Reference no: EM132759338

Task One This deals essentially with backward linkages from the construction works to the local economy in terms of output, expenditure and jobs created.

The key thing about spending on construction is that it is temporary. Hence expenditure of £60 million in one year will lead to increases. However, if the expenditure is at £55 million the next year, this will equate to a reduction of £5 million. So over the profile of the project, spending, jobs, imports etc., will end up exactly where they started. This was the draft cash flow schedule for the project on commencement.

Year    Dates    Actions    Construction Spend
2017    Q4    Tendering Process    £1 million
2018    To Q4    Tendering Process    £1 million
2018    From Q4    Preparation    £4 million
2019    From Q2    Construction    £15 million
2020    Q1 to Q4    Construction    £55 million
2021    Q1 to Q4    Construction    £78 million
2022    To Q1    Testing    £11 million
2022    From Q2    Operation    -
Total                                           165 million

Notional capital spending pattern

The expenditure on construction for the development plan for each of the years of the development plan is given above. The increase in construction output brought about by the investment programme in 2017 (£1 million) should be inserted in cell B12 of the sheet "Construction". This will enable the direct implications on Employment, Income, GDP, and Imports to be read from cells F20, G20, P20, and V20 respectively.

These are limited to the direct effects of the construction work. If the direct plus indirect effects are needed, the results can be read from D39, F39, H39, and J39 respectively. This will incorporate the implications on other industries such as materials supply from the additional construction work.

This will generate additional income throughout the economy. The direct plus indirect plus induced effects can be read from cells D58, F58, H58, and J58 respectively.

Insert the annual spend (in £ million) in Cell B12 of Construction. The main figures on spending etc. can be read off the sheet (in £ million). The impact on employment can be read (in thousands) from cells F20, D39 and D58.

For the second year (2018) the increase in construction output from 2018 will be £4 million. That is a total spend of £5 million (£1 million tendering plus £4 million preparation) less £1 million for 2017.

This can be inserted in cell B12 of a new sheet based on ‘Construction'. The above process should be repeated.

For the third year (2019) the increase in construction output will be £10 million (£15 million less £5 million). By 2021, the construction spend will have peaked. By 2022, the output should fall by £67 million (£78 million less £11 million). This should be inserted into cell B12 of a new sheet as a negative number.

Some adjustment may be taken for the negative effects of the construction process, on the key economic variables, including road closures and partial closures.

Please note that a project of this type would normally involve significant imports from the Rest of the World (RoW) as the trams concerned were manufactured in Spain by CAF, and the electrical equipment plus signalling gear and rails would almost certainly have been imported from RoW. However, in this instance all such equipment is already in the possession of Lothian Trams having been purchased under the previous contract and stored. Lothian Trams have more than enough trams to service this extension and beyond. Hence the costs of such are not required to be considered.

Task Two
Most of the information needed for this task can be found in the Updated Business Case Report from the City of Edinburgh Council. This would rely on the Benefit-Cost Ratios. That is the benefit to the economy from the investment divided by the cost.

However, there are alternative approaches to looking at this using dynamic input output analysis.

Just as Task One covered backward linkages from the project into the local economy, this is concerned with forward linkages. Some of these may well be negative because of traffic congestion created by total and partial road closures during the construction process, while others will be positive because of the benefits of better transportation links that will occur following opening of the extension.

Static input-output analysis will not capture most of the forward linkages for this type because it takes no account of the impact of capital investment. Dynamic input-output analysis will capture that. Unfortunately, no dynamic input-output tables are available for Scotland. They are available for the UK and the dynamic and static forward linkages are given below.

Dynamic forward linkages are different in that they constitute a chain of effects starting with the year of the investment and impacting forward for a number of years.

These results are not inconsistent with those published by Centre for Economics and Building Research (2013) which argued that for every £1 billion spent on infrastructure construction, there would be a boost to GDP of £1.299 billion using a static input-output model. If induced demand effects were included, using a Type II input-output approach, it would increase GDP by £2.842 billion. The above graph is for Type I input- put Analysis and does not include induced demand.

Task Three
The general thrust of the recommendations in the Updated Business Case Report seems to be the reverse of those adopted for the original 2008 contract. This may be a simple reaction against the failures in that approach or may be based on sound reasoning. Please examine the suggestions in the report in this context and also question the reasoning in the original project which were based on reasoned judgements even though they went badly wrong with the benefit of hindsight.

The key questions to be considered are:

Design and build, separating design from construction or a novated approach as used for the first phase.

The decision as to whether to have a separate contract for service diversions or to include it in the main infrastructure contract.

Use of a collaborative contract such as NEC3 or a recourse contract such as FIDIC.

Use of a lump sum contract or a target cost contract.

Use of Bills of Quantities or Activity Schedules.

Attachment:- BriefingCEP.rar