Presentation by Tom Worsley, OECD- ITF- Expert workshop on Strategic Investment Packages - Bratislava 15th -16th March 2018

1. Institute for Transport Studies
FACULTY OF ENVIRONMENT
Transport Projects Aimed at Fostering
Economic Growth – experience in the
UK of Crossrail and HS2
OECD- ITF- Expert workshop on Strategic
Investment Packages - Bratislava 15th
-16th
March 2018
Tom Worsley Visiting Fellow

2. Outline of presentation
• Use of economic appraisal to support the UK’s Transport
Business Case decision process
• Development of the Wider Economic Impacts guidance
• London’s Crossrail scheme – the role of economic appraisal
in the project’s evolution
• HS2 – a new high speed railway for England: estimating the
benefits
• Current work on transformational schemes and economic
growth
• Conclusions – strengths and weaknesses in measuring the
the regional economy effect.

3. What is the purpose of transport appraisal? – the
role of decision-makers and Parliament
• To help decision-makers, both national and in devolved
authorities/organisations:
– To understand the full range of likely impacts of a scheme or policy
– To decide which projects to accept and which to reject/refer for
further work
– To prioritise a wide range of projects against a budget constraint to
provide consistency
• Parliament and the Public:
– To facilitate the task of the public accountability watchdogs – the
PAC and the NAO
– To satisfy Treasury’s Green Book and Managing Public Money
requirements

4. Process of appraisal in the UK
• Problem identification, option development
• Strategic Outline Business Case
– high level ‘strategic fit’ of range of options
• Outline Business Case (5 case business model);
– Economic case
– Strategic case
– Financial case
• Full business case
– Refining, more detail, reduced number of options and updated OBC
• Information presented includes but is not restricted to the
BCR and Value for Money category
seeeeeeee
Commercial case eeeeeeec
- economic case - commercial case
- strategic case
- financial case - management case

5. UK experience – WebTAG and the
economic case – level 1 benefits
• Long established method of cost benefit analysis
– coverage has increased over past 20 years to meet new policy
objectives and to place money values on more of the impacts (with
non-monetised scaled according to size of impact)
• Economic and social impacts
– time savings, cost savings, public transport crowding, physical
activity, accidents, (reliability, journey quality, severance, security,
affordability, accessibility, option value)
• Environment
– air quality, greenhouse gases, noise,(landscape, townscape, historic
environment, water quality, biodiversity)
• Public accounts
– capital, operating and maintenance costs, tax and revenue changes.

6. Development of Wider
Economic Impacts(WEIs)
• Problem:
– Prior to the inclusion of WEIs, urban transport schemes tended to have low BCRs
– Land and construction costs in cities are high because land is highly productive –
many potential uses
– Revival of cities in the 1990s – 2000s: perception of cities as engines of growth.
– Unimproved transport network a constraint on urban growth
– No representation of any additional benefits for urban schemes despite these
perceived advantages
• Solution:
– Research to analyse causes of urban productivity
– Relationship between access to economic mass (A2EM) and productivity by sector
– Definition of A2EM- combination of
• Density of employment by zone and
• Accessibility of that zone to other nearby zones each weighted by employment
density

7. UK experience – WebTAG and the
economic case – level 2 & 3 benefits
• Level 2 wider economic impacts:
– Static agglomeration – changes in transport accessibility, with distance decay function,
raises productivity by sector in existing agglomerations
Level 2 impacts can be estimated from a multi-modal transport
model, productivity and employment data and parameter values
• Level 3 wider economic impacts:
– Dynamic agglomeration – changes in the location of economic activity ‘move to more
productive jobs’
Level 3 impacts require supplementary economic models to
represent responses of firms and households to changes in
accessibility including level 2 impacts.
• Impacts estimated only for largest schemes, level 2 count in ‘adjusted’
BCR and level 3 only inform Value for Money

8. Welfare and GDP – separate
but related metrics
• CBA – social welfare economics
– ‘willingness to pay’ basis for many impacts given absence of a market/market
failures, based on theory/evidence of consumer behaviour
– Informs ‘public interest’ decision – national perspective
– BCR and Value for Money metrics
• GDP metric – contribution to economic growth
– Broadly based on national accounting principles
– A ‘real’ number – gives estimates of GDP and employment effects by
zone/region – usually derived from business user cost savings and/or
agglomeration impacts
– Can help to identify funding sources
– A present value of GDP over 60 years is not always intuitive – is it a good
project?

9. The links between welfare and
GDP

10. 10
Route of Crossrail
• Joins Great Western suburban services to Great Eastern
and to South Eastern in Thames Gateway development
area with Heathrow link
• 2x21km new tunnels through Central London – 7 Central
London stations, all with interchange
• 2xnin Thames Gateway development areak shopping
districts (West End), financial districts (City of London,
Canary Wharf) and Heathrow Airport

11. Key Facts
• First cross-city suburban rail link in London: will increase Central Area
rail capacity by 10%
• 9 stations rebuilt and 28 upgraded
• 24 trains per hour in each direction during peak
• Tunnelling completed 2016: first new trains delivered
• Construction started 2009: open end 2018
• Journey times: Liverpool St - Heathrow 23 mins(55 now),
Paddington - Canary Wharf 14 mins (30 now)
11

12. Crossrail – a brief history
• 1989 Central London Rail Study- several options – E-W
Crossrail among the better with BCR of around 1.6
• Decision by government not to approve scheme
– BCR not good enough
– Funding from general taxation to benefit London rail commuters ‘unfair’
• Crossrail in new government’s transport plan for 2000 and
approved in 2007
– Wider impacts improved business case and identified user and external
beneficiaries, leading to agreement to raise local business taxes and to
justification of a national government contribution
– Reform of London local government – a London Mayor acted as champion
for the scheme, supported by Transport for London analysis

13. WEIs and Crossrail
• Conventional BCR 1.9:1
• Static agglomeration benefits raised this to 3.1:1
• Move to More Productive Jobs – dynamic agglomeration
– No LUTI or other model available
– Simple, transparent approach:
• Time series cordon data showed peak period crowding a constraint on growth and
indicated ‘maximum’ levels of crowding
• Analysis of employment densities showed other cities’ CBDs had more jobs per
km² than London
• Assumption – new capacity would fill up to ‘attainable’ levels over time with
between 26k and 70k workers moving from elsewhere
• BCR increased to 3.5 for low jobs move assumption

14. Composition of Crossrail
benefits post Wider Impacts
Category of Benefit Benefits £bn 2002 prices
DfT TfL
Public transport users; commuting and
leisure
6.1
Public transport users - business 4.1
Road users; commuting and leisure 1.6
Road users; business 0.6
Indirect tax change -1.4
Total transport user benefits 11.0 15.5
Static Agglomeration 3.1
Move to more productive jobs 2.0
Labour force participation 0.8
Imperfect competition 0.5
Total Wider Impacts 6.4 7.0-18.0

15. High Speed 2

16. HS2 Programme and
objectives
• HS2 New route, maximum speed 320kph, London to the
north
– Phase 1 London – Birmingham with connection to existing route
open 2026 (work has started)
– Phase 2a North of Birmingham to Crewe open 2027
– Phase 2b Crewe- Manchester and Birmingham to Leeds open 2033
• Objectives:
– Track and train capacity – long distance, commuter and freight
– Reduce journey times and improve reliability
– Promote economic growth and reduce regional imbalance

17. HS2 economic case
• 2013 economic case based on standard WebTAG levels 1
and 2 benefits
• Extensive analysis of uncertainty and effect on BCR/VfM of
alternative assumptions
• Source of wider benefits – static, both for HS2 and released
capacity –no model of the effects of change in location of
economic activity.
• BCRs on standard assumptions range from 1.4 (Phase 1, no
WEIs) to 2.3 (full scheme, with WEIs)

18. HS2 Economic Appraisal

19. HS2 Regional impacts –
KPMG analysis
• New Regional Economic Model developed
– ‘HS2 could potentially generate £15billion a year in productivity gains for the GB
economy in 2037(2013 prices). this would represent an increase of around 0.8% in UK
GDP in 2037’
• Connectivity index, by mode and purpose (commute, business)
estimated from travel survey data
• Analysis of zonal data on productivity showed an elasticity between
productivity and connectivity index, segmented by mode and purpose
• Business location model – trade-off between benefits of productivity gain
from more agglomerated locations and lower costs of locations that have
lower transport costs to markets

20. Impact of HS2 on GVA by
location

21. Assessment of HS2 Regional
Impacts report
• Attempt to estimate dynamic impacts and regional
distribution using available data without full LUTI model
• Method for estimating elasticity values criticised:
– ‘essentially made up’. ..‘On the optimistic side..’ ‘….I don’t think the
statistical work is reliable…’
– Method failed to take into account the fact that the composition of the
workforce is different in larger, better connected places.
– No assessment of the costs of complementary policies – local
transport improvements, worker training etc.
• KPMG economic model method not taken further.

22. Crossrail 2 – North East to South
West underneath London
• What?
– 2x38km new tunnels connecting in to
suburban rail from North East to South West
– 10% increase in rail capacity
– High frequency – 30 trains per hour in
Central Area
• Why?
– Supports London’s growth – more CBD jobs
– Addresses capacity constrains in CDB and
on main line suburban routes and stations
– Relief for Waterloo, London’s busiest
station >100,000 passengers morning peak
– Makes land accessible for housing –
200,000 new homes
• Cost
– £33.5 bn

23. Modelling the WEIs of Crossrail 2
• Crossrail 1 approach to estimating relocation of jobs
(capacity will be filled) not applicable:
– Crossrail 2 also creates demand through additional housing
– Intention is to improve service quality – below crush capacity
– Hypothesis that supply creates demand questionable
– Need to show where relocated jobs had come from
– Developments in modelling since 2007
• LONLUTI – transport/land use interaction model for London
with ‘bolt-on’ model to estimate GDP effects of location
change used for Crossrail 2.

24. Crossrail 2 - Appraisal of
WEIs
• LUTI model for London – LONLUTI:
– Transport model plus land use and spatial economic data
– Estimates responses to changes in accessibility for households, for
firms and for developers
– Increases in housing and business floorspace constrained by
planning policies, influenced by accessibility
– Regional economic model, to estimate firms’ responses to transport,
rents and labour cost changes and so the relocation/expansion effect
• Main use of LUTI model:
– Feedback loop of location change on transport network
– Relocation of firms/jobs to more or less productive places to give
estimate of spatial GDP effect

25. Other uses of LUTI-based
economic models in the UK
• No details published – work still ongoing: several
applications including:
– HS2 – new analysis of impact on regional growth
– Roads Investment Strategy – England wide investment in inter-urban
roads – new version with zoning as in Regional Highway Models
– Transport for the North – plan for new and improved east–west links
- strategic policy model
• Two outputs
– Changes in the location of economic activity
– The change in GDP/GVA from the agglomeration effects of that
relocation.

26. Conclusions – strengths of modelling
relocation and GDP effects
• Government has multiple objectives – place based policies,
jobs and economic growth as well as social welfare
• Wider Economic Impacts and good CBA have helped
transport secure high levels of public spending
• Identifying the beneficiaries can result in equitable funding
solutions
• Models of relocation help to explain how travel time savings
are used, adding to the plausibility of CBA

27. Conclusions: weaknesses of modelling
relocation and GDP effects
• Agglomeration is not the only cause of economic growth –
but it is the only link between transport and the economy
that we can at present model. At level 3 this is complex,
unvalidated and data intensive
• Productivity/output elasticities must deal with econometric
issues, reverse causality etc and double counting issues
• GDP/GVA methods are in their infancy and can produce
very large numbers relative to CBA if:
– structural underemployment is assumed
– multiplier effects allowed
– low or zero displacement from other economic activity is assumed
– the investment is net additional relative to the reference case

28. To summarise
• CBA is a well established method with a clear ‘message’
about value for money
• The Wider Impacts Guidance has strengthened CBA and
has made possible estimation of a GDP effect
• Decision makers like the GDP effect, complementing the
VfM metric and showing regional/local impacts
• Modelling dynamic agglomeration effects is data intensive
and require detailed and largely unvalidated methods
• Agglomeration impacts are not the only source of economic
growth, but the only ones we can model at present