A new approach to accurately quantify the wider economic benefits (WEBs) of metro rail systems – in addition to traditional time savings and quality benefits – is a valuable tool for transport authorities to determine whether or not a project should be given the green light.

The approach to WEBs was developed by SKM Colin Buchanan for the Crossrail project in the United Kingdom and was the key factor in securing Treasury approval for the £15.9 billion required to deliver this major new railway link under central London.

Metro schemes are generally built to serve the centres of large cities. They are always expensive, often the most expensive investment a city will ever make.

Historically, railway schemes have rarely, if ever, paid for themselves from the revenue generated by fare paying customers. Most systems aren't self-supporting, so advertising revenue and government subsidies are usually required to cover costs. Yet despite this, almost all “world cities” have metros and generally appear to want more, so what is it that metros do that makes cities desire them and persuades national governments to invest in them?

Traditional cost:benefit analysis tells us whether the benefits to society outweigh the net costs. Metros deliver social benefits in the form of time savings for travellers and improved journey ambience (congestion relief and improved quality). Projects with a positive social benefit:cost ratio are deemed to be economically worthwhile, but this is no guarantee that they will actually receive funding due to the competing demands of different government departments.

Three rail lines implemented in London since the 1960s, the Fleet Line (the Jubilee Line), the Docklands Light Railway (DLR), and the Jubilee Line extension (JLE) all had traditional benefit:cost ratios of less than 1:1 at the time of their appraisals. Yet the government funded these schemes and so must have perceived greater benefits than those captured in the traditional cost:benefit analysis. Traditional appraisal techniques were unable to value those benefits.

The UK government’s New Approach to Appraisal (NATA) used a framework to recognise the broader impacts of transport infrastructure on the economy and environment. However the problem remained that, the mechanisms by which transport schemes generated such benefits were not identified, quantified or most importantly valued. So what is it that metros do for cities that is not captured in traditional transport economic appraisals? To answer this question we need to understand why cities have developed the way they have and what role transport plays in that development.

Cities and transport

Cities grow because of the economic benefits of density. Even though businesses have to pay higher rents, wages etc. when they locate in a city centre, they find it worthwhile to do so because of access to labour, efficiencies, knowledge-sharing, a larger client market and a range of other productivity benefits.

This is the theory of agglomeration. Agglomeration happens everywhere from small villages where the shops and bars cluster in the middle to the major financial centres such as London, New York, Tokyo, and Shanghai. The Finance and Business Service (FBS) sector seems to have a higher tendency to cluster but agglomeration applies to all sectors ands all locations. It explains why jobs cluster and hence why cities exist.

Determining the agglomeration benefits

Our work on determining agglomeration benefits basically split into two stages:

• A quantification stage that determined what the potential employment growth could be, whether there was a transport constraint on employment growth, whether there were other constraints which would prevent that growth even if additional transport capacity were provided and the extent to which a scheme could support employment growth
• A Valuation stage which determined the change in economic performance resulting from the relief of the constraint on central London employment growth

The quantification stage started by developing our understanding of the relationship between crowding and growth in demand on the transport network, since constraints on travel to the city centre will prevent employment in the central area from reaching its potential level.

Investigations for London’s Crossrail project examined the historic relationship between the level of congestion on underground links and the amount of subsequent growth in demand for a number of time periods between 1981 and 2000. The analysis showed a strong, statistically significant, negative relationship between the initial level of crowding on a link and the subsequent average annual growth rate in demand. That relationship held across a variety of time periods and whether overall demand was rising (e.g. 1994 to 2000) or falling (e.g. 1987 to 1994).

Crowding was found to have an impact on growth even at low levels (of crowding), but became much more marked at crowding above “ideal” levels that allowed for standing passengers at an acceptable density across the morning peak period.
Using cordon data, which shows flows on all rail links passing through cordons around central London, a “crowding off” function was developed. When crowding on the network increases above a certain level, growth in demand is assumed to be reduced, stopping altogether once crowding is too high. Since Crossrail increases capacity passing through the cordons, there is then less crowding and less of a constraint on growth in demand. Assuming trips equate to jobs, Crossrail therefore allows more growth in employment in the central areas of London.

To translate changes in density into changes in productivity, we then require an “agglomeration elasticity”. This is the elasticity of productivity with respect to density. Evidence is available on this from a variety of sources that suggests a 100 per cent increase in density could lead to a productivity increase of 4 – 12 per cent. The agglomeration work undertaken for Crossrail used 7 per cent, based on London-wide research, but not specifically for central London. It may be considered that this is a conservative estimate given that London has a large FBS sector and that FBS is at the higher end of any ranges estimated.

There are two distinct agglomeration benefits:

1. Move to more productive jobs – this measures the increase in GDP from enabling more jobs in the city centre where productivity is higher; 
2. ‘Pure’ agglomeration – this is the increase in productivity for the existing city centre workers. It comes about due to higher “effective densities” both from the increase in central jobs (above) and from the transport accessibility improvements.

Data for productivity is available by individual borough in London and grown by 1.75 per cent annually to forecast future values. It is assumed that all the zones within an individual borough have the same output per worker.

Differences in employment between zones (or boroughs depending on the level of analysis) are combined with differences in productivity in order to quantify the value of the move to more productive jobs. For the pure agglomeration, changes in effective density are combined with the agglomeration elasticity in order to obtain changes in productivity for the workers already located within that zone / borough.

Agglomeration benefits are calculated for an appropriate appraisal period and discounted to a base year.

This gives a central value for the increase in GDP that Crossrail enables. A key output from this analysis is the additional revenue earned by governments through existing tax mechanisms from the increase in GDP. In the case of Crossrail, the tax effect, combined with the projected revenues generated by the new rail link, suggested that the project represented a financially viable case for government investment.

The end result of the analysis is that a substantial amount is added to the existing welfare increase that is calculated in the conventional appraisal, and a truer valuation of the benefits of the scheme can be gained.

Conclusions

The agglomeration approach outlined here gives us a method by which to value the impacts of urban rail schemes on city economic growth. Our view, and the experience from Crossrail, is that these impacts are just as important as the traditional time savings and quality benefits. That view has been reinforced by further work undertaken on other rail projects in London and Dublin by SKM Colin Buchanan.

We believe that decision-making on investments in urban rail projects around the world have typically taken account of the potential for employment growth, but in an ad hoc way without any real analysis to back-up or challenge those views. Agglomeration benefits provide a real improvement and in our view radically change the case for urban rail schemes. Schemes with similar transport benefits can have very different agglomeration impacts so

Traditional transport economic appraisal remains an essential element in considering whether a project should go ahead. But equally, in our view, the government also has to consider what a project will do for productivity and economic growth, and agglomeration benefits provide a major step forward in this regard.

© Sinclair Knight Merz
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