Published on March 3, 2016
1. Institute for Transport Studies FACULTY OF ENVIRONMENT Understanding the GDP Impact of Infrastructure Investment: Learning from Transport OXERA lunchtime seminar 10th February 2016 Tom Worsley Visiting Fellow
2. The emerging problem in the 1990s – The JLE ‘In terms of the measurable costs and benefits normally taken into account in such appraisals, the line does not meet the established criteria for approval.’ ‘The case for the Jubilee Line Extension depended not just on the measurable benefits but to a significant extent on the regeneration benefits for the docklands area, which are not captured in the conventional cost-benefit procedures.’ Steven Norris Transport Minister Hansard May 1992
3. SACTRA Transport and the Economy 1996-9 Standing Advisory Committee on Trunk Road Assessment – independent group of experts 1996 - new reference – Transport & The Economy • Extensive literature survey and assessment. • Strong endorsement of CBA to inform decisions. • Update and improve existing methods • Recognition of missing impacts where markets were imperfect – prices wrong or externalities, both positive and negative. • Economic Impact Report – regeneration of small areas • Proposal that DfT research LUTI and SCGE models to augment modelling and CBA
4. Department’s response to SACTRA Improved and updated cost benefit analysis methods • New research into values of time • Programme of research into environmental valuation • Economic impact report guidance published – number of additional jobs in regeneration area • SCGE models reviewed – too complex, too ‘academic’, inadequate UK data • Commissioned work on agglomeration benefits – a positive externality
5. Agglomeration Impacts – the causes High costs of urban transport schemes because land values are high - cities provide for high productivity Matching/proximity • People to jobs • Employers to skills – deeper labour markets • Products to firms and to people Specialisation and clustering Competition Knowledge spill-overs Public goods and realm
6. Quantification of Agglomeration Impacts Research by Dan Graham et al on • measures of economic mass and • the relationship between economic mass and productivity Define economic mass • Density of employment in each zone in the urban area • Connectivity of each zone to all other zones – transport costs, density weighting, distance decay function Elasticity of productivity wrt economic mass • eg Producer services 0.083, consumer services 0.024, • ‘People’ v place ‘effect’
7. Wider Economic Benefits TAG A2-1 DfT Appraisal Guidance Wider Economic Benefits as a sensitivity from 2005 Agglomeration impacts – fixed employment, Labour Supply Effects: – tax wedge • Move to more productive jobs • Labour force participation Outcome - an increase in the benefits for urban schemes
8. Crossrail 1 Economic case £bn 2002 prices Net project costs -5.6 Transport user benefits Business – all modes 4.7 Other - all modes 7.6 Indirect tax adjustment -1.4 Conventional benefits 11.0 Wider Economic Benefits Agglomeration 3.1 M2MPJs 2.0 Labour supply 0.8 Imperfect competition 0.5 Total WEBs 6.4
9. Role of Cost-Benefit in decision-making Method for informing decision-makers about: • The no-go decision if BCR<1.0 • Priorities within a fixed budget ‘Something would have to have been invented if CBA hadn’t existed.’ HM Treasury – Green Book and Managing Public Money • Accounting Officer responsibility for ensuring ministers’ decisions deliver value for money – ‘DfT has a well developed system of appraising value for money’ CBA is (broadly) comprehensible to public inquiries, Select Committees and others But weak in estimating ‘transformational’ change
10. Welfare benefits and GDP Cost benefit analysis: • Used to inform decisions where significant market failure exists and commercial considerations are inadequate, including in the case of most transport investment. • Based on the concept of people’s willingness to pay for - eg a less crowded railway • Outputs not directly sold through markets and so not relevant to financial appraisal nor linked to national accounts and hence to GVA/GDP. • Some benefits also count in GDP – eg additional output where the cost is already part of project costs • Some transport impacts result in an increase in GDP but not an equivalent increase in welfare
11. Welfare and GDP Source – TIEP Venables, Laird and Overman DfT 2014
12. The growth objective Relationship between investment in infrastructure and economic growth well established at aggregate level (issues remain about causality, stage of economic development) Micro-based assessment of transport’s contribution to growth: • Derived from the cost benefit appraisal and transport model • Business transport user benefits • Productivity effects- economies of scale and density – agglomeration • Investment and employment effects – change in location based responses to transport costs Scheme specific ‘GDP effect’
13. The Importance of Place Simple cost benefit analysis place-blind – fails to resolve the ‘two way road debate WEBs are place specific – • Agglomeration – restricted to specific area types– response of productivity to a reduction in transport cost differs by structure of local economy and by level of agglomeration • Labour supply effects – workers in commuting zone or in less productive places find jobs in more productive employment zone
14. Methods of identifying the place and GDP effects 1 Survey based economic impact approach – identify industries, simple Input/Output flows, transport cost changes and likely changes in local economic activity • Best suited to local impacts, assumptions about transport dependency, competition from ’outside’ and additionality may lack evidence • Risks understating effects of competition • Examples – DfT regeneration guidance, Transport Scotland EALI
15. Methods of identifying the place and GDP effects 2 LUTI models – demographic and economic scenarios, changes in location by firms and households: Transport costs, firms’ and workers’ responses, land supply/planning policies, rents, changes in output GVA effect from transport business cost changes, agglomeration and M2MPJs Labour supply fixed for modelled area
16. Methods of identifying the place and GDP effects 3 Dynamic Agglomeration models – changes in employment density in response to changes in connectivity • Based on econometric estimates of numbers employed by zone and connectivity • Supplements the static agglomeration elasticity, with netting off of output in places from which jobs have moved • Example: HS2 Regional Economic Impacts (KPMG 2013)
17. Methods of identifying the place and GDP effect 4 Spatial Computable General Equilibrium Models – whole economy response • Response to economic changes caused by a ‘shock’ • Captures changes in demand from transport scheme on other sectors • Supply side constraints limit extent of second round effects • Includes impacts of project costs, funding, • Growth generated by multiplier effects (under-employed resources) and by agglomeration • Examples – Airports Commission, Lower Thames Crossing
18. Role of the GDP effect in decision-making Metric – PV of GVA generated by the scheme Use of GDP effect analysis by City Regions, Combined Authorities and LEPs to select schemes for local transport plans • Standard approach is to reject all schemes below a BCR threshold and then prioritise according to GVA per £’s of local transport funding Use by HS2 and Northern Transport Strategy to demonstrate how transport might ‘rebalance’ Use in lobbying • Transport’s role in HMT’s growth objective • Contribution of the rail industry to the economy
19. The GVA metric - issues The narrative and logic map: • how does transport deliver, causes of market failure, what else is needed? Additionality: • displacement (internationally traded or not), • assumptions about capacity in the economy Most evidence is agglomeration based on monocentric city Inter-city connectivity changes – gains from trade – difficult (lack of data) What is ‘good’ in GVA terms?
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