Larkhall – Milngavie Railway Project Evaluation Study Final Report
10. re-calcuation of the benefit-cost ratio
10.1. Cost-benefit analysis undertaken at the economic appraisal stage of the Larkhall-Milngavie rail project in 2000 indicated a BCR of 0.66 for the project. The majority of the benefits were expected to come from journey time savings for existing and new public transport users.
10.2. However, it was expected that the project would bring other benefits that could not be easily monetised and captured within the formal cost-benefit appraisal including:
- assisting economic development and encouraging local investment;
- increasing social mobility;
- creating further opportunities for further public transport orientated land-use development; and
- reducing the local environmental impact.
10.3. These non-quantifiable benefits were considered by the main project sponsor, SPT, to be more than sufficient to offset the predicted deficit in the monetised appraisal.
10.4. Since the original economic appraisal of the Larkhall – Milngavie project, there have been methodological developments to economic appraisal (e.g. extension of the appraisal period from 30 to 60 years and changes to the discount rate applied to future year costs and benefits). Additionally, as the project was completed in 2005, outturn values to replace some of the forecast values are now available, as well as evidence to inform certain elements of the appraisal (e.g. the level of abstraction from car).
10.5. The economic appraisal was therefore repeated to provide a quantitative breakdown of the benefits and costs associated with the Larkhall – Milngavie project and allow the BCR to be recalculated to determine whether the project has offered value for money.
10.6. The recalculation of the BCR also provides an important insight and 'lessons learned' for future transport appraisals and will inform the recommendations for the Rail Evaluation Guidance.
10.7. An economic appraisal assesses the cost of the scheme against the resulting benefits to determine whether the project offers value for money.
10.8. Comparing the total cost against the total benefits is not sufficient since costs tend to 'front loaded' towards the construction phase of the project, whereas the benefits will accrue over the full appraisal period.
10.9. The basis of the economic appraisal process is to assess the long term worth of a scheme. Costs and benefits are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and project costs over time are expressed in a common basis in terms of their Net Present Value (NPV).
Impacts on Wider Society – Present Value of Benefits
10.10. The project's Present Value of Benefits (PVB) is the net value of benefits and dis-benefits that impact wider society. These include: increase in public transport revenue through generation of rail demand; user and non-user benefits such as travel time savings and reduced road congestion; and impacts on wider government finances such as indirect tax.
10.11. The benefits associated with the project are discussed in more detail below.
Impacts on Government – Present Value of Costs
10.12. The project's Present Value of Costs (PVC) is the cost of the scheme to government. The PVC includes only the costs that specifically to fund the project. These costs include: capital costs; maintenance costs; operational costs; and renewal costs.
10.13. The costs associated with the project are discussed in more detail below.
Benefit Cost Ratio
10.14. The BCR is given by the ratio PVB/PVC. This indicates how much benefit is given per unit of cost and is used to inform value for money assessment of transport schemes. A BCR greater than 1 indicates that the benefits outweigh the costs.
Economic Appraisal Methodology
i. Appraisal Assumptions
10.15. The economic appraisal was conducted by applying the assumptions shown in Table 26 in line with STAG.
10.16. In the original appraisal conducted in 2000, different assumptions were applied:
- the appraisal period was 30 years;
- the price base year was 1994; and
- a 6% per annum discount rate was applied.
10.17. However, it was preferable to recalculate the BCR using current STAG guidance, to eliminate the methodological discrepancy between the two BCR estimates and to facilitate comparison of the Larkhall – Milngavie project with recent/future appraisals of other transport schemes.
ii. Do-Something and Do-Minimum
10.18. To isolate the incremental benefit of the Larkhall-Milngavie rail project, it was necessary to forecast two scenarios, one with the project, the 'Do-Something' (DS), and one without, the 'Do-Minimum' (DM).
10.19. In the DM, it was assumed the project was not implemented (i.e. no new stations, and no change in service frequency).
10.20. The benefit applied in the BCR calculation was then the incremental benefit of the DS against the DM (i.e. DS – DM).
iii. Evaluation Scope
10.21. A proportionate, high-level approach was taken throughout the evaluation, with focus on the main benefits and costs and retaining consistency with the original appraisal where possible.
10.22. The evaluation covered all stations on the Larkhall to Milngavie ( Table 27) with the exception of the central Glasgow stations (Partick, Exhibition Centre, Glasgow Central, Glasgow Queen Street and Argyle Street). They were excluded as the frequency improvements at these stations were relatively minor. Furthermore, it would have been difficult to isolate the impact of the Larkhall – Milngavie project due to other network improvements implemented during the relevant period (e.g. the Airdrie to Bathgate link which will also have influenced demand at some of the central Glasgow stations).
10.23. The main project benefits and dis-benefits are:
- change in public transport revenue (rail, bus);
- rail user (both existing and new) benefits, predominantly journey time savings;
- non-user benefits due to fewer car trips (e.g. external costs of car use such as decongestion);
- lower indirect tax revenue as increased spending on rail means less spending elsewhere.
10.24. Each of these are discussed below including, where applicable, the STAG guidance applied to monetise each one.
Public Transport Revenue
10.25. The rail improvements delivered by the scheme (either new stations or service frequency improvements) have generated additional rail demand and therefore additional rail revenue.
10.26. However, evidence from the User Survey (see Chapter 5) suggests part of this additional demand has been abstracted from bus. Therefore, there will have been a fall in bus demand and revenue resulting from the project which will have offset the increase in rail revenue.
10.27. To determine the incremental rail revenue generated by the project, the DS and DM revenue streams were calculated as documented in Table 51 in Appendix C.
10.28. The DM and DS rail demand over the 60 year appraisal period is shown in Figure 30.
Figure 30 DS and DM Rail Demand, 2006 – 2065
10.29. The total 60 year rail revenue (in 2010 prices and values) in the DS is £516.5m and in the DM £446.6m. The total incremental rail revenue (DS – DM) is therefore £69.8m.
10.30. The small level of abstraction from bus to rail (based on the User Survey results) will reduce bus revenue by £2.5m over 60 years (in 2010 prices and values). Levels of abstraction from bus were determined from the User Survey and an average fare of £1.50 (2014 prices) was applied.
10.31. The incremental public transport revenue impact due to the Larkhall – Milngavie project over 60 years (in 2010 prices, discounted) is therefore £67.4m, as shown in Table 28.
| Revenue | Value £m |
|---|---|
| Rail | 69.8 |
| Bus | -2.5 |
| Total | 67.4 |
Values are 60 year totals discounted to 2010 prices and values
User Benefits
i. Journey Time Savings
10.32. The Larkhall – Milngavie project has delivered significant time saving benefits for existing and new rail users.
10.33. For existing rail users:
- station waiting times have been reduced at stations where service frequencies have improved; and
- station access/egress times have been reduced for rail users that now use the new stations but previously had to travel further to reach existing stations.
10.34. The rail improvements have also improved the convenience of journey-making and/or reduced journey times and therefore generated new rail users who either previously had longer bus-based journeys or who previously did not make the relevant trips at all.
10.35. New users derive half of the time saving benefit ('Rule of a Half'[41]) compared to existing users, in line with transport economic theory.
10.36. The calculation of the value of the journey time savings is documented in Table 52 in Appendix C. The time saving benefits were monetised using Values of Time (VoT) as shown in Table 29.
| Journey Purpose | Value of Time (£ per hour, 2010 prices) |
|---|---|
| Commute | 6.81 |
| Business | 26.86 |
| Leisure | 6.04 |
Source: STAG
10.37. The value of the journey time savings over 60 years (in 2010 prices and values) is £390.4m as shown in Table 30.
| Journey Time Savings | Value £m |
|---|---|
| Existing User | 361.2 |
| New User | |
| Abstracted from bus | 11.8 |
| Previously did not travel | 17.4 |
| Total | 390.4 |
Values are 60 year totals discounted to 2010 prices and values
ii. Crowding and other Benefits
10.38. Other potential user benefits such as crowding relief were not considered. Whilst there may be some localised crowding on peak services to Glasgow, the impact on crowding of the Larkhall – Milngavie project is likely to have been minimal and was therefore not included in either the original appraisal or that being reported here.
Indirect Tax Revenue
10.39. Schemes such as the Larkhall – Milngavie that generate rail demand shifts consumer consumption from alternative goods and services to rail. This impacts indirect taxation revenues because:
- diesel rail fuel duties are considerably lower than road fuel duties and many trains now run on electricity; and
- rail fares are zero-rated for VAT.
10.40. STAG guidance was applied to calculate the indirect tax impacts due to the generation of rail demand resulting from the Larkhall – Milngavie project. This involved calculating the difference between the DS and DM rail revenue (as per Table 51) and applying the indirect tax rate of 19%.
10.41. The value of the indirect tax impacts over the 60 year appraisal period (in 2010 prices, discounted) is -£13.9m as shown in Table 31.
| Indirect Tax impacts | Value £m |
|---|---|
| Commuting | -11.1 |
| Business | 0.0 |
| Leisure | -2.8 |
| Total | -13.9 |
Values are 60 year totals discounted to 2010 prices and values
Non-User Benefits
10.42. User Survey evidence indicated that there has been a mode switch from car to rail as a result of the Larkhall – Milngavie project which will have led to a (slight) reduction in traffic congestion and other traffic-related non-user benefits. At the appraisal stage, it is typical to monetise these non-user benefits (i.e. benefits to travellers who are not the primary users of the enhanced rail services).
10.43. Given the Larkhall – Milngavie project is now at the evaluation stage, it was decided not to include these non-user benefits in the core BCR calculation as the assumptions applied would be appraisal-based. However, to retain consistency with the appraisal BCR, the non-user benefits were still calculated and in the BCR calculation presented below, as well as the core BCR (i.e. excluding non-user benefits), the calculation is repeated but including non-user benefits.
10.44. The primary method for estimating non-user benefits is based on Marginal External Costs (MECs). The use of road vehicles incurs both private costs borne by the individual traveller (i.e. fuel costs, travel time and external costs borne by other). For cars, these external costs include congestion, air pollution, noise, infrastructure and accident costs.
10.45. A mode shift to rail therefore brings the following benefits:
- congestion relief due to fewer cars on the road;
- infrastructure relief as fewer cars means less requirements for road works;
- accident relief due to fewer cars on the road;
- air quality improvement as per person transported, emissions from rail are lower than from car;
- noise reduction as per person transported, noise from rail is lower than from car; and
- greenhouse gas reduction, since the per-passenger-kilometre emissions from travel rail are lower than from car.
10.46. However, there is also a dis-benefit to government as fewer car trips results in lower spending on car fuel and so the government collects less indirect tax.
10.47. STAG guidance was applied to calculate the change in these external costs arising from the reduction in car trips resulting from the Larkhall – Milngavie rail project, as documented in Table 53 in Appendix C.
10.48. The value of these benefits over the 60 year appraisal period (in 2010 prices and values) is £11.8m as shown in Table 32.
Values are 60 year totals discounted to 2010 prices and values
User Charges
10.49. There may have been some change in rail user charges as some passengers may now be paying higher fares such as those who previously boarded trains at Hamilton Central but can now board at Larkhall (which is in a higher-fare zone).
10.50. However, this impact is likely to have been small[42] and any increase in fare has likely been offset by a reduction in access time and costs.
10.51. This impact is therefore not included in the calculation of the PVB.
Wider Economic Benefits
10.52. The original appraisal anticipated that the project would bring other benefits that could not be easily monetised such as Wider Economic Benefits (WEBs).
10.53. This impact was assessed in Chapter 8 and concluded that whilst there is some evidence of small-scale localised impacts, in general the WEBs generated by the Larkhall-Milngavie rail project have been limited.
10.54. WEBs are therefore not included in the recalculation of the PVB being reported here.
PVB Summary
10.55. The total PVB over 60 years is £443.9m as shown in Table 33.
| Benefit | Value £m |
|---|---|
| Public Transport Revenue | 67.4 |
| User Benefits | 390.4 |
| Indirect Tax Impacts | -13.9 |
| Total | 443.9 |
Values are 60 year totals discounted to 2010 prices and values
10.56. If the marginal external costs (£11.8m) are included, then the PVB increases to £455.6m.
10.57. The costs of the Larkhall – Milngavie rail project can be broken down as follows:
- capital costs;
- operational costs;
- maintenance costs; and
- renewal costs.
Capital Costs
10.58. The project capital cost covered the construction costs of building the new track and stations. The total outturn capital cost was £34.5m, with funding as shown in Table 34.
| Source | Value £m |
|---|---|
| Scottish Government | 25.0 |
| Strathclyde Passenger Transport | 9.1 |
| South Lanarkshire Council | 0.4 |
| Total | 34.5 |
Source: Transport Scotland
10.59. For the purpose of this exercise, it was assumed that the capital cost was spread equally over the two years of construction, 2004 and 2005.
Operational Costs
10.60. The operational costs associated with the project include the cost for leasing extra trains, staff and fuel costs, and track and station access charges.
10.61. The operational costs were agreed by Transport Scotland under the franchise agreement with First ScotRail awarded in 2004. As part of their bid, operational costs were proposed for the project under a priced option. These are broken down between variable operational costs ( Table 35) and track and station access charges ( Table 36) for the life of the 10 year franchise.
10.62. It was assumed that these are the outturn costs (although they were 2004 forecasts). The 2014/15 values were assumed to apply each year until the end of the appraisal period with no real increases applied.
Source: ScotRail Franchise Agreement, Section 3
Source: ScotRail Franchise Agreement, Section 3
Maintenance Costs
10.63. Maintenance costs of the new assets were covered by SPT until added to the railway Regulatory Asset Base[43] at the start of Control Period 4 in April 2009 ( Table 37). The cost is a fixed cost charged by Network Rail under terms agreed by the Rail Regulator.
Table 37 Maintenance Costs, 2005/06 – 2008/09
| Maintenance costs (£) | 2005/06 | 2006/07 | 2007/08 | 2008/09 |
|---|---|---|---|---|
| 85 | 214 | 229 | 245 |
Source: Transport Scotland
10.64. From 2009/10 onwards, any maintenance costs are covered by the Regulatory Asset Base and so it was not possible to extract the precise maintenance cost attributable to the Larkhall – Milngavie rail project. The 2008/09 maintenance cost (£245k) were therefore assumed to continue to apply each year until the end of the appraisal period with no real increases or decreases applied.
Renewal Costs
10.65. It was assumed that renewals to the new stations and tracks will be undertaken to continue to provide an acceptable environment for rail passengers and to ensure public safety.
10.66. These costs were assumed to be 10% of the capital cost, spent every 10 years, with the first renewal due in 2016.
PVC Summary
10.67. The total PVC over 60 years is £160.4m as shown in Table 38.
| Cost | Value £m |
|---|---|
| Capital Costs | 39.9 |
| Operational Costs | 104.6 |
| Maintenance Costs | 7.5 |
| Renewal Costs | 8.4 |
| Total | 160.4 |
Values are 60 year totals discounted to 2010 prices and values
Calculation of Benefit Cost Ratio
BCR Analysis
10.68. Table 39 shows the PVB, PVC, NPV (calculated as PVB – PVC) and BCR (PVB/PVC) as recalculated on the basis of the analysis described above.
| Item | Value |
|---|---|
| PVB (£m) | 443.9 |
| PVC (£m) | 160.4 |
| NPV (£m) | 283.5 |
| BCR | 2.77 |
PVB, PVC and NPV are 60 year totals discounted to 2010 prices and values
10.69. The BCR is therefore recalculated as 2.77. If the PVB includes marginal external costs (£11.8m), then the BCR increases to 2.84.
10.70. With a BCR greater than 1, this indicates the benefits outweigh the costs.
Comparison against Original BCR
10.71. The original project BCR calculated at the appraisal stage was 0.66. The recalculated BCR therefore represents a significant improvement over the original BCR.
10.72. However, as discussed in section 10.16, due to changes in appraisal methodology, a direct like-for-like comparison is not possible.
10.73. To overcome this, two sensitivity tests have been run as shown in Table 40:
- as per current STAG guidance but assuming a 30 year appraisal period;
- as per current STAG guidance but assuming a 30 year appraisal period, a 1994 price base year and a discount rate of 6%.
10.74. Note however that even when implementing the above, inconsistencies remain between the two appraisal methodologies (e.g. appraisal values such as values of time which will have been updated since 2000 as a result of new research).
10.75. The sensitivity tests show that, even with a shorter appraisal period and higher discounting of future year benefits, the project's benefits still outweigh its costs.
It can therefore be concluded that the outturn benefit cost ratio of the Larkhall – Milngavie rail project is significantly higher than that reported in the original appraisal and indicates that the project's benefits outweigh the costs.