Transport and the economy

Memorandum from the Northern Way TE 34)

Summary

· This submission is by the Northern Way, the public and private sector partnership established to promote the North’s productivity and output growth and currently funded by North West Development Agency, One North East and Yorkshire Forward.

· UK economic conditions have materially changed since the Eddington Transport Study but we see no evidence that the recession has changed the relationships between transport connectivity and economic growth that Eddington considered or Eddington’s prescription, namely the economy needs adequate and appropriate connectivity within and between city regions, as well as to and from port and airport international gateways.

· Our evidence identifies key differences between transport demand in the North and the South. Existing travel patterns in the North are more sustainable. Car trips are shorter, bus use higher and rail use is growing but before the recession every percentage point of economic growth in the North led to transport demand growing more strongly in the North when compared with the South. Evidence shows that the North has a higher elasticity of transport demand.

· The recession has brought to the fore the importance of well targeted investment to facilitate economic growth. This is pressing in the North given that it has been most affected by the recession and the projections that the North’s economy will be most affected by public sector spending cuts. As we move out of recession, without investment the more sustainable pattern of transport demand in the North will be lost.

· The Northern Way’s evidence shows that what is needed to foster the North’s economic growth is a balanced approach that looks at the connectivity needs of travel within city regions and the links between the North’s city regions. Also important are links between the North and London with its World City functions, and international connectivity via port and airport gateways within the North and elsewhere in the country.

· The split between capital and revenue budgets can be a potential barrier to implementation. We would welcome further relaxation of the demarcation between capital and revenue budgets.

· The Northern Way supports the concept of NATA appraisal but considers that development of its processes and practices is needed. Also consideration needs to be given to how cost benefit analysis is used in decision making.

· There has been recent very valuable work on how transport investment can influence the size of the economy as measured by GVA. Our evidence is that more work needs to be done before such techniques can become part of mainstream appraisal.

· The Northern Way has filled a ‘strategic gap’ by acting as a counterbalance to Scotland and London where there are strong statutory bodies in Transport for London and Transport Scotland to make the strategic case for transport investment and progress implementation.The abolition of regional apparatus has the danger of creating a strategy gap for the identification and promotion of transport interventions of sub-national importance. Local Enterprise Partnerships will need to work together and be sufficiently resourced if they are to fill this gap.

The Northern Way

1. This submission has been prepared by the Northern Way, a public and private sector partnership currently funded by the three Northern RDAs (North West Development Agency, One North East and Yorkshire Forward). Our goal is to improve the sustainable economic development of the North towards the level of more prosperous regions by growing the North’s economy faster.

The Northern Way Growth Strategy 

2. The 2004 Northern Way Growth Strategy Moving Forward: The Northern Way sets out how the Northern Way seeks to bridge the output gap in the North’s economy. It highlights transport as a priority for transformational change. It identifies three transport investment priorities:

· to improve surface access to the North’s airports;

· to improve access to the North’s sea ports; and

· to improve links within and between the North’s City Regions.

The Northern Transport Compact

3. The Northern Way has established the Northern Transport Compact to provide advice on transport priorities at the pan-northern level linked to productivity. Chaired by Professor David Begg, the Compact includes City Regional, private sector and RDA members from the North’s three regions. The Compact has led the development of the Northern Way’s Transport Strategic Direction and Priorities as well as subsequent work.

The Strategic Direction for Transport 

4. The Northern Way’s Strategic Direction for Transport is an evidence-based assessment of the most appropriate transport interventions that will promote productivity gain, while at the same time seeking to protect and enhance the North’s natural and built environment, and contributing to the nation’s commitments regarding climate change. Looking over 20 to 30 years, it sits below the three high-level transport goals of the Growth Strategy and above the level of individual priority schemes and projects. The Strategic Direction sets out the types of interventions which will have the greatest productivity impact, as well as where in the North those interventions will have the greatest impact.

5. While the Strategic Direction for Transport pre-dated the Eddington Transport Study, its prescription and that of Eddington are consistent, namely what is needed is a balanced investment strategy that considers transport links within our city regions, between the city regions of the North and between the North and the rest of the country, as well as links to port and airport international gateways located in the North and elsewhere is the country.

The Northern Way’s Short, Medium and Long Term Transport Priorities

6. Having established our Strategic Direction for Transport, we then identified Short, Medium and Long Term Transport Priorities. Our prioritisation work shows that while the transport proposals being pursued by stakeholders across the North will make worthwhile contributions to productivity growth, taken together they do not allow our Strategic Direction for Transport to be met. Consequently, if the North’s productivity growth is to be maximised a number of the "Strategic Delivery Gaps" need to be addressed. We have identified strategic delivery gaps for the rail network, the road network and associated with network integration. The rail gaps are the Northern Hub (the strategy to transform rail in the North), rail gauge enhancements for multi-modal container traffic, a rail rolling stock strategy and strategies for trans-Pennine and north-south rail (including high speed rail). The road gaps relate to the need for a long term strategy to keep the strategic road network moving and a north-wide approach to behavioural change. For network integration the strategic gaps relate to pan-Northern smart ticketing and strategic park and ride.

TRANSPORT AND THE ECONOMY

1. 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?

7. As work published by the Northern Way in March this year has shown, the recession has significantly affected car and public transport demand, as well as the number of air passengers and volume of domestic and international freight. However, we see no evidence that the recession has changed the relationships between transport connectivity and economic growth that Eddington considered, nor the basic prescription that he put forward, namely the economy needs adequate and appropriate connectivity within and between city regions, as well as to and from port and airport international gateways. What the recession has done is bring to the fore the importance of well targeted investment to stimulate and facilitate economic growth. This is most pressing in the North given that it has been most affected by the recession and the projections that it will be most affected by public sector spending cuts.

8. Importantly, our Transport Demand in the North report showed key differences between the North and the South. Our work has shown that travel patterns in the North are more sustainable than in the South. Car trips are shorter, bus use is higher and rail use is growing (and continued to grow during the recession). However, in the years leading up to the recession, transport demand in the North grew more strongly than in the South. Every percentage point of economic growth in the North led to transport demand growing more strongly in the North when compared with the South. In the period of recession that followed, indications are that demand also fell away more in the North. In short, the North has a higher elasticity of transport demand than the South. Car trips are getting longer, rail trips are growing in number while bus use is now declining again.

9. In the North and without further intervention, a continuation of the pre-recession trends would suggest that transport demand in the North is likely to become more like that in the South.

10. The trend of re-structuring employment and economic activity as the North moves to a more private sector focused knowledge economy, is set to continue for many years to come. As we move out of the recession, it should be anticipated that the trend in the North of increased car use, increased rail use, but declining bus use will resume (and mooted changes to the concessionary fares regime and to BSOG would accelerate this decline). This reinforces the need for a balanced strategy of policy interventions that seeks to facilitate economic growth through targeted enhancements to the North’s transport system, combined with measures that seek to exploit the more sustainable pattern of transport use that currently exists in the North and wherever possible, supports the use of more sustainable modes.

2. 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?

11. Speaking in Shipley at the end of May in his first major speech as Prime Minister, David Cameron identified the Coalition Government’s goal of rebalancing the economy away from the heavy reliance on the South East, and through the growth of private sector businesses.

12. As we have already set out, the Northern Way’s evidence shows that what is needed to foster the North’s economic growth is a balanced approach that looks at the connectivity needs of travel within city regions and the links between the North’s city regions. Also important are links between the North and London with its World City functions, and international connectivity via gateways within the North and elsewhere in the country. Enhancing connectivity within city regions is focused on expanding labour supply across functional labour markets. Improving the connectivity between city regions facilitates the movement of goods, business to business links and allows the expansion of labour markets, most notably for entrepreneurial high level skills. International connectivity facilitates trade.

13. Clearly the outcome of the Spending Review will be less funding to enhance strategic and local transport networks in the North. Given the importance to the economy of capital investment in our transport networks, we contend that both enhancement and maintenance budgets need to share the burden of programme reduction. There will be a high economic cost if the spending reduction is met by the enhancement programme alone. Of course, spending reductions means there is a need to prioritise. To contribute to the Spending Review we have submitted to the Secretary of State our evidence-based assessment of what these should be. Our submission is summarised in the Annex to this memorandum.

14. We are also mindful of the time taken to develop significant transport interventions and the importance of bringing forward investment proposals in a timely manner. This means that it is important that funds are continued to be made available to Network Rail, the Highways Agency and local authorities for scheme development. As well as identifying priorities for which construction can start by 2014/15, we have also set out priorities for proposals that we consider should be taken through the business case, powers and other statutory processes for implementation subsequent to 2014/15. These too are summarised in the Annex.

3. How should the balance between revenue and capital expenditure be altered?

15. We are concerned that the split between revenue and capital funding could be seen as a barrier to implementation of measures that the Northern Way has identified as delivering productivity benefits to the North. For example, more widespread implementation of the Managed Motorway programme (and beyond that greater integration between Highways Agency and local authority intelligent transport systems) has a revenue as well as capital implication. In the case of Managed Motorways, this relates to the costs of operating control centres and provision of Highways Agency Traffic Officers amongst other things. A further example would be the more widespread and mainstream implementation of smarter choices measures, where Northern Way research has identified worthwhile productivity benefits but also that constrained revenue capital budgets are hindering implementation.

16. We would welcome further relaxation of the demarcation between capital and revenue budgets.

4. Are the current methods for assessing proposed transport schemes satisfactory?

17. In short, more research and development work needs to be done to develop approaches that quantify the impact of transport investment on the size of the economy and so they can be incorporated into the appraisal mainstream.

18. The Northern Way’s focus is on promoting the North’s economic growth while at the same time promoting a low carbon economy, but these are not the only reasons to support transport investment, nor is it just the economy and carbon that are affected by transport investment. The Northern Way strongly supports the conceptual approach of the New Approach to Appraisal (NATA) as it is an important decision making tool that offers a methodology and framework to consider positive and negative impacts of transport schemes.

19. This does not mean, however, that the further development of NATA is not warranted. Attention needs to be given to the methods and parameters employed in cost benefit analysis (CBA) and how this is used in assessing the value for money of transport investment. We welcomed the extension of the conventional cost benefit framework to include economic wider impacts, the largest and most significant of which is agglomeration. Also we contend that insufficient weight is given to carbon in the appraisal process. In this regard, we welcome the Coalition Government’s decision to review the process by which transport schemes are prioritised.

20. A particular area of interest is the potential role in appraisal of assessments of the Gross Value Added (GVA) impacts of transport investment in determining overall transport spending as well as the prioritisation of transport investment. The Greater Manchester authorities, Greengauge21, Network Rail and the Northern Way have each promoted work to develop and apply techniques in this area. Collectively, this work suggests that monetised GVA impacts of well targeted transport investment could be up to three times the welfare benefits in a conventional transport CBA.

21. Given the Northern Way has identified the criticality of transport connectivity to the North’s economic growth and the important potential impacts of GVA analysis on funding availability and scheme prioritisation, we commissioned the Institute for Transport Studies (ITS) at the University of Leeds to review the methods that have been developed to assess the GVA impacts of transport investment. Their findings are important to this inquiry. ITS identified a number of new insights that have come from the GVA assessment work. In particular:

· Transport investment can both stimulate a local economy and lead to redistribution of economic activity from elsewhere. The redistribution of economic activity due to a transport investment is important. The available evidence suggests that redistribution effects are stronger than local productivity gains.

· In turn, this reinforces the benefit in distinguishing between people-based productivity effects and place-based productivity effects. People-based effects come about from the migration of productive labour and are principally associated with re-distribution. It is place-based effects (such as greater agglomeration) that determine the net increase in national productivity.

· From the work to date, the contribution of different transport modes to productivity appears very different. The GVA benefits of rail investments can be large and overall the evidence thus far suggests that on a per traveller basis, rail investment has a greater productivity impact than road investment.

· Changes in productivity associated with rail schemes are particularly driven by productivity changes of medium skilled workers.

22. There are a number of further issues which are important when considering how these new approaches are used to inform decision making: namely, how much is spent on enhancing the transport system and where is that expenditure directed. Conventional cost benefit analysis takes an equity approach, that is the value for money case of a transport investment is a function of its use and how much it costs, not where it is located. In the GVA benefit calculations, both location and the area over which impacts are assessed are important influences on the derived estimates of GVA uplift. More work needs to be done to understand the area over which a transport intervention influences the economy.

23. ITS also identify that the estimates of GVA uplift are a measure of economic potential rather than are an assessment of the actual impact on the economy of a particular transport investment. For this potential to be realised, further investments may be needed in, for example, sites and premises or skills and training. The nature of these additional investments is unspecified and uncosted in the GVA assessment methods. It seems important that alongside the GVA assessment, work is undertaken to understand the capacity of a local economy to deliver the projected economic potential.

24. Considering the GVA assessment work in the context of the conventional approach to cost benefit analysis, the ITS review also identifies that well specified transport investments in the North have equal if not greater potential to deliver GVA benefits per pound invested when compared with investments in the South East. This concurs with findings from the Northern Way’s own work when considering conventional cost benefit analysis incorporating economic wider impacts (principally agglomeration), namely well specified transport investments in the North have equal if not greater potential to deliver welfare benefits per pound invested when compared with investments in the South East. However, what the ITS work also clearly concludes is that prioritising on a basis of GVA benefits per pound would give a different answer to a conventional benefit cost ratio.

25. Bringing all these points together, the key finding from ITS is that techniques to quantify the impacts of transport investments on the size of the economy are in their infancy. The work that has been done to date has helpfully furthered our understanding, but more research and development work needs to be done before such approaches can become part of the appraisal mainstream.

5. How will schemes be planned in the absence of regional bodies and following the revocation and abolition of regional spatial strategies?

26. Many of the strategic weaknesses in the North’s transport system cross city region boundaries. The journey to work catchments of the city regions overlap. What the work of the Northern Transport Compact has done is identify the key investments needed in the North’s transport networks to address these weaknesses. It has also overseen progress towards delivery through the early planning stages for a number of significant interventions, such as the Northern Hub. It has done this by fastidiously avoiding duplication of work best undertaken at a city regional level and adding value to what can be achieved by city regions or regions acting in isolation. The Compact’s approach of building the evidence-base on the links between transport and economic growth has been widely welcomed and is described as influential by Department for Transport. Independent evaluation of the Compact’s work has identified tangible benefits to the North.

27. It is the Government’s intention that Local Enterprise Partnerships (LEPs) will lead the development of strategy and identification of investment priorities for their functional economic areas. This will be challenging as individual local authorities will be both key partners in LEPs and transport scheme promoters. The intended geographic scope of LEPs will ensure that they have a natural focus on journey to work catchments and therefore on city and local transport networks. While the strategic road network and national rail network will be important to LEPs, the development of plans and programmes for investment in and management of these national networks will be directed nationally.

28. Over the last five years, the Northern Transport Compact has led for the three northern regions on pan-regional links and links between the North and the rest of the country, with representation from city authorities and the PTEs/ITAs, as well as private sector interests. It has filled a ‘strategic gap’ or ’market failure’ by acting as a counterbalance to Scotland and London where there are strong statutory bodies in Transport for London and Transport Scotland to make the strategic case for transport investment as well as progress implementation. The removal of the regional apparatus would mean in transport terms that there will be a strategy gap between nationally led initiatives and what will be the local focus of the LEPs. This appears to be recognised by the Secretary of State in his recent evidence to the Transport Committee where he expressed interest in sufficiently strategic coalitions of LEPs on some strategic transport issues.

29. We are considering how the work of the Northern Transport Compact can continue on strategic transport issues in the North. This would be supported by LEPs, where they are established, being given a statutory duty to cooperate on cross-boundary transport issues as well as ensuring they have sufficient resources to work collectively to continue the evidence building and early scheme development work that the Transport Compact has led over the last five years.

ANNEX A: NORTHERN WAY’S PRIORITIES AS SUBMITTED TO THE SECRETARY OF STATE FOR SPENDING REVIEW CONSIDERATION

Strategic Road Network

Scheme Implementation by 2014/15

· M62 Managed Motorway between Leeds and Bradford

· Completion of the upgrade of the A1 in North Yorkshire to motorway standard

· Upgrade of the A556 between the M56 and M6 in Cheshire

· M60 Junction 15 to 12 – additional lane

Scheme Development by 2014/15

· M1 Managed Motorway around Sheffield

· M60 Managed Motorway around Manchester

· Low cost interventions for the management of the A1 Gateshead Newcastle Western Bypass

Rail

Scheme Implementation by 2014/15

· Network enhancement between Liverpool and Leeds

· Network enhancement between London and Sheffield

· Electrification of the lines between Manchester and Liverpool, Manchester and Preston, and Liverpool and Preston

· Enhancements to the East Coast Main Line, including the introduction of a standard hour timetable

Scheme Development by 2014/15

· Northern Hub, for implementation by the end of Control Period 5

· Intercity Express Programme

· New rolling stock for Northern and Trans Pennine franchises

· Trans-Pennine electrification

International Gateways

Scheme Implementation by 2014/15

· Rail gauge clearance for the east Coast Main Line north of Doncaster to Scotland, between Doncaster and the East and West Midlands, to Teesport and to the north and south banks of the Humber.

· A160/A180 upgrade

Scheme Development by 2014/15

· A5036 to the Port of Liverpool

· Gauge clearance (associated with electrification) of trans-Pennine rail routes

September 2010