House of Commons - Transport Committee

Transport and the Economy - Transport Committee Contents

Written evidence from London First (TE 45)

1. London First is a business membership group whose aim is to make London the best city in the world in which to do business. We do this by mobilising the experience, expertise and enthusiasm of the private sector to develop practical solutions to the challenges London faces and to lobby government for the investment that London needs in its infrastructure. London First delivers its activities with the support of around 250 of the capital's major businesses in key sectors such as finance, professional services, property, creative industries, hospitality and retail. Our members represent around a quarter of London's GDP.

2. We welcome the chance to address some of the questions posed by the inquiry. Our submission is based on our recent study, Greater Returns - Transport priorities for growth. The full report can be found at www.londonfirst.co.uk/transport

Have the UK's economic conditions materially changed since the Eddington Transport Study and, if so, does this affect the relationship between transport spending and UK economic growth?

3. Britain faces a record fiscal deficit - a material change in conditions since the Eddington Study was published. While this doesn't, in our view, affect the underlying relationship between transport spending and UK economic growth, it does require a fundamental shift in the approach to the appraisal and allocation of transport expenditure.

4. Business believes that as Government starts to balance the books it is vital that its approach is based on supporting sustainable economic growth or, at least, doing as little damage as possible. Infrastructure investment is vital to this growth. The OECD has set out how investment in physical infrastructure increases long-term economic output more than any other kind of physical investment[125].

5. There will of course be other objectives for transport policy beyond maximising growth. They include carbon reduction, which will be spurred by consistently pricing carbon across all investment decisions. But the challenge for transport policymakers is to prioritise limited resources and secure the best returns. As Eddington states: "Where resources are limited and there is a need for prioritisation, it is logical to begin with identifying cost effective transport interventions in areas which are expected to yield the greatest contributions to sustainable economic performance in the UK."[126]

What type of transport spending should be prioritised, in the context of an overall spending reduction, in order best to support regional and national economic growth?

6. London has high levels of productivity: most industry clusters are around a quarter to a third more productive in London when compared to the UK average for that industry[127]. The economic activity in London's Central Activity Zone supports economic activity across the country. In 2007 London purchased goods and services worth approximately £123 billion and sold £130 billion to the rest of the country. London contributes more in tax than it receives in public spending by a margin of between £14 billion and £19 billion a year[128].

7. While transport investment is vital to economic growth, the returns vary considerably from scheme to scheme. Given the state of public finances, it is unlikely that all schemes with a net positive value will proceed, let alone all those that are seen as socially desirable.

8. A clear framework is needed for judging which transport expenditure is most likely to yield the greatest contribution to sustainable economic growth in the UK. This framework needs consistently to capture a scheme's wider economic benefits - "Wider Impacts" or WIs - and incorporate them into the scheme's Benefit Cost Ratio (BCR), such that the economic benefit of all transport spending can be assessed on a like-for-like basis[129].

9. Key to this framework will be a proper assessment of agglomeration impacts - the largest components of WIs - which are increases in economic output created by transport improvements in dense urban areas. A dense concentration of economic activity, businesses and workers creates cost reductions, high levels of productivity, knowledge spillover and efficiency gains. Greater returns are generated from transport investment in areas that, all else equal, have a high employment base (in absolute terms), high employment density, more productive workers and more concentrated activity in productive sectors.

10. Although transport investment cannot in itself generate agglomerations, it can facilitate their expansion, by increasing the catchment population and thereby the employment density. Employment density increases more by a given increase in catchment population - through a reduced journey time - if density is already high. The relationship is non-linear.

11. Agglomeration impacts are pronounced in London and its hinterland. Most industry groupings are a quarter to a third more productive in London when compared to the UK average for that industry[130]. A third of all of London's employment occurs in the Central Activities Zone[131], and contributes disproportionately to the UK's GDP. Inner London contributes 14% of the UK's GDP, and of this Westminster and the City of London alone contribute 4%[132].

12. The greater the increase in effective employment density brought about by transport improvements, the greater the increase brought about by the productivity elasticity[133], the higher the associated WIs. London's population is 7.7 million, estimated to rise to 8.89 million by 2031. Parts of Central London are the densest in the UK. Employment in London is highly concentrated compared to other cities. The City of London's square mile has around 250,000 employees, Canary Wharf around 600,000 employees per square mile.

13. The greater the productivity per worker in an area, the greater the wider economic impact of transport improvements. Major urban areas demonstrate higher per worker productivity. London's GVA per head is 66 per cent above the UK average - £33,200 in 2007. Inner London had the largest GVA per head[134] - £52,857 in 2006, compared with the UK average of £18,945[135]. London's economy is driven by business services, with acknowledged expertise in fields such as management consultancy, financial services and the creative industries. London is home to a quarter of UK enterprises in financial services and a third of UK employee jobs in this sector[136]. Business services is by some distance the largest sector in London with 1.1 million employee jobs[137].

14. The more people living in an area - and more jobs in total - the greater the potential brought about by transport improvements for people to move into higher paid jobs. These benefits will be greater in areas of high population density and high employment density. Over the last decade there have been more than 700,000 workers commuting into London every day[138]. Over 1 billion passengers used the Tube in 2007. Conservative estimates suggest that 1.5 billion journeys will be made per annum by 2020[139]. Two thirds of all rail journeys in the South East are currently to or from London[140], while Crossrail will bring a further 1.5 million new commuters within one hour's journey of the capital[141]. The benefits of the extra capacity delivered by Crossrail and the completion of the Tube modernisation programme are significant in this context.

Are the current methods for assessing proposed transport schemes satisfactory?

15. Quantifying the impacts of transport investment is complex. Government has a sophisticated and well-regarded methodology for capturing the direct benefits to users - so called "welfare benefits", such as journey time savings[142]. But it has yet to implement a consistent and comprehensive assessment of the wider economic benefit of many large-scale programmes.

16. DfT does not request that WIs be assessed for schemes costing less that £20 million (recognising the need for proportionality in the appraisal process[143]). For schemes costing over £20 million, DfT requests that only certain WIs be calculated[144]. It does not require the assessment of the largest component of WIs - agglomeration impacts - unless a scheme falls within, or close to, those parts of England it designates as Functional Urban Areas. And in practice, WIs are not uniformly included in the assessment of all schemes falling in these areas.

17. DfT does not permit a scheme's wider economic impacts to be incorporated into its final Benefit Cost Ratio. Without the systematic incorporation of WIs into Benefit Cost Ratios, a comprehensive comparison of transport schemes' contribution to long-term, sustainable economic growth will be hobbled.

18. In addition, new research is required to understand and quantify the gains from trade generated by transport improvements. We concur with the conclusion of the Eddington Study that "quantifying [their] scale through appraisal is pivotal to informing good transport policy, particularly around ports and airports, and their surface access".[145]

19. Any policy framework for London's airports should be informed by the capture of gains from trade in any appraisal of additional capacity, without which benefits may be consistently underestimated. London's international links are among its greatest assets. The capacity to allow economically viable, frequent direct flights to current key business destinations, and to those cities growing in commercial importance, is fundamental to maintaining these links. The trade gains generated by improving and expanding London's international links should be assessed, to understand whether continued capacity constraints threaten London's success as a world city and the sustainability of the UK as a fulcrum of the global economy.

September 2010

125 Going for Growth, OECD, 2009. Back

126 The Eddington Transport Study, HM Treasury, Department for Transport, 2006. Vol 1. Back

127 Focus on London, GLA, 2009. Back

128 Supporting UK Growth, London First, November 2010. Back

129 The Department for Transport (DfT) calculates the impact of transport improvements in terms both of Direct (Welfare) Benefits and Wider Impacts - or wider economic benefits. Back

130 Focus on London, GLA, 2009. Back

131 http://www.london.gov.uk/thelondonplan/caz/central_activities.jsp Back

132 The Economic Outlook for London, in Economic Outlook, pub. Wiley-Blackwell, April 2010. Back

133 Of public capital to output. Back

134 On a workplace basis. Back

135 Focus on London, GLA, 2009. Back