Further written evidence from HS2 Action
Alliance (TE 117a)
Dear Mrs Ellman,
I am writing to you in connection with some matters
addressed at the 30 November 2010 hearing of your Committee.
Specifically, there are two areas where I fear that
the Committee may have been misled:
- The alternatives to HS2.
- The economic benefits that might be expected
to result from HS2.
ALTERNATIVES TO
HS2
You asked Mr Rukin about the alternatives to HS2
and unfortunately, while prominent in opposing HS2, he was not
expert on the detail behind the analysis summarised in his written
submission.
The alternative concerns the uprating of the WCML,
as developed by Atkins for DfT and documented in the HS2 material
published by DfT (as part of the case for HS2) in March 2010.
The relevant reports are "High Speed 2 Strategic Alternatives
Study: Rail Interventions Report" and "High Speed 2
Strategic Alternatives Study Strategic Outline Case" (both
dated March 2010).
The pertinent alternative is "Rail Package 2"
(RP2). It is not an optimised alternative (as admitted in written
response from Jonathan Mitchell[322]),
but even as it stands—and on DfT's own numbers—it
has a lower net cost (£2.0 billion instead of £11.9
billion), a higher net benefit ratio (3.63 as opposed to 2.7),
and can be implemented incrementally and in advance of when HS2
could be available. This has several major advantages. RP2:
- can address the increases in demand that the
Secretary of State for Transport expects to outstrip capacity
in seven to 10 years when they occur (well before HS2 could help);
- can be done in stages in response to emerging
demand, thus avoiding the risks of long term forecasting;
- is much cheaper, and involves no expenditure
during the current parliament—unlike HS2 for which over
£750 million is budgeted—over a third of the total
net cost of RP2;
- is robust to adopting an up to date view of the
productivity of time on board long distance trains, where mobile
phones, mobile broadband and lap tops are making this time increasingly
productive. HS2's largest claimed benefit is from reducing the
wholly wasted time on board the train for business travellers;
- will generate additional capacity for commuter
services, eg at Manchester, and through the grade separation that
prevents the mutual interference of slow and fast traffic. The
reported analysis of RP2 does not, however, explore and quantify
these benefits, in the way that is done for HS2; and
- meets all the forecast demand by DfT with less
crowding on trains that HS2. The 2008 load factor was about 49%,
RP2 has a forecast load factor of 53% for 2033, while HS2 is forecast
to have a load factor of 61% for 2033—with even higher crowding
levels for HS2's classic compatible services north of Birmingham.
RP2 involves lengthening the entire Pendolino fleet
to 11-car, replacing some commuter trains with faster ones, and
has a number of discrete improvements to the infrastructure to
eliminate bottlenecks. It does not include further lengthening
sets to 11-car, although 12-car could be accommodated without
additional works except (as you will probably be aware) at Liverpool,
and at Euston (where the changes are already part of RP2).
Although RP2 does involve work on the existing railway,
which inevitably will cause some disturbance to services, it is
not comparable to the wholesale renewal that the recently completed
WCML Route Modernisation involves. It is primarily about addressing
the pinch-points. Indeed the write-up of RP2 itself describes
how some potential disruption could be avoided by suitable preparatory
works.
I would also like to point out that Matthew Farrow's
observation that "classic extension or extra capacity
would not cost much less" than HS2 is presumably
a reference to the alternative of building an entirely new "classic"
railway (not uprating the WCML, as HS2 has a net present cost
of £25.5 billion against £7.3 billion for RP2). Uprating
the WCML with HS2 has a net cost of just £2 billion.
ECONOMIC BENEFITS
A recent theme from the Government is that HS2 will
be a cure for the North/South economic divide. This topic received
some attention at your 30 November hearing.
During the current Inquiry you have heard from some
experts (for example Professors Overman and Tomaney), who summarised
the evidence on transformational benefits for HS2 as "not
really there".
However, you heard from a number of witnesses (for
example, again, Matthew Farrow of CBI) on 30 November, who suggest
that HS2 will bring material economic benefits to the regions,
and address the North/South economic disparity. Interestingly,
these contentions frequently took the form of "our members
tell us", rather than referencing substantive evidence.
We feel that not only are Overman and Tomaney right
about the absence of evidence, but that the particular case for
HS2 (as developed by HS2 Ltd and DfT) actually suggests it might
have the reverse effect and actually increase the dominance of
London. In particular:
- because the growth in passenger journeys is predominantly
in trips to London rather than from London, the
70% of journeys that are leisure ones will result in money being
spent in London rather than in the regions; and
- it would bring the service sector in the West
Midlands and North West into more direct competition with the
more efficient London businesses.
We have drafted a short analysis of the work done
by HS2 Ltd and DfT, and of some of the work conducted on behalf
of HS2's supporters. It also makes some observations on the argument
by analogy to London Dockland. I attach this, as it may be of
interest to you.
ECONOMIC IMPACTS
OF HIGH
SPEED 2 (HS2)
Summary
This note deals with the impact of HS2 on the economy,
and the so called "transformational" benefits. The main
findings are as follows:
- DfT's approach combines savings to business identified
through the conventional transport appraisal with Wider Economic
Impacts (WEI). As estimated by HS2 Ltd, they are £16.1 billion
and £3.6 billion respectively, but both are based on very
substantial overestimates of the value of business time savings.
WEI, at £3.6 billion, are only 11% of HS2's total benefits.
HS2 Ltd has also had the possibility of long distance "agglomeration
effects" investigated, but these proved to be very small.
- Regeneration impact has been considered by HS2
Ltd. This identified the best opportunity for the first stage
of HS2 as Old Oak Common (ie in the London area not the Midlands).
- HS2 Ltd has also considered the potential for
more general growth benefits that might be catalysed by HS2, through
encouraging additional investment. This finds no clear case, with
potential gains for locations served by HS2 likely to be off set
to some extent by losses from other locations in the region, and
risks to the regional economies from losing jobs to London.
- Work has been done for pro-HS2 groups and regional
development bodies that attempts to estimate the economic benefits
of better transport directly ("GVA techniques"), rather
than through conventional transport benefits such as time savings.
However, expert review (by LTS) of the methods used found methodological
problems that cause the benefits to be exaggerated.
- The 70% of HS2 passengers projected to be leisure
users will on balance bring money to London from the regions.
This reflects the dominance of London as the destination for travel
forecast by HS2 Ltd. For business travellers, because services
are the economic activity most affected by high speed passenger
travel, there are considerable risks of regional businesses losing
out to London, because of London's pre-existing dominance and
greater efficiency.
- Finally the frequently citied example of the
Jubilee Line extension is reviewed. The extension does not seem
comparable to HS2, and consequently provides no basis for expecting
HS2 to underpin economic regeneration similar to that of London
Docklands.
HS2 AND DFT'S
APPROACH TO
ECONOMIC EFFECTS
DfT's approach to economic appraisal focuses on welfare
benefits, although it does encompass effects on GDP. The principle
impacts on GDP are through the business time, reliability and
cost savings that are assessed through the standard transport
appraisal. However, there are some additional impacts on both
welfare and GDP that are not captured in the standard transport
appraisal. These are assessed as Wider Economic Impacts[323].
The table at Appendix 1 summarises the relationship between welfare
and economic benefits under DfT's approach.
Business saving in the conventional appraisal
HS2 Ltd assesses the business user benefits that
apply to GDP to be about £16.1 billion[324].
However, a separate report by HS2 Action Alliance argues that
the business time savings in this conventional transport assessment
are greatly over-estimated in value[325].
In short this is because DfT's approach incorporates out of date
views on the productivity of time on board long distance trains
(that it is all wasted), and on business passengers having very
high earnings (that must reduce with greatly increased passenger
numbers).
WEI
In the case of HS2 these additional WEI (£3.6
billion) are quite modest (11% of total transport user benefits).
However, for some projects WEI may be very significant—as
with Crossrail, which has a big impact on improving access to
key employment districts. For HS2 the main benefits identified
are from:
- Agglomeration with better transport creating
greater economic density (this is a local, not long distance effect)—worth
£2 billion, 46% of which goes to London. This is from re-using
freed up rail capacity for local services (and from road congestion
relief)—not from faster long distance connectivity.
- Businesses operating under conditions of imperfect
competition—worth £1.6 billion, which is assessed as
10% of the business time saving and reliability benefits.
Although within DfT's approach, HS2 Ltd did not see
benefits from bringing more people into employment, people working
longer, or people changing jobs to higher paid (hence more productive)
work. This is because HS2 was not thought to significantly affect
access to work or commuting.
HS2 also had the possibility of longer distance agglomeration
investigated, with the help of a leading academic in this area
(Dr D Graham[326]),
but it proved in practice to be a very small effect (at most £8-10m/a).
Total impact
The impacts on GDP that DfT's approach gives are
the business time and cost savings identified in the conventional
appraisal plus the GDP impacts found in the WEI assessment. For
HS2, the WEI GDP impacts are the agglomeration and imperfect competition
benefits, summing to £3.6 billion. This gives a total impact
of £19.7 billion. However, by far the greater part of this
disappears on an up to date view of the value of the business
time savings (as discussed above).
DfT's approach is concerned with net national benefits,
and does not address re-distributional effects, where there is
growth at one place at the expense of another.
REGENERATION
DfT's approach to WEI assumes constant land use,
as there is otherwise the need to consider the investments to
change land use. However, regeneration opportunities are recognised—ie
where the transport investment makes it particularly attractive
to make other investments that would involve land use changes,
eg building new offices or shopping centres etc.
For the first stage of HS2, HS2 Ltd identifies Old
Oak Common as the best regeneration opportunity.[327]
HS2 Ltd considers the evidence that HS2 would stimulate
economic growth as a result of investments encouraged by its building,
ie in the area of its stations.[328]
It reviews the considerable volume of material in this area with
the assistance of a leading academic Prof Vickerman, and Reg Harman
(author of a report in the same area for Greengauge 21). The conclusion
is summarised:
"………. It concludes that the key
for a high speed rail station being a catalyst for significant
local and regional development is the integration of that station
into a coherent wider spatial strategy for the city or region.
However it also notes that this will not be a win-win conclusion.
Some areas within a wider region may lose out, and it is possible
a region itself may lose with some activity encouraged to relocate
towards London. Whether such impacts materialise and how significant
they are will depend on the economic structure of the cities,
as well as the actions of regional and local planning authorities."
(page 159)
Its final conclusion concerning the economic benefits
is also illuminating:
"… They are in essence the manifestation
of time savings that are already captured in transport appraisal."
HS2 Ltd's summary does not seem to be a minority
view, with Professors Overman and Tomaney echoing this conclusion
in their Select Committee evidence:[329]
"….Claims about the "transformational"
nature of transport investments for particular areas should be
generally discounted in assessing these benefits because they
have no convincing evidence base to support them." (Professor
Henry Overman)
"…I broadly agree with Henry on the point
that the evidence that HS2 will have a positive impact on rebalancing
the national economy, to use the current jargon, is not really
there." (Professor Tomaney)
Interestingly a number of witnesses to this Inquiry
who spoke in support of HS2 having major regeneration benefits
that may redress regional disparities did not refer to academic
studies, or the opinions of experts, but said that "our members
tell me". While a number of eminent people espouse belief
in the transformational benefits, the basis for these claims has
not been made clear.
The conclusion by HS2 Ltd that coherent wider spatial
strategies for cities and regions would be necessary in promoting
regeneration is significant. A further report[330]
argues that these strategies would have to be extremely wide ranging,
slanting all "regionally relevant" public expenditure
to support disadvantaged areas, and involving devolution of decision
making to regions. Such strategies would appear to be extremely
unlikely in the foreseeable future as there is no indication that
government is taking this approach to public expenditure and regional
agencies such as RDAs and Regional Offices are being run down.
GVA ASSESSMENTS
There is a body of work that seeks to identify the
economic impacts of transport infrastructure improvements directly
(rather than through the workings of business cost savings and
welfare effects modelled by DfT). Greengauge 21, the Northern
Way, and others have had work done that tries to identify the
scale of such benefits.
The, Northern Way (a Greengauge 21 supporter), asked
researchers at the Institute for Transport Studies (ITS) at Leeds
University, James Laird and Peter Mackie, to review the KPMG work
and that done by the Spatial Economic Research Centre (SERC),
at the London School of Economics. The KPMG and SERC studies purport
to identify considerably larger economic benefits than those assessed
by the conventional DfT approach. However, as a result of identifying
a variety of methodological issues, the ITS review concluded:
"…….. it remains clear that further
work on methods and techniques will be needed before GVA assessment
could become part of 'mainstream' appraisal."
Three of a number of issues that ITS identify are:
- the approach only takes account of the transportation
investments not the other investments that are necessary to deliver
the economic benefits, eg concerning land use etc;
- the tendency for transport to be developed as
a response to demand (ie as a response to economic activity rather
than the cause of it) inflates the estimates of the effect of
transportation improvements made, as the methodology does not
recognise this direction of causality and ascribe it in the opposite
way round; and
- the approach does not identify a net national
increase in GVA, but focuses on local effects that are recognised
as being predominantly re-distributive (ie at the expense of surrounding
areas).
To illustrate the first point, the GVA approach would
see the regeneration of London Docklands as a transportation effect
and ignore the costs of the non-transport investments, rather
than as an integrated property development project, the success
of which turned on its proximity to the financial centre of the
City of London. Thus the GVA technique ascribes the London Docklands
benefits to transport.
It is generally accepted that redistribution of growth
is a major element in this, with specific better connected places
growing at the expense of nearby but less connected locations.
It is notable that while Northern Way has published
the ITS report on its web site, it still gave the numerical estimates
which it questioned to the Select Committee for Transport Inquiry
on Transport and the Economy. No reference was made to the conclusions
of the ITS analysis.
TRANSFORMATION AND
HS2
So what conclusions can we draw about what HS2 might
do to the differences in economic performance between London and
the North?
In HS2 Ltd's demand model, demand growth is largely
driven by economic growth, with people spending an increasing
proportion of their incomes on long distance rail travel. However
this approach sees greater growth for people living outside London
wanting to go to London than the reverse. Because the income elasticity
for trips to London about twice that of trips out from London,
passengers with London as the destination should grow at twice
the rate which should lead to greatly more than twice the increase[331].
The consequence is that London in increasingly the destination
of the trips made.
HS2 itself is forecast to increase the numbers of
journeys made, creating 38,000 entirely new journeys to and from
London a day. For business travellers, it is not obvious what
this means, but for leisure travellers it is.
Leisure travel
70% of HS2 travellers are leisure travellers, who
will move expenditure from their origin to their destination—spending
money in shops, restaurants and attractions. As the trips to London
are forecast to greatly outweigh (perhaps by twofold) those from
London, this can only worsen the North South divide.
Business travel
For business, faster transport to and from London
may reduce a barrier to competition—particularly in areas
such as financial services. HSR is seen as having its greatest
impact on service industries[332],
in which London is both dominant and more productive than the
regions.
A reduction in barriers to competition seems most
likely to extend London businesses' access to markets in the West
Midlands, and North West. This again would be to the disadvantage
of those regional businesses that are brought into closer competition
to London.
It is a brave gamble to seek better connectivity
to London as an opportunity for regional businesses to take the
market from London rather than the reverse.
Business relocation
A potential source of jobs for out of London locations
is the possibility of relocation of back-office functions from
London, encouraged by the reduced travel times for management
etc. A problem with this model is that while office space is cheaper
outside London, typically access to an appropriately skilled and
efficient workforce is crucial.
Long distance commuting
Philip Hammond proposed that a high speed network
would open up the possibility of commuting from Newcastle to London.
Such commuting might conceivably make a minor contribution to
economic performance (primarily in London), but would do so at
a serious personal cost in terms of the quality of life for those
affected.
Furthermore, the highest paid City jobs are hard
to perform in combination with even relatively local commuting,
due to the exacting hours that they involve.
Technology and transformation
For business generally, travel may well decrease,
as more productive means of communicating displace travel—eg
video conferencing. Similarly the internet makes access to information
easier, improving competition, and making physical location less
relevant to the performing of numerous professional, managerial
and clerical functions.
There seems greater prospect of reducing the relative
disadvantage of the regions through virtual co-location of business
activities through ultra-fast broadband, so that co-workers can
be tens, hundreds or even thousands of miles apart than trying
to reduce domestic intercity journey times.
Less travel, and travel being less important to conducting
business will diminish any possible benefits from reduced journey
times.
Technology is also increasing the usefulness of time
on board trains, making reduced journey times largely irrelevant
to productivity, and reducing its impact on the real costs of
business travel that relate to the unproductive time of getting
to and from the long distance train. Increasing productivity and
hence real wages will put increasing pressure on businesses to
avoid travel entirely, not because the time on board is unproductive
(which it won't be), but to avoid the time costs of the travel
at either end of the journey.
Examples
While the Government has not given evidence for the
likelihood of transformational benefits, they have given examples
of transport investments which they say have been transformational,
with the sub-text that HS2 would be like them.
The Jubilee Line extension has been mentioned repeatedly
as the catalyst in the regeneration of London Docklands. This
is curious as the extension to serve Docklands was not started
until 1993 and not completed until 1999[333].
Furthermore the final route was chosen because of the success
of the Docklands redevelopment, rather than being the cause of
it. The developers of Canary Wharf actually made a contribution
to the extension's cost. While it has contributed to the continued
development of Docklands, chronology suggests that the extension
has not been the cause.
The case is better made for the Docklands Light Railway,
which was built as part of integrated plans to redevelop Docklands,
and was started in 1987, with the Canary Wharf construction started
in 1988. The first buildings in the development were completed
in 1991, including 1 Canada Square. But it is clear that the redevelopment
was a property development project entirely driven by the proximity
of derelict land in close proximity to the most expensive property
in the UK. Land redevelopment and transport links were developed
as part of a single a co-ordinated plan.
While the Docklands re-development could not have
been successful without the required transport links, to identify
the transportation investment as transformational is to mistake
one of a number of necessary investments as determinant. One could
as well regard the investment in providing the electricity supply,
telecommunications infrastructure or indeed the sewage system
as transformational. It is wrong to attribute all the benefits
to any one of the investments: all were necessary. But none of
these created physical proximity to the City, and potential for
ready access to the financial services labour force that works
there. Were similar investments to be made in another city, they
would not be guaranteed similar results.
Whatever one concludes about the role of transport
for Docklands, it cannot be a model for what would happen with
HS2. HS2 is not creating ready access to previously derelict land
in the close vicinity of the UK's financial services centre, nor
is there any prospect that it could make other cities as accessible
to London's commercial centre as Docklands now is.
APPENDIX 1
Table 1
THE DFT APPROACH TO WELFARE AND GDP BENEFITS[334]
APPLIED TO HS2 (USING HS2 LTD'S FIGURES)
| benefit | welfare (£)
| GDP (£) |
| 1 | Business time savings$ |
Yes (£17.6bn) | Yes (£16.1bn)
|
| 2 | Commuting time savings^
| Yes | |
| 3 | Leisure time savings^ |
Yes (£11.1bn) | |
| total transport user benefits (conventional appraisal)
| 1+2+3 (£28.7) |
|
| 4 | increase in labour force participation
| | Yes (£0) |
| 5 | people work longer |
| Yes (£0) |
| 6 | people move to more productive jobs
| | Yes (not assessed) |
| 7 | agglomeration benefits |
Yes(£2.0bn) | Yes (£2.0bn)
|
| 8 | increased competition |
(Yes)# (£0) | (Yes)# (£0)
|
| 9 | imperfect competition |
Yes## (£1.6bn) | Yes##(£1.6bn)
|
| 10 | exchequer consequences of increased GDP*
| Yes (£0) | |
| additional to conventional appraisal (WEI)
| 7+8+9+10 (£3.6bn) |
|
| total (including WEI) |
1+2+3+7+8+9+10
(£32.3bn) |
1+4+5+6+7+8+9
(£19.7bn) |
$ Measured as the cost of time to employers
^ Measured as willingness to pay
# Typically zero
## Assessed as 10% of value of the business time (and reliability)
savings
* 40% of GDP 4, 30% of (GDP 5+GDP 6)
December 2010
322
Attachment to letter from Jonathan Mitchell, Policy Manager High
Speed Rail, DfT, to Bruce Weston, 20 September 2010 Back
323
DfT have produced a useful summary of WEI issues, "Transport,
Wider Economic Benefits and Impacts on GDP", Discussion Paper,
July 2005
http://webarchive.nationalarchives.gov.uk/ dft.gov.uk/pgr/economics/rdg/webia/ webmethodology/
sportwidereconomicbenefi3137.pdf. Back
324
Total business user benefits are £17.6 billion, but GDP impacts
exclude crowding benefits. Estimate derived from spreadsheet supplied
under FOI request FOI10/029 to Dr J Savin, 4 June 2010 Back
325
"Review of the business case for HS2" HS2 Action Alliance,
December 2010 Back
326
"Advice on the assessment of Wider Economic Impacts: a report
for HS2" Daniel Graham and Patricia Melo, March 2010 Back
327
,High Speed Rail
London to the West Midlands and Beyond A Report to Government
by High Speed Two Limited, section
4.2.52 page 183 Back
328
"HS2 Demand Model Analysis Appendix 3 High Speed Rail and
Spatial Patterns and Strategies in Cities and Regions" Back
329
Select Committee for Transport, Inquiry on Transport and the Economy,
19 October 2010 Back
330
Complementary measures to facilitate regional economic benefits
from high speed rail. Urban and regional Consultancy for Greengauge
21, 2009. Back
331
If GVA/capita growth is 2.5%/a, and the income elasticities are
1 and 2 for from and towards London respectively, growth in passengers
would be 2.5%/a from London and 5.0% towards London. Over 20 years
this gives a 64% growth from London but 165% growth to London. Back
332
Harman (2006), High speed trains and the development and regeneration
of cities, Greengauge 21
(http://www.greengauge21.net/assets/European_Regeneration_Experience.pdf) Back
333
Jubilee Line Facts, Transport for London Back
334
derived from DfT's "Transport, Wider Economic Benefits and
Impacts on GDP", Discussion Paper, July 2005, Table 1 page
18 Back
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