This allows us to consider the capital financing of transport projects in a new way. A project that offers proven, realistic potential to add to jobs and productivity will raise the total sum of taxes generated and present new sources of finance over time. And in due course, there will be continued streams of activity-generating benefits.
By viewing spending priorities in this way, we can break with the constraints of short-term decision-making and spending approaches, to create a virtuous investment and performance that rewards a spirit of entrepreneurialism in our cities. Through this model, of course, welfare benefits will still be represented, as has been shown by the Greater Manchester Transport Fund investment programme, whose components were determined by their GVA potential and refined by the ability to secure social and carbon benefits at a programme level.
Crucially, linking benefits to paybacks, particularly those generated by new economic activity, is done much more easily at a sub-regional or city region level than nationally. Once the assumption that the economy is independent of the transport system is abandoned, then the immediate prior question becomes what the objective of a policy is, so that the relevant benefits can be examined.
Cities and city regions should be able to have a more focused view of their prospects and how best to respond to opportunities. Indeed they will be essential to actually taking advantage of new opportunities. Transport is a necessary but not sufficient condition for success. Cities and their regions will play a key role in ensuring the other conditions are in place, and therefore for maximising the value for money of the overall investment.
Risk analysis is a vital component and should play a much broader role. It must achieve two things. First it must identify the key risks, then it must assess them. A big element of this is to assess where the future could be different from the past and how much needs to change for the future to pay back an investment. A sense of the scale of change, and whether such change has any historical precedent, is enormously valuable in assessing both feasibility and risk.
The risk that we fail to put in place sufficient infrastructure and thus constrain growth needs to be set against the risk that we over-invest. All the evidence suggests that we have historically under-invested, while economic opportunities are currently burgeoning. The need is to free up the ability to invest on the basis of a potential payback in revenue and in output terms.
The current system is not risk based. Implicitly it assumes that all possible productive investments have already been undertaken. The public sector only undertakes those investments which produce other benefits additional to what would otherwise exist. In fact it is very important to recognise that it is impossible to prove such additionality, at least in a real scientific sense. Consider HS2. This is an investment over twenty years at a minimum even if we accelerate the implementation. What will happen in the ‘Do Nothing’ case? Enormous changes in the world economy will occur. The EU might collapse; new but currently unknown technologies will certainly emerge. We can, however, be sure it will be hard to access new opportunities for northern cities and that they will remain small scale. But what is the economic consequence? How severe? Forecasts based on extrapolation cannot answer these questions.
Yet unless you are sure about the do-nothing, it is impossible to be sure about the impact of the do-something. Even less can you be sure if the do-something needs other investments alongside it, in local transport or in skills, to be truly effective. Additionality is an empty concept where long-term change is in prospect. It might have some validity at a small scale or over a short time. But in the case of significant change or over a long time scale it is impossible to use.
Risk analysis is more relevant. Risk analysis must do two things - it must identify the key risks, then it must assess them. A big element of this is to assess where the future could be different from the past, and how much needs to change for the future to pay back an investment. A sense of the scale of change, and whether such change has any historical precedent, is enormously valuable in assessing both feasibility and risk.
Take Crossail, for example. The additional peak capacity created by the scheme is around 80,000 additional people delivered into the central area. The analysis instead assumed that only around 35,000 additional people would arrive, based on both transport, cost and crowding off models. Could the additional output pay for the railway? On what assumptions?
Payback will be larger
Again, some restrictive assumptions about full employment, the size of a productivity differential and the time frame for increasing employment were used and the output and taxes were still sufficient. So the risks are largely on the upside - to the extent that as the rest of the system fills up, payback will be larger, and as new investors are attracted, payback will again be larger.
An approach of this nature would look at investments such as HS2, One North or Crossrail 2 from a rather different perspective. It would be possible to conclude that such investments are necessary because of the risk of constraints that could otherwise emerge, even if we cannot be certain.
There is a highly visible and powerful risk that London and the South East will become still more unbalanced, with regard to the rest of the country.
I have argued here that agglomeration forces are powerful, and it is therefore likely that scale will attract scale. It is not feasible to create an alternative agglomeration in one city, so the most likely strategy to succeed is to connect existing agglomerations together more effectively and then to connect them better to the outside world and to the international gateway of London.
From the analysis of cities with more than one centre, it must be recognised that multi-level agglomerations are harder to grow. However, they do exist in both Germany (the Ruhr) and the Netherlands (Randstad), and close links enable specialisation to become the diversity that drives success and resilience.
This is where it is necessary to begin to think in risk terms, rather than formal and unprovable models based on the past.
Let us assume that better connections between the cities of the North support an additional 5,000 jobs in each of the major cities. This is significant, yet in just the last two years, 13,000 private sector roles have been created in Manchester alone.
Let us also assume that this also raises the employment rate, so that 20% of the jobs go to people who were not previously working. This would narrow the gap on participation rates, but not close it. Using estimates of average output, this generates roughly £15 billion of additional value over a 60-year period, illustrating how a relatively small impact on the number of jobs available can build up over time to a large total, creating output and economic performance that helps pay for it.
Such calculations can and should be challenged. For example, what productivity growth rate should we think about, and how can history inform this? Are such job assumptions too weak, or conversely can they only happen if other investments are made as well, whether in transport or other areas? However, all of these questions can be laid out on a limited number of pieces of paper, so that everyone can understand them.
Most non-economists, including some politicians, are astonished to learn that transport is not considered to be an investment in the economy. They would consider it obvious that a city development plan should go alongside the plan for a new railway and new stations.
And yet it required a taskforce, chaired by Lord Deighton, to make this recommendation as a key element in maximising the benefit of new transport investment, alongside recommendations to review guidance on how we evaluate such major game-changing investments. (In High Speed 2 Get Ready, a 2014 report to the Government by the HS2 Growth Taskforce.)
A previous review of transport evaluation, chaired by Lord Eddington, argued that smaller projects may be more effective. With our current system, that is an inevitable result of an evaluation system that starts from the proposition that the economy and transport can be separated. It also results from greater ability to analyse smaller projects, because more variables can be held constant.
With schemes such as Crossrail, HS2 and the One North proposals, they rest precisely on the ability to change everything, and require plans to be put in place to allow this to happen.
Thus, the proposition (as described earlier) is actually fairly simple - integration of land use planning and development with the transport investment that can pay for them is central to economic growth and to future welfare.
However, the cities and city region authorities will also need a wider structure re-oriented to reflect this. Taking HS2 as an example, its success requires a robust alignment of local and national agencies to realise its potential. This will need a significant shift not only in the prioritisation and investment approaches adopted by agencies such as Network Rail, but also in their planning and funding horizons, so as to ensure that the current arrangements (typically constrained to five-year cycles at present) can be reformed to reflect the 20-year development processes involved in HS2. Only in this way can the UK ensure that its processes do not undermine its potential.
This is not a zero-sum game. If economic growth is somehow predetermined, then both government policy and market pressures will limit debt to GDP ratios. However, devolution and more integrated approaches to investment will make better infrastructure, unlock growth and create the opportunity to pay back debt. In this case there is a distinction between the purposes of borrowing - as growth emerges, then debt amounts can leave ratios unchanged.
The challenge for cities and transport authorities is to ensure that the case for borrowing includes the mechanisms by which it can be paid back.
Finally, the model requires a new paradigm for planning and funding transport across all agencies, national and local, breaking free from five-year funding cycles to truly respond to the long term.
The scale of opportunity and pace of change offered by our cities, acting in a global marketplace, demands this. So too does the national transport framework that will be shaped by programmes such as Crossrail and HS2 that will be delivered through the next ten to 15 years.
A fresh approach to these decisions is essential, to give a strategic focus on how investment is to be paid back, whether by fares, taxes on increased activity, or developer contributions.
- This article draws on Investing in City Regions: the case for long-term investment in transport, November 2014, prepared by Volterra Partners.
