Cost benefit analysis and the Crossrail project

1. Cross Rail
Applying the ideas of cost benefit
analysis to a major transport
investment project

2. Follow Geoff Riley on Twitter
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3. 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

4. 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

5. Funding of the Project
Source: Audit Commission

6. Crossrail Map (2014 version)

7. Crossrail Map (2014 version)

8. Basics about cost benefit analysis
• Cost-benefit analysis is a framework and
quantitative tool to inform policy making and
decisions

9. 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

10. Some of the main aims of Crossrail
Improve
transport
efficiency
Promote
economic
growth
Increase
competitiv
eness
Improve
consumer
welfare
Social
welfare and
equity

11. 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?

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Main Economic Benefits of Crossrail
Passenger
travel time
savings
Congestion
relief
Improved
journey
ambience
and station
accessibility

21. Main Economic Benefits of Crossrail
Passenger
travel time
savings
Congestion
relief
Improved
journey
ambience
and station
accessibility
Source: Crossrail

22. 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

23. 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

24. 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!

25. 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%

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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.”

33. 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

34. 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

35. 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

36. Related Videos on Cross Rail

37. Related Videos on Cross Rail

38. Related Videos on Cross Rail

39. Related Videos on Cross Rail

40. Follow Geoff Riley on Twitter
@tutor2u_econ
For the AS micro exam, follow the hash
tag #econ1
www.tutor2u.net for extra revision
resources