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Economics of Crossrail
 

Economics of Crossrail

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Cost benefit analysis and the Crossrail project

Cost benefit analysis and the Crossrail project

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    Economics of Crossrail Economics of Crossrail Presentation Transcript

    • Cross Rail Applying the ideas of cost benefit analysis to a major transport investment project
    • Follow Geoff Riley on Twitter @tutor2u_econ For the AS micro exam, follow the hash tag #econ1 www.tutor2u.net for extra revision resources
    • Basics of the Crossrail Project • Europe’s largest construction project • Crossrail will increase London's rail capacity by 10% • Crossrail route will run >100km from Reading and Heathrow in the west to Shenfield and Abbey Wood in the east. • 40 Crossrail stations including 10 new stations • Crossrail will bring an extra 1.5 million people to within 45 minutes of central London • Total funding available to deliver Crossrail is £14.8bn • Costs outside the £14.8 billion funding package include the estimated £1 billion cost of buying trains, the majority of which will be funded directly by Transport for London Source: Cross Rail website
    • Funding of Crossrail • “Crossrail is being financed by a combination of government grants, fares and an enhancement of land values. A business-rate supplement of 2p on non-domestic properties with a rateable value of £55,000 or more created £4 billion for the project, nearly as much as the government is providing.” (Source: The Economist, November 2013) Benefit-Pay Principle: Over 60 per cent of Crossrail’s funding will come from Londoners and London businesses
    • Funding of the Project Source: Audit Commission
    • Crossrail Map (2014 version)
    • Crossrail Map (2014 version)
    • Basics about cost benefit analysis • Cost-benefit analysis is a framework and quantitative tool to inform policy making and decisions
    • Costs Benefit Analysis Process • Set key objectives for the project • Set project decision criteria i.e. benefit to cost ratio • Identify and value the costs of the project • Identify and value the benefits of the project • Consider distributional effects e.g. On inequality • Discount annual value of future benefits (crucial) • Adjust for risks and uncertainties • Consider unvalued / non-monetised costs and benefits • Measurement of the expected net social return • Compare with expected returns from other projects i.e. The opportunity cost
    • Some of the main aims of Crossrail Improve transport efficiency Promote economic growth Increase competitiv eness Improve consumer welfare Social welfare and equity
    • Some of the main aims of Crossrail Improve transport efficiency Promote economic growth Increase competitiv eness Improve consumer welfare Social welfare and equity Traditional cost- benefit analysis can leave out important macroeconomic effects How important will Crossrail be to the wider health of the UK economy?
    • Crossrail and Economic Growth • Aggregate demand • Incentives to work • Cost of labour • Labour market efficiency and skills • Market competition • Trade • Enterprise and Innovation • Investment Drivers of Growth
    • Social Benefits and Social Costs • Social benefit is the accumulation of – Private benefits to the agents involved – External benefits to third parties • Including environmental benefits • Community benefits • Social cost = – Private costs (internal costs) – External costs arising from a project
    • Social Benefits and Social Costs • Social benefit is the accumulation of – Private benefits to the agents involved – External benefits to third parties • Including environmental benefits • Community benefits • Social cost = – Private costs (internal costs) – External costs arising from a project
    • Main Objectives of Crossrail Relieve congestion to the transport network in and around London Accommodate future travel demand growth Improve connectivity and reduce journey times Deliver wider economic impacts, including supporting economic growth
    • Main Objectives of Crossrail Relieve congestion to the transport network in and around London Accommodate future travel demand growth Improve connectivity and reduce journey times Deliver wider economic impacts, including supporting economic growth
    • Main Objectives of Crossrail Relieve congestion to the transport network in and around London Accommodate future travel demand growth Improve connectivity and reduce journey times Deliver wider economic impacts, including supporting economic growth
    • Main Objectives of Crossrail Relieve congestion to the transport network in and around London Accommodate future travel demand growth Improve connectivity and reduce journey times Deliver wider economic impacts, including supporting economic growth
    • Main Objectives of Crossrail Relieve congestion to the transport network in and around London Accommodate future travel demand growth Improve connectivity and reduce journey times Deliver wider economic impacts, including supporting economic growth London's population is set to grow from 8.4 million today to around 10 million by 2030 – higher density of population It is estimated that, when finished, Crossrail will generate 75,000 business opportunities and support 55,000 full time jobs in the UK
    • Main Economic Benefits of Crossrail Passenger travel time savings Congestion relief Improved journey ambience and station accessibility
    • Main Economic Benefits of Crossrail Passenger travel time savings Congestion relief Improved journey ambience and station accessibility Source: Crossrail
    • Wider Economic Benefits of Crossrail Passenger travel time savings • A more comfortable journey Congestion relief Improved journey ambience and station accessibility Increased productivity from greater clustering of firms Employment creation effects Makes London more attractive for inward investment
    • Passenger travel time savings Congestion relief Improved journey ambience and station accessibility Increased productivity from greater clustering of firms Employment creation effects Makes London more attractive for inward investment The benefits of a major infrastructure project occur over time – so there needs to be an adjustment to calculate the net present value of future benefits – i.e. A process of “discounting” the future benefits
    • Economic concepts relevant here • Consumer surplus – e.g. From lower fares • The value of time / leisure (time saved) • Economies of scale – agglomeration effects from supporting the growth of cities How do you measure the value of enjoyment from being in cleaner, more accessible stations? Or the value of less stress from reduced congestion? Not all of the benefits can be valued easily or precisely!
    • Crossrail and house prices One in five new build homes sold in London since 2009 were within 1 mile of a Crossrail station Housing transactions within a mile of Crossrail stations grew by 21% in 2013 against a London average of 13%
    • Economic Costs of Crossrail Construction costs of new infrastructure Costs of running and maintaining new infrastructure Reduced indirect tax revenue because of fall in car use
    • Economic Costs of Crossrail Construction costs of new infrastructure Costs of running and maintaining new infrastructure Reduced indirect tax revenue because of fall in car use
    • Economic Costs of Crossrail Construction costs of new infrastructure Costs of running and maintaining new infrastructure Reduced indirect tax revenue because of fall in car use
    • Economic and External Benefits / Costs Type Costs Benefits Economic • Construction costs • Operating costs • Cost of capital (interest on loans) • Potential health and safety costs / insurance liability • Lower transport costs for businesses • Time savings for travellers and businesses • Potential innovation spill- overs and export potential in and around London Social • Externalities from construction • Landscape issues • Increased noise / congestion in and around new stations • Regeneration in potentially deprived communities • Potential re-skilling of workforce employed • Lower CO2 and other emissions
    • Economic and External Benefits / Costs Type Costs Benefits Economic • Construction costs • Operating costs • Cost of capital (interest on loans) • Potential health and safety costs / insurance liability • Lower transport costs for businesses • Time savings for travellers and businesses • Potential innovation spill- overs and export potential in and around London Social • Externalities from construction • Landscape issues • Increased noise / congestion in and around new stations • Regeneration in potentially deprived communities • Potential re-skilling of workforce employed • Lower CO2 and other emissions
    • Benefit forecast • “The business case for the line estimates that Crossrail will produce £1.97 of benefit for every £1 of cost, through reduced journey times, reduced crowding on public transport and quicker interchanges between services.” • “This is within the Transport Department’s definition of ‘medium’ value for money, a range of 1.5 to 2. If estimated wider economic benefits are included, the benefit–cost ratio increases to 3.1” • Source: Audit Commission Report, January 2014
    • The Economist (April 2014) “Big infrastructural projects often make economic sense only when consumer surplus is taken into account.” “Time savings are often the biggest element of transport benefits.”
    • COBA Problems: Monetising Values • Some can be assigned a monetary value – Time savings e.g. For passengers and businesses – Operating costs of the project – Value of carbon emissions e.g. Lower CO2 from less car use – Risk of death or injury • Other variables much harder to assign values – Bio-diversity – Water quality – Air quality – Heritage – Social inclusion / accessibility
    • COBA Problems: Monetising Values • Some can be assigned a monetary value – Time savings e.g. For passengers and businesses – Operating costs of the project – Value of carbon emissions e.g. Lower CO2 from less car use – Risk of death or injury • Other variables much harder to assign values – Bio-diversity – Water quality – Air quality – Heritage – Social inclusion / accessibility
    • COBA Problems: Uncertainties • Many uncertainties / risks involved in major projects with long construction times and even longer operating times 1. Forecast errors for passenger numbers 2. Uncertainties about population growth 3. Uncertainties about operating costs 4. Future business growth / types of businesses / impact of new technologies Supporters of projects may suffer from optimism bias when evaluating a project
    • Related Videos on Cross Rail
    • Related Videos on Cross Rail
    • Related Videos on Cross Rail
    • Related Videos on Cross Rail
    • Follow Geoff Riley on Twitter @tutor2u_econ For the AS micro exam, follow the hash tag #econ1 www.tutor2u.net for extra revision resources