Transport and the economy

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 [1] ), but even as it stands – and on DfT’s own numbers – it has a lower net cost (£2.0bn instead of £11.9bn), 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 £750m 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.

· 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 £25.5bn against £7.3bn for RP2). Uprating the WCML with HS2 has a net cost of just £2bn.

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

· 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 £16.1bn and £3.6bn respectively, but both are based on very substantial overestimates of the value of business time savings. WEI, at £3.6bn, 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 [2] . 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 £16.1bn [3] . 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 [4] . 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 (£3.6bn) 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 £2bn, 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 bn, 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 [5] ), 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 £3.6bn. This gives a total impact of £19.7bn. 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 [6]

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 [7] . 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 [8] .

‘….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 [9] 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.

· 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 [10] . 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 [11] , 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 [12] . 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 [13] applied to HS2 (using HS2 Ltd’s figures)