The UK approach to Wider Economic Benefits

When the CBD Rail Tunnel business case was released late last year the Minister of Transport was skeptical about many of its details – and in particular its approach to various forms of ‘wider economic benefits’ (WEBs). He was reported as calling many of the benefits outlined in the business case “WEBs on steroids”. Now I am no economist, but certainly parts of the calculation of the project’s wider economic benefits confused me. The contentious benefits are those called “Net Value Added from CBD Increased Productivity” in the table below:
As you can see those benefits are rather substantial, being around $3.3 billion compared to the $1.3 billion of ‘traditional’ transport benefits the project was assessed as likely to generate. If you dig through the Business Case in more detail  you can find where these numbers are compiled, but although the thinking behind them makes a lot of sense (people working in the CBD have higher productivity jobs than outside the CBD so if the project allows/encourages more CBD workers then it creates a benefit) the logic behind the connection between that statement and the final number was somewhat opaque.

The best thing we get is a big table:
The first two columns make sense: the difference in the number of employees in the CBD with and without the tunnel. To be honest I think the tunnel might make a bigger difference than this – because our ability to get more people into the city without the project is extremely limited. What is a bit more difficult to make sense out of is how the difference in employee numbers get transferred into a monetary benefit. Once again I understand the logic behind it: that a CBD job is more productive and high value than a job elsewhere, I just don’t quite get how the connection is made in a numerical sense.

From reading some of the advice provided by Treasury and the Ministry of Transport to Steven Joyce, it would seem that they haven’t got their heads around this issue either (at least not prior to the business case review project, which one would hope has cleared this issue up). So they seem to propose canning any consideration of these benefits as part of the process of undermining the business case.

As a result of my concern about this pressure to simply ignore these benefits, I have done a bit of research over the past few months to try to expand my knowledge of these “wider wider economic benefits” as I have previously called them. One particularly interesting place to look is the United Kingdom, as they undertake business case analyses of transport projects in a pretty similar way to what we do. Furthermore, over the past few years there have been a number of very large rail projects that have gone through the process of a business case assessment – with London’s CrossRail project being a particularly relevant example (although one obviously on a somewhat different scale as its price tag is about ten times that of the CBD Rail Tunnel).

The Business Case used to justify the CrossRail project has its welfare and GDP impacts summarised in the table below:
What I find particular interesting is the line in the benefits that is called “Move to More Productive Jobs”. This sound awfully similar to what the CBD Rail Tunnel’s business case is trying to describe. These benefits are outlined in a bit more detail on the UK Department for Transport website:

If a reduction in transport costs encourages a worker to join the labour market or to move to a more productive job, transport appraisal should aim to capture the full productivity increase from this. When deciding whether to work an individual will weigh up the disbenefit of working (including travel costs) against the wage they would receive from the work net of tax. This potential net wage is the return from making the commuting trip to work.

The gain to the worker from making a trip to work – the net wage – is recognised in appraisal by commuters’ willingness to pay for time savings and this welfare gain is offset by costs such as travelling to the job. This is captured in conventional appraisal benefits and is implicit in the rule of a half welfare calculation. Adding this as an estimate of the labour supply benefits into appraisal would be double counting the benefits.

This sort of captures what my post a couple of days ago was discussing – that travel time savings benefits are something of a proxy for other benefits: be it whether they’re land value increases or ‘net wages’ in this case. I guess it’s not so much that you benefit from being able to make a trip fifteen minutes faster than before, but rather that a lot more potential jobs are located within a reasonably travel proximity than was previously the case.

However, apparently that does not cover everything. There is also a public benefit in the form of the increased potential taxation that can be gained through all of this enhanced productivity that a project like the CBD Rail Tunnel (or CrossRail) will provide through the improved accessibility detailed above. This is reasonably logical: more workers in the CBD participating in more productive jobs will generate more tax revenue. As outlined below, it is this benefit that gets captured by the “Move to More Productive Jobs” line in many UK projects’ business cases.

There is, however, a difference between the productivity of a worker and the net wage the worker receives (the ‘tax wedge’) so that the wage does not reflect the social benefit of labour supplied. As user benefits reflect only the net wage, commuter benefits in conventional appraisal do not capture the full productivity benefit – there is an ‘external’ benefit from an individual joining the labour market or moving to a more productive job in the form of the exchequer revenue they generate. The part of the benefit not captured in appraisal is the ‘exchequer’ or ‘tax wedge’ effects of the worker joining the labour market and this is also part of the productivity gain. These benefits (the tax wedge) should therefore be added into appraisal to capture the full benefit.

To ensure additionality to conventional appraisal, the 2005 discussion paper provides an approach for estimating the labour supply and productivity impacts, and then adds in to the appraisal benefits only the exchequer component of the labour market response. In effect the tax component of the overall labour market response is calculated on the basis of tax rates, and only this ‘tax wedge’ benefit is added as the wider economic benefit to appraisal.

For the CrossRail project, the types of WEBs (including what I have described above) are analysed in good detail in a study called “The Economic Benefits of CrossRail” – prepared by Colin Buchanan Ltd. The “Move to More Productive Jobs” analysis for CrossRail had two elements: that the project would help generate jobs from international companies that would have otherwise located overseas, and that the project would help shift jobs from one part of London to another (a less productive area to a more productive area).

While the international element might have some relevancy to Auckland, as international firms probably look at the attractiveness of Auckland’s CBD when deciding whether to have a New Zealand office or whether to simply locate in Sydney, probably the main effect will be on the location of jobs within Auckland. For CrossRail, this part of the analysis is detailed below (from the Colin Buchanan report):Now of course it’s difficult to compare CrossRail with the CBD Rail Tunnel, because Auckland and London are cities on such a vastly different scale. However, it seems that there’s obviously an accepted methodology in the UK for measuring the same type of benefit that was included in the CBD Rail Tunnel business case. I don’t know whether the benefits were measured in the same way, but certainly some sort of analysis that looks at this employment shift issue seems highly legitimate.

When is that CBD Tunnel business case review going to be completed anyway?

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