Railways, costs and benefits — the long view

A railway bypass route for Winnipeg has been endorsed by Premier Wab Kinew for further feasibility study. Naturally, critics have emerged that question the economics of a railway bypass.

Doubters want to be convinced that the benefits exceed the costs, and quite rightly.

So, how should we be thinking about costs and benefits?

It is always easier to estimate the costs of large infrastructure projects than it is to measure benefits. Rail contractors can provide cost estimates of the kilometres of rail bed construction and rails required, plus the additional switches, overpasses and a railway trestle that will be needed. Land acquisition is a major cost and time delay.

The proposed railway bypass can share the Manitoba Hydro right-of-way for about 80 per cent of the route. This is a huge cost avoidance.

Regardless, the construction cost is large; is the cost-benefit ratio positive?

Public cost/benefit studies are different than the calculations made by the private sector. A corporation need only consider whether the investment’s net revenues after taxes meets their profit expectations.

Government must consider positive and negative externalities, as well as the direct economic returns from infrastructure investments.

The railway bypass will have efficiency benefits that can be measured in terms of increased traffic flows and speed, and reduced time making interchanges between the railways. Time savings and improved utilization can be monetized for the analysis.

These benefits are likely to be significant because more than 60 per cent of rail traffic is neither destined for, nor originating in, Winnipeg. Long unit trains roll through the city carrying oil, grain, potash and lumber, stopping only to refuel and change crews. The railyards sort cars and containers that subsequently travel east, west, and south from Winnipeg.

Governments have a responsibility for public safety. The railways are highly focused on safety, rules and regulations, too. They welcome opportunities to be safer still by substantially reducing risks. The railway bypass is a safety enhancement, but the safety benefit is likely to be modest, barring some catastrophic accident.

A critical element in a cost/benefit calculation is the time horizon. The costs occur at the construction phase, while the public benefits are spread out over long periods. To equate costs and benefits over time, dollars are converted to their net present values based on a discount rate. The mathematics is essentially the inverse of compounding interest. Money today is worth more than money received later.

Depending on the discount rate, benefits received after 20 years tend to add little to the cost/benefit calculation.

This underestimates the benefits of railway infrastructure that can last centuries. The work around is to add a salvage value as a benefit in the 20th year. In this case, the salvage value would be the cost of replacing the railway bypass.

Positive externalities are benefits received indirectly. Building the railway bypass is like knocking over a row of dominos. The bypass creates the potential to relocate rail operations and repurpose the rights-of-way within the city. Economics would encourage the shift of aging railyards to modern facilities with better access to the railway bypass.

Some lightly used rail lines could be shared with commuter services like the Go Train does in Ontario. Commuter rail service to surrounding communities, like Selkirk and Niverville, would reduce highway traffic congestion.

In other cases, such as the Brooklands, the former right-of-way could become a recreational path like the Northeast Pioneers Greenway that parallels Gateway.

Areas that are criss-crossed with rail lines or divided by rail yards could be redeveloped as residential areas. St. Boniface and River Heights come to mind in this regard. The benefits of redevelopment are hard to put a number on, but they may provide the largest financial benefits in the form of land sales, tax revenues, and new amenities.

Also, the railway bypass could eliminate the need to build grade separations at busy locations on Lagimodiere and the Perimeter Highway, not to mention replacing the Arlington bridge.

Critics want to see a hard analysis, but public cost/benefit deals with benefits that have no market prices, such as the time wasted waiting for a train to pass on Grant or the other 120+ level crossings in the city. The remedy is to use shadow prices, to estimate congestion benefits based on a proxy. The closest proxy for the railway bypass is the Perimeter Highway truck bypass that was also constructed by public money.

Cost-benefit analysis is a useful tool for ranking projects, but it is not always necessary to make an informed decision. No one needs a cost/benefit analysis to decide when to change the tires on their car.

The railway bypass creates the opportunity to modernize Winnipeg’s rail hub and permanently transform the urban environment.

The benefits will continue to mount long after the cost is repaid.

Barry E. Prentice is director of the Transport Institute at the Asper School of Business, University of Manitoba.