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Vanity fayre or bonfire of vanities? The tales of infrastructure projects

Updated Friday, 23rd January 2015

Why are so many large scale infrastructure projects in the London region and do they ensure long lasting socio-economic benefits? 

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As the population of the United Kingdom (and particularly London) gears up for the next Olympiad, the Jeremiah question is whether the infrastructure projects associated with it will generate lasting socio-economic benefits. The related question is why so many large projects are either in the London region or are centred on the capital when  regional disparities within the United Kingdom have been growing wider. These projects include CrossRail and High Speed 2 (HS2), the rail link to Birmingham and eventually cities further North.

Vanity Fair is the novel by Thackeray based upon Piligrim’s Progress in which man’s attachment to worldly goods is the  main narrative. It is centred on a stop along the pilgrim’s path: a town called Vanity in which a never-ending fair is held. This Groundhog Day scenario is akin to our attachment to signature infrastructure projects, whether architectural or transport links.

In an economic environment in which the Plan A of fiscal austerity appears not to be creating growth and combating rising unemployment, and Plan B is seen as a rapper/turned soul singer, the only fayre on offer appears to be a number of vanity projects whose benefits do not appear to be widespread. Moreover, these projects tend to reinforce regional imbalances by accepting the existing spatial structures and characteristics, rather than using investment in infrastructure to influence the scale and scope of connectivity between locations. In doing so, demand patterns and their future size and duration will be influenced and changed.

The UK government expects that over the next 30 years  HS2 will cost £32 billion to build; generate £27 billion in fares; and provide £43.7 billion of economic benefits (just less than a  third of UK national income). However, like any calculus of a large amount of economic benefits over time  its logic  is problematic. The Roskill Commission, that investigated the case for a new London airport in 1969, showed that the benefits of building it were widespread but the costs very localised.

In the case of HS2, the benefits are mainly travel time savings, from which job creation numbers are inferred.  That is, time savings associated with  faster business travel are estimated at the average hourly wage rate plus non-wage costs of about 21%.  A fifth of this figure accounts for  time savings  for leisure travel , of which  commuting accounts for a fourth of this proportion.

The essential problem is that these calculations are uncertain and given the likelihood of cost overruns that are a consistent feature of British construction projects, then total net benefits are likely to be considerably lower.  Indeed the ratio of benefits to costs for HS2 has now been reduced from 2.7:1 to 1.9:1, if wider economic benefits are included, and 1.4 if they are not included. One of the problems of applying a measure of benefits that include time savings is that it can be self-fulfilling. A way of exploring this is to use the Alonso Model named after the urban economist, William Alonso.  His model explores the relationship between location, transport and housing costs. This is displayed in the figure  below.

The line Tx1 shows the increase in transport costs as one moves further out from an urban centre, whilst Hshows the decline in housing costs  at longer distances from the centre. Thus, the optimal household location (assuming away income considerations) is at D1. If a transport improvement occurs, then the transport cost  line tilts downwards, showing that households can locate in places with cheaper housing costs (TC2) or  trade higher cost housing further away (D2).   The outcome is that this increases longer distance commuting  that generates  a range of policy implications in respect of transport infrastructure, as well as housing and supporting services.

It can be argued that the longer commuting effect will lead to higher house prices as well as increase the value of land around termini along the route.  The increase in land prices is the capitalised rents of residential  and commercial real estate over a period of time.  This contributes to  an increase in Gross Domestic Product (GDP), depending on assumptions that are made, but given the distorted and  unbalanced nature of the UK housing market this is hardly a set of economic benefits that should be welcomed.

The UK’s government’s own calculations show that the modal shift to HS2 from air and car travel will only be 16%. The freight benefits are claimed on the basis of freeing up existing rail capacity, yet evidence for this modal shift is not set out in any detail.   This cuts to the heart of the matter: demand forecasting. You do not have to be John Maynard Keynes to believe that the past is s poor guide to the future, as increasingly observed in the circumstances leading up to the ongoing economic and financial crises. The central assumption is that current demand for rail travel will continue to grow until capacity is over-full.  Estimates suggest that rail passenger traffic grew by 10% on the West Coast Mainline (the one that HS2 will complement) in the three years from 2007 and 2010.  Estimates, from a 2007 base, of overall rail demand suggest a total increase of 6% for the whole of the UK and 10% for London and the South-East until 2031.  The underlying assumptions relate to socio-economic changes including population and demographic changes and the trend rate of GDP.  In the present circumstances most consensus forecasts foresee a lower trend rate of growth until 2018 of just under 2% per annum and declining average family incomes for a decade.

The clamour for a high speed rail link seems to be a repeat of past British transport policy, with the same claims made that without adding extra capacity  a near congested system,  then gridlock will ensue. The same argument  was made in the 1970s about motorways and trunk roads based on the application of a Sigmoid curve (commonly known as the ‘S’ curve):

The curve shows the trajectory of demand whilst the dotted line represents the limit of capacity (Cd) , from the base year (B0). Well, in the case of road traffic we have not yet reached deadlock, as the system continues to be managed without turning ‘This Sceptred Isle’ into a concrete kingdom. This is in spite of doomsday warnings about catastrophe if road traffic demand was not met. Moreover, unlike HS2 this refers to the system as a whole rather than a point-to-point link.  In regard to expanding road capacity, there is the well-established traffic generation effect. A similar logic applies to HS2 in that building it may well fulfill the projections it is based upon, rather than generating system-wide economic benefits from a general and targeted upgrade of the whole railway system.  Evidence from high speed rail networks in France, Germany, Italy, Japan and Spain show that they have little or no impact on new investment and economic activities in peripheral regions.  Indeed, they tend to encourage either longer distance commuting and/or economic flows draining away from the periphery towards the core.

In Tom Wolfe’s 1987 novel Bonfire of the Vanities, the central character Sherman McCoy is wealthy bond trader and a ‘Master of the Universe’ of Wall Street. His demise follows a wrong turning whilst driving on the freeway to Manhattan with his mistress that leads them into the poorer Bronx. Their denouement starts with a hit-and-run accident involving a local black youth who eventually dies.  The title refers to the vanities of 1980s New York from a number of social, economic and anthropological perspectives : a heady brew of ambition, class, greed, politics and racism. The vanities of the protagonists are ultimately burnt as they pursue their self-interest irrespective of their fates. The current transport fayre on offer is analogous to Wolf’s novel.   The prospect of infrastructure investment that  would stimulate general growth in the economy, notwithstanding, the vanity of a single high-speed rail link seems to blind its proponents to all our fates.

It is interesting that the core cities outside London should look to links to the capital to strengthen their economic resilience. Yet a proper mapping of the attributes of this form of resilience and the connectivity (real and virtual) needed to sustain it should be the precursors of policy formulation and implementation.  Until British urban and regional economic policy is no longer solely based on the town of Vanity (otherwise known as London) and the site of its continuous Fair (otherwise known as Heathrow Airport), then we may be condemned to continue to light the touch paper to the UK’s ongoing economic welfare.

This article was originally published on The Sceptical Economist blog. 

 

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