Tram Construction and Operating Costs

Construction Costs

I’ve been posting a few ideas for tram extensions, so I thought it might be an idea to lay the groundwork by looking at how much the fixed infrastructure is likely to cost. An easy way of doing this is to look at how much recent Melbourne tram extensions have cost.

Box Hill
The Box Hill extension, opened in 2003, is 2.2 kilometres long and cost $28 million.

Vermont South
The Vermont South extension, opened in 2005, is 3 kilometres long. The exact capital cost is tricky to work out, given that the works included upgrading the 732 bus and funding the operation of these services for 4 years (god knows why). Of the $42.5 million total cost, $12 million was allocated to future service operation, leaving us with a construction cost of $30.5 million. This probably overestimates the cost somewhat, given that it includes capital works on the 732 bus.

Docklands Drive
The Docklands Drive extension, also opened in 2005, is just under a kilometre long (my Melway says 940 metres) and cost $7.5 million.

Indexation and calculating an average per-kilometre cost

Using the RBA’s inflation calculator to work out these prices in 2006 dollars* (2007 dollars not yet available), we find that Box Hill would cost $30.46 million; Vermont South $31.58 million and Docklands Drive $7.77 million. This yields an average per-kilometre cost of $10.87 million in 2006 dollars.

*These price increases are based on the Consumer Price Index, not an index of infrastructure costs, so it is conceivable that they may be a little bit out. However given how close we are to the base year, the difference is probably negligible.

Note about economies of scale

I’d say that the provision of tram infrastructure faces an l-shaped long run average cost curve (LRAC) on the scale that occurs in Melbourne, indicating there are economies of scale. Now of course if every city in Australia decided to each build 200 kilometres of tram lines, then we’re going to see some diseconomies of scale due to insufficient skilled engineers and workers – pointing to a u-shaped LRAC. As stated, however, for this to occur, the scale of production would have be implausibly high; so on a city wide scale we can assume that infrastructure investment LRACs are probably only downward sloping. This suggests that a 10 kilometre tram extension ought to cost less per-kilometre than a 500 metre tram extension.

Operating Costs

Shown below are the estimated operating costs over 2004-08 for Melbourne’s train and tram systems – taken directly from page 29 of the Auditor General’s 2005 report on public transport franchising.audit-costs.jpg

Over these five years, the operating costs for trams total $1204 million, or $240.8 million per year assuming no inflation. These costs include lease payments for new rollingstock, which aren’t an operating cost, but rather a (not particularly efficient) way of spreading the costs of capital stock (the trams) over the life of the investment. These costs should be dealt with elsewhere, and will be excluded from operating costs for the purposes of the exercise. This yields $210.4 million in operating costs per annum.

Melbourne has 249 kilometres of tram track. Dividing total operating costs by by the size of the system in kilometres, yields a per kilometre operating cost of approximately $0.84 million per year. As mentioned previously in my infrastructure costs post, these calculations assume constant returns to scale. However, I would suggest that there are significant economies of scale in the industry, so the marginal cost will be lower for a for a city with a large tram system (like Melbourne) than it will be for a city starting up a tram system from scratch. Consequently, the $0.84 million marginal per kilometre cost figure for Melbourne is probably slightly higher than it should be when looking at calculating operating costs for tram extensions.

However, any significant extension to the tram network would likely require more trams, and the hitherto ignored new rollingstock lease repayment figures offer an easy way to estimate these costs. The Auditor General’s report estimates these costs to be around $30.4 million per year. But only about 1/5th of the trams in Melbourne are “new” and purchased under these arrangements. Again assuming constant returns to scale, if all the trams were new, the lease repayments would total around $152 million per year. Divide this by the number of kilometres of track on the system, and we find that the marginal cost (per kilometre) for providing new trams is $0.61 million per year for the life of the asset. I don’t like leaseback arrangements, but they do make it easy to get an annual figure.


11 Responses

  1. Hey Phin

    I said i’d check your blog and i have… like the content and am very impressed by the level of effort!

    a small comment: you can probably use the road and bridge construction producer price index the abs puts out (free downloads from to more accurately index the change in costs of construction. i think it even breaks it down by state – so you could use the vic figure to avoid the especially high price escalation in WA/Qld. this is a data set that uses less data, so is more subject to random error, but should avoid the perils of using CPI…

    that’s enough for now. i am going to keep ploughing through!

    • Thanks so much for making clear the second tip, I have been really uncertian about it for months. My bffs trying to learn more on this issue. I could have sworn I’ve been to this blog before. When I first arrived here I thought I was an expert however now I feel like I don’t understand what I am talking about.

  2. Many thanks for the tip Jason – a road and bridge construction producer price index would be much better than the CPI for indexing this sort of thing – I just didn’t realise it existed. Interestingly, you mention WA and QLD where this sort of inflation is running strongly – these states are perversely where rail projects tend to be good value for money. Look at WA – they got 70km of high standard rail for $1bn – for that price all we get is myki…

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  4. Good job!

  5. The construction index is an indicator of the prevailing market price in a region,it works well in countries where there is transparency and independent auditing of gvt projects.Factors beyond the control of market forces may inflate the price, for example subcontracting a won tender to another party.Tendepreneurs as they are called, have no experience nor expertise in construction,they act as agents or middlemen.They will therefore subcontract the tender to experienced contractors which will increase the final cost.

  6. using this guide and factoring inflation I calculated a pipe dream I often wonder about. connecting the airport to Watsonia via the M80 ring Road corridor using a light rail tram system. this has the potential to connect the airport to 6 suburban rail and tram routes and allow residents not working in the city to link across multiple lines to commute to work via public transport without going anywhere near the CBD currently not possible via any public transport as all tracks lead to the CBD, in 2016 money that cost per km would calculate to 13.71mil so linking the airport to watsonia is approx 350million, half the cost of a short extension the mernda for the train network from south morang so it’s hard to believe that’s even remotely realistic figure. but if you compare to the gold coasts cost of light rail, a system to the airport from watsonia would be more like 3 billion? alot lot more but still this is a government is spending 6 billion to remove level crossing so 3 billion to connect 6 transport routes to the airport seems like incredible value for money to me. be interesting to know if a project like that was actually viable and it’s cost estimate vs the current big money transport spending the state of Victoria is undertaking it never ceases to amaze me projects like this one are never talked about, it’s always into city, out of city, yet most congestion is not in the city these days it’s outside the city and in the suburbs

  7. Dead indited subject matter, Really enjoyed reading through.

  8. I wants to be a mentor in this issue. Incredible.

  9. You remind me of my uncle back in South Dakota. I discovered your site by chance Thank you for sharing your info.

  10. […] A�A� […]

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