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Understanding the GDP impact of infrastructure investment - learning from transport
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 โ The JLE
โIn terms of the measurable costs and benefits normally
taken into account in such appraisals, the line does not
meet the established criteria for approval.โ
โThe 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.โ
Steven Norris Transport Minister
Hansard May 1992
3. SACTRA Transport and the
Economy 1996-9
Standing Advisory Committee on Trunk Road Assessment โ
independent group of experts
1996 - new reference โ Transport & The Economy
โข Extensive literature survey and assessment.
โข Strong endorsement of CBA to inform decisions.
โข Update and improve existing methods
โข Recognition of missing impacts where markets were imperfect โ prices wrong or
externalities, both positive and negative.
โข Economic Impact Report โ regeneration of small areas
โข Proposal that DfT research LUTI and SCGE models to augment modelling and CBA
4. Departmentโs response to
SACTRA
Improved and updated cost benefit analysis methods
โข New research into values of time
โข Programme of research into environmental valuation
โข Economic impact report guidance published โ number of additional jobs
in regeneration area
โข SCGE models reviewed โ too complex, too โacademicโ, inadequate UK
data
โข Commissioned work on agglomeration benefits โ a positive externality
5. Agglomeration Impacts โ the
causes
High costs of urban transport schemes because land values
are high - cities provide for high productivity
Matching/proximity
โข People to jobs
โข Employers to skills โ deeper labour markets
โข 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
โข measures of economic mass and
โข the relationship between economic mass and productivity
Define economic mass
โข Density of employment in each zone in the urban area
โข Connectivity of each zone to all other zones โ transport costs, density
weighting, distance decay function
Elasticity of productivity wrt economic mass
โข eg Producer services 0.083, consumer services 0.024,
โข โPeopleโ v place โeffectโ
7. Wider Economic Benefits
TAG A2-1
DfT Appraisal Guidance
Wider Economic Benefits as a sensitivity from 2005
Agglomeration impacts โ fixed employment,
Labour Supply Effects: โ tax wedge
โข Move to more productive jobs
โข Labour force participation
Outcome - an increase in the benefits for urban schemes
8. Crossrail 1 Economic case
ยฃbn 2002 prices
Net project costs -5.6
Transport user benefits
Business โ 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:
โข The no-go decision if BCR<1.0
โข Priorities within a fixed budget
โSomething would have to have been invented if CBA hadnโt existed.โ
HM Treasury โ Green Book and Managing Public Money
โข Accounting Officer responsibility for ensuring ministersโ decisions deliver
value for money โ โDfT has a well developed system of appraising value
for moneyโ
CBA is (broadly) comprehensible to public inquiries, Select
Committees and others
But weak in estimating โtransformationalโ change
10. Welfare benefits and GDP
Cost benefit analysis:
โข Used to inform decisions where significant market failure exists and
commercial considerations are inadequate, including in the case of
most transport investment.
โข Based on the concept of peopleโs willingness to pay for - eg a less
crowded railway
โข Outputs not directly sold through markets and so not relevant to
financial appraisal nor linked to national accounts and hence to
GVA/GDP.
โข Some benefits also count in GDP โ eg additional output where the
cost is already part of project costs
โข Some transport impacts result in an increase in GDP but not an
equivalent increase in welfare
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 transportโs contribution to growth:
โข Derived from the cost benefit appraisal and transport model
โข Business transport user benefits
โข Productivity effects- economies of scale and density โ agglomeration
โข Investment and employment effects โ change in location based
responses to transport costs
Scheme specific โGDP effectโ
13. The Importance of Place
Simple cost benefit analysis place-blind โ fails to resolve the
โtwo way road debate
WEBs are place specific โ
โข Agglomeration โ restricted to specific area typesโ response of
productivity to a reduction in transport cost differs by structure of local
economy and by level of agglomeration
โข Labour supply effects โ 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 โ identify industries,
simple Input/Output flows, transport cost changes and likely
changes in local economic activity
โข Best suited to local impacts, assumptions about transport dependency,
competition from โoutsideโ and additionality may lack evidence
โข Risks understating effects of competition
โข Examples โ DfT regeneration guidance, Transport Scotland EALI
15. Methods of identifying the
place and GDP effects 2
LUTI models โ demographic and economic scenarios,
changes in location by firms and households:
Transport costs, firmsโ and workersโ 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 โ changes in employment
density in response to changes in connectivity
โข Based on econometric estimates of numbers employed by zone and
connectivity
โข Supplements the static agglomeration elasticity, with netting off of output
in places from which jobs have moved
โข Example: HS2 Regional Economic Impacts (KPMG 2013)
17. Methods of identifying the
place and GDP effect 4
Spatial Computable General Equilibrium Models โ whole
economy response
โข Response to economic changes caused by a โshockโ
โข Captures changes in demand from transport scheme on other sectors
โข Supply side constraints limit extent of second round effects
โข Includes impacts of project costs, funding,
โข Growth generated by multiplier effects (under-employed resources) and
by agglomeration
โข Examples โ Airports Commission, Lower Thames Crossing
18. Role of the GDP effect in
decision-making
Metric โ 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
โข Standard approach is to reject all schemes below a BCR threshold and
then prioritise according to GVA per ยฃโs of local transport funding
Use by HS2 and Northern Transport Strategy to demonstrate
how transport might โrebalanceโ
Use in lobbying
โข Transportโs role in HMTโs growth objective
โข Contribution of the rail industry to the economy
19. The GVA metric - issues
The narrative and logic map:
โข how does transport deliver, causes of market failure, what else is
needed?
Additionality:
โข displacement (internationally traded or not),
โข assumptions about capacity in the economy
Most evidence is agglomeration based on monocentric city
Inter-city connectivity changes โ gains from trade โ difficult
(lack of data)
What is โgoodโ in GVA terms?