Transport and the economy

2.5. The rail freight industry was privatised from 1994 and there have been several new entrants since; a total of five active operators currently. Operators have adapted to changing demand, developed new markets and can offer a viable alternative to road. The sector is highly competitive, this has driven efficiency through seeking economies of scale and scope (such as longer and heavier trains), higher staff productivity and increasing throughput at existing terminals. The rail freight sector has attracted over £1.5 billion of private sector investment, in rolling stock, terminals and IT. This capital investment has driven the 30% real unit cost reduction and brought improved service quality to the rail offering. However, due to competition, predominantly with road hauliers, it remains a low margin business earning 1.7% (Profit After Tax) across all rail operators in 2009.

3.
"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?"

3.1. The UK economic climate did materially change after the publication of the Eddington report and the "credit crunch" had an immediate and negative impact on global and national trade; the demand for freight transport in the UK reduced as a consequence. The effect, however, has been short lived and there is now credible evidence of a recovery in traffic, particularly in the movement of deep-sea containers, where year to date (from April) port volumes are up 11.6% and rail volumes are up 12.6% [8] . We are aware of future further recessionary pressures but are advised any impact is unlikely to be lengthy or severe.

3.2. Long-term forecasts for growth of GDP and freight movements have not changed and we believe that the conclusions that the Eddington report reached remain valid. The downturn in traffic in 2008/2009 led to some reduction in congestion on the UK road network but a return to pre-recession demand is already resulting in a similar level of road congestion (estimated to cost the UK economy between £7 and 8 billion per annum by Eddington).

3.3. Arguably a period downturn is the best time to make investment, as impacts on UK business will be minimised at a time of lower demand. However, the nature of spending on infrastructure schemes means investments take, at best, several years to complete; a short-term view is therefore impractical and decisions on transport spending should consider at least the medium term economic expectations, if national infrastructure is to be suitably prepared.

3.4. Alleviating congestion requires supply side investment characterised by enhancing the capacity of infrastructure or increasing the efficiency of the user of the infrastructure. Eddington concluded that incremental improvements to existing infrastructure, rather than building new infrastructure, would deliver the best ratio of benefits to cost. The current schemes of gauge clearance and train lengthening as part of the Strategic Freight Network are good examples of incremental investments that will make the most efficient use of existing infrastructure and increase the efficiency of the rail freight operator (thus increasing competitiveness with road).

3.5. Certainty of investment in infrastructure, such as the Strategic Freight Network programme, is a key driver of private sector investment, which in turn allows for best use of the delivered infrastructure. In the rail freight sector assets such as locomotives, wagons and cranes typically have a 30 year life span (versus 7-8 years for lorries), so certainty that future capacity on the rail network will be put in place facilitates private sector investment.

4.
"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?"

4.1. It is quite difficult to provide a detailed response to this question, as there is a lack of transparency as to how the current Department of Transport budget is spent; we are unable to undertake analysis in the way we would to our own business. However, from the position of the private sector, we would ration spending to where the value for money case is clearly demonstrable and deliverable, rather than aspirational. Transport spending should be targeted where most deliverable economic benefit can be realised, whilst aiming to reduce carbon emissions, deaths and injuries.

4.2. In a constrained funding environment, the private sector would make the best use of its’ existing assets rather than undertaking large-scale unproven investments. This aligns well with the conclusions of Eddington and an incremental approach to improving existing infrastructure, rather than brand new infrastructure. In this context, careful consideration of ‘landmark’ projects should be undertaken to ensure the benefits are deliverable. Multiple smaller investments on existing infrastructure could release more benefits for the same value, and can be staged, as funds become available.

4.3. From a rail freight perspective, the Strategic Freight Network, with a relatively modest budget of £200 million, is part way through a succession of key nationwide projects that will strengthen rail’s position as a viable alternative to road by improving the existing infrastructure to release capacity and also deliver economy of scale opportunities for operators, for instance, gauge clearance work on key routes [9] and signalling modifications to allow longer freight trains. By such means the existing infrastructure is made fit for purpose and the operators can more effectively compete with road, leading to modal shift from road. This is turn reduces the need for further investment in the road network as well as bringing carbon and safety benefits.

4.4. In order to maintain the benefits already achieved by rail freight growth and modal shift, the highest priority spending is the Modal Shift Revenue Support grant that is currently available to all rail freight operators and customers. Whilst modest in terms of budget (£20 million per annum), without this grant a considerable volume of rail freight traffic would return to the road. The grant makes up the difference between current road and rail costs and is critical to retaining business to rail. (£10 makes the difference between whether a container travels by rail or road). It should be noted that in real terms, revenue support has declined by 65% since privatisation, yet has delivered an increasing Value for Money from 1 to 1 at privatisation to currently greater than 5 to 1. The scheme is risk adjusted for government as it is only paid when it is delivered, and therefore it is certain that the benefits will be reaped, unlike capital schemes. Without the continuation of this grant, the potential benefits of the Strategic Freight Network investment may not be deliverable. There would be a significant reduction in volumes moved [10] , concentrated between the major deep-sea ports and the West Midlands (Birmingham). The consequence would be a dramatic surge on already heavily congestion roads, e.g. A14, A34, M6, and an urgent need for significant road enhancement works, which have been estimated as high as £21 million per mile [11] . The recently postponed A14 upgrade scheme was estimated to cost some £1.3 billion.

5.
"How should the balance between revenue and capital expenditure be altered?"

5.1. In straitened times such as these, additional scrutiny of capital spend is required to ensure that the assessed returns are both realistic and deliverable. Because capital spending is depreciated over many years rather than directly impacting on the current account the actual cost of the cash of capital spending is not always as heavily scrutinised as revenue spending. In particular, schemes with very long accounting paybacks should be carefully reviewed and spending should be focused on schemes with a shorter payback.

5.2. Facing a shortage of available funds, the private sector would try to continue to invest in those capital schemes that will trigger future growth and efficiencies but would ensure that these capital schemes were cut to the pareto optimum, i.e. to only that which is really needed to secure the benefits. More emphasis on investments with a faster payback is likely to lead to investment in smaller incremental schemes rather than "big bang" projects.

5.3. In considering spending choices, consideration should also be given to how spending will impact on the private sector and in particular creating the right environment to enable private sector investment. A good example for this is the Modal Shift Revenue Support (detailed in 4.4 above). Certainty as to market viability derived from the continuation of this fund would enable rail freight operators and their customers to invest in new equipment, which makes rail more efficient, and reduces the gap between the cost of rail and road. This in turn will enable, in the future, a reduction in the grant paid and a growth in freight moved by rail.

6.
"Are the current methods for assessing proposed transport schemes satisfactory?"

6.1. This is a complex area and there are many different impacts from investments that have to be considered and evaluated. We believe that much thought and consideration has been put into evaluation methodology already used (‘NATA’ – DfT’s ‘New Approach To Appraisal), and that this should be built upon rather than rebuilt from scratch. It is very difficult to measure accurately economic benefits from investment, however this is one of the most important drivers, particularly at this time and additional focus is needed in this area.

6.2. Network Rail recently published a document in conjunction with the CBI titled "Prioritising investment to support our economy", which helpfully focuses on this area. This report suggests a parallel approach to appraisal in order to capture the wider economic benefits of transport schemes, such as lowering costs of UK distribution and a focus on providing the same outcomes for less.

6.3. The current appraisal methodology includes only the marginal benefits of modal shift to rail rather than the full value of the modal shift already achieved. The mechanism calculates the benefit of the next lorry removed from the roads rather than the impact if all current rail volume returned to the road. Roads such as the A14, A34 and M6 would potentially gridlock if this were to occur. The net result is that the current appraisal methodology undervalues the value of modal shift, particularly when used to calculate the benefits to calculate the value for money in the Modal Shift Revenue Support Scheme, which enables existing rail freight volumes to be retained to rail rather than shifting to road. This is illustrated in the following diagram, with the marginal benefit being represented by area A, whereas the real total benefits of rail freight is the whole of the area under the marginal benefit curve, i.e. areas A + B.

Total Benefit of Rail Freight (KPMG 2006)

6.4. We perceive that the current value generally attributed to carbon is too low [12] , and does not reflect likely future oil prices or the likely real market value of carbon, and we suggest that this reviewed. Additionally, carbon positive schemes have a perversely higher return because of the current method of discounting benefits of a scheme by the loss in revenue from lost fuel duty.

6.5. Another difficult area is how the value of externalities are captured across modes, and the validity of the values ascribed, are a key consideration, not least since the rail freight sector is disadvantaged as a more environmentally friendly mode of transport by the failure of the road sector to repay its’ true external costs to society. The arising problems are twofold; it makes the external benefits of rail freight harder to capture, since they are not quantified adequately in economic terms, and since they distort the haulage market, keeping road haulage prices artificially low at the expense of the environment.

6.6. According to research published in April 2008 by MTRU [13] , "…even using the assumptions which are most favourable to HGVs and leaving out congestion, no study shows that tax revenues from HGVs cover their UK costs except on motorways: "Current cost estimates in the UK used for comparing rail and road freight (the Sensitive Lorry Mile – SLM values) appear to be in the low to middle range of the study results for environmental factors and thus may underestimate HGV costs in the UK." The report, consistent with others in this country and abroad, stated that using Sensitive Lorry Mile calculations (those used by Department of Transport), and counting fuel duty and annual licences as income, Heavy Goods Vehicles met 36% of their external costs – a shortfall of £6.7 billion at 2006 prices.

6.7. It would be gainful to consider how levelling the playing field across transport modes might improve rail’s critical mass generally, and unlock efficiencies in the rail sector and elsewhere. We consider lorry road user charging to represent such an opportunity, as demonstrated in countries such as Germany and Switzerland. Growth and improved efficiency in rail freight operations may be brought about whilst simultaneously addressing road congestion.

7.
"How will schemes be planned in the absence of regional bodies and following the revocation and abolition of regional spatial strategies?"

7.1. Transport generally is difficult to plan locally as, by its’ very nature, it connects one place to another. In the context of rail freight goods are moved on average 220 miles and therefore there is a need for national planning of the rail network.

7.2. Development of existing or new rail freight terminals will be more difficult in the absence of regional bodies and there is a significant concern about the "nimby" effect. It will always be difficult for a local council to give planning permission for a development that has local impacts but the benefit is only seen at a national level. The concept of National Planning Statements was introduced to ensure that there was national guidance for planning that would assist local decisions. It is unclear whether the intention is now to proceed with National Planning Statements but we believe such guidance would assist local councils in reaching the right decisions.

September 2010