of 0.88) to reflect the scope for other changes in trips such as combining shopping and fuel trips. Similarly from the business and user surveys we have:

• estimated the proportions of local work trips and leisure trips and of tourist / visitor trips; and
• estimated annual fuel sales volume per site and volume per customer fill, which yields the number of demand occasions and is used as a proxy for the number of vehicle trips which would have to be extended if the preferred station were to close.

Applying TEN values for time and VOCs at market prices to the estimated demand occasions by trip type and vehicle occupancies, and the extra distances required if the preferred station were to close yields a value of benefit per annum, which we extended to a 30 year value. The latter involved a discount rate of 3.5% but we did not assume any growth or decline in numbers of trips due, for example, to population change or changes in car ownership and use. All costs were estimated at 1998 prices.

In order to make a meaningful estimate of the TEE ratios (benefits to cost and benefits to net cost to government) we had to eliminate projects where we had no reliable cost data, and then look at the costs and the benefits of projects which were additional and where both cost and benefits data exist. Table 19 sets out the TEE findings.

TABLE 19 SCHEME BENEFITS

This shows that on a 30 year lifetime basis the scheme performs well even when the effects of loss of duty to the Exchequer are included, with a BCR of 4.5.

Value of environmental benefits

Using data from our recent study of the benefits of the rail network to the Highlands, we can put monetary values on environmental benefits associated with reduced travel due to the non-closure of petrol stations. Table 20 sets out the benefits and costs including environmental impacts.

TABLE 20 IMPACTS INCLUDING ENVIRONMENTAL BENEFITS

This illustrates that environmental impacts are positive and add to the purely transport economic benefits discussed above.

Value for Money assessment

The analysis of deadweight calls into question the efficiency of the petrol element of the scheme, in that the provision of actual functioning petrol stations "on the ground" could in principle have been achieved at a cost some 35% below actual cost. In practice squeezing all of this deadweight out would not be feasible or cost effective, but nonetheless we consider 35% to be excessive for a scheme of this nature.

However, for the projects which were additional, the level of outcomes measured by standard transport appraisal techniques plus environmental benefits is significant when considered over the expected 30 year lifetime of the "project". As such, this compares favourably with most alternative transport interventions and - subject to the provisos below - we would consider to be highly effective.

Our principal concern here relates to the risk that projects might have a business lifetime which is shorter than the expected technical lifetime of the scheme which is assessed as 30 years. This would arise where, for example:

• there are shifts in rural populations which obviate the need for some stations
• there are other business circumstances - change in ownership, emergence of competitors providing associated non-fuel services, changes in costs of fuel supplies by major distributors and such like - which lead to closures of petrol station businesses
• technological changes to motor vehicles take place over a short time period - for example a significant reduction in the cost of hybrid electric / fossil fuel vehicles - which reduce demand for petrol by an amount which significantly changes the economics of rural fuel supply.

The effects of a shorter effective project lifetime is of course to reduce the benefit to cost ratio. In the case including environmental benefits, a reduction in project life to 15 years reduces the ratio to 3.6 to 1 from 5.6 to 1. Nonetheless, given that project life is the only substantial risk identified and that there is scope to increase the benefit to cost ratio through reduction in deadweight, we conclude that the outcomes have been delivered effectively.

Effects on employment

For each petrol station that remains in operation, there is a direct effect of maintaining existing employment levels.

Rural petrol stations employ an average of 7.5 people in all activities undertaken at the site, of which 5 are full-time and 2.5 part-time. If each part-time staff member is estimated to be equivalent to half a full-time equivalent (FTE) post, total current employment is 5.25 FTE staff per business.

Of the 7.5 staff, 0.7 are wholly employed for the sale of fuel and a further 4.0 are involved in the sale of fuel along with other duties. Thus 36% of total staff time at each site is spent in the sale of fuel ¹⁴ and so fuel sales create an average of 2.25 FTE jobs per petrol station.

Additionally, all of the businesses surveyed offered at least one other service in addition to the sale of fuel from the petrol station site (most have, at least, a shop selling other products). Many businesses report that these other services are dependent on fuel sales to attract customers. Table 21 gives the responses of rural petrol stations to the question: "If you were no longer able to sell fuel from this location, would the other business activities on site cease?"

TABLE 21 DEPENDENCE OF OTHER SERVICES ON FUEL SALES

Using the analysis as shown above, there are 3.0 FTE jobs per petrol station site that are not related to the sale of fuel. If it is assumed that all of these jobs would be lost at those sites where all other activities were to cease and that half would be lost if some activities would cease, then the impact on non fuel sales employment were fuel sales to cease is an average of 1.65 FTE jobs per site.

Hence, the net estimate employment loss per rural petrol station business were fuel sales to cease is:

It is possible, of course, that if a petrol station were to close its neighbours might wish to take on additional staff to cater for an increase in demand. This is likely to happen in some locations, however observation of operations at petrol stations visited during the course of the study suggests that many rural petrol stations have significant spare capacity at present and could cater for additional demand with current levels of infrastructure and staffing.

Hence, while the long-term net employment loss in the sector may be less than 4 jobs per fuel station closure, it is expected to remain close to this level. It is also likely that some of the business will transfer from rural petrol stations to those in the towns, creating a move in the labour market from rural to urban areas.

This view is reinforced by the survey of petrol station customers. When asked where they would purchase fuel if they were unable to at the rural petrol station site, over _ of all responses stated that it would be in the local town (albeit that many of these towns, Banff and Campbeltown are examples, have populations of less than the 10,000 threshold used for the current eligibility for RPSGS).

Effects on other local businesses

There are a number of potential effects that the closure of a rural petrol station could have on other businesses not involved with the sale of fuel. These potential effects are:

• the transfer of non-fuel expenditure to other existing local businesses offering the same product;
• the transfer of non-fuel expenditure to other locations/neighbouring towns if people do not stop to purchase fuel;
• tourist expenditure could transfer to other areas if the lack of fuel availability affected destination choice.

Changes to net tourist expenditure are predicted separately below and here we assess transfer to other local businesses.

Of the rural petrol station customers surveyed for this project, only 46% had purchased fuel at the time of the interview. This data indicates the importance of petrol station location to the provision of non-fuel goods and services within rural communities (although average expenditure on fuel is much greater at 23.00 per transaction than for other sales, which average 6.24).

Our surveys enable the estimation of the dependence on fuel for sales of other products by the same business. Table 22 summarises responses to whether petrol station customers that had purchased fuel would come to the site in question to buy other non-fuel items as frequently if fuel were not available.

TABLE 22 DEPENDENCE OF NON-FUEL SALES ON FUEL AVAILABILITY

Thus, assuming that those who would only have bought some other items would spend half as much as now, it could be expected that 18% of expenditure on non-fuel items by local people and 65% of non-fuel expenditure by tourists would transfer away from the business ¹⁶.

Given average stated expenditure on non-fuel items of 6.97 by local people and 3.61 by tourists and that one third of all customers are tourists ¹⁷, a direct loss of non-fuel expenditure to the business of around 1.60 per customer would result. Given an average of 32,000 customers per rural petrol station per annum ¹⁸, total net reduction in non-fuel sales would be 50,000 per petrol station per annum even if the petrol station site continued trading in other services.

However, as stated above, half of all businesses said that they would cease trading altogether and a further 10% would reduce non-fuel sales services if fuel sales were to cease. Average total turnover of rural petrol station businesses was reported to be 1.3 million per annum (of which, 57% is from fuel). An overall estimate of loss of revenue to a rural petrol station if trading in fuel ceased is given in Table 23.

TABLE 23 REVENUE LOSS ON CEASING OF FUEL SALES

Of this total of approximately 1.1 million revenue loss to the business, around 750,000 (68%) would result from lost fuel sales, the remainder from lost sale of other goods.

Our survey work did not probe in detail for the likely location of where this expenditure might transfer. However, it is unlikely that the revenue loss on petrol station closure would lead to a significant reduction in expenditure in the economy as a whole. The reasoning underlying this conclusion is now given.

Types of expenditure (by number of sales, not sales value) at petrol stations are shown in Table 24.

TABLE 24 EXPENDITURE TYPES AT PETROL STATION

Total petrol sales are likely to increase, rather than decrease, on petrol station closure (a less dense network of outlets will, in general, lead to increased mileage to purchase fuel and so increase fuel consumption: section 7 of this report quantifies this effect) and hence marginally increase net expenditure at a regional level.

This conclusion appears to be contrary to what might be expected given that there would normally be an inverse relationship between price and consumption, expressed as the price elasticity. However, this is an estimate of the effect ceteris paribus - here what we have is a form of price increase accompanied by longer distances that are required to be driven if people want to continue normal activities that need fuel. It is likely that in the short term people would try to drive less but, over time, those who can not accommodate the new supply pattern, for example by getting more fuel when in big towns, will have to drive more - or else leave the area. This simply reflects the very high car dependency in rural areas. It is expected that there would be a small increase in aggregate fuel consumption because of the fact of longer distances - but some people will be able to drive less and some may move away. The economic effect would be to transfer spend from non fuel to fuel items - i.e. other businesses would tend to lose trade. This might affect items such as holidays abroad rather than local goods whose income or cross elasticities of demand are low.

Some of the non-fuel goods purchased are relatively non-discretionary. Groceries are predominant amongst these. If they were not available at the petrol station it is likely that a high proportion of the total expenditure would transfer to other businesses. The more discretionary items (purchase of confectionary whilst purchasing fuel is perhaps the best example) would, it is assumed, transfer along with the fuel purchase to an alternative petrol station.

However, whilst overall expenditure at a regional level may be largely unaffected by petrol station closure, the location of that expenditure will alter. In conjunction with transfer of fuel sales, a significant proportion of discretionary purchases will transfer to other petrol stations. Non-discretionary items will transfer to other petrol stations or to other local businesses.

As with employment effects, it should be noted that, in general, whilst regional-level net expenditure might be relatively unaffected by the closure of a single petrol station, closure will tend to lead to some migration of expenditure from the rural to urban economy.

Purchases from other local businesses

Rural petrol stations, in general, have a high level of interaction with other local businesses and rely on them for a wide range of goods.

Seventy-five percent of respondent businesses indicated that they buy at least some supplies from other locally-owned businesses. More than three-quarters of these bought groceries or other food products from local suppliers, especially bakers and meat, vegetable and dairy suppliers. The only other common locally-supplied product was wood/logs.

Average value of non-fuel purchases from local businesses from those business that use local suppliers was approximately 59,000 (an equivalent to over 44,000 per petrol station on average) or around 10% of all non-fuel sales.

As with other elements, it is likely that at least some of this expenditure would be removed from the local economy if the petrol station were to close.

Increased transport costs to businesses

Of the local people questioned during the course of the study, 39% drive, at least occasionally, during the course of their employment (excluding journeys to work). Of these people, 52% said that the closure of the petrol station at which they were being interviewed would have some effect on their employer or business (42% said there would be no effect and the remaining 6% did not know).

When asked what the effects would be, stated concerns were as shown in Table 25.

TABLE 25 EFFECTS OF CLOSURE ON BUSINESS

Note: excludes 'don't know' responses.

Hence one-third of all local people that drive during employment ²¹ estimate that there will be additional financial and/or time costs to their business if the petrol station closes.

Furthermore, it is important to note that around 7% of all people that drive on business felt that petrol station closure would reduce the interaction between them and their customers. Although not quantified in this study, previous research ²² has shown that this is an important barrier for the development of business in rural Scotland and other initiatives, such as the recent proposals for improvement to the air services network in Scotland target this as one of the benefits.

Effects on tourist visits

Car is by far the most used transport mode for tourists (including recreational day visits) to and within rural Scotland. In the Highlands, for example, 85% of visitors use their own car, rented car or motorhome ²³ and are hence reliant on fuel purchase.

The availability of fuel in rural Scotland is a concern to some tourists. Fifty-six percent of all tourists interviewed at rural petrol stations that had been to the area previously thought that purchasing fuel was 'difficult' (36%) or 'a little difficult' (20%). Fifteen percent of tourists that had not visited the area previously had thought, before they left home, that buying fuel may be difficult or a little difficult, although over half of respondents 'had not thought about it'.

Nearly one-fifth of tourists that had been to the area previously had, at times, had problems buying fuel. Reported problems are as given in Table 26.

TABLE 26 TOURISTS' REPORTED PROBLEMS OF FUEL PURCHASE

These data suggest that limited availability of fuel may be a deterrent to visiting rural Scotland for some people ²⁴. However, in our research, only one visitor respondent said that problems with fuel purchase had affected what they had done in any way as they had had to spend additional time searching for fuel. Only one (a different) respondent reported that they would spend any additional time in the area of the interview if fuel was more widely available.

Thus it is felt unlikely that the closure of individual petrol stations would have any large effect on tourist decisions to come to that part of rural Scotland or to significantly change their behaviour, and hence expenditure, while there. (It is recognised that a widespread closure of a large proportion of petrol stations may have a significant effect, although this has not been tested and is not analysed within this research).

This view is reinforced by the Highlands visitor survey which rates the transport system (as a whole) to be one of the better rated categories of facilities by visitors and that there are greater concerns about shops and pubs/restaurants.

It is expected, therefore, that the only significant tourist expenditure effects following the closure of a petrol station will be the transfer of the expenditure at the petrol station business. Some of this will migrate to the larger towns and some to other competing rural businesses. Overall, it is not seen that the closure of a single petrol station will alter tourist activity noticeably.

Impacts on business profitability

Our survey work aimed to identify the additionality effects arising from the RPSGS. The necessity and timing of requirements for infrastructure enhancements are discussed in section 4 of this report. In addition, however, our survey work asked RPSGS recipient businesses whether receipt of the grant had enabled them to expand the range or services offered or helped to improve profitability of the business.

Forty percent of all recipients surveyed reported that they had recently made other investments or improvements to the business in addition to those part funded by RPSGS. Most of these improvements related to improvements to the quality of services that were offered previously, including cosmetic enhancements, and some others the provision of new computer or credit card technology. Only one business reported that the new investments had resulted in the employment of additional staff.

More than half of these businesses that had made other investments stated that they were only able to do so because they had received RPSGS.

Responses to the question as to whether receipt of RPSGS had improved business profitability are given in Table 27

TABLE 27 EFFECT OF RECEIPT OF RPSGS ON PROFITABILITY

There is no notable correlation between improvements to profitability and the type of works undertaken.

It is clear, however, that a substantial proportion of businesses feel that they have benefited from RPSGS beyond just the completion of infrastructure works none of which, with the exception of LPG provision should significantly alter client perceptions of the business, demand or operating costs.

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