Presentation by Tom Worsley http://www.its.leeds.ac.uk/people/t.worsley

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?

20. Questions?