U-Link’s Value: An Introduction to Costs

Yesterday, Sound Transit’s University Link extension finally opened to much fanfare. And deservedly so. Sound Transit projects that the extension will serve between 71,000 and 78,000 riders per day by 2030. At a 1.9 billion total cost, the project’s cost per daily rider is between $24,000 to $27,000 or roughly speaking $25,000.

Now quick question: is $25,000 per rider for a subway project too much, a bargain or a fair cost?

The answer to this question is not obvious and the overwhelming majority of Americans, including and even many ardent transit supporters, would probably not have a sound argument about the cost-effectiveness of the project. Most arguments on public transit talk in general platitudes about the importance of regional transit, growth, the environment, and world class cities or, on the other side argument, general platitudes about how transit won’t work here or transit should pay for itself.

This is a problem and the reason it’s a problem is that the actual benefits of public transit are within an order of magnitude of the costs. A project may be worth twice its cost or even maybe four times its cost, but it’s impossible to find a project worth ten times its cost, at least in a developed country. This means that if $25,000 is a fair (per rider) price for a project we should wonder whether an $100,000 project is a fair (per rider) cost for a project and be extremely skeptical of projects whose costs per rider are in the range of $250,000.

So how valuable is a $25,000 per rider subway extension? The simplest way to answer this question is to assume constant ridership over 50 years with a 2% discount rate and then determine the value per ride that makes the project worth it’s cost. For my calculations I estimated 73,000 riders and a 1.9 billion dollar cost. At those figures U-Link breaks even if we value a ride on U-Link today at $2.20. More realistically we would need to value each ride at at least $2.40 for the project to be worthwhile as break-even is generally not worth government investment.

This type of analysis represents a useful starting point for reasoned conversation about costs and benefits. If instead of $2.40 per ride the calculations suggested that the minimum benefit necessary to justify the project was five times higher at $12 per ride, the conversation would be much different. At almost five times the current fare, $12 per ride is a lot of money to spend for each rider. But $2.40 per rider is well within a realm of reason and compares favorably to current U.S. public transportation spending. U.S. transit agencies’ farebox recovery is typically around 30% (King County Metro is 29.1%) meaning that if the fare is $2.50 then $5.83 is being spent to subsidize that trip. Now this is comparing operating costs to capital costs and comparing what is often lifeline transit service with premium transit service, but overall $2.40 is a reasonable subsidy per ride compared to existing public spending, while $12 should require serious justification. 

Now this dollar per ride analysis is at best a proxy for the actual benefit of the investment. For starters, different ridership estimates may project different numbers of years into the future or use different nominal dollars and so the comparison is not always apples to apples. It also ignores systematic benefits. Many riders using Lynnwood Link will take advantage of the new tunnel between downtown and Husky stadium even if they don’t get off at one of the two stations. For this reason, core segments are more valuable than their ridership numbers would suggest.

But the more fundamental problem is that a particular ridership projection likely ignores some of the long-term growth potential around the station. Areas that have the opportunity for long range major development over 20 or 30 years should score higher than 10 year ridership estimates would suggest. Inversely, areas with minimal growth opportunities should score lower than 10 year ridership estimates would suggest. Nonetheless, cost per rider should serve as the jumping off point when discussing the merits of various high capacity transit investments.

Sound Transit is currently planning it’s ST3 ballot measure for November 2016. So with that in mind below is a table below showing the cost effectiveness of some potential Sound Transit 3 projects as well as Sound Transit 2 projects that are in the planning or construction phase.

cost per rider 2

 

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6 thoughts on “U-Link’s Value: An Introduction to Costs

  1. Interesting analysis. As we’ve talked about before, I think other externalities should also be included: recovered time from avoiding traffic, health benefits from less exposure to CO, CO2, NOx emissions, etc.. Hard to quantify but also very much necessary in justifying capital investment in rail.

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    • Yes, but ridership is a proxy for those positive externalities. Roughly speaking, each additional rider you have means less carbon and more travel time savings. But at a certain point, the cost of subsidy for a rider isn’t worth the benefit, and especially so if given a counterfactual of spending on expanded bus service. I’m not sure exactly where that point is and clearly it is dependent on the farebox recovery ratio of the service*. But I think $10 per rider or more is unambiguously too much to pay.

      *For example, in Vancouver, Skytrain fares more than pay for Skytrain operational costs largely because the Skytrain is automated. Thus, the only subsidy for Skytrain is for construction so a higher subsidy per rider is reasonable for their capital projects.

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      • I see. That makes sense since all the positive externalities are based on ridership as well.

        A further exercise that I personally want to do/see is a comparison between these costs and highway infrastructure and private spending on automobiles. I think it’s really fascinating that the cost per rider for U Link came out to about the same as the cost for your average automobile.

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  2. Something to consider about cost and “efficiency” is that, for a voter submitting their ballot, the choice is rarely between proposal X and some other more efficiently constructed policy meant to get the same benefits. For example, wage subsidies seem to clearly be better than minimum wages (they more directly target the poor, they distribute the costs more evenly throughout society). However, wage subsidies are simply not politically feasible at this point in time. Therefore, when faced with a proposal to wage the minimum wage to $12 or $15, it might be advisable for someone to vote for that policy, assuming they are in favor of wealth redistribution in favor of the poor, despite knowing that it is an inefficient policy.

    If we apply this same notion to infrastructure projects and public transit, we may find that it is valuable to support “inefficient” projects that have a chance of success when put up for a vote. Public transit projects like a light rails or buses are much more progressive forms of government spending than many other infrastructure projects. There are cost barriers that prevent poor people from accessing cars and thus benefiting from things like highway projects, parking subsidies, or parking space requirements. Subsidizing stadiums may help create a sense of community, but the economic benefits for those in lower income brackets are very “trickle down” and frequently aren’t realized. Therefore, political realities may be such that a progressive voter should support a public transit project that has a higher than desirable cost per rider.

    Something to think about. Discussions of cost and efficiency can often be abstracted to the point where they no longer serve as useful guides for a voter or public policy maker (this isn’t to suggest your post did that at all).

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    • Agreed. I think this post raises two issues for constituents. First, are the marginal projects in the table (those with dollar per ride values between $4.50 and $7.00) worth it in an absolute sense? You’d really have to dig more into the operating costs and development opportunities to answer that question, but it’s not obvious that the region is better off with those projects than without them.

      If those projects are worth it, then voters should approve the package despite the money being light on fire on the east side. But we don’t have a package yet and it would behoove residents of the eastside to push Sound Transit to build more beneficial projects in exchange for their votes. If I lived on the eastside, I would be livid that my tax dollars were going to fund such terrible ROI investments.

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