The on-going Transport Select Committee (TSC) Inquiry into Transport and the Economy has put the spotlight once again on the link between transport investment and economic growth. While its starting point is the acknowledgement that “a good transport system is a pre-condition of (…) the UK’s economic recovery” the TSC is now tasked with revisiting the findings of the Eddington report and to answer two key questions:
- What types of transport investment should we prioritise?
- Do we have the right tools for the job?
A significant amount of work has taken place in the wake of Eddington, and especially over the past year, which suggests that the right tools do exist. The problem, I would argue, is that we are not using them in the right way. As a result, we are failing to give due weight to some of those projects which can deliver the greatest impact on jobs and the economy. I am of course talking about the treatment of wider economic benefits (WEBs) in the Department for Transport Transport’s Appraisal Guidance.
In a perfect world
It is worth taking a minute to examine the approach to appraisal currently followed by the DfT. Its key underlying assumptions are, in my view, that markets are perfectly competitive, that there is no unemployment or the potential for transport investment to influence exogenous growth.
This gives rise to the DfT’s classic welfare approach which concentrates on valuing travel time savings (plus a few monetised externalities). In this parallel world, every minute of monetised travel time saved is worth the same wherever it may take place (although this does vary by trip purpose) and will eventually affect the behaviour of firms and individuals to generate a new optimal state of equilibrium across the economy.
Back to reality
The Eddington report (and before it the 1999 SACTRA report) brought these assumptions into question by recognising that, under conditions of imperfect competition (some people would call this the real world), transport can contribute towards agglomeration economies. Increased agglomeration, it has been shown, can drive up productivity and wages and may also lead towards a more efficient labour market and lower consumer prices. The impact of transport investment on agglomeration is also much more pronounced in large urban areas, where there is a much higher density of businesses and workers than elsewhere. The accelerated growth over the recent years in city centre employment in the largest UK conurbations, and the concomitant growth in rail commuting, can be interpreted as a sign of agglomeration economies at play.
The effect of transport investment on agglomeration economies and productivity was recognised by the DfT with the publication, almost a year ago, of TAG Unit 2.8 on Wider Impacts and Regeneration, which remains under consultation to this day. While this guidance document provides a robust methodology for assessing wider economic benefits of transport projects the DfT has shown no sign of intending to allow the inclusion of WEBs in the calculation of benefit cost ratios (BCRs). This is somewhat alarming given the explicit objective of the Coalition Government to re-focus spending on those projects with the potential to deliver the greatest returns in terms of economic growth. If WEBs vary between different types of scheme then excluding such benefits from appraisal would surely undermine national objectives.
But do WEBs vary to any great amount between schemes and do they have a material impact on BCRs? Well, I’m afraid that the answer is yes on both counts. With respect to the first question, a recent report by Deloitte and PBA compared several UK schemes and found that those significantly improving accessibility across large urban areas, and to city centres in particular, are likely to have much greater agglomeration benefits than inter-urban or rural projects. On the other hand, the report also suggests that while London public transport schemes produce the greatest agglomeration effects in absolute terms, higher unit construction costs mean that the impact of WEBs on BCRs is of a similar size in the capital and in the metropolitan areas.
Turning to the second question, there’s a growing body of evidence which highlights the scale of the potential economic impact of transport investments:
- Analysis of the Leeds trolleybus proposal by Steer Davies Gleave shows that its impacts in terms of job creation and economic output are of approximately the same order of magnitude as the direct benefits to transport users in terms of travel time savings;
- Analysis by CEBR in the West Midlands shows that the job creation benefits of the Coventry Spirit Bus Rapid Transit and of phase 1 of the Midland Metro light rail scheme are, respectively, 30% and 50% higher than the capital cost of these schemes.
- These findings are echoed by SDG’s analysis of the Northern Rail Hub scheme in Manchester and the Centre for Cities work on agglomeration and growth in the Leeds City Region. These reports agree that public transport schemes improving city centre accessibility can generate wider economic benefits corresponding to 20-25% of total benefits.
While some methodological issues do remain on the extent to which the totality of these benefits represent national net impacts it is clear that WEBs cannot be ignored if we are to make the right investment decisions for the economy and the public purse. At a more fundamental level, it has been argued by some that, at times of financial difficulty in particular, investment decisions should prioritise financial benefits accruing directly to the the Exchequer (such as the increased taxation arising from agglomeration economies) over those accruing to individuals (such as pure travel time savings to commuters). This is already the approach followed by some government bodies such as the Department for Work and Pensions (DWP). And while the DfT and DWP may be worlds apart in policy terms I would suggest that in the looming age of de-ringfenced budgets, localism, tight financial constraints and focus on economic growth investment appraisal needs to become increasingly consistent across departments. Instead of concentrating on improving the accuracy of existing methodologies further the DfT needs perhaps to take a step back and make sure that it is actually counting the right benefits in the first place. That should help ensure that we all get the greatest bang for our buck in the difficult times ahead.
This article was first published in Local Transport Today.