The wider economic benefits of transport Kurt Van Dender 9 March 2011 Infrastruktur som vækstdriver for Danmark

– Annual Summit: Leipzig May, Transport for Society – Think tank – IGO. The International Transport Forum at the OECD 2

3 Wider economic benefits of transport (infrastructure) 1.Transport and growth 2.The social benefits of transport 3.The role of economic appraisal 4.The scope of cost-benefit analysis - wider benefits 5.Summing up

4 1. Transport and growth Is transport a driver for economic growth? Do infrastructure investments boost its contribution?

5 1. Transport and growth Is transport a driver for economic growth? Do infrastructure investments boost its contribution?...it depends!

6 1. Transport and growth Is transport a driver for economic growth? Do infrastructure investments boost its contribution?...somewhat more precisely: It can be a prerequisite for realising an existing potential. It does not in itself constitute or create such potential.

7 1. Transport and growth “It can be a prerequisite for realising an existing potential.” When is that likely? -New networks, new modes or technologies. -Eliminating constraints in high-growth places (metropolitan areas; Crossrail, Métro Grand Paris). (diminishing marginal returns)

8 New networks, new modes or technologies: Social savings from railway freight England and Wales (1865):4.1% of GNP Brazil (1913):18.1% of GNP Difference: improvement over waterways vs. new connections Source: Leunig, 2011

9 Crossrail Ca. 15bn pounds Set of tunnels connecting Great Western and Great Eastern Main Lines 2018 Network Rail, BAA, City of London, DfT, TfL (EIB)

10 Métro Grand Paris 155km of track 40 stations 20-25bn € Done by 2023

11 2. The social benefits of transport Transport is not just about growth. Other benefits: -Time savings used to enjoy leisure. -Reducing environmental impacts....appraisal aims to include all benefits

12 3. The role of economic appraisal What infrastructure to build, and when? No hard and fast rules. Appraisal provides a systematic analysis of costs and benefits to inform (not: to make) decisions. Appraisal leads to better decisions and more credibility. Cost-benefit analysis is an often used form of appraisal.

13 4. The scope of cost-benefit analysis Standard CBA focuses on direct user benefits – what are users willing to pay for better infrastructure? Note: willing to pay, not have to pay; time savings important. Are direct user benefits the same as total benefits? Yes, if perfect competition and constant returns to scale.

14 4. The scope of cost-benefit analysis Standard CBA focuses on direct user benefits – what are users willing to pay for better infrastructure? Note: willing to pay not have to pay; time savings important. Are direct user benefits the same as total benefits? Yes, if perfect competition and constant returns to scale.... in other words, no.

15 4. The scope of cost-benefit analysis Standard CBA gives an approximation to total benefits. Sometimes the approximation is good. Sometimes it needs to be amended to take account of wider economic effects / wider economic benefits.

16 4. The scope of cost-benefit analysis What wider economic benefits?... many are related to the arguments on transport and economic growth (productivity) made before: -Increased competition in good markets (“unlocking”), -Increased size of labour markets leading to lower wages, -Agglomeration economies.

17 4. The scope of cost-benefit analysis Agglomeration economies: A form of economies of scale external to firms, so not included in standard CBA. Increased access to economic mass boosts productivity through better matching, sharing, and learning.

18 4. The scope of cost-benefit analysis Agglomeration economies: Empirical estimates of 10 to 20% “extra” benefits. Suggests bigger benefits in metropolitan areas (high growth areas constrained by transport infrastructure used at capacity; cf. e.g. the Eddington study).

19 4. The scope of cost-benefit analysis But doubts regarding the direct relevance of the empirical work are emerging. No rules of thumb. Strong case for customised research, in particular for major projects in metropolitan areas.

20 5. Summing up -Transport infrastructure can be key to unlocking growth potential. -It is not in itself a source of growth. -There are other benefits than growth. -Systematic appraisal improves decisions. -Wider economic benefits sometimes need to be considered but should not be taken for granted.