Department for Transport. Transport, Wider Economic Benefits, and Impacts on GDP

Transcription

1 Deparmen for Transpor Transpor, Wider Economic Benefis, and Impacs on GDP Discussion Paper July 2005

2 Transpor, Wider Economic Benefis and Impacs on GDP Execuive Summary: 3 Chaper 1: Inroducion 11 Chaper 2: Wider economic benefis Wha are wider economic benefis? Wha effecs canno be included as wider economic benefis? 16 Chaper 3: Esimaing he wider economic benefis Agglomeraion economies (WB1) 19 Overview 19 Descripion of he effec 20 How o esimae agglomeraion effecs 21 Daa and parameers o be used Increased compeiion as a resul of beer ranspor (WB2) 23 Overview 23 Descripion of he effec Increased oupu in imperfecly-compeiive markes (WB3) 25 Overview 25 Descripion of he effec 26 Calculaion of adjusmen o appraisal 26 Parameers o be used Economic welfare benefis arising from improved labour supply (WB4) 27 Descripion of he effec 28 Calculaion of wider benefi 30 Chaper 4: The impac of ranspor on GDP 31 Chaper 5: Overlaps wih curren appraisal procedures 33 Agglomeraion and business ime savings 33 Agglomeraion and imperfec compeiion 33 Exchequer consequences of increased GDP 34 Chaper 6: Concluding remarks 35 Annex: 1 Annex: 2 Annex: 3 Annex: 4 Annex: 5 Theory and evidence 36 Sep by sep guide o calculaing he effecs 55 Tools for forecasing impacs on empoloymen locaion 63 References 65 Glossary 67 2

3 Execuive Summary 1. Transpor invesmens can, and generally do, affec he economy. They can in paricular affec he locaion and paern of economic aciviy, and be used o reduce regional dispariies. 2. Transpor projecs are appraised in a susainable developmen framework: all projecs mus se ou heir environmenal, economic, safey, accessibiliy and inegraion effecs. Appraisals esimae he social welfare benefis and coss 1 of a scheme, relaive o a 'do nohing' scenario. These welfare effecs include journey ime savings and reliabiliy, and environmenal and oher facors. The NATA requires assessmen of he following environmenal effecs: noise; local air qualiy; greenhouse gases; landscape; ownscape; heriage of hisoric resources; biodiversiy; waer environmen; physical finess; and journey ambience. 3. Appraisal guidance and pracice has been developed over a long period, and coninues o evolve. This paper is par of ha evoluion. I focuses on he presence and scale of "wider economic benefis" (which can be posiive or negaive). These wider benefis conribue o he impac of ranspor on produciviy and GDP, and are caused by he exisence of marke imperfecions 2 in ranspor-using indusries. These imperfecions mean ha he values individuals place on impacs may differ from hose placed on i by sociey. Appraisal seeks o include all benefis and coss, and so should in principle include he bes esimaes of all wider benefis (or coss) including hose arising because markes are imperfec. 4. One assumpion in curren, convenional appraisal is ha he welfare benefi from being able o arrive a a desinaion more quickly is equal o he value of he ravel ime saved (and he "rule of a half" applies o generaed or suppressed rips). This assumpion is generally a good firs approximaion; and works perfecly if here are no marke imperfecions. Bu as markes are imperfec in he real world, i is necessary o allow for he effecs of hese imperfecions in order o arrive a a complee assessmen, in addiion o he convenionally-assessed value of ravel ime savings. This will help answer quesions such as, How much does he exclusion of wider benefis maer? Wha esimaes could be made o ry beer o incorporae wider benefis ino appraisal? 5. The purpose of his paper is o: - Se ou mehods for incorporaing in ranspor scheme appraisal he wider economic benefis ha are missing from curren appraisals. The paper idenifies he main influences on he scale of hese benefis; and ses ou mehods for calculaing hem for individual schemes (or packages of schemes); and 1 Welfare or social welfare is he oal well-being of sociey. I reflecs he uiliy of people wihin sociey. Alhough he level of welfare is impossible o measure, i is possible o assess changes resuling of a projec or policy. Cos-benefi analysis is based on assessmens of welfare benefis and coss. Some of hese impacs can be calculaed in moneary erms; ohers canno. 2 The glossary defines marke imperfecions. Paragraphs explains why i is marke imperfecions in ranspor-using indusries ha maer here, wih oher marke imperfecions (eg polluion, congesion) already capured in appraisals. 3

4 - Provide a mehod for calculaing he impac of ranspor schemes (or packages) on GDP, allowing for impacs on boh produciviy and employmen. This is essenially abou idenifying and showing specifically he impacs on GDP which are included in an appraisal clearly. Impacs on GDP canno be simply added o welfare effecs (his would be double couning). This paper accompanies he furher informaion being published, also in July 2005, on he Transpor Innovaion Fund. Paragraphs of ha documen are paricularly relevan. Furher informaion on process is on page 9 of his paper. Welfare and GDP 6. Many welfare gains from ranspor schemes are hemselves recorded as increases in GDP, bu some are no. And i is possible ha some impacs on GDP do no reflec increases in welfare. Raher confusingly, welfare benefis (where hey can be valued) and GDP are boh measured in s. The following Venn diagram shows his. Welfare Leisure and commuing ime savings Environmenal impacs Safey Social impacs Business ime and reliabiliy savings Compeiion effecs Agglomeraion Economic welfare benefis arising from improved labour supply (from commuing ime savings, including Exchequer benefis) GDP Labour marke effecs which do no add o welfare * I is imporan o be clear abou hese impacs. They are abou improving he valuaion of commuing ime savings, no including Exchequer impacs per se. See paragraph 10(iv). Wider economic benefis 7. The issues in paragraph 4 are no sraighforward. SACTRA (he Sanding Advisory Commiee on Trunk Road Assessmen) considered hem a lengh, and hey have been he subjec of much academic aenion. This paper builds on SACTRA's work; subsequen research by Dr Dan Graham, Prof Tony Venables and ohers 3 ; analysis of he agglomeraion impacs of Crossrail and of he scale of oher wider economic benefis; and analysis by DfT and ohers of he marke imperfecions involved. I reflecs discussions wih regional and local auhoriy sakeholders, academics and oher Governmen Deparmens. I is pu forward as a se of recommendaions on how bes o proceed given he curren sae of knowledge, wih a presumpion ha furher developmen will be needed. 3 Annex 4 liss he references. 4

5 8. There are some high-level messages from his work: (a) (b) (c) (d) Wider economic benefis are no always rivially small, so failing o incorporae hem risks disoring decisions beween ranspor schemes or beween programmes across governmen; Transpor appraisal already capures mos economic benefis and coss, including much of he impac ha ranspor has on welfare hrough GDP 4. I would be surprising if he wider economic benefis addressed in his paper (eiher individually or in combinaion) were even nearly as large as he impac on ime savings and reliabiliy. The wider economic benefis ha are missing from convenional appraisal reflec he main marke imperfecions: agglomeraion exernaliies, imperfec compeiion (spli in wo for he purpose of his paper) and he economic benefis of increased employmen and produciviy. I is possible, as SACTRA has observed, for a scheme o have negaive wider economic benefis (i.e. wider coss). However, posiive wider economic benefis are generally more likely: imperfec compeiion and he presence of axes boh imply posiive wider economic benefis for all schemes ha faciliae faser or more reliable journeys (on any mode), while agglomeraion effecs could go eiher way. 9. For each of he wider benefis in paragraph 8 (c), we describe: he effec; wha calculaion would be needed o esimae i; he parameers (elemens of he calculaion) ha migh be used for specific schemes, including how hese migh vary across schemes or locaions; and he evidence for our suggesed parameer values. 10. Our suggesed approach is as follows. Fuller descripions are in Chaper 3:. (i) The impac of he agglomeraion exernaliy will depend on he impac of he scheme on "effecive densiy" of employmen in affeced areas. Effecive densiy of employmen is a measure of he economic size of a locaion ha more effecively describes he level of agglomeraion in he area han would he level of employmen. This is because i no only considers he number of jobs in a locaion bu also akes accoun of he number of jobs in neighbouring areas. So ranspor improves effecive densiy of employmen by bringing jobs closer ogeher. However, ranspor can also cause employmen o relocae, so he overall impac of he agglomeraion exernaliy depends on in which places employmen is increased, and where i is reduced, as a resul of 4 For example, if a ranspor improvemen reduces he ime needed o make a paricular journey, and so faciliaes economic developmen a eiher end of he journey, ha should - if he forecass are correc - be included in appraisal already. I will be scored as a "ime saving" o he raveller, raher han a gain in employmen, wages or profis. The laer is a manifesaion of he ime saving, and i would be double-couning o include boh. Saving of business ime represens a produciviy gain, wheher i leads o exra produciviy for an exising aciviy (reducing prices or improving he produc) or increased business in a new locaion. 5

6 he scheme. There are wo effecs. One will always be posiive from a ranspor improvemen: he scheme will bring people and firms closer ogeher (in erms of he number of minues beween firms' locaions, even if no km 5 ). The oher could be posiive or negaive: posiive if i encourages increased employmen in ciies or clusers of economic aciviy, and negaive if i encourages he dispersion of economic aciviy. Schemes o improve journeys in ciies would herefore be expeced o have posiive agglomeraion benefis unless i srongly shifs aciviy from a sill larger ciy. On he oher hand, iner-urban road improvemens migh have posiive or negaive agglomeraion effecs (he firs effec posiive; he laer of eiher sign). Our suggesed formula is: wider benefi due o agglomeraion = (Elasiciy of oal produciviy wih respec o he densiy of employmen in an area) x (Change in he effecive densiy of employmen in he area due o he projec) x (GDP in he area) The effec mus be added over all areas, including areas from which "disagglomeraion" migh occur because employmen is moved from hose places. Agglomeraion effecs are discussed in more deail in secion 3.1. New research by Dr Dan Graham 6 helps wih he calculaion of hese effecs by providing esimaes of he elasiciy in he above equaion, and how i varies by local auhoriy and indusry 7. Tha will help show how hese agglomeraion effecs would vary by scheme and place. Alhough an effec ha is likely o be larger in big ciies, Graham s evidence shows ha here can be agglomeraion exernaliies also in less dense locaions. (ii) (iii) (iv) Our bes esimae of he impac of ranspor in improving compeiion is generally, perhaps cauiously, zero. This is largely because here is an exensive ranspor nework in he UK. Mos of he heoreical effecs apply where firms can make connecions ha were no previously available, and here will be very few examples of his. However, here is an impac from he presence of imperfec compeiion in ranspor-using indusries. Some such imperfecions are ineviable, even wih an acive compeiion policy, because of increasing reurns o scale or oher imperfecions. Our recommended esimae, using daa on price-cos margins, is ha, o reflec hese effecs, one-enh (or 10%) should be added o he value of business ime savings and changes o he reliabiliy of business ravel. The economic benefis of increased employmen and produciviy, arising from commuing ime savings, are an addiion o naional welfare. A presen our appraisals include he benefis o he individual commuer (in erms of 5 Effecive densiy is increased when people become closer in erms of minues ravelling disance; densiy is measured by people per square km. 6 Graham (2005), published oday on he DfT s websie 7 See able 2 for deails. More disaggregaed ables wih furher deails by indusry, local auhoriy and (if people wish o carry ou he analysis o his level of deail) ward are available from Lars Rognlien on or lars.rognlien@df.gsi.gov.uk 6

7 8, which in urn reflecs pos-ax wages and he value of leisure ime. The full welfare effec includes all he gain o sociey, wheher i accrues o he employee or is paid in axes o be used for public services. The former is capured already: he laer is no, in respec of hose commuers whose employmen or wages are affeced by he scheme. (iv) herefore ries o recify ha. I is reasonable o ask why he same ax effecs do no apply o business ime savings. This is because he value of business ime savings is based on he average wage, and already calculaed gross of ax, so he impac for business ime savings is already correcly recognised in appraisals. The calculaion of (iv) depends on he hree GDP effecs se ou in paragraph 15 (d). 11. The wider benefis are he sum of hese four effecs. As explained in Chaper 5:, we do no believe ha hey overlap. Effecs of ranspor schemes on GDP 12. Journey ime savings and increased reliabiliy for business ravel conribue o GDP. Boh appear already in appraisals - he former quaniaively, he laer qualiaively. 13. The impac of ranspor schemes on produciviy and GDP goes wider han hese. I includes he effecs lised in paragraph 15 and any GDP consequences of environmenal or social impacs. 14. There are four effecs, all of which are eiher usually already idenified in appraisal or necessary elemens of he calculaion of wider economic benefis. However, hey go beyond wha is currenly included in ranspor appraisals. 15. In brief, he effecs are: (a) Faser and more reliable journeys in he course of work represen a produciviy gain. Business ime savings herefore increase GDP as well as welfare - a firm values he welfare gain because of he commercial advanage and higher produciviy ha resuls. This GDP effec is herefore idenical o he welfare benefis o firms ha are already idenified in appraisal. (b) Agglomeraion effecs reflec increased produciviy amongs firms and herefore conribue o GDP o he same exen as hey do o welfare. 8 See Mackie e al (2003) 7

8 (c) The wo compeiion effecs (ie (ii) and (iii) in paragraph 8) likewise have he same effecs on GDP as welfare. (d) There are effecs in he labour marke ha may mean furher effecs of ranspor on GDP if ranspor direcly or indirecly causes an increase in labour supply. In his case GDP rises because ime savings (which are capured as welfare benefis in appraisal) have an impac on he labour supply decision of a few individuals. Bu for some of hese individuals, he welfare impac may in some cases be smaller han he GDP effec (since, for insance, joining he labour marke means he worker needs o give up valuable spare ime). We can separae hese labour marke impacs on GDP of beer ranspor as hree separae effecs; ha more people would be willing o ener he labour marke, workers would be willing o work longer hours and employmen could be relocaed from a lower produciviy area o a higher produciviy area. The las of hese effecs builds on evidence ha wages are higher in clusers of economic aciviy. This cerainly reflecs agglomeraion 9 ; i may also reflec differen effor associaed wih such jobs. The balance beween he clusering and effor effecs is no relevan o he calculaion of GDP impacs. We simply look a he difference in wages for whaever reason i arises. I is imporan o adjus for differences in skill levels and he ype of job o achieve a like-for-like comparison. Wages in inner London are abou 50% higher han in ouer London, bu analysis by Nera (2002) and Venables (2004) shows ha he wage differenial is 30% afer adjusing for skill and ype of job. The 30% is he relevan figure for he las benefi. 16. These calculaions involve analysis - such as he impac of a ranspor scheme on he locaion of jobs - ha involves a differen ype of modelling from hose usually used for appraising improvemens o ranspor, where he focus is on he impacs on ravel imes and demand. Assessmen of hese impacs for Crossrail 17. Neiher wider economic benefis nor GDP effecs have normally been idenified in ranspor appraisal. To illusrae how he analysis migh work in pracice we show below some illusraive analysis carried ou for one scheme (Crossrail). 18. The following able shows he economic welfare benefis from convenional appraisal and he esimaed wider economic benefis. The righ-hand column also idenifies he associaed GDP effecs. To simplify he presenaion we do no show in he able he esimaes of environmenal and social impacs. 9 This is addiional o he agglomeraion impac, as we have defined he effecs so as o avoid double-couning. The agglomeraion wider benefi is abou he exra agglomeraion exernaliy arising from a ranspor scheme. This impac includes he agglomeraion ha already exiss wihou he scheme, ie inra-marginal agglomeraion. 8

9 Welfare and GDP impacs of Crossrail Benefis Welfare GDP ( m) ( m) Business ime savings 4,847 4,847 Commuing ime savings 4,152 Leisure ime savings 3,833 Toal ranspor user benefis - convenional appraisal 12,832 Increase in labour force paricipaion 872 People working longer 0 Move o more producive jobs 10,772 Agglomeraion benefis 3,094 3,094 Increased compeiion 0 0 Imperfec compeiion Exchequer consequences of increased GDP 3,580 Addiional o convenional appraisal 7,159 Toal (excluding financing, social and environmenal coss and benefis) 19,991 20,069 Furher informaion 19. Chaper 3 provides, for each of he wider benefis, fuller informaion on: he effec; wha calculaion would be needed o esimae i; he parameers (elemens of he calculaion) ha migh be used for specific schemes, including how hese migh vary across schemes or locaions; and he evidence for our suggesed parameer values. 20. Chaper 4 does he same for he presenaion of an impac upon GDP. 21. Chaper 5 explains why we are confiden ha here are no overlaps: we are keen o avoid double-couning in appraisals. Tha is why we make clear ha he GDP and welfare impacs canno simply be added ogeher. Annex 1 provides furher deailed evidence and heory which describe, and underlie our suggesed parameer values, in suppor of he effecs. 22. Annex 2 provides a sep by sep guide for calculaing each of he impacs. 23. The wider economic benefis and GDP effecs are a newer mehodology, and are less robus, han he convenional appraisal. These impacs should be idenified separaely, herefore, so ha he convenional, wider economic and GDP effecs can all be seen. 24. The able used for Crossrail above provides a forma ha would enable his o happen. Oher schemes may have he same lis of welfare and GDP effecs, alhough he balance beween hem may of course vary. 9

10 Process 25. We propose o use he Transpor Innovaion Fund o es a new approach o: - capure more fully hose economic benefis missing from curren appraisal mehodology, and - measure he conribuion of schemes o GDP. 26. All poenial produciviy TIF schemes will be assessed for heir conribuion o wider economic benefis and GDP. Bidders o he congesion TIF are also invied o follow he approach se ou in his paper, which provides furher deails on how impacs on GDP can be esimaed, for hose pars of he packages ha do no involve demand managemen. 27. We are looking o incorporae hese wider economic benefis ino ranspor appraisal. These esimaes are he firs sep, in many cases, o idenify he broad scale of each of he effecs. The mehods have been developed principally o measure he produciviy benefis of infrasrucure invesmen (and using evidence from such schemes). Tha is why he mehodology is being esed on schemes ha may be included in he produciviy TIF. We are exploring he feasibiliy of developing hese mehods for he very differen ask of esimaing he produciviy benefis of road pricing schemes, and plan o provide guidance in due course. If you are doing work o develop your own hinking on his, we would encourage you o discuss i wih he Deparmen for Transpor. (NB: Paragraphs 26 and 27 were amended in January 2006 o reflec he accompanying TIF guidance.) 28. This paper is inended for discussion wih regional and local sakeholders, and wih academics. We would welcome commens on he approach, mehodology and esimaes; and how o improve hem. This is a developing research field, and he daa requiremens for perfec esimaes seem o be well beyond wha is available and ofen wha is likely o be available. Tha poins o producing he bes esimaes recognising ha effors on appraisal need o be proporionae. We are commied o coninued improvemen over ime. 10

11 Chaper 1: Inroducion 29. Transpor projecs are appraised (i.e. subjec o ex-ane assessmen) o assess heir economic, safey, environmenal, accessibiliy and inegraion effecs. The size of hese (welfare) benefis and coss affecs a scheme's value for money, how i performs compared o oher prioriies, and wheher i should be funded. 30. Appraisal guidance and pracice has been developed over a long period, and coninues o evolve. This noe is par of ha evoluion. 31. The laes guidance on ranspor appraisal is available a Recen developmens include: The inroducion in July 2003 of an Economic Impac Repor, o help scheme promoers and appraisers o esimae he number of addiional jobs in regeneraion areas and o include his explicily in he appraisal; Refinemens o he values of ravel ime savings; Iniial values for changes o unreliabiliy of road journeys, alhough hese are preliminary and he values are no ye ready for inclusion in appraisal guidance. Reliabiliy coninues o be included qualiaively in appraisals; Publicaion in December 2004 of inernal guidance on he assessmen of schemes' value for money; An ongoing programme of research, working wih Defra, DH and oher sakeholders, o assess and, where possible, value he impacs of environmenal damage, including on noise, local air polluion and climae change. 32. This paper is he nex one of hese developmens. I considers he presence, and scale, of wider economic benefis 10 no currenly included in appraisal 11. These are welfare effecs ha arise from marke imperfecions ha are no considered in convenional appraisals. 33. This paper also considers how ranspor conribues o GDP, which is he measure of naional economic oupu. The paper is concerned primarily wih aggregae, naional effecs on welfare and on GDP. Idenifying regional impacs is beyond he scope of his paper. Breaking he effecs down by region is sill of significan ineres, bu he ools for doing so are no ye well developed and his is an area for fuure developmen. 34. Transpor appraisal is based on he New Approach o Appraisal (NATA), which was developed by he Governmen in The economic componen of he NATA is spli ino ranspor economic efficiency (ime and cos savings) for consumers, 10 The paper uses wider benefis, wider economic benefis and wider welfare benefis inerchangeably. They effecs are always welfare effecs. We use he erm economic because hey are relaed o he economy. 11 Curren appraisal guidance describes "wider economic impacs" as he wider economic benefis discussed in his paper, as well as he value placed on addiional employmen in deprived areas. This paper does no change he inclusion of such regeneraion effecs, which should be se ou in an Economic Impac Repor. 11

12 business users and ranspor providers; reliabiliy; cos o public accouns (ypically he cos of he projec); and wider economic impacs (which in he NATA able is usually aken o mean regeneraion). 35. This paper ses ou o provide informaion, evidence and analysis o help improve he calculaion of he welfare benefis and coss under he economic heading. Time savings and reliabiliy are paricularly affeced. 36. In addiion, he impac on GDP is a key (bu no he only) ineres, especially when considering he economic crierion. Transpor appraisals currenly: Include some of he GDP effecs and produciviy gains (e.g. business ime savings); Bu do no include all he impacs on GDP; And include some effecs as economic 12, which do no change aggregae, naional GDP. 37. One of he purposes of his paper is, herefore, o faciliae he esimaion of he impacs of ranspor schemes on GDP. 38. The paper does no change he requiremen ha appraisals show he environmenal effecs of schemes. Environmenal consideraions mus be included; hey are an imporan par of he appraisal and of he decision-making process. The guidance for civil servans puing submissions o DfT Minisers abou invesmen decisions and choices, published las year, makes his explici: Value for money measures he benefis for each 1 of coss. I includes boh he benefis and coss ha can be couned in moneary erms (which can be described as a Benefi/Cos Raio) and oher non-moneised impacs such as regeneraion and environmenal impacs. 39. Curren NATA guidance, and curren pracice, is ha appraisals include he following environmenal impacs 13 : Noise; Local air qualiy; Greenhouse gases; Landscape; Townscape; Heriage of hisoric resources; Biodiversiy; Waer environmen; Physical finess; and 12 Because hey are welfare effecs ha are economic in naure: ime savings for leisure journeys (and, for differen reasons, regeneraion) are perhaps he mos obvious examples 13 Impacs on severance mus also be appraised. I s no included in his lis because i s under he NATA caegory of accessibiliy 12

13 Journey ambience 40. There are oher imporan consideraions which are no covered in his paper. The need for good and robus appraisal, he imporance of using he laes echniques, and making appropriae developmens in he generaed raffic and variable demand modelling, are examples. They are however no he subjec of his paper. 41. This paper mees he commimen o publish new appraisal guidance on he wider economic benefis of ranspor. Is analysis also informed he 'Sory So Far' and 'The Way Forward' in ODPM's 'Realising The Poenial Of All Our Regions' publicaions earlier his year. Also of relevance is he research commissioned by England's Regional Developmen Agencies on Surface Infrasrucure of Naional Economic Imporance (SINEI), which was published in January The Governmen wans appraisal o ake accoun of all relevan effecs. We propose o use he Transpor Innovaion Fund o es a new approach o measuring he conribuion of schemes o GDP and o capure in full hose benefis missing from curren appraisal mehodology. Furher deails on how we propose ha bidders o he TIF should do his are se ou in his paper. If successful, his new approach will be applied more widely o ranspor appraisal. We also invie scheme promoers o include in scheme appraisals he wider benefis which are specified in his noe (and o he exen ha his noe suggess). Such appraisals should sae explicily wheher wider benefis have been included, and wha esimae has been included and a deailed descripion of how he esimae has been arrived a, and why. For some of he wider welfare benefis and GDP impacs described in his paper, including hem in appraisal is a maer of simple adjusmens o curren pracice. For oher effecs, robus esimaes require considerably more effor. The deph of he analysis underaken should herefore be proporionae o he individual scheme. We would welcome views, based on evidence or experience, abou he ypes of schemes ha would be more likely o generae more significan wider benefis and for which exra aciviy here would be more likely o make a difference: ha could be he basis for furher advice on proporionaliy in his aspec of appraisal. 43. This noe, especially Secion 2, describes he wider benefis ha can be included, and hose ha canno. The esimaes and analysis will change, as he research and evidence base develops, and so guidance would be subjec o refinemen over ime. 13

14 Chaper 2: Wider economic benefis 44. SACTRA 14 looked in deph a he impacs of ranspor on he economy. This noe relies on, and builds on, he work of SACTRA and subsequen research and analysis Wha are wider economic benefis? Overview One par of he benefis delivered by ranspor improvemens is normally in he form of ime savings o ravellers. We value ime savings by measuring he willingness o pay for hem. For ravel ouside of work, his is he value ha ravellers pu on heir ime. For ravel in he course of work, his is he value he firm pus on heir employees' ime, ie he gross salary coss. These direc benefis o ranspor users are someimes ransferred o ohers. The ime savings o firms will lead hem o reduce prices and increase oupu - passing on benefis o hose who buy is producs. Time savings for commuers (and ohers) in an area migh make his area more aracive o live in - so benefis are passed on o house and land owners. In his way, ranspor's conribuion o economic developmen is a subse of he direc ime savings, reflecing he final incidence of he effecs raher han addiional effecs. This approach is largely, bu no always, complee. In some circumsances he benefis of ranspor exceed he direc ime savings o he ravellers or he firms hey work for. In such cases, he willingness o pay approach will no be an accurae esimae and will usually be an underesimae of he rue benefis o sociey. We have idenified four areas where here migh be such wider economic benefis of ranspor projecs. These areas are covered in urn in chaper The appraisal of ranspor projecs compares he expeced oucome where he scheme goes ahead wih he siuaion where i does no. The focus is on idenifying how he projec will impac on welfare. Welfare is a measure of well-being (or 'qualiy of life'). Measuring he welfare benefis of a projec provides a broader measure han GDP as i covers effecs (such as environmenal effecs and leisure ime savings) ha are no recorded in naional saisics as conribuing o naional oupu. 46. SACTRA noed ha where here are such marke imperfecions 15, ranspor appraisal will be likely o undersae or oversae he welfare impacs. The disincion was made beween marke imperfecions in ranspor secors and in ranspor-using 14 DETR (1999) 'Transpor and he Economy', SACTRA (Sanding Advisory Commiee on Trunk Road Assessmen) 15 Marke Imperfecions: "Economic heory predics ha all markes will 'normally' be perfec. Marke imperfecions are defined as marke condiions ha preven he realisaion of perfec compeiion. Such marke condiions include exernaliies and marke power eg where one or a few sellers (or buyers) can conrol he marke" 14

15 secors. Marke imperfecions in ranspor secors concern exernaliies 16 in he direc use of ranspor, such as congesion and emissions. The impacs a scheme can have on welfare by reducing or increasing hese exernaliies are already assessed in convenional appraisals. 47. Marke imperfecions in ranspor-using secors, however, could give rise o impacs on welfare beyond he ime savings o ranspor users. Such effecs are currenly no assessed in appraisals. This noe discusses wha hese effecs are and how hey can be quanified. 48. We should be clear abou he exen o which marke imperfecion is, or is no, aken ino accoun in convenional appraisal: The welfare gain from a ime saving is convenionally assumed o be equal o he value of ha ime. Tha is a good firs approximaion - and perfec in he absence of marke imperfecions. Bu wih marke imperfecions, he welfare impac of he ime saving can be more (e.g. miigaing imperfec compeiion) or poenially less (e.g. loss of agglomeraion benefis for a scheme ha encourages dispersion) han is value o businesses or ravellers. These effecs lead o (posiive or negaive) wider economic benefis. In conras, forecass of raffic and public ranspor paronage should be based on esimaed behavioural responses o changes in generalised ranspor coss. These behavioural responses will be based on real-world daa, which reflecs a world wih marke imperfecions. (Improvemens o demand forecass are ouside he scope of his paper.) 49. There are a number of marke imperfecions which migh mean ha esimaes based on an assumpion of perfec compeiion may underesimae (or possibly overesimae) he welfare gain. These were described in paragraph 10. We define hese as, respecively, WB1, WB2, WB3 and WB Before we sar describing he differen effecs, i is useful o se ou wha wider economic benefis are, and why and in wha sense hey are addiional o he welfare effecs capured in curren appraisal. The res of Chaper 2 does so. 51. The Deparmen for Transpor's exising guidance on projec appraisal aims o idenify and value all welfare benefis and coss arising from he scheme. Some, bu no all, welfare impacs can be pu in moneary erms. These moneised impacs are measured by sum of individuals' willingness o pay 17 for hem. 52. This mehodology is correc under he assumpion of perfec compeiion in ranspor using markes. This means, for example, ha if a ranspor improvemen in a ciy, makes ranspor-using firms here more compeiive, all benefis arising from his are capured in he ime savings. This is rue even if he firm as a resul earns a higher 16 Exernaliies: "Coss or benefis ha do no fall on hose individuals or agencies whose choices have caused hem, bu on oher individuals or on sociey as a whole. Examples include polluion and congesion. Exernaliies are one form of marke imperfecion." 17 Willingness o Pay: "The highes amoun of money an individual, or a group of individuals, is willing o pay for somehing. A concep ofen used o value non-pecuniary coss and benefis in moneary erms. 15

16 profi, if hey pay heir workers more or if hey hire more workers. These are all second-round effecs ha are manifesaions of he iniial ime savings. To include hem as well as he ime savings would be double couning. 53. However, he guidance has been devised over some ime and is under coninuous developmen. As new evidence becomes available and as our undersanding of complex ineracions improves, he guidance is amended or augmened. 54. The assumpion of perfec compeiion is no always adequae. This paper addresses he 'wider economic benefis' ha may arise from broadening he analysis o allow for he four marke imperfecions lised in paragraph Appraisal guidance (Webag paras and 1.1.5) already defines wider economic impacs as: hose arising where compeiion is no perfec, plus he addiional value he governmen places on employmen in regeneraion areas, over and above he same amoun of employmen in oher places. 56. This documen addresses wider economic benefis from he former only. The laer impacs are capured separaely in he Economic Impac Repor (EIR) 18 and are no affeced by his guidance Wha effecs canno be included as wider economic benefis? 57. We have seen, from he Venn diagram, ha impacs on welfare canno simply be added o impacs on GDP. Tha would lead o double-couning. 58. We are concerned abou double-couning because of he advanages of including everyhing ha maers (wheher moneised or no) once and only once. Wihou ha, here is an unresolved concern ha somehing imporan is being missed or being included wice. Tha is a he hear of our boom-up approach here, saring wih he appraisal (for which here are echniques, some longsanding and some newer) and building in any missing benefis or coss. 59. The analysis in his paper shows ha we are capuring much of he economic effec already: business ime savings are a produciviy and GDP gain, bu i is presened in differen language. 60. Esimaes of wider benefis should no, in whole or in par, double-coun he effecs ha are already capured elsewhere in appraisal (see chaper 5 for a furher discussion of overlaps). This means for example ha effecs of ranspor on employmen should no iself be couned as a wider benefi as defined in his paper. Higher employmen may be a manifesaion of ime savings, and herefore capured wihin i, or a disribuional consideraion (e.g. employmen in regeneraion areas 19, which should be covered in 18 For furher informaion on Economic Impac Repors, see Webag ( 19 We believe he welfare impac of addiional employmen in regeneraion areas, leading o increased aggregae employmen, is capured already in he welfare consequences ha feaure as par of good appraisals including good esimaes of generaed raffic and ime savings. This is moivaed in par by a broad look a oal 16

17 Economic Impac Repors). Increased employmen a a naional, aggregae level may bring wider benefis in specific circumsances (see chaper 3.4). 61. More generally, for an effec o be included as a wider benefi i needs o be shown ha i adds o welfare (Chaper 4 discusses welfare vs GDP effecs). We wan o include he whole benefi o leisure ravellers alhough i does no necessarily affec GDP. Conversely, we do no wan o capure GDP effecs ha do no conribue o welfare. For insance, by joining he labour marke a person will increase her income and conribue o increasing GDP. Bu her welfare gain may well be lower han his if she has o spend more ime ravelling. Only he ne benefis are couned The following Venn diagram 20 illusraes he overlap beween welfare and GDP effecs. Welfare Leisure and commuing ime savings Environmenal impacs Safey Business ime and reliabiliy savings Agglomeraion Exchequer impacs* arising from improved labour supply (from commuing ime savings) Compeiion effecs GDP Labour marke effecs (excep hose capured in Exchequer consequences) * I is imporan o be clear abou hese impacs. They are abou improving he valuaion of commuing ime savings, no including Exchequer impacs per se. See paragraph 10(iv). employmen, and wha influences i, including considering he ineracion wih moneary policy. A demandinduced increase in employmen may shif employmen raher han increase i in oal. Wih higher demand, inflaionary pressure would be higher, oher hings equal. Tha in urn has implicaions, a he margin, for he operaion of moneary policy in he presence of he Bank of England s inflaion arge. Tha moivaes us o say ha demand-induced changes are disribuional, supply-side enhancemens aren. A source of furher informaion is ODPM's 3Rs guidance: hp:// 20 I is possible o have an alernaive depicion of his Venn diagram and consider GDP as a subse of welfare. In ha case, he welfare non-gdp consequences of employmen would need o be included oo. Whaever he shape of he Venn diagram, he elemens of welfare effecs and he elemens of GDP effecs would be unchanged. 17

18 63. The following able illusraes hese effecs in respec of Crossrail. The welfare effecs are called WB1-WB4 and he GDP effecs are GP1-GP6. Table 1: Summary of Crossrail's welfare and GDP impacs (Ne Presen Value, discouned over 60 years) Benefis Welfare GDP ( m) ( m) Business ime savings (also equal o GP6) 4,847 4,847 Commuing ime savings 4,152 Leisure imesavings 3,833 Toal ranspor user benefis - convenional appraisal 12,832 Increase in labour force paricipaion (GP1) 872 People working longer (GP2) 0 Move o more producive jobs (GP3) 10,772 Agglomeraion benefis (WB1, GP4) 3,094 3,094 Increased compeiion (WB2, par of GP5) 0 0 Imperfec compeiion (WB3, par of GP6) Exchequer consequences of increased GDP (WB4, which depends on GP1, GP2 & GP3) 3,580 Addiional o convenional appraisal 7,159 Toal (excluding financing, social and environmenal coss and benefis) 19,991 20, I is also essenial ha he differen elemens of he esimaes of wider economic benefis are muually exclusive. The paper herefore srives o define he elemens and proposed mehods of esimaion in such a way o avoid double-couning: all ne benefis (including wider benefis) should be included once and only once. 18

19 Chaper 3: Esimaing he wider economic benefis 65. Secions 3.1 o 3.4 cover in urn each of he wider economic impacs for which we propose adjusmens because, as a resul of marke imperfecions, welfare impacs are no he same as hose calculaed by convenional appraisal. For each, we: describe he impac (marke imperfecion) ha is being aken ino accoun se ou wha calculaion is needed o adjus he appraisal provide our suggesions for he bes parameer values o include in he calculaion, some of which will vary by he scheme or locaion 66. In addiion, annexes 1 and 2 cover he effecs in furher deail by seing ou he heory behind he effecs and describing he evidence on which we have based he parameers providing a sep-by-sep guide o calculaing he effec 67. In each case, we approach his from he perspecive of rying o improve he assessmen of welfare benefis in he appraisal process 68. Our approach here has been o ry o make he bes esimaes of wider benefis. Our general approach is ha his is an improvemen over he curren siuaion where hese benefis may be erroneously assumed o be zero or incorporaed in a non-ransparen way. 69. We would welcome commens on how o furher improve hese esimaes, wheher in erms of beer parameer values or beer mehodology. We would also welcome views as o how given he exising daa, or daa ha could be colleced and analysed during a scheme appraisal (or a research programme) hey could be made more accurae for individual schemes, regions and localiies Agglomeraion economies (WB1) Overview Economies of agglomeraion describe he produciviy benefis ha some firms derive from being locaed close o oher firms. This could be because proximiy o oher firms faciliaes more sharing of knowledge or because locaing close o oher firms means access o more suppliers and larger labour markes We see evidence of his when firms decide o locae in ciy cenres despie coss of labour, propery and ranspor ofen being higher here han elsewhere. In general, he larger he cluser is, he more producive is firms are. In a cluser of firms, herefore, each firm s produciviy depends on he locaion decisions of he oher firms. This is an example of a "posiive exernaliy" - when making i's decisions on where o locae, a firm would no consider he posiive effecs i's locaion has on nearby firms. Should rising ranspor coss lead one firm o relocae away from a cluser, he socieal impacs would exceed hose faced by he relocaing firm. In agglomeraed locaions herefore, we would need o capure 19

20 Such effecs need o be aken ino accoun - hey lead o real welfare and produciviy gains - bu will no be if we assume (as we usually do) ha he welfare gain from ime savings are equal o he ime savings valued a he privae value of ime - ie he value each firm places on hem.. Agglomeraion is herefore one of he marke imperfecions ha need o be aken ino accoun. We sugges here a formula and some parameer values o faciliae he esimaion of hese wider economic effecs. The calculaion depends on: - he ime and cos of ravel from and wihin clusered areas wih and wihou he scheme - he relocaion of employmen caused by he scheme - he elasiciy of produciviy wih respec o employmen densiy - he level of oupu in he agglomeraed secors While we expec he agglomeraion effec o be posiive in he areas ha see improvemens in ranspor, here could be negaive effecs in oher locaions if employmen is displaced. I is possible ha he overall effec could be negaive. The proposed calculaion will also capure such disagglomeraion effecs. Many of he parameers needed are provided in his paper and in Graham (2005). However, he change in employmen in agglomeraed and less agglomeraed areas will need o be esimaed alongside he appraisals (jus as ime savings have o be esimaed). We provide, or can provide, informaion o be placed alongside esimaes by locaion and (in broad erms) indusry secor. If, for example, indusry secor is unknown hen a more broad-brush approach can be adoped, e.g. ha employmen would change in line wih he curren secoral composiion of he area. Descripion of he effec 70. Labour coss, land rens, ranspor coss and oher prices are ofen higher in ciies han elsewhere. Despie his, ciies are normally very aracive o many firms. The explanaion mus be ha (a leas some) firms are more producive when hey are clusered. 71. Many firms are more producive in agglomeraions because in such locaions hey have access o larger produc, inpu and labour markes and herefore benefi from a greaer variey (as he firm is herefore likely o find inpus and workers ha sui he firm beer). They can also more easily benefi from he knowledge and echnology of oher firms. Research has also sressed he imporance of face o face conac in many business environmens. Evidence suppors all of his by showing ha, as a ciy grows and becomes denser, is firms become more producive. 72. There is an exernaliy here - we can expec firms o ake accoun of he produciviy difference in heir own locaion decision, bu hey will no ake accoun of he gains o 20

21 Lower ranspor coss effecively mean ha firms are closer ogeher. Firms do no consider he effec his have on oher firms han iself. As ime savings are couned a he value ha firms pu on hem, hey will reflec he privae raher han he social benefis. 74. Such effecs need o be aken ino accoun - hey lead o real welfare and produciviy gains - bu will no be if we assume (as we usually do) ha he welfare gain from ime savings are equal o he ime savings valued a he privae value of ime. Agglomeraion is herefore one of he marke imperfecions ha need o be aken ino accoun. 75. As wha maers for agglomeraion economies is proximiy o oher firms, workers and markes, sandard measures of size or densiy of an area, such as employmen in a ciy or per square kilomere, do no necessarily suffice. A beer measure would be one ha considers no only he employmen wihin an area, bu also he level of employmen in surrounding areas. We define he 'effecive densiy' of a locaion as he employmen in and surrounding he area, weighed by heir proximiy (in generalised cos) o he locaion. Defined in his way, effecive densiy of employmen is herefore a proxy for he facors ha cause clusered firms o be more producive. So if he effecive densiy of a cluser increases, many firms and workers become more producive. 76. The agglomeraion consequences of a ranspor scheme will be in wo pars, linked o he effecs on effecive densiy: Firms and workers in heir exising locaion will be closer o each oher and he locaion more accessible, as generalised coss fall firms and workers may relocae in response o he change in ranspor coss and hereby have furher effecs on densiy. 77. The firs effec undoubedly gives rise o increased effecive densiy. The resul of he second effec is ambiguous. Some firms and workers may now be araced o he area where ranspor is improved while oher may now find i possible o locae furher away (in miles) from heir suppliers, cliens, employees and employers - whils reaining he proximiy in minues. Alhough i appears highly likely ha he overall effec of a ranspor scheme on he effecive densiy of a cluser is posiive, consideraion mus be given o boh effecs. Annex 3 discusses ools ha could help on esimaing he laer. How o esimae agglomeraion effecs 78. These effecs occur where a ranspor projec affecs he cos of ravelling o, from or wihin one or more locaions of economic aciviy where here is evidence of agglomeraion (ie where he produciviy elasiciy daa referred o in annex 2 is differen from zero). A cluser can be a ciy, a own or perhaps an indusrial park. 21 This is in a similar way as wih congesion exernaliies. We expec a road user o consider he cos of congesion when deciding wheher or no o ravel by road, bu no o consider he coss o oher ravellers. 21

22 Where employmen is found o relocae because of he projec, he areas from where employmen is dislocaed mus also be included as sudy areas. 79. Evidence ha is currenly available on he direc relaionship beween ranspor invesmen and produciviy (see Annex 1 for an overview). I is beer suied o a wosage process. We herefore recommend using he concep of effecive densiy o spli he link beween ranspor and produciviy ino wo: (a) (b) he impac of ranspor upon effecive densiy and he impac of effecive densiy upon produciviy. 80. Effecive densiy should be calculaed for each area and year using a formula of he following ype: ED, j k E, k T, j, k Where E k = work-place based employmen T jk = generalised cos of ravel beween areas j and k. α = parameer signifies year 81. Concepually, he wider economic benefis from agglomeraion, which we have called "WB1", would hen be: WB1 = (Elasiciy of oal produciviy wih respec o he densiy of employmen in an area) x (Change in he effecive densiy of employmen in he area due o he projec) x (GDP in he area) 82. Summed across all affeced areas. 83. Or, as a formula (when calculaed for each successive year 22 ): WB1 i, j ElP i, j ED ED j j GDP i, j E i, j Where i represens indusries, j represens locaions, and ElP ij = Elasiciy of produciviy wih respec o effecive densiy (as measured by ED ij ) on indusry i in area j. ED j = Effecive densiy of employmen in area j (ΔED = change due o ranspor projec) GDP ij = GDP per worker in indusry i and area j. 22 This is he formula when calculaing he effec for every year, as was used for Crossrail. The calculaion needs o ake accoun of he compounding effec on GDP, ie he forecas GDP for any year would depend on he increase in effecive densiy in preceding years. The exac formula o use can be found in annex 2. If here is a need insead o model a sub-se of fuure years, raher han each year, he appropriae formula can be found in paragraphs The equaion in paragraphs 83 and 255 is a very close approximaion (echnically, i s a linear approximaion) of he one in paragraph

23 E ij = Work-place based employmen in indusry i and area j. 84. As usual, benefis would be added up over he period of he appraisal and he appropriae discoun rae applied. 85. Annex 1 discusses he heory and evidence of agglomeraion effecs in furher deail. Daa and parameers o be used 86. Evidence on he aggregae relaionship beween ciy densiy and produciviy end o be wihin he range of 0.04 o These esimaes will encompass some indusries wih sronger and many wih much weaker, if any, relaionships. Dr Dan Graham a Imperial College has produced UK-specific evidence of he relaionship beween effecive densiy and produciviy by secor. These esimaes give elasiciies of produciviy ha vary across secors and Local Auhoriy (from 0 in many indusries up o 0.3 in some secors). We recommend using hese elasiciies o predic he impacs of increased effecive densiies on he produciviy of separae secors. The evidence can be found in annex Change in generalised cos beween zones should be available for ranspor models used in he main scheme appraisal. 88. Oher daa needed include secoral GDP per worker for each zone. Sub-regional GDP per worker by secor can be derived from daa available from he ONS. Furher discussion of daa sources and a sep-by-sep analysis o calculaing he effec can be found in annex Increased compeiion as a resul of beer ranspor (WB2) Secion 3.3 looks a he wider economic benefi ha occurs when markes are no absoluely perfec, and willingness o pay is herefore no he full measure of value from a ime saving. Secion 3.2 looks a he wider benefi ha could possibly arise from a ranspor improvemen as beer ranspor can a leas in heory - break down elemens of monopoly or oligopoly. Overview The wo opposing forces ha drive firms o operae efficienly are he desire o increase profis ogeher wih he hrea of compeiion. Joinly hese forces drive firms o minimise coss, develop and deliver he producs consumers wan and doing so a he lowes possible price. Where compeiion, or he hrea of compeiion, is weak, firms will behave differenly. In paricular hey will end o sell o lile and a oo high a price (in he absence of regulaory or compeiion auhoriies). Tha is par of he raionale for compeiion auhoriies. I can be argued ha ranspor coss are a barrier o compeiion. Lower ranspor coss will exend he geographical "reach" of firms enabling hem o compee in 23 See Rosenhal and Srange (2004) and Venables (2004). 23