Please note: This working document was prepared to inform the design and development of the Melbourne Metro rail tunnel. The project team used the

Transcription

1 Agglomeration Benefits of the Melbourne Metro Final Report Public Transport Victoria July 2012 MM - Agglomeration Benefits of the Melbourne Metro for the web

2 This report has been prepared on behalf of Public Transport Victoria. SGS Economics and Planning and its associated consultants are not liable to any person or entity for any damage or loss that has occurred, or may occur, in relation to that person or entity taking or not taking action in respect of any representation, statement, opinion or advice referred to herein. SGS Economics and Planning Pty Ltd ACN Offices in Brisbane, Canberra, Hobart, Melbourne, Sydney Please note: This working document was prepared to inform the design and development of the Melbourne Metro rail tunnel. The project team used the relevant patronage forecasts, population projections and workforce statistics available at the time of writing. It is not a statement of government policy nor is it necessarily an accurate description of the current project. These forecasts and inputs are subject to regular review and updating during the project planning and development stage. Third parties should not place any reliance on the content of this document and, if they do so, such reliance is at their own risk. MM - Agglomeration Benefits of the Melbourne Metro for the web

3 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 INTRODUCTION Purpose and Scope of this Report 1 Melbourne Metro 1 Agglomeration Impacts and Project Evaluation 1 Structure of the Report 2 I 2 AGGLOMERATION IMPACTS OF MELBOURNE METRO Theoretical Underpinnings Elements of the Estimation Method 4 Comparison with United Kingdom Department for Transport Method 4 Effective Job Density 4 Labour Productivity 5 Labour Productivity Patterns within Melbourne 8 Regression Analysis Estimating the Impact of Particular Projects on Agglomeration and Productivity Estimated Impacts of Melbourne Metro 15 Change to Effective Job Density 15 Labour Productivity Impact 17 3 HUMAN CAPITAL IMPACTS OF MELBOURNE METRO Theoretical Underpinnings Approach to Estimating the Human Capital Effects in Melbourne 22 Australian Human Capital Estimates 22 Melbourne Human Capital Estimates 22 Impact of Agglomeration with ABS Human Capital Framework Estimated Benefits from the Melbourne Metro 31 Human Capital Impacts 31 Impacts on Melbourne Economy 36 4 IMPACT OF MELBOURNE METRO FULL SCHEME 37 5 COMPARISON WITH OTHER TRANSPORT PROJECTS 39 6 CONCLUDING REMARKS 45 APPENDIX 1 46 APPENDIX 2 47 Human Capital Regression Results 47 REFERENCES 49 Agglomeration Benefits of the Melbourne Metro

4 EXECUTIVE SUMMARY The past 20 years have seen the Melbourne economy transformed from a manufacturing hub, reliant on long standing protectionist policies, to a diversified post-industrial economy very much living off its knowledge base in a highly competitive and global trading environment. This is evident in the pattern of GDP growth for Melbourne versus the nation as a whole. Since the depths of recession in the early 90 s, Melbourne has, more often than not, outperformed the national economy. This was the outcome of focussed policy effort by both the Commonwealth and State Governments. The micro economic reforms, fiscal/taxation initiatives, in harness with National Competition Policy and the Kennett Government s moves to commercialise some State owned businesses injected a fluidity and dynamism into the Melbourne economy. Several settlement pattern shaping infrastructure projects played a major part in repositioning Melbourne. CityLink was vital in connecting Melbourne s inner western industrial areas to the rich skills pool in the Monash corridor. This gave a great productivity boost to these manufacturing and logistics areas which, in turn, helped to promote residential growth in a part of Melbourne that had lagged behind for decades. The Western Ring Road further improved the accessibility of Western Melbourne and reinforced the shift in Melbourne s hitherto unbalanced growth towards the east. More recently, the commissioning of EastLink has given a similar, though more modest, accessibility advantage to the key centres of Ringwood and Dandenong. The transformation of its manufacturing base towards higher value added activities is already underway. Several infrastructure investments paved the way, including the SouthBank, Fed Square and Docklands. The relationship between high accessibility to employment and improved economic outcomes has not only been observed in Melbourne, but in countless international examples. The earliest literature dates back to the late 19th Century. More recently the appraisal of transport projects in the United Kingdom has been leading the way into attempting to qualify the economic benefits which flow from improved accessibility. Using the United Kingdom methodological framework as a platform, a dataset and methodology has been constructed to assess the economic benefits (labour productivity and human capital) which flow from the proposed Melbourne Metro. A review of the United Kingdom methodological framework revealed that some of the benefit streams are well supported in the literature and others had much less support. SGS has focused on those benefits which are the most defensible. The labour productivity industry elasticities produced by the method are in line with the international literature in the field. The ratio of labour productivity benefits to transport benefits derived from the Melbourne Metro is in line with the ratio observed from a number of projects in the United Kingdom. This favourable comparison combined with a range of diagnostics and sense checks provide a great deal of confidence in the estimates. Although it should be noted that conceptualising and quantifying agglomeration benefits of transport projects is still a very new field. As more projects are appraised and the methodology is debated within the transport and cost benefit community there will be ongoing refinements to the methodology. By reshaping the accessibility for the metropolis, particularly for the western and northern sub-regions, the Melbourne Metro will enable businesses to achieve higher productivity through economies of scale and scope. The elevation of labour productivity from this source is expected to generate additional gross value added $ million across the metropolitan economy by While this is substantial impact, it needs to be kept in perspective. Across all industries, the productivity benefit amounts to 16 cents in each hour worked in In % of this $308 million benefit came from the City of Melbourne LGA, and 36% from inner Melbourne (defined as the City of Melbourne, Port Phillip, Yarra and Stonnington). 30% of the total agglomeration benefit in 2031 came from Western Melbourne (defined as the LGAs of Wyndham, Brimbank, Moonee Valley, Hobsons Bay, Melton & Maribyrnong). Agglomeration Benefits of the Melbourne Metro i

5 TA BLE 1. IMPACT OF MELBOURNE METRO ON EACH HOUR WORKED Manufacturing -$0.06 -$0.18 -$0.27 Construction $0.04 $0.51 $0.24 Wholesale Trade $0.01 $0.04 $0.09 Retail Trade $0.02 $0.06 $0.14 Accom, Cafes & Rest. $0.03 $0.09 $0.17 Transport & Storage -$0.04 -$0.15 -$0.30 Finance & Insurance $0.06 $0.19 $0.51 Property & Business Serv's $0.05 $0.14 $0.29 Education $0.02 $0.06 $0.10 Health & Community Serv's $0.02 $0.07 $0.15 Cultural & Recreational $0.04 $0.11 $0.21 Serv's Personal & Other Serv's $0.06 $0.16 $0.38 Total $0.02 $0.07 $0.16 Given the new nature of the methodology in the Australian context and the areas for further research highlighted in this report, a very conservative approach has been taken. Only a selection of industries has been included in the analysis. A methodological issue with estimating small area labour productivity has meant about 10% of the economy (which on the whole would benefit from the Metro) has been excluded from the analysis. Also it worth mentioning that in transport project appraisals there is no uplift in the number of jobs across Melbourne. The literature and empirical evidence would suggest that increases in production / income lead to higher employment growth. This would expose more jobs to the agglomeration forces of the Metro and hence increase the benefits attributable to the project. Five scenarios have been modelled which have a Net Present Value (NPV) of the labour productivity benefit (using a 7.5% real discount rate over 30 years) of between$1.3 billion and $2.0 billion. The headline NPV is in the middle of the range at $1.7 billion. The human capital estimates reveal that the Melbourne Metro presents the opportunity to help to address the considerable levels of relative disadvantaged experienced by large parts of western Melbourne. Improved human capital development (driven by improved access to employment opportunities) provided by the Metro would improve the equality within the society of Melbourne. Agglomeration Benefits of the Melbourne Metro ii

6 1 INTRODUCTION 1.1 Purpose and Scope of this Report Melbourne Metro The Melbourne Metro Rail Tunnel is proposed to run between the Domain and the Dynon area to Melbourne s inner west (Figure 1). This first stage of the Melbourne Metro will provide additional capacity within the existing metropolitan rail network and help to further integrate Footscray into the central Melbourne economy. The new stations at Arden Street and Parkville will service new or existing concentrations of higher order business, education and research activities and effectively fuse these nodes with the Melbourne CBD. FIG URE 1. MELBOURNE METRO UNDERGROUND RAIL LINE Source: Melbourne Metro The Melbourne Metro potentially represents a step change in the development of Melbourne s spatial economy. As well as improving service coverage and quality for public transport users, this investment is likely to lead to a significant redistribution of future employment growth, favouring the inner west in particular. Moreover, the public transport capacity and travel options opened up by the Melbourne Metro will have implications for trip times by all modes across the metropolitan transport network, with especially strong impacts across the northern and western sub-regions. Such shifts in travel times and employment location will change the pattern of Effective Job Density (EJD see definition below) across Melbourne with consequential impacts on the productivity of businesses and the accumulation of knowledge and skills in the metropolitan labour force. This report sets out to estimate the $ value of these agglomeration linked labour productivity and human capital benefits of the Melbourne Metro. Agglomeration Impacts and Project Evaluation Projects such as the Melbourne Metro can be expected to offer a wide range of benefits. Some of these benefits have been routinely factored into economic appraisals of such projects for many years. Others, such as the Agglomeration Benefits of the Melbourne Metro 1

7 agglomeration induced labour productivity and human capital impacts noted above are now receiving greater recognition in these appraisals, following theoretical and analytical break-throughs in the literature. Table 2 identifies the scope of benefits counted in traditional cost benefit analyses versus wider economic impacts that are theoretically justifiable. The highlighted cells in the table indicate the focus of the current report. TA BLE 2. SCOPE OF BENEFITS IN TRANSPORT COST BENEFITS ANALYSES (CBA S) Potential Benefits Generated by a New Transport Link Traditional CBA Business to business transport costs are reduced (time and vehicle operation) Business to business synergies are improved (e.g. economies of scale and scope) Labour participation is improved as a result of increased employment choice and access Human capital is enhanced (skills& knowledge accumulation through better job matching & depth of experience) Household travel costs are reduced (time and vehicle operation) Households enjoy greater choice of recreational, retail, cultural opportunities Harmful environmental emissions are reduced Incidence of accidents (property and personal costs) is reduced Structure of the Report The following two chapters deal, in turn, with the business to business agglomeration benefits and the human capital impacts generated by the Melbourne Metro (Stage 1). Each chapter sets out the theoretical basis for the indicated benefits and provides a detailed exposition of the estimation techniques used. Where relevant, comparisons with findings in the wider literature are cited. Comparisons (qualitatively and quantitatively) to other transport projects are also provided. The third chapter of the report draws together the estimated agglomeration benefits offered by the Melbourne Metro, and contextualises them with reference to the current and prospective size of the Victorian and metropolitan economies. The fourth chapter briefly describes the benefits of the Melbourne Metro Full Scheme. Agglomeration Benefits of the Melbourne Metro 2

8 2 AGGLOMERATION IMPACTS OF MELBOURNE METRO 2.1 Theoretical Underpinnings The term agglomeration is used in spatial economics to describe the benefits which flow to firms from locating in areas which have a higher density of economic activity. Macroeconomic theory describes agglomeration as part of economies of scale and scope. Locating in an area which has a higher density of economic activity (as measured by employment) allows firms to achieve economies of scale through access to an extensive customer base. Within this large customer base, the opportunity for economies of scope is presented to firms. That is, with increased numbers of clients, firms will be able to gain efficiencies by specialising in a particular field. The competitive marketplace also presents a firm with many potential clients, freeing it from reliance on a single client. This enables firms to manage a range of business risks. The automotive manufacturing supply chain provides examples of the dangers of poor diversification of risk for firms. The closure of the automotive assembly plant generally results in the closure of component manufacturers. Agglomeration also provides opportunities for firms to access a deep and diverse pool of skilled labour. With so many firms located together there will be a high level of technological / knowledge transfer between firms, which will help bolster innovation. This innovation is vital for firms to survive in a very competitive market place. Much of the knowledge transfer is provided by skilled labour moving between firms. Literature related to agglomeration can be traced back to the work of Marshall (1920). Despite the passage of a century, this still provides an excellent conceptual analysis of the benefits which firms can gain by occupying a strategic location. Within this conceptual framework, agglomeration has since been measured in a number of ways including city population (Aaberg, 1973; Tabuchi, 1986), industry employment (Nakamura, 1985; Henderson, 1986), the number of industrial plants (Henderson, 2003b) and effective job density (Graham, 2006). Although all these methods attempt to measure the same basic economic phenomena, there are two somewhat distinct effects at work. The first is that the larger the city (in terms of population, employment, or economic production), the higher the labour productivity. The literature often refers to this as urbanisation. The second is related to the spatial organisation of the city (the ease at which firms can interact with each other). The literature often refers to this as localisation. Consider two cities, A and B, each with a population of five million people. Both will gain a labour productivity premium from their size. However, economic activity in City A is poorly linked while City B features distinct employment centres which are well integrated via a robust transport network. In this case the labour productivity in City B is likely to be higher than City A. The method applied in this paper is more focused on localisation effects but has the capability to account (if required) for urbanisation. We now turn to the application of this theory to Melbourne and the Metro project. The method used by SGS was independently developed but is very similar conceptually to recent work undertaken in this area by the UK Department of Transport (Graham, 2006). The UK transport project appraisal guidelines offer up a range of benefits which could flow from transport projects. A very brief review of these various benefits is provided in the Appendix. SGS has only focused on those benefits which are strongly supported in the literature. This are outlined in the following sections and where SGS has moved away from the UK method. Agglomeration Benefits of the Melbourne Metro 3

9 2.2 Elements of the Estimation Method Comparison with United Kingdom Department for Transport Method Like the UK Department for Transport, SGS has set out to develop a method to measure agglomeration impacts on labour productivity. There are some minor differences between the SGS and UK approaches which are: The UK s elasticity has been calculated using a business micro dataset. In Australia a comparable dataset does not exist. In the absence of this business micro dataset a synthetic SLA dataset has been created using available data. The creation of this synthetic SLA dataset is discussed in more detail in section Labour Productivity Patterns within Melbourne. Transport mode split has been used as a weighting in the SGS approach rather than generalised cost. As outlined below, the former better reflects the real world choices made by commuters. The SGS weighting for total elasticity is based on industry Gross Value Added rather than industry employment. SGS uses Gross Value Added per hour worked rather than Gross Value Added per worker as the measure of labour productivity. Gross value added per hour worked is an internationally recognised measure of labour productivity whereas Gross value added per worker is not. Effective Job Density A simple measure such as looking at the employment density of an area does not adequately reflect the phenomenon of agglomeration. A firm in a relatively low-employment area but located on the edge of a Central Business District (CBD) could potentially capture agglomeration benefits through such proximity. Thus a measure of agglomeration must incorporate both proximity and the scale of the economic activity and be calculated for very small areas (Graham, 2006). Accordingly, SGS has used the level of employment relative to the time taken to gain access to that employment and the mode split that is currently experienced by those employees. A travel time matrix (sourced from the Victorian Government s Melbourne Integrated Transport Model) is available for 2,253 travel zones in Melbourne. This shows how long it takes to travel from one zone in the city to all other zones by both car and public transport. In the analysis presented in this section the travel times have been converted from the travel zone level to a Statistical Local Area level. This measure of effective job density (EJD) enables a more real life representation of the proximity (in terms of travel time) component of agglomeration that other more basic measures overlook. That is a rational commuter would use the mode of transport which minimises their travel costs including value of time and any monetary cost. By way of illustration, 68% of people working in the CBD of Melbourne travel to work on public transport, implying that proximity to those jobs is closely related to public transport travel times. The other extreme can be seen in locations such as Cranbourne (an outer location of Melbourne), where 98% of workers travel to work using private vehicles 1. Therefore, EJD has been estimated as follows: Estimate the EJD for each SLA. Where: = Effective Job Density for SLA i = per cent of work trips which involve public transport for zone j = number of jobs/employment within zone j = time it takes to travel on public transport from zone i to zone j = time it takes to travel by private vehicle from zone i to zone j 1 This method does exclude travel times from other modes (bicycle or walk.) Agglomeration Benefits of the Melbourne Metro 4

10 This method reflects real and perceived costs associated with travel in various parts of the city. SGS has aggregated travel zone EJD to an SLA level using a weighted average based on population for origin and employment for destination. This includes estimation of the trips within the SLA. Figure 2 presents the SLA level EJD pattern for Melbourne. Ongoing research into EJD estimation is a topic for the SGS research program. Estimating EJD using generalised costs rather than just travel time produced almost statistically identical elasticities. FIG URE 2. SLA EFFECTIVE JOB DENSITY, Labour Productivity Labour productivity is calculated by dividing the Gross Value Added (GVA) for an industry by the total number of hours worked in that industry. Where: is the Labour Productivity for zone i is the Gross Value Added for zone i is the number of hours worked for zone i Agglomeration Benefits of the Melbourne Metro 5

11 The GVA = f(k, L, T) within Melbourne, where K is Capital, L is labour and T is the prevailing level of technology at the time. Labour productivity is a partial measure of productivity as changes in GVA could be driven by changes to other factors of production such as capital. The most comprehensive measure of productivity is known as Multifactor Productivity (MFP). MFP measures the ratio of growth in GVA to growth in both labour and capital inputs and also represents that part of the change in GVA that has not been explained by changes in labour and / or capital. The Australian Bureau of Statistics produces Labour Productivity, Capital Productivity and MFP for each industry at the Australian level on an annual basis. However, the ABS does not produce estimates of the capital stock at the State level; labour productivity is the only measure available at this time for use in the investigation of agglomeration impacts. The estimate of GDP for each capital city including Melbourne is derived from industry data published in the Australian National Accounts: State Accounts (cat. no ) publication. There are three approaches to measuring GDP; the Production approach (the sum of the GVA for each of the industries and taxes less subsides on products); the Expenditure approach (measures final expenditure on goods and services) and the Income approach (sum of income generated by all factors of production). At the Australian level the Production, Expenditure and Income approaches are averaged by the ABS to produce GDP. However, at the State level due to a lack of data on interstate trade, the Expenditure and Income approaches are combined and averaged with the Production approach. In developing the GDP 2 for each capital city the production approach is used, firstly because of this lack of data on intrastate trade. The other major reason is that the data available to calculate the Production approach is more robust (and hence requires fewer assumptions to be made) than that available for the Expenditure or Income approaches. For each industry, wherever possible, the same data sources which have been used to produce industry Gross Value Added at the State level are used to produce industry Gross Value Added at the city level. Some of these data sources include: Agricultural Commodities: Small Area Data, Australia (cat. no ); Business Indicators, Australia (cat. no ); Manufacturing Industry, Australia (cat. no ); Regional Population Growth, Australia (cat. no ); Household Expenditure Survey (cat. no ); Education and Training Experience (cat. no ); and Labour Force, Australia, Detailed, Quarterly (cat. no ). To maintain consistency with the wider National Accounts, the Production approach estimate of Gross City Product is benchmarked to the Gross State Product using a statistical discrepancy method. Via the use of the implicit price deflation technique, the Chain Volume Measures of the Gross City Product are converted into Current Prices. This method overcomes the non-additivity issue with the Chain Volume Measure. The estimates of hours worked are derived from Information Paper: Implementing New Estimates of Hours Worked into the Australian National Accounts, 2006 ( ), which provides the total hours worked within the economy for The index of total hours worked from the Australian System of National Accounts, (cat. no ) has been used to advance the estimate for the years between and This Australian total hours worked figure has then been allocated for each industry in each capital city based on its share of total hours worked from the Labour Force, Australia, Detailed, Quarterly (cat. no ). There are several advantages of using this measure of labour productivity. It is built on the National Accounts framework. This allows the agglomeration benefits to be viewed in the context of the wider economy. This includes the Australian, State and City economies. The National Accounts also provides a clear methodology for measuring economic activity and labour productivity. Direct comparisons of the benefits of agglomeration can be made between and within Australian cities. It should be noted that, in conducting this analysis, industries outside the Australian Bureau of Statistics Market Sector are included. 2 GDP (Gross Domestic Product) refers to Australia, GSP (Gross State Product) refers to a State, while GCP (Gross City Product) refers to a city. But for simplicity s sake in this paper all different measures are referred to as GDP. Agglomeration Benefits of the Melbourne Metro 6

12 The four so called non-market Sector industries are Property & Business Services, Government Administration & Defence, Education and Personal & Other Services. ABS excludes these industries from the Market Sector owing to the difficulty of estimating volume measures of output for these industries. However, given that for current purposes, the analysis is for a single point in time, SGS does not anticipate difficulties with the incorporation of the ABS excluded sectors. As shown in the table below, the larger cities of Melbourne and Sydney have higher labour productivity than the smaller cities. Table 4 provides the population and GDP for each city. The population is the estimated resident population which relates to the 30th of June of each year while the GDP and labour productivity relates to financial year ending on the 30th of June. These tables provide the first clear indication that the size of the economy of a city can provide improved outcomes for labour productivity. The industry mix within each city would also have an influence on the outcome. That is, more productive industries may tend to locate in particular cities. Figure 3 presents the labour productivity for Melbourne between and TA BLE 3. MAJOR CAPITAL CITIES LABOUR PRODUCTIVITY ($ OF GROSS VALUE ADDED PER HOUR WORKED) Sydney Melbourne Brisbane Adelaide Perth TA BLE 4. MAJOR CAPITAL CITIES ECONOMY 3 ($BILLION) AND POPULATION (MILLION) Sydney Melbourne Brisbane Adelaide Perth GDP Pop GDP Pop GDP Pop GDP Pop GDP Pop and ABS Regional Population Growth, Australia cat. no Chain Volume Measure reference year Agglomeration Benefits of the Melbourne Metro 7

13 - Chapter 24: Value added by industry Chapter 27: Productivity measures Chapter 28: State accounts -

14 TA BLE 5. SELECTED SLA PROPERTY & BUSINESS SERVICES PRODUCTIVITY & EJD Rank SLA Labour Productivity Effective Job Density Level ($) Log Level Log 1 Melbourne (C)- S'bank , D'lands 2 Port Phillip (C)- West , Melbourne (C)- Inner , Bayside (C)- Brighton , Hobsons Bay (C)- Altona , Moonee Valley (C) , Essendon 15 Stonnington (C)- Prahran , Boroondara (C)- Kew , Manningham (C)- East , Darebin (C)- Northcote , West Melbourne , Moreland (C)- Coburg , Maroondah (C)- Ringwood , Maribyrnong (C) , Gr. Dandenong (C) , Dandenong 60 Frankston (C)- West , Hume (C)- Sunbury , Knox (C)- North-East , Cardinia (S)- Pakenham , For labour intensive industries (all other industries except for Electricity gas & water and Communications which have been excluded from the analysis for technical reasons explained below) a quality adjusted labour input method was used. That is, average industry wage rates were estimated for each SLA and combined with total hours worked for each industry for each SLA. This provides a proxy for total factor income for the SLA. The SLA share was then used to allocate the Melbourne total industry GVA to each SLA. As a result of this data compilation, the synthetic dataset contains: an estimate of industry GVA for each SLA; an estimate of hours worked for each SLA; and A derived estimated of labour productivity. All of the SLA GVA, hours worked and labour productivity estimates are integrated with the respective Melbourne, Victorian and Australia totals produced by the Australian Bureau of Statistics. Table 5 presents the labour productivity and EJD for a selection of Melbourne SLAs. This analysis reveals that the highest labour productivity SLAs are clustered around central Melbourne, the industrial zones in the south east, and the airport in the north. Much of the variation can be attributed to industry mix across SLAs. That is, the higher labour productivity service based industries tend to cluster around the CBD, which in itself is not clear proof of the impact of agglomeration. Agglomeration Benefits of the Melbourne Metro 9

15 FIG URE 4. SELECTED SLA PROPERTY & BUSINESS SERVICES LABOUR PRODUCTIVITY To confirm agglomeration impacts, variations in labour productivity across the city for a particular industry should be observable. Figure 4 presents such variation for the Property & Business Services industry. That is, a worker located in the central area of Melbourne (where there is high agglomeration) has a higher labour productivity than a worker in the same industry located on the fringe of Melbourne (where there is low agglomeration). Regression Analysis The degree to which agglomeration affects labour productivity for each industry is now estimated using a translog regression where the natural log of labour productivity levels for the respective industry is regressed against the natural log of effective job density by SLA. Due to their small size within the metropolitan economy, both the Agricultural and Mining industries have been excluded from the analysis. Communications and Electricity, gas & water industries have also been excluded due to the difficulties of measuring labour productivity at the SLA level. In both of these industries, the vast bulk of GVA is attributed to the capital infrastructure covering the city. The labour productivity measure would allocate the GVA to the clusters of workers in these industries, which is clearly incorrect. The relationship has been estimated as follows: log ILP β β w log EJD ε Agglomeration Benefits of the Melbourne Metro 10

16 Where: ILP is the Industry Labour Productivity for SLA i EJD is the Effective Job Density for SLA i w is the weighted based on total SLA i industry GVA and ε is a zero mean random disturbance. This equation has been used for each industry with the exception of Accommodation, cafes & restaurants and Manufacturing. For Accommodation, cafes & restaurants a dummy variable 4 was included for the SLAs in the Mornington Peninsula and Yarra Valley. This is reflecting the natural beauty, specialisations and clustering in these areas which results in higher labour productivity. The Manufacturing industry equation has an economic mass 5 variable based on the SLA GVA for the Manufacturing, Wholesale and Transport & storage industries. This is reflects the economies of scale which are associated with a large cluster of industrial production. By way of example, Figure 5 shows the relationship between labour productivity in the Property & Business Services sector and EJD. FIG URE 5. PROPERTY & BUSINESS SERVICES LABOUR PRODUCTIVITY & EFFECTIVE JOB DENSITY, The results of this regression analysis is summarised in Table 6. As would be expected, the strength and degree of this relationship varies across industries. Productivity in some industries linked closely with agglomeration while in others this appears to be a weak or even unwanted factor. Using the translog regression formulation allows us to look at the effect of doubling EJD on labour productivity for each industry. In the literature, the impact of doubling effective job density is referred to as the agglomeration related productivity elasticity of the industry in question. This allows for easy interpretation and comparison of the coefficients. Table 6 presents the elasticity for each industry. The weighted total for all industries included in the analysis is That is, a doubling of the EJD will result in an 8% increase in labour productivity in an area. 4 A dummy variable is a binary variable which is equal to one for selected observations and zero for all other observations. 5 Statistical Analysis was undertaken to examine if there a multicollinearity issue between the SLA weight and industry mass variable. The statistical analysis showed that the two measures had little explanatory power in explaining the movement in each other. Agglomeration Benefits of the Melbourne Metro 11

17 TA BLE 6. SUMMARY REGRESSION RESULTS 6 Industry Elasticities Intercept (Β0) Slope (Β1) Β1 p-value R2 Manufacturing Construction Wholesale Trade Retail Trade Accom, Cafes & Rest Transport & Storage Finance & Insurance Property & Business Serv's Govt Admin & Def Education Health & Community Serv's Cultural & Recreational Serv's Personal & Other Serv's Total 0.08 This finding is within the range of results from international studies of agglomeration using some measure of effective job density as the explanatory variable. A selection of these results is presented in Table 7. Trubka (2009) 7 who estimated an elasticity of 0.07 for Melbourne used a significantly different methodology to the one employed in this paper but arrived at a similar outcome. Research into the measurement of economic benefits flowing from transport projects is undertaken in a number of countries. Although the diverse nature of transport projects (freight focused, passenger focused, rail / road urban intercity etc) has resulted in a range of methods being employed. As a result a definitive methodology has not been excepted internationally. A paper prepared as part of a Round Table sponsored by OECD / ECMT and Boston University identified methods which incorporate the wider economic benefits of transport infrastructure, not typically captured in the CBA estimates of benefits and costs. A summary of that paper can be located here 8. The References section of this paper also presents numerous papers which have examined the economic benefits of transport projects. TA BLE 7. ELASTICITY OF OTHER STUDIES Author Elasticity Location of Analysis Mare and Graham (2009) 0.07 New Zealand Trubka (2009) 0.07 Australia Graham (2006) 0.13 United Kingdom Ciccone (2000) 0.06 United States of America Ciccone & Hall (1996) 0.05 European Union There is potential for an omitted variable bias in this model. The clearest example of this is the capital able to be accessed within each SLA. If an estimate of capital was included in the regression the elasticity for each may change industry. The international studies have included an estimate of capital in their regression analysis. The fact that the elasticity for Melbourne is close to the international studies provides some confidence that the inclusion of capital estimates would not dramatically alter the findings. However, this is clearly still an area for further research. 6 The industrial weight in the Manufacturing regression had a coefficient of 3.31 and the Accommodation cafes and restaurants dummy variable had a value of cksum=21d67318bdebe9252c33caf60023ff56 Agglomeration Benefits of the Melbourne Metro 12

18 FIG URE 6. ELASTICITY INDUSTRY GROWTH INDUSTRY SIZE To provide some further context to the Figure 6 presents the elasticity for the industry (Y-Axis), the growth in the industry share of Melbourne s economy over the past ten years (X-Axis) and the size of the bubble represents the size of the industry. The large growth industries of Property & business services and Finance & insurance have reasonable large elasticities. While Manufacturing which still has a large share but this has been contracting over the past decade has a negative elasticity. 2.3 Estimating the Impact of Particular Projects on Agglomeration and Productivity Against this background, the labour productivity impact of a new transport / land use project such as the Melbourne Metro can be estimated by: Using the projected travel time matrix for the new project and employment in each travel zone for a future year to estimate future SLA EJD; Projected industry labour productivity for each SLA. This is based on projected future industry labour productivity for Melbourne disaggregated to each SLA based on the current distribution. That is, labour productivity will increase across the city, but the relative ranking of the SLA s will not change; Applying the observed elasticity for each industry to the projected industry labour productivity (see Table 8 and Table 9); Applying the industry labour productivity to the number of hours worked (Figure 7); Sum the increases in industry labour productivity for all industries and all SLAs. The various scenarios for labour productivity growth are: No Change to Productivity The labour productivity observed in is assumed to remain unchanged; Agglomeration Benefits of the Melbourne Metro 13

19 Whole Period Growth 9 The average annual growth rate in each industry observed between and is used to project future labour productivity; Most Recent Cycle Growth The average annual growth rate in each industry observed between and ; IGR 1.5% The Commonwealth Treasury s Inter-Generational Report describes the expected a 1.5% long term growth rate in labour productivity. This 1.5% has been applied to all industries; Selected Long Run Growth Analysis of the various growth rates highlighted that it would be unlikely for some industries to continue to have rates of labour productivity growth in line with historical growth. The various scenarios for labour productivity growth have been used as there is a large degree of uncertainty about the future levels of productivity. The level of productivity for various industries could produce a wide range of outcomes for the estimation of the economic benefit of the Melbourne Metro. TA BLE 8. INDUSTRY LABOUR PRODUCTIVITY GROWTH RATES Period Used Industry to to to All Data Selected long run growth Manufacturing 0.6% 1.0% 0.7% 0.5% 0.5% Construction 2.5% 0.6% 0.6% 1.2% 0.6% Wholesale Trade 5.9% 6.1% -2.2% 4.9% 1.6% Retail Trade 6.3% 2.8% 2.3% 3.8% 2.4% Accommodation, Cafes & 2.5% 0.0% 0.0% 1.1% 0.6% Restaurants Transport & Storage -0.6% 4.8% 6.1% 3.0% 2.0% Finance & Insurance 5.0% 2.3% 2.9% 3.6% 2.9% Property & Business Services -1.7% -0.4% -1.8% -0.9% 1.5% Education 3.2% -2.0% -5.1% -0.8% 1.0% Health & Community Services -0.1% -0.4% 2.7% 0.9% 0.9% Cultural & Recreational Services -2.2% 2.9% 0.7% -0.3% 0.5% Personal and Other Services 3.5% 1.2% 7.1% 3.0% 3.0% TA BLE 9. INDUSTRY LABOUR PRODUCTIVITY SELECTED LONG RUN GROWTH PROJECTIONS ( DOLLARS) Manufacturing Construction Wholesale Trade Retail Trade Accommodation, Cafes & Restaurants Transport & Storage Finance & Insurance Property & Business Services Education Health & Community Services Cultural & Recreational Services Personal and Other Services Melbourne (All Industries) n.a. n.a. n.a. Australia (All Industries) n.a. n.a. n.a. 9 The ABS defines growth cycles (determined by comparing the annual multi factor productivity estimates with their long-term trend estimates) for productivity as year on year changes in movements may reflect changes that are conceptually distinct from the notion of productivity. For example, changes in the businesses utilisation rates for their labour and capital stocks. Analysis of average productivity statistics between growth cycle peaks, the effects of some of these influences can be minimised, allowing better analysis of the drivers of growth in different periods. The Productivity growth cycle peaks are Agglomeration Benefits of the Melbourne Metro 14

20 2.4 The base case and project EJD has been based on transport model outputs from Zenith Model rather than the MITM; Given the location of the Metro Stations the Melbourne Remainder SLA has been divided into 6 small SLAs (West Melbourne, Port Melbourne, Kensington & North Melbourne, Parkville & Carlton, East Melbourne and South Yarra). These SLAs also have quite different economic structures which will have different reactions to changes in EJD; The Government Administration & Defence industry has been excluded from the analysis. This has been done, due to sensitivity testing using various functional forms resulting in a wide range of labour productivity elasticities being produced. All they industries exhibited fairly consistent labour productivity elasticities during the sensitivity analysis.

21 This shows that the primary beneficiaries of the Melbourne Metro in terms of EJD will be the western and, to a lesser extent, the northern sub-regions of Melbourne. The Central and Eastern sub-regions are expected to see negligible change. Importantly, businesses in the western growth corridors are expected to enjoy the greatest boost in EJD and therefore productivity. FIG URE EJD WITH MELBOURNE METRO Agglomeration Benefits of the Melbourne Metro 16

22 FIG URE EJD IMPACT OF MELBOURNE METRO Labour Productivity Impact When the labour productivity elasticities estimated in Section 2.2 are applied to the Melbourne Metro induced changes in EJD, the impact on metropolitan value added is indicated to be some $308 million in 2031 and $856 million in 2046 (Table 10). This estimate is somewhat sensitive to the projected rate of background growth in labour productivity. As shown in Table 11, value added impact could range between $572 million and $1,055 million in In % of this $308 million benefit came from the City of Melbourne LGA, and 36% from inner Melbourne (defined as the City of Melbourne, Port Phillip, Yarra and Stonnington). 30% of the total agglomeration benefit in 2031 came from Western Melbourne (defined as the LGAs of Wyndham, Brimbank, Moonee Valley, Hobsons Bay, Melton & Maribyrnong). Agglomeration Benefits of the Melbourne Metro 17

23 TA BLE 1 0. INDUSTRY LABOUR PRODUCTIVITY IMPACT ($000 S) Manufacturing -31,138-86, ,913 Construction 20,377 77, ,238 Wholesale Trade 3,568 13,912 33,901 Retail Trade 8,676 35,855 94,446 Accom, Cafes & Rest. 5,639 17,316 40,152 Transport & Storage -10,290-43,708-97,231 Finance & Insurance 17,466 61, ,374 Property & Business Serv's 41, , ,687 Education 6,869 20,672 39,866 Health & Community Serv's 9,732 36,469 87,125 Cultural & Recreational Serv's 5,478 18,381 45,286 Personal & Other Serv's 8,834 24,840 58,404 Total 86, , ,335 Impact Relative to Melbourne GDP 0.04% 0.11% 0.23% The present value of the recurrent increases in GVA enabled by the Metro range between $3,635 million and $898 million, depending on the discount rate applied (Table 12). The Melbourne Metro has small adverse impacts on the Manufacturing and Transport & Storage industries. This is consistent with historical trends which have seen these industries displaced from more central locations (where EJD is high) to less central locations (where EJD is low). Despite this the overall level of labour productivity has continued to expanded (Figure 10) in these industries as they become increasingly innovative and capital intensive. This adverse impact is discussed more in section human capital section. 10 Selected Long Run Growth Agglomeration Benefits of the Melbourne Metro 18

24 FIG URE 10. LABOUR PRODUCTIVITY MANUFACTURING & TRANSPORT Table 11 and Table 12 present how sensitivity the estimate of the labour productivity is to alternative productivity growth rates. TA BLE 1 1. IMPACT OF ALTERNATIVE LABOUR PRODUCTIVITY GROWTH RATES ($000 S) No Change to Productivity 76, , ,606 Whole Period Growth 88, ,932 1,055,863 Most Recent Cycle growth 76, , ,018 IGR 1.5% 92, ,074 1,008,243 Selected Long Run Growth 86, , ,335 TA BLE 1 2. SENSITIVITY ANALYSIS NPV OF LABOUR PRODUCTIVITY ($ MILLION) Whole Period No Change to Productivity Period Used Most recent cycle growth IGR 1.5% Selected Long Run Growth Total undiscounted $12,197 $7,750 $9,699 $12,358 $10,690 Total discounted at 4.0% $4,075 $2,696 $3,258 $4,175 $3,635 Total discounted at 5.5% $2,785 $1,872 $2,231 $2,865 $2,501 Total discounted at 7.0% $1,935 $1,322 $1,554 $1,998 $1,749 Total discounted at 10.0% $980 $691 $791 $1,020 $898 In terms of the boost to SLA value added, measured in proportional terms, the Melbourne Metro project would have the strongest impact on Melton East, Hobsons Bay (Williamstown), Brimbank (Keilor), Maribyrnong and Melton (Balance), reflecting the accessibility shifts described earlier. In absolute terms, the biggest impacts in GVA are expected to be felt in the inner city areas of Melbourne, Docklands and Port Phillip West. Agglomeration Benefits of the Melbourne Metro 19

25 TA BLE 1 3. IMPACT OF MELBOURNE METRO GVA OF SELECTED SLAS $000 s Impact % of SLA GVA Melbourne (C) Inner 15,912 39,970 95, % 0.1% 0.2% Melbourne (C)- S'bank-D'lands 8,566 18,699 50, % 0.2% 0.3% Melbourne (C)- Kensington & Nth 3,859 8,974 15, % 0.5% 0.6% Melb Port Phillip (C)- St Kilda 2,783 6,907 19, % 0.1% 0.3% Port Phillip (C) West 1,869 7,421 40, % 0.1% 0.2% Brimbank (C) Keilor 3,278 8,847 27, % 0.3% 0.6% Brimbank (C)- Sunshine 1,770 6,112 28, % 0.1% 0.4% Hobsons Bay (C)- Altona 1,514 5,743 15, % 0.2% 0.4% Hobsons Bay (C)- Williamstown 3,113 8,489 17, % 0.5% 0.8% Maribyrnong (C) 5,735 15,866 28, % 0.4% 0.6% Moonee Valley (C)- Essendon 1,491 7,853 22, % 0.3% 0.4% Moonee Valley (C)- West 589 2,794 8, % 0.3% 0.5% Melton (S) East 2,331 6,431 14, % 0.8% 1.4% Melton (S) Bal 3,374 9,333 16, % 0.5% 0.7% Wyndham (C)- North 2,682 14,340 24, % 0.2% 0.2% This is despite the fact that some inner city locations (Melbourne, St Kilda) suffer near term declines in economic activity versus business as usual projections. This is because the Melbourne Metro will direct some business services employment growth from these areas during the initial stages of operation. Ultimately, however, the relative centrality of these locations will assert itself in significant productivity gains (Table 13). Agglomeration Benefits of the Melbourne Metro 20

26 3 HUMAN CAPITAL IMPACTS OF MELBOURNE METRO Human capital is embodied in individuals as the total income that they could generate in the labour market over their lifetime. Wages and salaries (market returns to Human Capital) for different cohorts are used to estimate the net present value of the stock of Human Capital (using the yield method). That is, what is the net present value of a person s (at a certain age with a certain level of educational attainment) total life time labour income. This remainder of this section provides a more detailed description of Human Capital theory and the measurement as it relates to the Melbourne Metro. 3.1 Theoretical Underpinnings In addition to boosting productivity at the firm level for a given stock of capital and labour, agglomeration can further lift productivity by improving the quality of labour inputs available to businesses. If there is a large range of jobs on offer, a worker can search through the opportunities and achieve a superior match between their skills, their learning potential and the needs of the employer in question. This facilitates acquisition of commercially valuable knowledge and experience. In other words, workers will be engaged in a number of different jobs and hence gain a range of experiences, which can be seen as on-the-job investment in their education, leading ultimately to higher productivity. In this context it is worth noting that urbanisation, the increasing relative population share of cities, is cited by Mincer (1995) as a contributing factor in the development of human capital in the United States. Improved access to jobs (via improved transport network) will allow improved job matching within Melbourne. This doesn t mean that there will be net gain or loss in employment, Rather it means that the supply of labour will be better matched to the demand for labour. A more efficient labour market will provide a more productive labour force. The UK Department of Transport has developed a methodology to measure changes in the productive capacity of workers contingent upon delivery of city shaping projects. In concept, this measure is aligned with the improvements in Human Capital as outlined above. However, the method developed by SGS takes an alternative path to measuring the increase in the quality of the labour stock. Rather than allowing workers and jobs to be matched more productively (as postulated in Human Capital theory) the UK method is premised on transport project attracting new (higher productivity) employment to an area and those jobs being found by local workers who are currently employed in less productive jobs. The employment and population inputs used for the UK method are drawn from a Land Use Transport Interaction model. The difference between the productivity of the two job sets is calculated and then multiplied by 30% to reflect the tax captured as a result of the increased production. The UK method does not account for any expansion to GDP which will come about from the movement to more productive jobs. The reasons for not using the UK method in evaluating the Human Capital impacts of the Melbourne Metro include: Transport improvements allow workers to access a wider field of jobs beyond those located where they live. The changes in hours worked and labour force participation purported to be caused by reduced travel times cannot be observed in real world data for Melbourne (see Appendix 1 for more details). Agglomeration Benefits of the Melbourne Metro 21