Why HS3 won’t create a ‘Northern Powerhouse’

The North of England’s economic problems are undeniable. There is relatively little wealth creation in its once-great cities. The entrepreneurial dynamos of the industrial revolution are now heavily dependent on government handouts, with public spending making up half or more of their ‘GDP’.

Even the bright spots of the northern economy are creatures of the state. The booming universities rely in large part on government-guaranteed loans and research grants. And the professional services sector concentrated in Leeds and Manchester is parasitic on costly regulations imposed on individuals and businesses. In reality it represents the destruction of wealth.

Unfortunately it’s difficult to be optimistic about the northern economy in the long term. A combination of high costs and mediocre human capital (skills etc.) means that the region will continue to struggle.

A programme of radical spending cuts and deregulation could of course reduce the costs of doing business in the North – but the short-term effect on public services and local economies is unlikely to be politically palatable. The scale of deregulation required to make a significant impact is probably impossible while the UK remains signed up to the EU and various other supranational bodies.

At the same time, long-term demographic trends are likely to exacerbate the region’s human capital problem, with increasing numbers of elderly and incapacitated, as well as young people typically ill-equipped to undertake high-skilled jobs. Those who think improved training and education can resolve the latter issue are surely deluded.

The tides of economic geography are also working against the North. The region finds itself on the periphery of a Western Europe sinking rapidly into stagnation and irrelevance as the global core shifts to the East. Indeed, even the region’s handouts may be at risk as the vast UK revenues based on Western geopolitical power and associated market-rigging eventually unravel.

In this context there is a ‘fiddling while Rome burns’ quality to George Osborne’s plan to create a ‘Northern Powerhouse’ by speeding up rail journeys between the region’s major centres. This is not, however, to deny that transport investment has the potential to deliver very substantial economic benefits.

Reductions in transport costs lower the cost of exchange, which in turn boosts trade and brings higher productivity through specialisation, economies of scale and so on. They also enable the development of agglomerations, clusters of activity that may further increase productivity and output. For example, thicker labour markets may lead to the better matching of workers to jobs and increased firm density may lead to greater knowledge sharing and to increased specialisation in supply chains.

Thus, in theory, better transport links could improve the economic performance of the North by enabling its businesses to make better use of its human capital. There could also be significant benefits from creating a larger hub in say Manchester. Improving the connectivity of the airport, for example, could increase the number of flight destinations that are economically viable, raising the attractiveness of the city as a business location.

Improved transport infrastructure in the North won’t be enough to overcome the region’s long-term structural problems, and it can’t reverse the impact of global economic trends, but it does have the potential to improve economic performance and perhaps slow down the rate of relative decline. This conclusion, however, depends on the assumption that such infrastructure would deliver a substantial reduction in transport costs in the North, which is where the government’s ‘HS3’ proposals fall short.

Indeed, the HS3 plans are likely to be useless for the vast majority of transport users in the region, and worse still will impose large tax costs and deadweight losses on the wider economy.

The core part of HS3 is likely to be an enhanced rail link between Manchester and Leeds city centres (and possibly also Sheffield), its cost estimated at roughly £10 billion. This would cut journey times from around 50 minutes to about half an hour.

The project is, however, unlikely to deliver significant results in terms of the thicker labour markets and other ‘agglomeration economies’ that are essential element to the aim of having these cities work as a single economic unit.

The main problem is the geography of northern conurbations. They are ‘multinucleated settlements’ comprising numerous smaller centres such as Stockport, Oldham, Salford, Rochdale etc. In addition, the region exhibits a high degree of suburbanisation and has experienced significant counterurbanisation.

Despite the huge government subsidies poured into inner-city regeneration programmes over the last thirty years, the vast majority of high-skilled workers reside in the outer suburbs or semi-rural villages. The gentrified inner-city districts so characteristic of London are largely absent.

The urban geography of the north suggests that a 30-minute city centre to city centre journey time would not deliver the single labour market so vital to the vision of the ‘Northern Powerhouse’. Typical door-to-door journeys would still be too time consuming and expensive for practical daily commuting. Indeed the seemingly quite large percentage reduction in travel times promised by HS3 becomes relatively small when examined in these terms.

To give a practical example, take someone who lives in the wealthy suburbs of north Leeds and works in Manchester. The bus trip to Leeds station takes say 35 minutes in the morning peak, but in practice the commuter has to allow 50 minutes to give some leeway for transfers and the walking involved. The 30-minute high-speed trip to Manchester takes the total up to 80 minutes, and then the worker faces say a 10-minute walk to his office – making a total of 90 minutes or a 3-hour round trip, about three times the average.

The situation is of course similar or worse for residents of many of the various ‘satellite’ towns and villages in the region. It should also be noted that employment hubs, such as the universities, main hospitals and Salford Quays are often a considerable distance from the city centre stations, increasing travel times further.

Such long journeys would be unacceptable and/or impractical for the vast majority of potential commuters, effectively adding 40 per cent or more to the length of the working week. Moreover, the cost – about £3,500 a year based on current fares and possibly much more if HS3 charged a premium – makes this option prohibitive for many workers.

Urban planners might attempt to address at least the travel-time problem by encouraging more high-paid workers to live in city centres through adopting policies of restricting suburban development and driving it instead into high-density tower blocks close to rail hubs. At the same time, businesses could be forced or nudged to locate near the stations. This could perhaps get door-to-door round trips to just under 2 hours.

But even if Kowloon densities were achieved, say of 100,000 residents in the square mile around each HS3 stop, this would still represent less than 3 per cent of the total population of Yorkshire and Lancashire – and in reality only a fraction of the residents would be trans-Pennine commuters. This hardly suggests a transformative effect on the regional economy. Such high-density environments also create numerous costs and problems, such as anti-social behaviour and congestion, the so-called diseconomies of agglomeration. Moreover, it’s difficult to see how they would appeal beyond quite limited niche groups.

It therefore seems likely that HS3 will prove a costly failure in terms of uniting the labour markets of Leeds, Manchester and Sheffield. Worse still, the North will have to contribute a significant share of the tax bill for the scheme and suffer a proportion of the resulting wider economic losses. Even if London and the South-East pay much of the cost, this will still have a negative knock-on effect on northern economies.

HS3 will also be useless in terms of freight transport in the north, further diminishing its potential to deliver many of the vaunted competition and specialisation benefits. This also applies to many businesses that rely on cars and vans to carry their equipment, such as construction firms. Faster rail links are only likely to benefit a small number of sectors, particularly professional services, which as mentioned earlier is typically parasitic on other businesses and typically contributes little to wealth creation.

Indeed the relatively short distances between the major northern cities and their dispersed, multi-nucleated nature makes rail freight impractical and uneconomic apart from a handful of niche markets. It’s far cheaper to load cargo on to lorries for fast, door-to-door convenience. Unsurprisingly given this fundamental obstacle, there is very little rail freight traffic on the trans-Pennine routes between Leeds, Manchester and Sheffield – with the exception of bulk limestone from the Peak District quarries.

Accordingly, if reducing freight costs were a major component of the government’s strategy, resources would be allocated to the road network rather than HS3. While some vague plans have been mooted and incremental improvements announced, it’s clear that fast rail links are the main priority.

Such modal bias is particularly misguided because it would be possible to fund trans-Pennine road improvements – such as a fast Sheffield-Manchester link – with private investment at no cost to the taxpayer, with construction costs covered by future toll revenues. Yet our politicians seem to prefer uneconomic big government projects like HS3. Indeed they often go out of their way to obstruct non-state initiatives to improve infrastructure, by imposing strict planning restrictions, for example.

Something is clearly very rotten in the state of British transport policy. HS3 is just the latest example of politicians wasting taxpayers’ money on ill-conceived projects that fail to deliver their objectives. Transport investment should be about maximising economic returns by allocating scarce resources in the most cost-effective way, but instead it has become a PR-driven process of grabbing headlines, ‘buying’ votes and paying-off special interests.

Advertisements

High Speed 1: how taxpayers were taken for a ride

Eurostar 203High Speed 1 (HS1) would never have been built if the decision had been made on commercial criteria, or indeed on rational economic grounds. While the high-speed-rail lobby promotes the scheme as a success story, it was in fact a financial failure, marked by cost increases, repeated bailouts, disappointing passenger numbers and failed objectives.

The cost of the final HS1 scheme was far in excess of original estimates. In November 1985, British Rail’s preferred high-speed option was costed at about £1 billion in 2015 prices, while the final cost of the project has been estimated at approximately £11 billion in current prices.

Moreover, after the line opened below-forecast passenger numbers meant that the operator, Eurostar, had to be bailed out by the Department for Transport. Further government support for the struggling route was obtained via the access charges for (subsidised) Kent commuter services.

In addition to substantial operating subsidies, HS1 appears to have been artificially supported by the manipulation of the rail market. Some services from Kent stations to convenient London termini such as London Bridge, Cannon Street, Charing Cross and Victoria have been cut, while others have been slowed down, in an apparent attempt to drive passengers onto HS1. Commuters across the Southeastern franchise area also faced steep increases in fares to pay towards the high-speed services, whether they used them or not.

Many of the objectives of HS1 have also yet to be achieved. Plans to run international services from Stratford in London and through services to the Midlands and the North did not materialise due to low demand. At the time of writing, Eurostar trains do not stop at the £250 million Stratford International station. And notwithstanding exceptional traffic during the 2012 Olympics, it appears that the stop is only lightly used by commuters from Kent, often handling fewer than 1,000 passengers per day in each direction.

HS1 also provided a rationale for the construction of additional transport infrastructure at further expense to the taxpayer. A £250 million (2015 prices) extension to the Docklands Light Railway (DLR) was constructed largely to improve the accessibility of Stratford International. The line also provided a major justification for the redevelopment of Kings Cross St Pancras Underground station, at an additional cost of roughly £1 billion (2015 prices).

It should also be noted that much of the ‘regeneration’ along the route has been state-funded. The subsidised public sector and ‘crony capitalists’ dependent on government privileges dominate the post-Olympics redevelopment at Stratford. Major tenants will include the bloated bureaucracies of Transport for London and the Financial Conduct Authority.

Similarly, the government has sought to kick-start the stalled redevelopment of Ebbsfleet – a highly undesirable site, much of which is at risk of flooding – with the injection of at least £200 million of public funds.

The development of land near Kings Cross – also partly government funded – could well have been viable without the link, given the artificial scarcity of opportunities produced by strict planning controls in Central London. Indeed, the redevelopment of such areas may be delayed by the uncertainty and planning blight associated with major transport schemes.

Even if one makes highly optimistic (and questionable) assumptions about the wider economic gains from HS1, it is clear that the project represented very poor value for money compared with alternative investments in transport infrastructure. Indeed, when the deadweight losses from the tax bill and off-balance-sheet spending are included, it seems likely that the costs of the scheme have outweighed the benefits.

 

This analysis of High Speed 1 is partly based on research published in The High-Speed Gravy Train: Special Interests, Transport Policy and Government Spending.

Eurostar sale backed by government subsidies

The sale of Eurostar is a terrible deal for the taxpayer. It is only possible because the government subsidises loss-making high-speed commuter services to Kent and this funding now pays a high proportion of the infrastructure costs of High Speed 1. According to a 2012 National Audit Office analysis:

‘Under the new track access charging regime, access charges paid by Eurostar were reduced to the levels being paid by the domestic operator. A greater proportion of overall charges (60 per cent of HS1 Limited’s forecast access charge income over the 30-year concession) is now paid by the domestic operator because it uses more of the capacity of the line. To support domestic high speed services, the Department pays additional subsidy to the domestic train operating company. The Department forecasts that additional subsidy payments will amount to almost £110 million in 2011-12. If this level of subsidy in 2010 prices was to continue until the end of the concession in 2040, we estimate that the present value of subsidy payments will be some £2,100 million but the actual level will depend on the outcome of future franchise negotiations.’

The NAO report also reveals that five years ago, taxpayers also spent around £800 million (in current prices) bailing out Eurostar and its parent company. The massive losses accrued since the service started in 1994 were effectively written off. Passenger numbers have been over 60 per cent lower than originally forecast when the line was approved.

It seems highly unlikely that Eurostar would have been commercially viable without these bailouts and hidden subsidies. Indeed, the sale may be viewed as a form of government borrowing in the sense that it relies on ongoing taxpayer support for the route over the long term. The receipts are of course miniscule compared with the estimated £11 billion total cost (in 2015 prices) of High Speed 1.

 

An earlier version of this article appeared in City AM.