The UPX Economics and Long Term Gain for Canada's Prosperity

TORONTO, March 10, 2016 /CNW/ - Canada has lots to gain from the UPX transportation infrastructure project yielding first class results and a positive outcome over the course of time. There has been much discussion and debate about the Union Pearson Express (UPX) over the past several weeks regarding its financial and operating performance to date. Commentators and analysts have decried the initial poor ridership figures1 and its high cost per trip at $27.50 for non-Presto card holders.2 They suggest that Metrolinx has spent an inordinate amount on design and branding.3

While some of the criticism may be considered fair and there are certainly lessons to be learned, it is important to note that much of the criticism focuses on what has occurred over a very short time period, particularly in the UPX's first year.

Infrastructure projects, by their inherent nature, deliver returns over a much longer period. It can take decades for project to. Politicians, policymakers and the broader public need to recognize that this is normal course. It is important to have the patience to take a long-term view on infrastructure projects and to have the stamina to play the long game. By taking the short-term view of continuing to do what has always been done and making decisions based on those short-term whims and desires, it would be easy to lose sight of the bigger picture, as this short-term vision, more than anything, has led to a pronounced infrastructure deficit across Canada at $350 billion to $400 billion4 thus hindering competitiveness and long term prosperity as a country.

Let's look at the economics of the UPX project. The project has cost $468 million with approximately $68 million in annual operating costs to develop and build. The project was delivered on time and within budget, an impressive delivery in today's common multimillion-dollar cost overruns and schedule delays. From its outset, the UPX was saddled with a need to demonstrate that it can cover its annual operating costs, although this is a rare occurrence for urban rail services. With the exception of certain transit services in Japan, Hong Kong and Taiwan where revenues exceed annual operating costs, all others tend to lose money.5

Transit ridership delivers economic and social benefits that warrant subsidization. From a policy perspective, reducing car traffic provides congestion relief benefits to users and non-users alike. Productivity benefits also arise from individuals being able to get from point A to point B quicker and with increased on-schedule certainty. In fact, the Toronto Board of Trade suggests that congestions cost the City of Toronto $6 billion annually in lost productivity.

Economic development benefits also arise from new businesses and housing developments, with increased traffic and opportunities for existing business located near stations. Environmental and health safety benefits result from individuals taking a comparatively cleaner and safer mode of travel.

Tourism benefits represent another important component of economic development which are rarely quantified and considered in traditional infrastructure evaluations. These are likely to be quite significant given that UPX connects two of Canada's largest passenger terminals, Pearson International Airport and Union Station. Let's not forget that most world-class cities like London, New York, Paris or Tokyo have airport-to-city centre rail connections, which help to attract investment, and appeal to highly-qualified personnel. These rail connections help host cities to attain worldwide status and prestige. Toronto's own rail connection may yet help the city reach new heights on the world stage.

Metrolinx indicated that ridership needs to reach approximately 7,000 per day for UPX to break even from a purely financial perspective.6 It could still reach that with existing projections indicating a ramp up period of at least three years. When socioeconomic benefits are considered, UPX can operate on a much lower level of ridership to cover its operating costs and pay back its initial capital cost. By taking a holistic, longer term view and considering the UPX's benefits from a broader perspective, the economics of the project stack up.

So yes, there are lessons to be learned and Metrolinx is already taking some positive steps to promote the UPX, including decreasing fares. Still, courage, wherewithal and patience are needed to make long-term infrastructure investment decisions that can maximize socioeconomic outcomes over the long-term, investing in what is referred to as 'shovel-worthy' projects. This is crucial to global competitiveness and long-term prosperity. Jurisdictions that are able to take a longer-term view and understand that "it is not just about the dollar today or tomorrow, but the dollar decades from now" will be the ones that win in this increasingly competitive and globalized world - and by playing the long game, I believe Canada can win." (Alex Kotsopoulos, Collins Barrow Toronto)

About Collins Barrow Toronto:
Collins Barrow Toronto is one of Canada's fastest growing accounting, tax and advisory firms and an indepen­dent member of Collins Barrow, the 8th largest group of chartered professional accountants in Canada. With an entrepreneurial mindset, we pride ourselves in the company we keep and the value we create. Ask us anything. CollinsBarrowToronto.com

1 http://www.thestar.com/news/gta/transportation/2016/02/10/upx-chief-laments-lack-of-early-adapters.html

2 http://www.metronews.ca/news/toronto/2015/09/18/upx-ridership-drops-by-23-per-cent.html

3 http://www.theglobeandmail.com/opinion/editorials/how-toronto-got-a-world-class-gold-plated-half-billion-dollar-empty-train/article28708468/

4 http://www.theglobeandmail.com/opinion/government-alone-cant-fix-canadas-infrastructure-deficit/article21966661/

5 https://en.wikipedia.org/wiki/Farebox_recovery_ratio

6 http://www.thestar.com/news/gta/transportation/2016/02/10/upx-chief-laments-lack-of-early-adapters.html

SOURCE Collins Barrow Toronto LLP

For further information:

Alex Kotsopoulos, Vice President, Economics at Collins Barrow, apkotsopoulos@collinsbarrow.com; Telephone: (647) 726-0486. www.collinsbarrowtoronto.com

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