REGIONAL ECONOMIC IMPACTS FROM TRANSPORTATION AND INFRASTRUCTURE INVESTMENTS Billy Leung Scott Nystrom Zilin Cui Regional Economic Models, Inc. 433 West Street Amherst, Massachusetts, 01002 United States of America AET 2011 and contributors All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the publishers. The material submitted, including manuscripts, drawings and graphs, is retained by AET and will not be returned unless the author specifically requests otherwise. 1
Table of Content Abstract. 3 Introduction..4 Methodology 5 Model framework......5 Approach 7 Results..9 Impacts of construction on employment and GRP..9 Impacts of transportation on employment and GRP. 11 Overall impacts on employment and GRP..... 13 Conclusion.15 Reference 16 Notes 17 2
Abstract This study investigates how investments in transportation networks influence regional economies and demography. Using Regional Economic Models, Inc. s (REMI) PI + model, we will detail how a transportation project influences the local industrial mixture through changing labor productivity, labor access, and commodity access. In addition, we will examine transportation s hold over major macroeconomic indicators like gross domestic or regional product (GDP or GRP), employment opportunity and occupational growth, tax revenue, migration, personal income, and the cost of living. The term region is very flexible in this analysis it can include any combination of countries, provinces, states, cities, or other geographical subdivisions. Thus, our case study here involves the planned Strait of Messina Bridge and its economic and demographic impacts on the future development of the Sicilian economy, as well as the rest of Italy and Europe. 3
Introduction Since Roman times, a bridge made of boats and barrels connecting Calabria and Sicily over the Strait of Messina has been dreamed of. In the mid-19 th Century, Italian military and political leader Giuseppe Garibaldi wanted to build a bridge as a symbol of Italian unity. In 1969, a competition resulted in the first concrete bridge, but it is not until the current government that actual construction to be designed and scheduled to begin 1. Once completed, the Strait of Messina Bridge will be the world s longest suspension bridge with a 3,300-meter central span, overtaking the 1991-meter Akashi-Kaikyo Bridge in Japan. The project was approved in 2003 by the Interdepartmental Committee for Economic Planning (CIPE) to be undertaken by Stretto di Messina SpA, which will design, build and operate the project and open the bridge to public by 2012 2. Due to parliamentary opposition and an earthquake in 2009, the project was temporarily shelved but is likely to continue this year, postponing the estimated completion date to around 2019 3. Once open to the public, the bridge could shorten travel time across the bridge from a few hours down to minutes 4. The Strait of Messina Bridge is funded by a combination of public, private and foreign sources. The government has pledged 1.3 billion out of the 6 billion projected total cost. The private entity Stretto di Messina SpA is expected to contribute 2.5 billion 5. The remaining 2.2 billion will be raised in the international bond market 6. A fee schedule is proposed to recoup the cost through charging motor vehicles by single passing 7. The study uses REMI PI + to evaluate the economic impacts of the Strait of Messina Bridge on the region of Sicily. Although cost-benefit analysis has indicated that the proposal will have a benefit-cost ratio (BCR) over 1, it is insufficient to capture the dynamic aspect of the project. For example, are impacts on job creation and output a short-term boost or a long-term, sustainable growth? REMI PI + captures these effects with its year-to-year forecasts that break down the process and compares it to a baseline forecast of normal events and situations (the business-as-usual, or BAU), avoiding double counting, and apples-to-orange comparisons by identifying the accurate reference case. The REMI PI + model integrates several modeling methodologies, which allow for the strengths of each to show while compensating for their weaknesses. These include input-output tables (I-O models), computable general equilibrium theory (CGE), econometric estimates, and New Economic Geography (NEG) on the spatial relationships of an economy. For this study, we use a customized 10- region, 30-sector model including the nine provinces of Sicily and the rest of Italy. We analyze the impacts on the following key economic indicators: GDP (Gross Regional Product, or GRP, is used when evaluating output of a local economy), employment, price levels. Demographic indicators are also evaluated by using 4
the concept of net economic migration, which captures the movement of labor force in response to employment opportunities, compensation and costs of living. 5
Methodology Model framework The overall structure of the REMI PI + model can be summarized in five major blocks: (1) Output and Demand, (2) Labor and Capital Demand, (3) Population and Labor Supply, (4) Compensation, Prices and Costs and (5) Market Shares. The blocks and their key interactions are shown in Figure 1 (without Economic Geography Linkages) and Figure 2 (with Economic Geography Linkages). Figure 1. REMI Model Linkages (excluding economic geography linkages) The Output and Demand block consists of output, demand, consumption, investment, government spending, exports and imports, as well as feedback from output changes due to the change in the productivity of intermediate inputs. The Labor and Capital Demand block includes the determination of labor productivity, labor intensity, and the optimal capital stocks. Labor force participation rate and migration equations are in the Population and Labor Supply block. The Compensation, Prices, and Costs block includes composite prices, determinants of production costs, the consumption price deflator, housing prices, and the 6
compensation equations. The proportion of local, inter-regional, and export markets captured by each region is included in the Market Shares block. 7
Figure 2. Economic Geography Linkages As exogenous shocks are introduced into the model, the inherent linkages can be used to trace the ripple and feedback effects throughout the macro-economy that influence not only those sectors and regions directly affected by the policy shift, but all industries nationwide. This study uses a customized ten-region (nine provinces of Sicily and the Rest of Italy), 30-sector model to analyze the potential impacts of the Strait of Messina Bridge. 8
Approach Two sets of policy variables are concerned in the study, providing different approaches to evaluate their isolated and combined impacts on the overall economy of Sicily. The first set of simulations only includes changes to construction demands and evaluates the impacts on the overall regional economy of Sicily. The second set only includes changes to the transportation sector and assesses the impacts of greater transportation efficiency due to reduced effective distance and the resulting reduction in the costs of production of goods that include inter-regional trade. The third set takes into account both the change in demand for construction and the change to the transportation matrix and their combined impacts on the Sicilian economy. The construction approach includes the following changes. According to the cost breakdown of the bridge project, bridge construction was originally estimated to cost 2.23 billion for the construction of the bridge itself, 1.12 billion for the construction of the highways connecting traffic on both sides to the bridge, and 0.53 billion for design and supervision 8. However, a more realistic appraisal shows that the estimate of total costs should be about 6 billion 9 instead of the 3.88 billion summed from the estimates above. Taking the latter estimates, we assume that each part of the construction project still takes up the same percentage as before, making bridge construction cost 3.45 billion ( 2.23* ( 6/ 3.88) = 3.45), highway construction 1.73 billion, and design and supervision of 0.82 billion. The transportation approach reflects time savings and greater efficiency of travel across the Strait of Messina, which can help lower production costs of goods that involve inter-regional trade within Italy. We assume that due to the bridge construction, effective distance is reduced by 5% inter-regionally between Messina and the rest of Italy and intra-regionally within Messina, estimating that the bridge will also positively impact the transportation infrastructure within the region. Finally, the combined approach including both greater demand for construction and the improved transportation is undertaken to analyze the overall economic impacts on the region of Sicily. The study is primarily focused on analyzing the primary and secondary effects of the construction of the Strait of Messina Bridge, namely, the direct impacts of the construction, the impacts of financing for the construction, and the improved transportation as a direct result of the construction. The impacts of depreciation and toll fee revenue are beyond the scope of the study, due to a lack of reliable estimates of bridge traffic to correctly assess the toll fee revenue. The overall purpose of the paper is not to provide a precise prediction of the economic 9
impacts and employment outlook of the project, but rather, to provide a dynamic framework with year-to-year forecasts of the economic impacts of a transportation construction project, which broadens the scope of simple, static cost-benefit analysis. All the results reported are percentage differences compared to the baseline forecast (no bridge constructed) from 2004 to 2040. The green and red lines report different measuring methods (using production or sales) but the results are identical. 10
Results The results are analyzed in terms of both job creation and output (Gross Regional Product or GRP). Specifically, the study evaluates the impacts on the overall Sicilian economy and employment induced by higher demand for construction and more efficient transportation, first separately and then the combined effects. All results are estimates based on the available data and do not account for economic or demographic factors irrelevant to the project and not already captured in the baseline forecast from 2011 to 2040. Impacts of Construction on Employment and GRP Impact of Construction on Employment Graph 1. Total employment created in Sicily due to construction The Sicilian economy witnesses an expansion of employment due to construction during the bridge project years of 2012-2019, peaking at a 0.9% increase over the baseline in 2012 which gradually falls to 0.8% by 2019. In 2020, the positive impacts on employment fade out. In the long run, more employment opportunities, better economic conditions and greater connectivity will attract people to move into Sicily. Thus, the short-term construction employment spike 11
retains a mild positive effect on the overall regional economy with around 0.05% gain over the baseline through 2040. 12
Impact of Construction on GRP Graph 2. Sicilian GRP increase due to construction As the construction industry of Sicily gets a boost due to the project, it also expands total sales and revenues, contributing to higher gross regional product (GRP) of Sicily. Sicily s regional economy sees a sharp spike in 2012 with approximately 0.85% increase over the baseline, which gradually smoothes out to 0.75% by 2019 when construction ends. After the completion of the bridge, Sicilian GRP dips to 0.1% below the baseline due to the readjustment process required for the former construction workers to find other employment or to relocate. This decrease gradually recovers to the same level as the baseline around 2032 and maintains at the same level into 2040. 13
Impacts of Transportation on Employment and GRP Impact of improve transportation on employment Graph 3. Total employment created in Sicily due to improved transportation Once the Strait of Messina Bridge is completed in 2020, the reduction in effective distance between Sicily and the rest of Italy and within Sicily results in a 0.35% increase in employment. This positive impact keeps rising until 2023. In the long run, as productivity increases, transportation employment growth slows down mildly from 2026 onwards, ending up with about 0.33% more jobs than the baseline in 2040. 14
Impact of improved transportation on GRP Graph 4. Sicilian GRP increase due to improved transportation Transportation time savings due to the Strait of Messina Bridge also reduces effective distance and thus production costs of goods that require inter-regional trade, resulting in positive impacts on the gross regional product. The changes to GRP follow the same pattern as that of employment due to improved transportation. Upon completion of the bridge in 2020, Sicilian GRP increases by 0.35%, which rises to about 0.36% in 2023 and most of the positive impacts (0.35%) remain through 2040. 15
Impacts on Overall Employment and GRP Overall Employment Graph 5. Total employment created in Sicily due to construction and transportation Taking both construction demand and improved transportation into consideration, overall employment in Sicily rises sharply with a 0.9% increase in 2011 as soon as the bridge goes into construction. The positive impacts are highest during the construction phase of 2012-2019 with the employment level 0.85%-0.9% higher than the baseline forecast. The extra employment rate changes to 0.3% in 2020 during the adjustment period after the completion of the bridge project, which rises up to 0.35%-0.4% and remains at that level through 2040. 16
Overall GRP Graph 6. Sicilian GRP increase due to construction and transportation Impacts of demand for construction and improved transportation cause Sicilian GRP to change the same way as employment: rising sharply as bridge construction begins in 2012 with over 0.8% increase over the baseline forecasts, which smoothes out to 0.75% by the end of the construction in 2019, dips in 2020 due to readjustment, and recovers to a steady 0.35%-0.4% gain over the baseline forecasts through 2023-2040. In all three approaches, GRP changes with almost identical percentages as regional employment. The REMI PI + model takes into account the productivity change over time which would result in milder positive impacts on employment than on output. However, the results reported are differences compared to the baseline which already captures the productivity change, thus showing the relative benefits compared to the alternative scenario of not building the bridge. 17
Conclusions The Strait of Messina Bridge can bring positive impacts to the regional economy of Sicily both by stimulating higher demand in the construction industry as well as improving transportation infrastructure and reducing the effective distance across the strait. The construction of the bridge spikes local employment and output by about 0.8% over the baseline forecast during project years 2012-2019, out of which 0.05% remains through 2040. On the other hand, the impacts of improved transportation kick in upon project completion in 2020, generating a 0.35% increase in employment and output over the baseline forecasts, most of which remains through 2040. The aggregate impacts reflect about 0.8% increase in regional employment and output over the baseline forecasts during the construction phase of 2012 to 2019 (due to construction impact) and 0.35% increase from 2022 to 2040 after a short adjustment period. The REMI PI + model enables a dynamic analysis of economic impacts of different aspects of policy changes. This shows both individual and aggregate effects on the overall economy and employment on a year-by-year basis to allow separate analysis of long-term and short-term effects. The forecast results are compared against a baseline scenario of the same region but without the policy change, creating an ideal apples-to-apples comparison that can provide reliable insights for policy analysis and project evaluation. Although this study is primarily concerned with illustrating a concept and a framework to evaluate the bigpicture economic impacts of projects, the REMI PI + model can be integrated with travel demand models, energy demand models or land use models and with specific data inputs to produce accurate forecasts to aid decision making and impact analysis. 18
References BBC staff. March 6, 2009. Italy Revives Sicily Bridge Plan. http://news.bbc.co.uk/2/hi/7928949.stm The Economist Staff. Nov 20, 2003. Economics and Finances: Strait of Messina Bridge: A Bridge Too Far. http://www.economist.com/node/2235192 Falciai, Lorenzo (2001). The Straits of Messina Bridge Project: A Landmark Infrastructure Not A Monument. The Infrastructure Journal. http://www.ijonline.com/pdf/ij29/messina.pdf Fiammenghi, Giuseppe. 10 November 2008. Is Project Management Effective In Large Infrastructure Projects? Stretto di Messina SpA. The Strait of Messina Bridge. Rome, Italy. Presented at 22 IPMA World Congress. http://www.ipmaroma2008.it/files/presentations/giuseppe_fiammenghi.pdf Grimaldi, Gesualdo (year unknown). The Role of the Time Saved in the Evaluation of the Messina Strait Bridge Project. Università di Catania, Facoltà di Economia, Dipartimento di Economia e Metodi Quantitativi. www.demq.unict.it/db/allegati/grimaldi.pdf Ramsden, James (2009). A Critical Analysis of the Proposed Bridge Over the Strait of Messina. Proceedings of Bridge Engineering Conference. University of Bath, Bath, UK. http://www.bath.ac.uk/ace/uploads/studentprojects/bridgeconference2009 /Papers/RAMSDEN.pdf Signorino, Guido (2006). Mistakes and Erroneous Solutions in Urban Planning: The Project for a Bridge over the Strait of Messina (Preliminary Version). http://www.ecomod.org/files/papers/1434.pdf Stretto di Messina SpA (2006). Strait of Messina Bridge: Project Status Report. koti.kontu.la/jvirola/koti/messina/mesisina%20status.doc 19
Notes 1 The Economist (2003). Strait of Messina Bridge: A Bridge Too Far. 2 Ramsden, James (2009). A Critical Analysis of the Proposed Bridge Over the Strait of Messina. 3 BBC (2009): Italy Revives Sicily Bridge Plan. 4 Grimaldi, Gesualdo (year unknown). The Role of the Time Saved in the Evaluation of the Messina Strait Bridge Project. 5 Fiammenghi, Giuseppe (2008). Is Project Management Effective In Large Infrastructure Projects? 6 Falciai, Lorenzo (2001). The Straits of Messina Bridge Project: A Landmark Infrastructure Not A Monument. 7 Stretto di Messina SpA (2006): Strait of Messina Bridge: Project Status Report. 8 Ibid. 9 Signorino, Guido (2006). Mistakes and Erroneous Solutions in Urban Planning: The Project for a Bridge over the Strait of Messina 20