St. Louis Urban Corps
 
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Source: www.looptrolley.org
Like most St. Louisans, I was exited to learn that the St. Louis Trolley Project would receive a $25 million grant from the federal government.  The grant takes the project one huge step closer to becoming a reality.  Once the project leaders raise the remainder of the $44 million (at least) required to put the system in place, they will begin building a trolley line to connect the Delmar Loop to Forest Park.  As somebody passionate about development in St. Louis, I have great visions for the impact that this project can have on our community, both economic and intangible.  Among the intangible potential returns are improvements in quality of life for St. Louis residents and St. Louis' reputation and how visitors to the city perceive us.  But being a business student, I am curious what the economic impact of the project might reasonably be.

The most recent Urban Corps poll asked St. Louisans whether they felt the project would yield returns for the community worthy of the $44 million price tag.  The results of that poll are available on the Polls page.  But what is the anticipated return on investment (ROI) for the Trolley Project?  The answer is anything but clear.  While I am not in a position to make such a projection, I will attempt in this article to provide a rough sense (very rough) of what would have to happen in order for the ROI to be a positive one.

To start, let us examine the feasibility study conducted for the project in 2000, paid for by Metro (formerly the Bi-State Development Agency).  The study is often cited for having deemed the project feasible and for indicating that the project would stimulate economic development. (See, e.g. The Loop Trolley website, HeritageTrolley.org, and the St. Louis Business Journal)  But it is important to keep in mind that feasibility does not necessarily translate to profitability.  Unable to find that study anywhere online, I did some good-ol'-fashioned investigative journalism and tracked down a copy, courtesy of the East West Gateway Council of Governments.  I am now making it available to you here (see below).

Looking more closely at the study, the findings do not give much guidance for those seeking an estimated ROI for the project.  The specific finding was that the project was "technically feasible," meaning that there were no obstacles that would make construction of the line impracticable.  The study did discuss the potential of the project for stimulating economic development, but it made no attempt to quantify how much development might occur.  What the study did quantify, however, was the projected operating deficit of the trolley.  I will use those numbers to get some sense of what it would take to generate a positive ROI for the project by conducting a "quick and dirty" break even analysis.

Let us assume the feasibility study projection for the operating deficit is correct.* With trolley fares of $2.00, the study anticipates an annual operating deficit ranging from $438,600 to $629,000.  That operating deficit thus represents the annual investment required to sustain the trolley system.  Going forward, I will use the study's "Medium Forecast" of a $534,600 deficit.  In other words, the annual returns on investment in the form of economic growth would have to be greater than $534,600 per annum in order to eventually yield a positive ROI.

Assume further that the operating deficit holds steady for the life of the trolley's operation (i.e. ignore inflation).  One study prepared for the American Public Transportation Association (APTA) has shown that every billion dollars of annual investment in public transportation can yield $3.5 billion of GDP.  (The report is provided below.)  Let's make another assumption that the Trolley Project can achieve those 3.5 to 1 average annual returns.  If it can, then the trolley would generate $1,336,500 of economic productivity per annum (= [3.5 * 534,600] - 534,600).  At that rate, the Trolley Project would break even on a $44 million capital investment in roughly 33 years (not taking into account the time value of money).  Only after that breakeven point would the project yield a positive ROI.

This approach to the analysis is paradoxical.  It would suggest that the higher the operating expenses, the greater the potential economic impact.  That notion is, of course, absurd.  Greater efficiency would yield greater returns, not less efficiency.  Operating expenses are not exactly the kind of annual investments the APTA report envisions in its calculations.  But I use the ratio only as a supposition.

So, if one accepts all the underlying assumptions of this analysis, the question then becomes how likely is it that the trolley will bring more than $1 million of yearly economic productivity.  How much development would have to occur east of the Delmar Loop in order to generate that economic activity?  Would we need to double the size of the Loop?  More?  Less?  Joe Edwards would be in a better position to answer that question than I.

But to provide the simple answer to the question posed at the outset of this article, the trolley project can yield a positive ROI if it generates economic productivity in excess of its operating deficit and if it operates long enough to pay off the initial capital investment (factoring in the time value of money).  That answer sort of states the obvious.  But the analysis I have conducted here sheds some light on an even more profound question.  Even if the trolley project does yield a positive ROI, how strong will those returns be compared to the potential returns of other projects to which the $44 million could be applied?

Whether the ROI of this project will be positive, I cannot say.  Whether there are other projects that would have a higher ROI, I cannot say.  And again, economic returns are only one aspect of the impact the trolley can have on our city.  Whether the investment is a good one needs to take into account all the potential returns.  Many of those returns will, no doubt, be valued very differently depending on the audience.  But projections aside, we have placed our bets that the Trolley Project is a wise investment of limited resources.  With its $25 million grant, so too has the federal government.  I remain hopeful, optimistic even, that those bets will pay off.  I look forward to finding out whether they do.

Evan Weiss
Executive Director
St. Louis Urban Corps


* This is a significant assumption, in part because it depends on their projections for ridership also being correct.  Moreover, the estimated capital expense of the project at the time of the study was only about $20 million - in year 2000 dollars - as opposed to the $44 million plus that the project is expected to run now.  If the necessary capital investment has gone up more than 100% in ten years, operating expenses likewise have most certainly gone up.

2000_trolly_project_feasibility_study.zip
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economic_impact_of_public_transportation_investment.pdf
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