I have a new book published on 1 September, one in a series of short books on policy and economics topics described as ‘essays on big ideas by leading writers’. My contribution is a critique of the inconsistencies of transport policy in recent decades, which I attribute to the shortcomings of conventional transport economic appraisal in identifying the benefits that arise from investment. Readers of this web-magazine will recognise many of the arguments, now brought together in a single volume at a modest price.
On a recent visit to Sweden, I learned of the Swedish approach to planning a new High Speed rail network linking Stockholm, Gothenburg and Malmo, led by the National Negotiation on Housing and Infrastructure. The approach is to initiate a negotiation on co-financing focused on the benefits and in which municipalities, regions, towns and cities and the business sector can all participate and influence the result. The aim is to get the greatest possible benefit for the funds invested by all parties, both housing and labour market.
The outcome will be agreements that identify who finances the infrastructure in the major cities and who finances the new high-speed railways, where the highspeed railway lines will be mapped out and where homes will be built. Evidently, the more that localities are willing to contribute, the more benefit they can hope to gain from the route of the railway.
The Swedish approach seems a lot more attractive than the UK approach to HS2, which involved top-down route planning for a nationally financed railway, with subsequent adjustments to respond to representations from cities, in particular for city-centre stations rather than the original lower cost out-of-town locations. The Swedish approach also focuses on real economic benefits, rather than notional travel time savings whose relationship to reality is obscure.
I contributed to a recent meeting of the Transport Statistics Users Group to discuss Investment Appraisal. My presentation: Metz TSUG 13-7-16 The main points I made are set out below.
The Department for Transport (DfT) recently commissioned new research to establish monetary values for the saving of travel time. This has served to highlight the problems of using Stated Preference experiments to estimated values of time saved by asking respondents hypothetical questions about the trade-off of time and money costs. Quite a lot of variation in the value of time is found, according to the experimental set up, depending on what other factors are invoked, for instance journey time variability, road congestion or rail crowding; and also whether, for work trips, the perspective is that of the employer or employee. Moreover, an attempt to establish Revealed Preference values, by ascertaining behaviour for rail trips where there was choice of alternative routes, did not succeed for technical reasons. The upshot was new values for time savings that differed substantially from previously established values using the same approach, for reasons that are not clear.
Altogether, the SP approach seems decidedly problematic in establishing sound values for travel time savings. But there is a bigger problem, in that the National Travel Survey shows that average travel time has hardly changed over the past 40 years that this has been measured, despite huge investment in infrastructure justified by supposed time savings benefits. The explanation for this apparent paradox is that the SP experiments use short term trade-offs whereas the NTS recognises the long term outcomes, whereby people take the benefit of investment by travelling further at higher speeds to gain additional access.
Land use change
This additional distance travelled gives rise to changes in land use, as for instance in London’s Docklands, which have been made accessible by public investment in the rail system, permitting private investment in high value accommodation. The economic case for Crossrail, due to open in 2018, was based largely on time savings (user benefits), divided three ways between business, commuting and leisure travellers. To this was added the economic benefits attributed to ‘wider impacts’ (mainly agglomeration effects) not included in the user benefits. What was not included, however, was the increased real estate values since this would be double counting user benefits. So real observable increases in land and property values are disregarded in the standard approach to appraisal, which prefers notional time savings and notional ‘wider impacts’.
Another rail investment appraisal is that for HS2, which is also based mainly on user benefits. The problem in this case is the lack of any indication as to where, regionally, the benefits arise, a serious deficiency given that the intention of the new rail route is to boost the economies of the cities of the Midlands and the North.
For road investment, the problem with the standard approach based on time savings is the failure to consider distribution of benefits across classes of road users. Congestion arises on the Strategic Road Network in or adjacent to populated parts of the country, where it is used by local users, particularly for commuting, as well as by long distance users. My own analysis suggests that it is local users who get the bulk of the benefit from investment to increase the capacity of the SRN, faster travel permitting more choice of jobs and homes, the extra traffic returning congestion to what it was, with long distance users no better off. If this is right, there is a question of the value of national investment in the SRN that fosters local car-based commuting. The failure to distinguish how the benefits of investment affect different classes of road user means that this question is not addressed. (In contrast, the distribution of benefits to different classes of rail users is possible, because we have data from ticket sales that allow this classes to be distinguished.)
In summary, the travel time savings methodology is problematic because:
- SP values of time are sensitive to context.
- There is only a very tenuous connection between short run SP values and the value of long run real estate development.
- There is no indication of how benefits of investment are distributed regionally (for long distance rail) or by classes of users (for roads).
- Observable changes in land and property values are disregarded, which means there is a disconnect between the economic case for an investment and the business case.
A further benefit of transport investment can be improved reliability – improved traffic flow on roads, reduced lateness on public transport. The SP research investigated this and concluded that the ‘Reliability Ratio’ should be reduced from 0.8 to 0.4. (The RR is the value of travel time variability (SD) divided by the value of travel time savings: it enables changes in variability of journey time to be expressed in monetary terms.) This downgrading of the importance of reliability seems at odds with a previous study by DfT that surveyed road users about their preferences. One question asked about priorities if additional money were available: improving traffic flow ranked well above reducing journey times. While not a formal SP investigation, the survey findings suggest that reliability should be the main economic benefit from a user perspective, rather than time savings, which is the reverse of the WebTAG treatment.
Having appropriate monetary values for reliability is important for appraising investments focused on this aspect, for instance variable speed controls for managed motorways and predictive journey time information that mitigates the main detriment of traffic congestion. Such digital technologies are likely to be far more cost-effective that civil engineering technologies in improving the user experience.
The DfT’s approach to transport investment appraisal, known as WebTAG (web-based transport analysis guidance):
- Under-estimates benefits of urban rail investments, because the enhancement of real estate values is disregarded.
- Over-estimates benefits of inter-urban road investments, which foster local car commuting.
- Under-estimates benefits of digital technologies.
The Treasury provides central guidance on analytical methods used across government departments. The original Green Book advises on investment appraisal, where the WebTAG approach to cost-benefit analysis is seen as an example of good practice. It is, however, an outlier in the amount of detailed analysis required to be compliant, and hence in the effort required. Other departments are less demanding. For instance, there have been major programmes of school and hospital building in recent years, but there is no theory of how replacing an obsolescent building improves educational or health outcomes, which limits analysis to considerations of cost-effectiveness.
The most recent Treasury guidance is the Aqua Book, which deals with quality assurance in analytical models, and was prompted by DfT’s analytical shortcoming in connection with retendering the West Coast Main Line rail franchise in 2012. One requirement is that analysis should be ‘grounded’ in reality: connections must be made between the analysis and its real consequences. The WebTAG approach fails this test, for the reasons outlined above.
I am not alone in my criticism of the established approach to transport appraisal. The Transport Planning Society conducts an annual survey of its members: ‘Most TPS members consistently say that appraisal methods should be reformed. In the most recent survey, only 3.5% considered current methods did not need reform, with 60% having major issues with them. The top reason for this by some way was the need to appraise changes in land values, land-use or travel behaviour.’
Space not time
Recalling first principles:
- Transport moves people and good through space (not time).
- Investment that increases speed or capacity leads to more movement through space (not time).
- We therefore need an economic framework that recognises spatial characteristics – Spatial Economics.
Spatial economics is a long-established sub-discipline of economics, going back almost two centuries to the seminal work of von Thunen who related the value of agricultural land, as measured by the rents that farmers could afford to pay to landowners, to the nature of the produce grown and the costs of transporting it to the market in the nearest city. This approach was subsequently extended to cities (urban economics) where the cost of housing falls as the costs of travel to employment in the city centre increase. The Spatial Economics Research Centre at the LSE is one source of expertise, although it appears not to have engaged in consideration of the kind of spatial economic analysis that would assist transport investment appraisal by mitigating the deficiences of the time savings approach.
My colleagues at the UCL Transport Institute recently organised a conference on the theme of ‘Radical Transport’. The outline of my presentation is below.
Plans were developed in London in the 1960s for an inner motorway ‘box’ (ie a rectangular orbital road within the North and South Circular Roads). Westway, an elevated arterial road, was built westwards from central London to the planned ‘box’ at White City. A similar northwards route, widening the A1, was started, with a six-lane duel-carriageway constructed up to the edge of Highgate Village. There followed four public inquiries into plans to continue the widening, which were strongly opposed by local people, led, amongst others, by a Haringey councillor, the young Jeremy Corbyn. The upshot was the decision to abandon plans for the motorway box, although the sections in east London, north and south of the Blackwall tunnel, were constructed.
London avoided building obtrusive elevated motor roads in the inner city, essentially retaining the historic street pattern from the age of horse-drawn vehicles. This has limited the growth of car traffic, which indeed has fallen somewhat over the past twenty years, despite rapid growth of population and incomes. The consequence has been a steadily declining share of journeys by car, from 50% of all trips in 1993 to 36% currently, with public transport use growing to compensate.
London has thrived economically, culturally and socially, despite (and because of) not building the motorway box to accommodate growing demand for car travel. Had the standard approach to economic appraisal of proposed transport investments been in use at the time, the economic case for construction (the ‘Do-something’ case, as the economists designate) would have been based on the time savings to car users, compared with the supposed traffic-congested ‘Do-minimum’ case. In fact, the Do-minimum case was adopted, which turned out to be the better policy.
I have written previously about the possibility of not building another runway at Heathrow, an issue with which the Government is still struggling following the recommendation of the Airports Commission in their final report of July 2015. The Commission’s economic case estimated benefits of a third runway at Heathrow (the Do-something case) as £69bn NPV gross, and £12bn net, after subtracting construction costs and disbenefits. What is not clear from the published information is the nature of the Do-minimum case, against which these benefits are estimated. It seems likely that a static pattern of air travel has been assumed to hold in future at Heathrow. What appears to have been disregarded is the dynamic response of a very competitive aviation industry to a capacity constraint.
Three-quarters of passenger passing through UK airports are on leisure trips. Even at Heathrow, only 30% of passengers are on work trips. Yet all the arguments for airport expansion are about increasing business travel – more destinations for British exporters, more inward investment, London as a world city for doing business. There is little reason to expand leisure travel: the UK has a negative balance of trade in tourism, which could worsen; and London, a working city, is getting very crowded with visitors.
With no new runway at Heathrow, business travellers would claim priority for existing capacity because they would be wiling to pay premium process for use of the hub airport. This would displace leisure travellers elsewhere, for instance to take advantage of unused capacity at Stansted. An important innovation in air travel in recent years has been the rapid growth of Middle East airlines based at hubs in the Gulf, well suited for serving long-haul destination to the east and south. At present, the three Middle East airlines between them fly daily from six UK airports apart from Heathrow, not yet including Stansted, which seems a natural alternative if Heathrow accommodates more business travellers.
If it were easy to decide where to build another runway in southeast England, if it were easy to mitigate the environmental consequences, and if it were easy to finance construction from private sector resources, then it would be sensible to go ahead. But since none of these are easy, we could live with a runway capacity constraint, and London would continue to thrive on the Do-minimum case.
East London River Crossings
Another situation where Do-minimum may be the best policy is the case of the proposed two new river crossings in East London, costing £1bn each. As I have argued previously, the scale of congestion from induced traffic has been underestimated, and the impact on development probably overstated. Better use of the money is available – the ‘opportunity cost’ – by strengthening radial rail links to employment opportunities in central London, which will allow developers to building housing on land made more accessible.
We tend to neglect consideration of the Do-minimum case in transport investment appraisal for a number of reasons:
- There is a ‘bias to action’ that motivates contractors and consultants to favour construction, since that is how they earn revenues. Likewise, many politicians favour investment that gains them credit. The bias to action is compounded by the well-known phenomenon of ‘optimism bias’, which involves underestimating construction costs and overestimating usage.
- Spending other people’s money allows these biases to flourish. Spending your own, or your shareholders’, enforces a more rigorous analysis. A mistaken investment in the private sector can be damaging to the business and to the reputations of those responsible, but in the public sector, the ship of state sails onwards, with blame for disappointing investments being diffuse.
- We neglect the ‘opportunity costs’ of investments: the benefits forgone from better use of the resources.
- There are of course uncertainties associated with the Do-minimum case, but these are not different in kind or scale with those associated with the Do-something case. It may take more imagination to consider how users of transport systems – individuals and businesses – respond to capacity constraints.
The comparison between Do-something and Do-minimum nowadays increasingly boils down to a question of investment in civil/mechanical engineering versus digital technologies. Most transport investment involves costly and impacting civil engineering – shifting earth, pouring concrete, rolling tarmac – or in expensive kit: trains and planes. In contract, digital technologies can be far more cost-effective, and are out of sight and mind. The Do-minimum option for London’s proposed motorway box has turned out to involve an effective urban traffic management system that proved its worth coping with the big shift of flows during the 2012 Olympics, and improved signalling on the Underground that permits 36 trains per hour, increasing capacity by up to 30% – an example of the ‘digital railway’.
The Government recently established a National Infrastructure Commission, an independent body whose purpose is to identify the UK’s strategic infrastructure needs over the next 10 to 30 years and propose solutions to the most pressing infrastructure issues. The Commission’s initial remit from the Government includes transport investment both in the North of England and in London. The Chair is Andrew Adonis and one Commission member is Lord Heseltine, the former deputy prime minister who has long championed the regeneration of Britain’s inner cities through infrastructure investment. Another Commission member is Demis Hassabis, artificial intelligence researcher and head of DeepMind Technologies, a company acquired by Google for a reported £400m. He may be an advocate for twenty-first century digital infrastructure, rather than yet more twentieth-century concrete and tarmac.
The National Infrastructure Commission has the potential to improve decision making by ensuring that sound analysis takes place in advance of decisions. The interesting question is how the Commission will function. Will it be a cheer-leader for those keen to build big civil engineering stuff with other people’s money? Or will it be a critical friend to government departments needing to get best value from constrained budgets?
There are two useful models for how independent bodies can advice government. The Office for Budget Responsibility was created to provide independent and authoritative analysis of the UK’s public finances. The Committee on Climate Change has the task to advise the Government on emissions targets and report to Parliament on progress made in reducing greenhouse gas emissions and preparing for climate change. Both the bodies are seen to be independent and their advice carries weight on that account.
It will be important for the National Infrastructure Commission to look critically at the analytical methodologies current employed by government departments, to ensure these are fit for purpose. This was one aspect of the paper that I recently submitted in response to a call for evidence (Metz NIC sub 4-1-16 pdf). I contrasted the position in London, where a dynamic economy requires continuing transport investment to keep up with economic and population growth, with the North of England, where it is hoped that such investment will stimulate growth, a far from certain outcome.
High Speed 2 (HS2), the planned new rail route from London to the cities of the Midlands and the North, is a controversial project, about which I have been rather agnostic. What are the pros and cons?
Demand for rail travel has been growing rapidly, with passenger numbers doubling over the past 20 years since the industry was privatised. Has this growth arisen because of or despite privatisation? Probably both: the train operating companies have invested in new rolling stock, which attracts customers; but growth has also been the result of road congestion, digital technologies allowing productive work on rail journeys, the shift of the economy from manufacturing to business services located in city centres, and more people living in cities without a car.
We can expect demand for rail travel in Britain to continue to grow, driven both by population increase and by the attractions of an improving network that offers fast and reliable travel. Hence the need to invest in track, stations, signalling and rolling stock. Additional capacity on existing routes is publicly acceptable despite weekend interruptions to services, and can be cost-effective if spare capacity exists, although the decade-long modernisation of the West Coast Main Line in recent years was problematic, involving delays and cost over-runs. Longer trains and longer platforms, with a smaller proportion of first class seats, is one approach. Most rail investment involves improving existing routes, or occasionally reviving disused track, for mixed passenger and freight use. The main exception is HS2, a new build high speed route for fast passenger trains only.
The development of HS2 is being carried forward by a Government-owned company. A Bill is currently being considered in Parliament to secure powers to construct and maintain the first phase, London to Birmingham. The strategic case for HS2, published in 2013, argues that this offers a step change in north-south connectivity, at a cost for a high speed line of 9% more than a conventional railway. Travel time from London to Birmingham, for example, would be reduced from 1hr 21min to 49min. Long distance trips transferred to the new line will free up capacity on existing services for additional commuter services.
An important part of the case for HS2 is the economic case. On the standard approach to transport cost-benefit analysis, where the main economic benefit is time saving through faster travel (valued because this permits more productive work or desired leisure), the benefit:cost ratio for the first phase is estimated to be 1.7 and for the whole route 2.3. These values take some account of a debate about the value of time savings when one can work on the train.
The Economic Affairs Committee of the House of Lords has issued an illuminating report critical of the case for HS2, making the following key points:
• Business travellers, who derive 70% of the transport benefits, should pay higher fares than for standard rail journeys.
• Long term growth of demand for rail travel is unclear; overcrowding arises from commuters, not long distance users who would most benefit from high speeds.
• The economic impact is unclear; the economic case based on the value of time saving is unconvincing; and London may be the biggest beneficiary.
• There are better ways of spending £50bn, the cost of constructing HS2, track and trains.
The Government responded to the House of Lords report, rebutting the criticisms without shedding further light on the economic case.
The economic case for HS2 relies largely on estimates of the benefits to business travellers from speedier journeys, for instance saving half an hour between London and Birmingham. The value of this benefit depends on the future number of travellers and on estimates of the value of time savings – both subject to considerable uncertainty. The Department for Transport has recently published research findings that would increase the value of time savings from long distance rail travel.
What the conventional economic case does not illuminate are the benefits to the cities of the Midlands and the North of the new rail route arising from new urban developments. To include the enhanced value of land and property that would arise from improved access and connectivity would be double counting the time savings benefits, according to the orthodox view. This view has nothing to say about distribution of benefits other than to different classes of travellers (business, commuters, leisure) – nothing about spatial distribution as between cities and regions, nor about benefits to existing land and property owners.
An approach to economic analysis of transport investments that was based on spatial economics would allow changes in land use and enhancement of land and property values to be taken into account as reflections of the economic benefits of improved access. This is what happens, in effect, when a particular transport investment is promoted as part of a more general development – an example is the planned extension of the Northern Line tube in London to allow the development of the Nine Elms riverside site.
Appraising the development potential in the cities to the north of London that would result from HS2 is difficult, given the many uncertainties. Much depends on the efforts made by the city authorities to take advantage of the new rail route, efforts that are seemingly being undertaken with some enthusiasm, as well as on the commercial judgement of the developers. But it is clear that the range of uncertainty associated with such a large, single, hopefully transformational investment is substantial. So unless the benefit-to-cost ratio is large (unlikely for HS2 however valued), the political judgement to proceed could not be based on a clear economic case.
We cannot be sure that the main beneficiaries of HS2 will not be businesses based in London. The challenge for the cities to the north is to prevent this outcome.
I gave a talk to the Transport Economists Group in London on 28 October 2015. Much of the material covered can be found in recent articles on this website. One new theme is set out here.
The Government has announced its Road Investment Strategy that commits £15 billion expenditure over the next five years. One stated aim is a ‘free-flow core network, with mile a minute speeds increasingly typical’. How realistic is this?
Let’s consider the past pattern of travel behaviour that has been tracked over the past forty years by the National Travel Survey. Average travel time has stayed steady at about 370 hours a year, or an hour a day, a finding that holds true for all settled human populations. What has changed over the period is the average distance travelled, which increased from 4500 miles a year in the early 1970s to 7000 miles in the mid 1990s, since when this has ceased to grow. Increased distance in unchanged travel time is the result of investment in the transport system that has permitted faster travel – private investment in cars, public investment in roads and railways.
Not time savings
People have taken the benefit of investment by travelling further to more distant destinations, not by saving time in reaching unchanged destinations. This is contrary to what transport economists suppose when they estimate the main benefit of investment as time savings, valued for the extra work or leisure supposedly made possible. In reality, people travel further to have more opportunities and choices. For instance, by travelling faster on the journey to work, you have more choice of jobs accessible from where you live in the time you allow yourself for travel, more choice of homes accessible from your workplace, and similarly more choice of shops, schools and so forth.
So people take advantage of road improvements that permit faster travel to make longer trips as part of their daily routine. This is particularly the case in areas where demand for housing exceeds supply, creating an incentive to travel further in search of affordable properties.
Daily travel is an important component of traffic on parts of the Strategic Road Network (SRN). Congestion on this network arises near to populated areas, where local users interfere with long distance users. Half the traffic on the M25 is local. Remote from populated areas, the traffic generally flows freely. The conventional response to congestion on the SRN is to add capacity – an extra lane, conversion of the hard shoulder, or an improved junction. Conventional economic appraisal involves multiplying small time savings from such capacity increases by a large number of vehicles and by standard values of time to generate monetary benefits that can be compared with the costs of the extra capacity, to assess value for money.
The time savings per vehicle are quite small. The Highways Agency (now Highways England) carried out evaluations of around 120 completed major improvements and found the average time saving to be three minutes at times of peak congestion. There has been debate about the value of such small time savings. One view is to disregard these as too small to change behaviour. Against that, it is argued that small time savings can accumulate as more improvements are implemented, so in logic all need to be counted.
While three minutes is too small to matter for a long distance trip, it is not insignificant for a local journey. So if we add carriageway to a congested section of the SRN, it is the local users who take advantage of the faster travel to make rather longer trips, particularly for greater choice when they change jobs or move house. These lengthier trips generate extra traffic, which restores congestion to what it was previously. Long distance users are no better off.
This extra traffic is what is known as ‘induced traffic’, about which there used to be debate – did it arise and if so why? We can now see that induced traffic is the extra traffic that arises because people take the benefit of road improvements that allow faster travel as more opportunities and choices at greater distances, consistent with the evidence of the National Travel Survey, rather than as time saved.
Occurrence of induced traffic is the basis for the maxim: ‘You can’t build your way out of congestion’, which from experience we know generally to be true. This is what transport ministers at one time used to say, when they did not have a big budget for road construction. Current ministers tend to speak rather vaguely about new road schemes ‘creating opportunities for hardworking people across the nation and driving economic growth’, but no doubt hoping that congestion would be lessened, as is seemingly implied by the time saving rationale.
What road construction can achieve is to make land accessible for development. But this needs to be led by planners and developers identifying sites suited for development that are commercially attractive. If such sites require improved road access, then this should be a candidate for funding, whether from a local transport investment budget or a national funding programme, subject to a value for money test. Such local initiatives fit with devolved funding, not as part of a national Road Investment Strategy for which local development is inadvertent or incidental.
If we can’t build our way out, what do we do about congestion? Surveys of road users find that the main perceived problem arising from congestion is unreliability, rather than increased time taken. We can tackle the unreliability problem by providing road users with good predictive travel time information before they set out, so reducing uncertainty in arrival time. This is becoming increasingly possible through digital technologies, which are far more cost effective than traditional civil engineering technologies in meeting the needs of road users. In Britain, we are familiar with roadside variable message signs predicting the time to the next junction – although this tends to be too late to be of much use.
One example of useful predictive travel time information is found at Seattle, where you can input the postcodes of your home and workplace, and the time you want to arrive at work, to be advised of the time to leave home to arrive on time nineteen times out of twenty. A more ambitious example has been in operation in Nordrhein-
Two kinds of driver
Predictive journey time information can be used by the two kinds of driver on the roads. Those who need to be at their destination at a particular time will know when they need to set out – whether to get to work or a meeting, or deliver time-critical goods. Those who are more flexible may be able to use such information to avoid peak traffic – for instance when on shopping or leisure trips or visiting friends. The more the flexible drivers can avoid peak traffic, the less congestion for those who have to be on the roads at that time – which is win-win.
Anecdotal evidence of the usefulness of digital technologies is to be found in Just-in-Time delivery, offered by efficient road freight haulage businesses who understand the road network well and can manage their vehicle fleets to perform rather precisely. For instance, a haulier working for a supermarket business to deliver from the central warehouse to the stores may be contracted to deliver within 30 minutes time slots, and can do so.
These digital technologies need to be made generally available. Highways England has an important role. The investment case for digital technologies requires monetary values for journey time reliability, which might be available from the latest Department for Transport research on the value of time. The investment case also requires information about drivers’ response to predictive information about journey times, which is researchable, albeit not a static situation since positive responses are likely to increase with familiarity.
A further consideration is the information currently made available by specialist providers such as TomTom or general providers such as Google. It is not clear how reliable is this information or what impact it is having on the functioning of the road network. Nevertheless, there is scope for collaboration between Highways England, which has an interest in the overall efficiency of the SRN, and the private sector businesses that provide information to individuals for reward, directly or indirectly.
It is a step forward that Highways England’s recent Concept of Operations recognises the importance of maximising the throughput of people and goods through initiatives such as smart motorways and Intelligent Transport Systems ‘to squeeze every drop of capacity out of what we have’.
So while we can’t build our way out of congestion, we can manage the problems arising from congestion far more effectively. But to do that, we need a substantial reallocation of planned expenditure within the Roads Investment Strategy. The £15 billion spend over the next five years includes some ring-fenced funds for Innovation (£150m) and Growth & Housing (£100m). However, these earmarks are a tiny proportion of the total, with the bulk of spend devoted to traditional civil engineering work aimed at increasing capacity – a very twentieth-century approach that is not appropriate for the digital twenty-first century.
The Department for Transport (DfT) has committed £15bn for investment in the Strategic Road Network of interurban roads over the next five years. To justify this programme, known as the Road Investment Strategy (RIS), DfT has published an economic analysis based on standard appraisal practice in line with DfT’s WebTAG guidance. The main monetised benefit is the saving of journey time that is supposed to arise from investments that increase road capacity.
For 25 major schemes already announced, the average benefit-to-cost ratio (BCR) is estimated to be 4.5, which is considered to represent very high value for money. An estimate is also made of the whole investment programme as a package, using the Department’s National Transport Model (NTM) (see my article on the Road Traffic Forecasts for a critique of this model). Overall the RIS is forecast to deliver benefits to road users worth over £40bn with a BCR of 4.6, much of which comes from a 1.9% reduction in time lost due to congestion across the road network.
It is recognised that this reduction in congestion is likely to result in some increase in traffic – known as induced demand – as people take advantage of the time savings by changing their travel behaviour. But the NTM forecasts this increase in traffic to be only 0.19% by 2040. Moreover, evaluation of completed major road schemes by the Highways Agency (see below) suggests that only 12% of schemes had evidence of induced demand effects.
Evaluation of completed road investments
The Highways Agency has carried out evaluations of the impact of completed major projects (known as Post Opening Project Evaluation (POPE)). These are conducted five years after the opening of the new road. The first overview of a set of such studies (know as a meta-analysis) covered 58 major schemes and concluded that on average a scheme saved users 3 minutes during the peak traffic period and 2.5 minutes at other times. A second set of studies of 75 completed schemes confirmed that journey time savings are the main monetary benefit (75% of the total, with safety improvements the second biggest contribution) but did not highlight the average time saving (although Figure 4-18 indicates that the observed time savings were similar to the first set).
So the main economic benefit of investment in major road schemes is small time savings per vehicle, of the order of 3 minutes on average, multiplied by a large number of vehicles, then multiplied by values of time saved whether for more productive work or more valued leisure. One difficulty with this approach is that any such small time saving arising from a single investment is unlikely to be big enough to change behaviour of road users. The counter-argument is that the economic case should not depend on whether an improvement is carried out as a single large project or as a series of smaller improvements, hence in logic the small time savings in the latter case should not be disregarded.
A weightier criticism of the time savings methodology is that average travel time is invariant. The National Travel Survey (NTS) has been measuring average travel time for 40 years. As shown at NTS Fig, this has remained at about 370 hours per person per year or an hour a day. This finding implies that in the long run there are no time savings that we would value because they allow more productive work or valuable leisure. Any travel time savings must be short run and therefore are not a sound basis for valuing investment in long lived infrastructure.
Land use change disregarded
What has changed over the 40 years of the NTS is the average distance travelled – 4500 miles in 1973, reaching 7000 miles by 1995 (by all modes except international air). This is the result of investment that has permitted faster travel. In the long run, people do not take the benefit of transport investment in the form of time savings but rather as greater distance travelled, which allows more access, opportunities and choices, and which in turn results in changes in land use.
The long run consequences of transport investment are to make land more accessible for productive use. This is exemplified by the regeneration of East London, Docklands and beyond, through rail investment – Docklands Light Railway (DLR), Jubilee Line, Overground, with Crossrail under construction. Public investment in the rail system makes brownfield land more accessible, which allows private developers to construct commercial and residential property, which accommodates new jobs and homes, and which results in enhancement of land and property values that reflect the economic benefit of the public investment.
Railway investment to make land accessible and productive is nothing new. In 1850 the United States’ economy was small, not much bigger than Italy’s. Forty years later, it was the largest economy in the world – the result of the railways, which linked the east of the country to the west, and the interior to both. They gave access to the east’s industrial goods; they made possible economies of scale; they stimulated steel and manufacturing—and the economy boomed.
The standard approach to transport economic appraisal disregards changes in land use, even though enhancement of value is evident in the property market, because inclusion would double count the benefits already estimated as time savings. However, changes in land use and enhancement of values (whether as freehold or leasehold land and property values or as rents) is very relevant to investment decisions, both as regards the spatial location of benefits and their distribution amongst beneficiaries. A public investment that benefited only existing property owners would not represent good value (unless the extra revenue from fares covered the cost – rarely possible in practice). A transport investment that makes land available for development, as in East London, benefits landowners as well as the businesses and individuals who occupied the new properties Such landowners might be expected to contribute to the financing of the investment, as indeed has happened to some extent with developments in Docklands.
Land use change as a consequence of transport investment is not limited to new railways, although it can be more evident than in the case of roads where investment generally improves existing routes and so changes are incremental. But such incremental changes should not be disregarded since they are the long run outcome of road investment.
“You can’t build your way out of congestion”
This is what transport ministers used to say when they did not have a big budget for road building. The statement is substantially true, on account of the phenomenon of induced traffic. Investment in the inter-urban road network is justified by time savings arising from increased capacity which reduces congestion. But such time savings are transient and are converted into land use changes in the long run, which has implication for traffic volumes.
Congestion on the inter-urban road network mainly occurs near to densely populated areas. Remote from these, the traffic mostly flows freely. But adjacent to conurbations, half the traffic can arise from local people using the road for short distance daily travel, as evidenced by the typical pronounced morning and evening peaks from commuting. Widening the road initially results in reduced congestion and faster travel. But over time the locals take advantage of the higher speed to make longer trips, particularly when changing job or moving house. This extra local traffic restores congestion to its former state, and long distance road users are no better off. The longer local trips are associated with changes in land use – development of greenfield sites where permitted, and enhancement of property values that reflect improved access.
This additional traffic resulting from road improvements is known as ‘induced traffic’ or ‘induced demand’. It corresponds to the increased average distance travelled as recorded in the NTS, because people take the benefit of investment as access not time savings, in the long run. It is therefore surprising, as noted earlier, that the NTM forecasts the increase in traffic from planned investment to be only 0.19% by 2040.
In the past, the DfT’s road scheme appraisal methodology assumed fixed origins and destinations of trips, hence no induced traffic or land use change. were allowed for. Subsequently, it was recognised that a change in supply would lead to a change in demand, but nevertheless most of the major schemes of the Highways Agency that have been evaluated were originally appraised on the basis of fixed demand.
Moreover, as noted above, evaluation of completed major road schemes in the Highways Agency’s Post Opening Project Evaluation (POPE) suggests that only 12% of schemes had evidence of induced demand effects, which suggests a deficient evaluation methodology. Five years may be too early to see the full effects of land use change and induced traffic. And because such consequences were not of interest at the appraisal stage, a blind eye may be turned at evaluation.
Recent developments in thinking about investment economics
There have been some interesting developments in thinking about the economic benefits of transport investment, particularly the contribution to economic growth.
Transport for London (TfL) and Transport for Greater Manchester commissioned a report from the economics consultant Volterra Partners that highlights the mismatch between the standard approach to transport appraisal, which focuses on welfare benefits to travellers, and the impact of transport investments on wider economic potential, both spatial and temporal developments. TfL is preparing a business case for Crossrail 2, the planned new SW-NE rail route across London, consistent with the Volterra report.
The Treasury has recently issued supplementary guidance to the Green Book, the source book for public sector investment appraisal methodology, on the topic of valuing infrastructure spend, where it is recognised that new infrastructure may impact on land values. However, it is reiterated that increased such values effectively capitalise the value of time savings that are captured in the standard cost-benefit analysis, so to include them would be double counting. The Treasury therefore persists in the view that notional, unobserved, short run time savings are a better measure of economic benefits than are real, observable changes in market values of land and property made more accessible by the transport investment.
DfT commissioned a thorough study from three notable economists (Tony Venables, James Laird and Henry Overman) on the implications of transport investment for economic performance (the TIEP report). It is recognised that increases in land values are associated with urban transport projects and that commuters who see their travel times cut may end up transferring the benefits to their landlord in higher rent. It is proposed that changes in land use should be estimated and reported for a wider range of projects, and that techniques for predicting such change be further developed. Nevertheless, this report endorses the usual disregard of such changes in land values, as this would be double counting of conventional time savings benefits.
The TIEP study recognises that transport investments can deliver economic benefits over and above conventionally measured user benefits, which arise by: (a) fostering intense economic interaction that raises productivity, whether in clusters within narrowly defined areas or more widely by linking areas; (b) shaping the level and location of private investment, potentially leading to higher levels of economic activity in some areas. What the report does not recognise, however, is that changes in land and property values, as seen in the market, incorporate such agglomeration and related benefits, which need not be separately estimated.
Thinking outside the box
The conventional approach to transport economic appraisal, where the main benefit is time savings and land use change is disregarded, has been well established for half a century and is used in many countries. Arguably, transport economists have taken a blinkered view, not noticing alternative viewpoints, three in particular.
The nineteenth century economist, von Thuenen, developed a direct relationship between transport costs and land values. He postulated a city surrounded by agricultural land that was let to tenant farmers who paid rent to land owners. The rent that could be paid depended on the value of the produce when sold in the market in the city, the production costs, and the transport costs incurred in getting the produce to the city. The higher the transport costs, the lower the rent that could be afforded. Far enough away, land would be good only for subsistence farming. Von Thuenen published his seminal treatise in 1826, before the coming of the railways, which reduced transport costs and made much more land valuable for agriculture, as in the US Mid-West. Von Thuenen’s approach was extended to urban economics by Alonso and others, and continues to be developed.
Behavioural economics focuses on how decision making departs from the rational behaviour assumed in standard economic models. Daniel Kahneman was awarded the Nobel Prize in Economics for using cognitive psychology to explain various divergences of economic decision making from neo-classical theory. The underlying argument is that we need to observe how people actually behave, rather than rely on assumptions of rational utility-maximising behaviour. In the case of transport economics, we observe that, in the long run, people take advantage of improvements to the transport system to travel further, not to save time in order to carry out more work or have more leisure. Transport investment decisions should be based on observed behaviour, not assumed behaviour.
Thomas Piketty’s book, Capital in the Twenty-First Century, has attracted much interest since publication in 2013. It is concerned with wealth concentration and distribution, and with increasing inequality. This is relevant to travel in two respects. First, travel is a relatively egalitarian domain in that it is hard to pay more to go faster. First Class on plane or train offers greater comfort, not speed. Top of the range supercars go no faster on congested roads than a basic family hatchback. So increasing wealth does not buy faster travel, at least not until private jets or helicopters become affordable.
Transport economists argue that road pricing is the answer to congestion – ration a scarce resource by price. However, the usual economic case for road pricing neglects an important externality – the preference of voters for equity rather than efficiency in respect of use of the road network, a preference revealed in referenda in Manchester and Edinburgh for example. Such preference, when quantified and monetised using Stated Preference methods, and incorporated into the cost-benefit analysis, would be expected to tilt the balance against road pricing schemes.
The second aspect of Piketty’s opus that is relevant is his use of long time series of income and wealth, compiled from official records, to help interpret the trends that have led to the present position. This approach contrasts with the standard technique of building a formal model, calibrated using quite recent data. The NTS data shown at NTS Fig is an example of a time series that demonstrates a change the underlying driver of travel demand, without recourse to formal transport modelling.
The economic basis of transport investment appraisal is not just a matter of theoretical interest. It affects the investment decisions that are made. The conventional methodology, focusing on time savings and neglecting land use change, biases investment decisions against urban rail schemes that can make land accessible for development. The early rail developments in Docklands were marginal on the basis of the cost-benefit analysis at the time, but went ahead because the promoters had strategic vision – amply justified by the outcome. But other cities were less lucky. Alan Wenban-Smith has recounted how, in the early 1990s, Birmingham concluded that supporting a larger and more attractive city centre would need no more money for transport overall than in the past, but spent differently: roughly 50/50 rather than 75/25 road/rail. Although this principle was accepted at the highest levels of the DfT, the strategy was undone by an appraisal system that passed the road and failed the rail elements. (Wenban-Smith LTT Viewpoint – Cities 2Feb12 )
The conventional appraisal methodology biases in favour of road schemes that offer small notional time savings, which, when multiplied by a large number of vehicles, yield apparent large aggregate time savings which are supposed to allow more productive work to be carried out and more valuable leisure to be had. But in reality, these supposed time savings are converted into land use changes located fairly near the improvement, which may or may not be desirable, and which in any event do not form part of the investment case.
If we can’t build our way out of congestion, what can be done? When road users are asked in surveys why congestion is a problem, journey time unreliability is more important than slower speeds. So the best means of dealing with congestion is to provide the user with reliable predictive journey time information prior to the trip, so the optimum time of departure can be judged. However, the valuation of the benefits of reliability is not well developed, and the behavioural responses of road users to information are not well understood – which means that the case for investment in the relevant technologies is difficult to make. Nevertheless, providing predictive journey time information by means of investment in the digital technologies, to achieve more efficient operation of the road network, is likely to be far more cost effective as a means of tackling congestion than investment in expensive civil engineering works.
There exists remarkable commitment to an investment appraisal methodology based on valuing notional travel time savings – savings which are valued because they permit more work or leisure, but which are ‘notional’ because they are assumed, not observed. To the extent they may exist, such time savings are transient since average travel time remains unchanged in the long run. Moreover, because of the reliance on time savings as the main benefit, changes in land use and enhancement of land and property values are disregarded, to avoid double counting. Yet such enhancement of values are real, as seen in the market, not notional, and reflect both the increased access arising from the transport investment and the increased economic potential of the property, including the agglomeration and related benefits.
It is not surprising that the economic case for HS2 is unconvincing, based as it is on travel time saving between London and the cities to the north. What we wish to know is the economic benefit to these cities, which will manifest itself in changes in land use in these locations.
Arguably, transport economists have been seduced by theory. Empiricism would be a better approach. Let us observe the behavioural response to the intervention – how travel behaviour changes following a transport investment – which we ascertain through open-minded evaluation of completed schemes. We then use what we have learned to inform appraisal of prospective schemes. An empirical approach avoids double counting since people cannot do two things at the same time.
Since transport investments that result in faster travel lead to increased access and hence changes in land use associated with development, it would be sensible to plan transport investments and the associated development together. This sometimes happens naturally, as would be the case if a new runway were built at Heathrow or Gatwick, when surface transport access would need to be reinforced. This would be a sensible approach generally, since it would secure the real benefits from transport investment.