TITLE: THE HISTORICAL APPROACH TO IDENTIFYING WIDER ECONOMIC BENEFITS FROM MAJOR URBAN RAIL INVESTMENTS: THE LIVERPOOL OVERHEAD RAILWAY – LESSONS FROM THE PAST AND FOR THE FUTURE?
PRESENTATION DETAILS: Transport Economists Group Seminar, London, May 25th 2011
AUTHOR: John Dodgson
John Dodgson was head of NERA Economic Consulting's European Transport Practice until he retired in 2007. He joined NERA in 1997 after over 25 years as an academic economist at the University of Liverpool. John has published extensively on railway economics, and directed rail consultancy studies for the European Commission, the UK Department for Transport, the Office of Rail Regulation, and the former Strategic Rail Authority. After retirement he worked on the measurement of Total Factor Productivity growth in nineteenth century British railways, and was a Visiting Fellow in the Department of Economic History at the London School of Economics. He is now undertaking research on Gregory King and the measurement of economic activity in late seventeenth century England and Wales.
Abstract. This paper is concerned with the measurement of the benefits of urban railways in the cities that they serve. In particular it is concerned with what are termed 'wider economic benefits', which are benefits over and above those that accrue to transport users. The paper uses an historical approach in a case study of the Liverpool Overhead Railway. This electric elevated railway was opened in 1893 and closed in 1956. The paper calculates the financial returns from the railway, the social returns including user benefits (primarily time savings), and total social returns adding in wider benefits in the form of agglomeration economies. The railway did not cover its cost of capital, but social returns adding in user benefits were positive. The paper shows how there are also likely to have been wider economic benefits, and provides both an estimate of these and some reflections on the way such wider benefits should be included in future rail project appraisals.
Acknowledgements. I should like to thank Frank Geary for providing access to his and Stark’s detailed data on regional incomes per head, Graham Milne for providing information on the economy ofnineenth century Liverpool, and Stephen Gibbons, Henry Overman and Michael Spackman for valuable comments on an earlier draft. I alone am responsible for the contents of this paper and methods used. Information was obtained from the following libraries: British Library of Political & Economic Science, London School of Economics; Crosby Library, Local History Collection; Liverpool and Merseyside Record Office, City of Liverpool Library; Merseyside Maritime Museum; National Railway Museum, York; and Sydney Jones Library, University of Liverpool. An earlier version of this paper was presented at the 4th International Railway History Conference in Mechelen, Belgium, in May 2010.
- INTRODUCTION/MOTIVATION
This paper is concerned with the impact of urban railways on the cities that they serve. This is a topic of major concern at present in the United Kingdom. A number of major extensions to the urban rail system are presently under construction, including the major west-to-east mainline Crossrail system in London, and the East London line extension. Crossrail will provide services across central London through the West End and the City and a link to the major financial centre at Canary Wharf, while the East London extension, which opened in April/May 2010, links a number of economically-deprived districts to the east of the city centre. Neither of these two lines could be justified by conventional cost-benefit analysis which includes as a benefit time savings to travellers, but their economic case has included what are termed ‘wider economic benefits’ (or simply ‘wider benefits’). A major motivation for this study is to see if there are any historical lessons in regard to the estimation of such wider economic benefits.
The paper uses as a case study an urban railway not in London, but in another British city, Liverpool. This railway is the Liverpool Overhead Railway (henceforth LOR) a pioneering elevated electric passenger railway opened in 1893. In 1891 the population of the City of Liverpool was 630,000, and the Merseyside conurbation, of which Liverpool was the major city, was 908,000. By comparison the population of the London conurbation was 5,638,000, South East Lancashire 1,894,000, West Yorkshire 1,410,000, Clydeside about 1,350,000, and the West Midlands 1,269,000 (Mitchell, 1988, p.19). Liverpool was the most important British port after London, and the city centre was the location of the headquarters of many major shipping companies, and of banks, insurance companies, shipbrokers, the corn exchange, the cotton exchange and the Liverpool stock market.[1]
- THE LIVERPOOL OVERHEAD RAILWAY
The Liverpool Overhead Railway was an independent railway company constructed with private capital and no government subsidy. The major motivation for construction of the railway was to avoid congestion on the dock road which ran north-to-south along the line of enclosed docks along the River Mersey in Liverpool.[2] This road suffered from congestion in particular because most of the goods passing through the port used rail freight facilities provided by the different main line railways serving Liverpool. Most of this freight needed to be conveyed across the dock road in rail wagons using the Mersey Docks and Harbour Board (MDHB[3]) system of rail lines (or using road carts), thereby conflicting with horse-drawn traffic along the road. Passengers along the road were conveyed in horse-drawn omnibuses which were able to use the MDHB rail lines but which were required to leave the rails to give way to rail freight (henceforth I refer to these as the ‘line of docks horse trams’).
The main section of the LOR was constructed between 1889 and 1893. The double-track railway was constructed on iron decking 4.9 metres above street level. The first 9.5 km section to be opened ran from Herculaneum in the south to Alexandra in the north, passing through the city centre with stations at Pier Head and James St close to the commercial heart of the city. Most of the line was located inside the Dock Estate, with stations within that estate. Electric traction was used from the start, and signalling was automatic and operated by the trains. The official opening of this first section took place on February 4th 1893, by Lord Salisbury, the British Prime Minister (though not in office at that time) and an amateur electricity buff. Public service started on March 6th.
There were three extensions to the line. Services were extended north to Seaforth Sands[4] on April 30th 1894. A southern extension was opened, mainly in tunnel, from Herculaneum to Dingle on December 21st 1896. Both these extensions brought the LOR within range of middle income residential districts.[5] Finally, the line was linked to the Lancashire and Yorkshire Railway’s (LYR) electrified suburban route from Liverpool to the residential town of Southport by an extension on a conventional railway embankment from Seaforth Sands to the LYR’s Seaforth and Litherland station on July 2nd 1905. The LOR also operated a 4 km feeder street tramway system north from Seaforth Sands to the residential districts of Waterloo and Great Crosby between 1900 and 1925.
When the LOR opened it used a flat fare system, 2 pence for third class, and 3 pence for first class, with some reduced fare tickets for workmen. These flat fares lasted until 1905, when they were abandoned in favour of a graduated system in the face of low fare competition from the corporation trams.
The LOR retained its independence both in the 1923 Grouping of railway companies into the ‘Big Four’ private railway companies, and in the nationalisation of Britain’s railways in 1948. The line closed at the end of 1956, and the structure was dismantled in the following two years after unsuccessful attempts to save it.
The LOR was purely a passenger railway, and it never carried freight.
It is important to consider the relationship between the LOR and other public transport services. The horse-drawn buses using the MDHB rail tracks were withdrawn when the LOR opened, though they were replaced by horse-drawn omnibuses along the dock road.[6] In the 1890s Liverpool was served by a network of horse trams. These ran from the city centre past the southern LOR terminus at Dingle, and on a route parallel to the dock road but further inland north of the city centre. This network was purchased from its private owners by the Liverpool Corporation in 1897 (White, 1951, p.161). The tram network was converted to electric traction around the turn of the century: electric trams were introduced on the southern route along Park St and past Dingle station in November 1898,[7] while the northern route followed suit in 1900. The northern section of the LOR was paralleled by the LYR’s Southport route, further away from the dock road than the trams. This rail route terminated at Exchange Station in the commercial district (and about 500 metres from the LOR Pier Head station). This line was electrified in 1904 and provided faster service than the trams (Forbes et al, 1976).
The link to the LYR at Seaforth and Litherland provided the LOR with connections (and through ticketing) to and from the north of the city, both by interchange with LYR trains and through a direct service that was operated between Southport and over the LOR to Dingle using lightweight electric trains built by the LYR. These provided an hourly service between 1905 and 1913/14, though the service does not seem to have been regarded as very successful and was not re-introduced after the First World War. The LYR also operated an infrequent electric service between their station at Gladstone Dock (close to the LOR’s Seaforth Sands station) and Aintree between 1914 and 1924, while the LOR operated special race day specials to Aintree until 1956. Neither of these Aintree services can be regarded as making a significant contribution to the overall public transport task.
In the centre of the city both the LOR and the underground cross-river Mersey Railway had stations at James St, with entrances located some 150 metres apart. Both Pier Head and James St were located close to the Pier Head terminus of most of Liverpool’s tram routes and the cross-river ferry services.
In the south LOR passengers could transfer at Dingle to tram routes to Liverpool’s southern suburbs of Aigburth and Garston. Some through ticketing was available.
- DATA AVAILABILITY
Because the LOR was an independent company, detailed data on the company’s activities exist. The company produced half-yearly reports up to 1912, and yearly reports from 1913 onwards. These include both financial information and information on traffic levels and train miles operated. The company was also obliged to supply regular information to government. This was published in the Board of Trade Railway Returns up to 1913 (and in less detailed form up to 1923), and in the Ministry of Transport’s Railway Statistics between 1924 and 1938. There was one company history written shortly after the railway closed, by C E Box (Box, 1959), whose father was General Manager and Chief Engineer from 1934 to 1943. Box therefore had some inside knowledge of the railway. This book includes some statistics, plus material on fares and service levels. As well as these sources, I have also usedthe excellent collection of material on the Overhead, and Liverpool Corporation tramways, held at Liverpool City Library in William Brown Street, and the extensive literature on public transport in Liverpool. I have also drawn on the present-day debate in Britain on the estimation of wider economic benefits, and on material on the economy of Liverpool in the late nineteenth and early twentieth century.
Chart 1 shows figures of annual passenger journeys on the LOR in each year of its operation. These figures exclude season ticket travel (which was nevertheless not of great significance). Since the chart only shows journeys on the railway and not the Crosby tramway, I have estimated journeys for the years 1900 to 1913 by assuming that rail journeys accounted for 75 per cent of overall LOR (rail plus tram) journeys. Figures for 1915, 1919, 1920, and 1921 were published separately for rail and tram services by the Board of Trade. Figures for the years 1924 to 1938 were calculated by adding the monthly passenger figures for each year published by the Ministry of Transport in their Railway Statistics. I believe that the figures for the years 1922 to 1925 exclude tramway passengers.[8] Figures for 1939 to 1956 are from the LOR’s own Annual Reports. Finally I have simply interpolated journey figures for 1914, and for 1916 to 1918 from the figures for adjacent years.
Chart 1 shows that demand for LOR services varied quite markedly between periods. From 1893 (when the railway was only open for about ten months of the year) to 1899 traffic grew quite rapidly to 9.7 million passenger journeys. From the turn of the century until the beginning of the First World War traffic was on a slowly declining plateau (the LOR blamed poor general trade conditions towards the end of the first decade of the twentieth century, and this is confirmed by port traffic statistics for the period (Starkey, 1999)). Traffic boomed in the Great War, though I am suspicious that the high peak figures might reflect different ways of measuring passengers when the railway was under Government control. There was sharp decline after the end of the War with the Depression of the 1920s and 1930s, and the lowest point, of 5.5 million journeys was reached in 1932, with some recovery through the rest of the ’thirties. The Second World War saw another traffic boom, albeit adversely affected by the blitz in 1941, but peaking at 13.7 million passengers in 1945. The late ‘forties and ‘fifties saw traffic at high levels, but on a declining trajectory. By 1956, the year of closure (on December 30th) the LOR still accounted for nearly nine million journeys, higher than the levels achieved in the ‘twenties and ‘thirties, and a little above the levels of the 1900s.
The available data have been used to construct ex post estimates of the costs and benefits of the LOR. In section 4 I consider the financial case for the railway by calculating financial Net Present Value (NPV)and financial benefit-cost ratios (BCRs).[9] In section 5 I calculate social cost-benefit returns using social NPVs and BCRs by adding in time savings to travellers and considering other benefits in the form of benefits of increased reliability and reduced congestion. In section 6 I consider the possibility that there were wider economic benefits by considering Department for Transport advice on how these should be measured at present and considering how relevant these methods are in the historic context and given the availability (or should I say non-availability) of historical data. Finally section 7 provides a more general conclusion both with regard to the LOR and with regard to the wider issue of the measurement of wider economic benefits.
- THE FINANCIAL JUSTIFICATION
This section presents the results of my financial calculations. My aim is to look at the case for the railway alone, and not consider benefits of the Crosby tramway. The company’s reports provide information on capital expenditure by half year up to 1912, and separating out expenditure on the tramway. This gives a valuable profile of annual capex. The reports also provide information on working expenses and revenue. Between 1893 and 1899, and between 1926 and 1956 these relate to railway activities only, but between 1900 and 1925 it is necessary to exercise care that tramway costs and revenues are excluded. (Some years there are separate data, some years not.) I have converted all financial figures to constant 1913 prices using the British Retail Price Index (RPI).[10] These figures are then converted to present values using a financial discount rate of 4 per cent. This figure of 4 per cent is taken from Acworth (1905, p.13), the distinguished late nineteenth/early twentieth century railway economist , who used 4 per cent in a simple worked example of railway costs including interest and notes that this value ‘is certainly not high when risk is allowed for’.
Any ex ante estimates of the case for an investment will have to predict the future, and some of these predictions will prove to be incorrect. In the LOR share prospectus the directors predicted that the railway would carry 5 million passengers a year exclusive of excursion traffic, and we have seen from Chart 1 that this total was exceeded from 1894, the first full year of operation, onwards. However, I think that there were three major events that affected the LOR, and which could not have been expected to be predicted in advance. The first of these was the First World War, between 1914 and 1918. This led to Government control of the railway, but to greatly increased traffic. The second event was the Great Depression of the ‘twenties and ‘thirties, which saw a decline in activity in the port, and much reduced traffic on the LOR. The third unforeseen event was the Second World War, between 1939 and 1945. In the second half of 1940 and the first half of 1941, the LOR suffered from enemy action, and services had to be suspended while bomb damage to the structure was repaired. In the later years of the war traffic boomed as Liverpool was the major port for Atlantic trade and because of the build up of men and materials for the invasion of mainland Europe. There must have been other ‘surprises’ too: the electric pioneers of the LOR must have realised that electric traction would eventually come to street tramways, but they appear to have been surprised by the impact of price competition from the corporation-owned electric tramcars. There was also some delay in construction from end 1891 to early 1893, while high inflation, especially during and immediately after the Firts World War, meant that real fares declined.