economics of crossrail (microeconomics)
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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 pricesOne 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 / CostsType 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 / CostsType 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 numbers2. Uncertainties about population growth3. Uncertainties about operating costs 4. Future business growth / types of businesses /
impact of new technologiesSupporters 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
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