Connected Updates

Driverless cars – A £150bn opportunity?

23rd January 2014

Driverless cars – A £150bn opportunity?

On the Local Transport Today forum I recently commented on how driverless cars will shake up how we think about transport.  It motivated me to probe a bit deeper into the economics of driverless cars and how we plan for them. No doubt about it, driverless cars will be a technological revolution but questions are endless.  How will they work on the existing network?  Will they take over completely as cars did from horses and carts?  Will we see mini mobile offices? Will every household have one?  Will most operate like taxis?  Will this be the death of public transport?  No one really knows yet, but the possibilities are pretty staggering.  But how much do we have to know to get a rough handle on economic benefits?

Time – a resource eater

The problem with transport is that it eats resources.  Not just fuel and the resources in vehicles and infrastructure, but also a little bit of everything else that gest moved around.  Goods in transit are extra inventory, professional drivers are a massive cost and firms have to hire people whether they are at their desk or driving to a meeting. Some rough maths tells us that the economic benefits are potentially eye-watering.  Our recent work finds that the total value of time spent travelling by road is around £120bn per annum.  And this excludes professional drivers.  Spin off benefits on firm productivity and through wage effects attracting people into the labour market might be at least another 20%, even if how we operate doesn’t change all that much.  So £140 or £150 billion pounds of economic benefit each year might even look like the bottom end of a range.

Paralysis of uncertainty

So how can we plan to realise these gains in the face of so much uncertainty about what the driverless car ‘product’ will actually look like? However things shake out, we will still need roads and there will still be pinch points. The massive public infrastructure challenge remains.  And public transport will still have a competitive advantage in some areas - such as mass transit and over long distances.  In fact, when you think about it, vehicles you don’t own will still probably be called taxis, the bus companies will probably operate high capacity driverless vehicles we call buses and many people will probably have their own – possibly which they use to take them to the station for a long distance trip.

Transport challenges are already here

From here this looks like a revolution, but looking back it will probably look more like look like an evolution.  We have always had to make long term decisions in the light of massive uncertainty - weren't we all going to have jet packs? Let's not get distracted but plan and build adequately with suitable risk management. We need to get comfortable with the idea the future will never be exactly what we expect.  If, when we look back in 20 years’ time, we have better transport options than today with an expanded infrastructure to meet demand we will have succeeded.  If ‘driverless cars’ was an excuse for not investing then we will have failed.

 

Budget 2013: Build more transport infrastructure

21st March 2013

With fuel duty paused, transport budgets rising, the heavily trailed single pot confirmed and £3bn a year of additional infrastructure spending promised, this seems like a good budget for the transport sector.  While the fuel duty escalator was the biggest news of the day, behind the headlines lie some good news for transport capital funding – in the medium and the longer term.

As the dust settles from yesterday’s announcements and MPs debate, Connected Economics has been through the detail of budget announcements to distil the important features for the transport sector.

Taxes: Big change now for fuel duty

On the tax side, the biggest financial change comes from the extended freeze of the fuel duty escalator.  HM Treasury expect this to have an annual cost that rises to £900m a year by 2017/18.  This dwarfs all the other transport tax measures and, based on standard DfT parameters could lead to over 2.6 million additional kilometres driven on our roads in cars vans and taxis each year*.  Some additional financial benefits for motorists came from lowering capital allowances for Low Emissions Vehicles.  These changes are in effect now and the sustained freeze on fuel costs could is likely to have a significant long term impact on transport and traffic.

However, on the corporate side, the assault on company cars continues.  Big changes from the last budget come through now and add around £400m a year to the costs of company car tax, alongside reductions in capital allowances for company cars that cost businesses about half as much.

Spending: So how have transport budgets changed?

On the spending side, transport resource budgets have shrunk while capital budgets have grown, particularly in the medium term.  However, the biggest story is the underspend in capital resource budgets which fell around 14% (£700m) short of anticipated expenditure in the last financial year 2012-13 – larger than the much touted £500m underspend in 2011-12 under Phillip Hammond.

Transport capital budgets grew again.  Taking the longer view, the last Comprehensive Spending Review budgeted for £30.8bn of transport capital expenditure over four years.  In last year’s budget this rose to £31.6bn and now rises again to £32.9bn.  This is made up of a substantial 10% increase in 2013-14 and 8.5% increase in 2014-15.  However, these large percentage increases on previous estimates are partly due to a shift in the timing of expenditure while most is already committed to projects.

Budget 2013: transport budgets

More jam tomorrow

Prospects for developing new transport projects will depend on what happens to budgets after 2014-15 and here the news is promising but patchy.

After April 2015 we are told that infrastructure budgets will rise by £3bn per year.  However, there are no details as yet of how this will be allocated between departments or how it will be spent.  Similarly, we have an acceptance of Lord Heseltine’s proposal for a competitive single pot of funding directed at local growth.  The Single Local Growth Fund will be carved out from existing budgets and will again be available from April 2015.  More details of this are available in the government’s response to the Heseltine review.

In our view, transport capital will continue to prosper under the current government, but it will increasingly be devolved and wrapped up with other infrastructure spending.  The governance challenge here continues, both for central and local government.  Expect the spending review to extend commitments to local integrated budgets, but potentially at the expense of devolved major scheme budgets and LTB funding.  In the long term this promises a lot, but with a message of ‘wait and see until the next spending review’.  We should know more after the details on June 26th.

Summary

  • A big tax break for motorists through the fuel duty freeze which happens immediately;
  • Another large underspend on transport resource budgets and cuts going forwards;
  • Substantially bigger transport capital budgets  for the next two years, even after accounting for rescheduling expenditure; and
  • Promises of additional capital spending in the next spending review period, but few details yet.

So private motorists are better off while publicly funded transport operations suffer.  But there is much better news on capital expenditure with more jam tomorrow and the promise of further increases in capital budgets on the horizon.
 

21st March 2013

 

* Based on a fuel price saving of 1.89 pence per litre and a fuel price elasticity of -0.3 from the DfT’s web based Transport Appraisal Guidance

 

 

 

 

 

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Budget 2012 Transport Update: Some FAQs

22nd March 2012

How have transport budgets changed?

Overall, transport budgets have not been changed significantly by this budget.  The evidence of an underspend in 2011-12 is clear, with resource spending down by around £500m but largely unchanged in future years.  A smaller capital underspend in 2011-12 is trumped by increases in budgets towards the end of the CSR period.  Total transport capital budgets over the CSR period have risen by £800m or around 2.6%.

 

 

What decisions were made about funding or progressing transport projects?

Key announcements were:

  • Funding for the Bexhill to Hastings link road (£56m);
  • Funding of £130m for the Northern Rail Hub (subject to value for money appraisal).  This is a small share of the overall planned Northern Hub project cost of around £1bn but is designed to progress work primarily on the Hope Valley line; and
  • Options shortlisted for the A14 corridor between Huntingdon and Cambridge.

The budget also contained commitments to work together to bring forward fundable proposals for electrifying the Welsh Valley Lines and for improving London rail capacity, and a commitment to explore “the case for using the Planning Act 2008 to streamline the planning process for the proposed additional river crossings in East London”.

What other transport measures were announced?

Key announcements were:

  • A new national roads strategy to include examination of ownership and financing models with a report on progress in the Autumn statement; and
  • A promise to set up Transport Systems and Future Cities Catapult Centres by 2013, designed to commercialise technologies that will increase efficiency of transport systems.

What other measures will affect transport?

As the coalition government continues to devolve local budgets and blur the distinctions between traditional grant funding and other sources, several measures in the budget could play a significant role in funding and delivering transport projects in the coming years.  These include:

  • The “Earn Back Model”, agreed with Greater Manchester which allows it to claim a share of national tax revenues that arise from Greater Manchester’s economic growth.  This is linked directly to infrastructure investment and marks a radical widening of tax increment financing approaches to capture national taxation (such as income tax and corporation tax).  Greater Manchester estimates an annual income stream of £30m from this which it is gearing up against to contribute (alongside other funding) to an infrastructure investment package which is worth £1.2bn in total;
  • Expansion of the Growing Places Fund by £270m with £70m of this ringfenced for London;
  • An additional £150m for tax increment financing in the core cities; and
  • The establishment of the Pension Infrastructure Platform to encourage pension funds to invest in infrastructure.  An MOU has been signed between Treasury and several pension funds to progress early stage greenfield infrastructure such as railways, roads and energy projects based on a guaranteed return linked to RPI (in the same way as regulatory asset base regulation).

Other key measures in the budget affect the planning system, including:

  • A commitment to publish the National Planning Policy Framework (NPPF) by the end of March 2012, including the presumption in favour of sustainable development;
  • A commitment to reduce information requirements and make change of use easier;
  • Bringing forward legislation to adjust the scope of Special Parliamentary Procedure to clarify it and remove duplication in the consenting regime for major projects; and
  • The completion of a review of the implementation of the Habitats and Wild Birds Directive, published by DEFRA today, to reduce cost and delay, for example by setting up a cross-departmental Major Infrastructure and Environment Unit.

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A budget for city localism

21st March 2012

A radical extension of localism?

The 'Earn Back Model' announced in the budget sees Greater Manchester earn national tax income from Treasury on economic growth that it generates.  This is a radical extension of localism because it it the first step in putting revenue from national taxes (such as income tax or corporation tax) directly into the hands of local areas.  Previous steps towards localism have been about devolving control of taxes which have a local character (such as business property tax).

Greater Manchester's deal sees it expecting to earn around £30m per annum through this source - roughly the same as its budget for smaller local transport capital schemes.  By gearing up against this, Greater Manchester can put substantial new resources into infrastructure which would otherwise have to wait for years.  This is a massive step for how we think about tax increment financing and really starts to make local growth incentives look significant enough to make a difference.

Big benefits for cities

This, and a lot more besides, has been negotiated behind the scenes over recent months and achieved through the City Deals Initiative.  City Minister, Greg Clark, said "We've said to each City "Make us an offer.  Tell us how you can drive growth in ways that have not been tried before..."".  Alongside this the Chancellor has promised to "make up to £150m available [...] for larger scale projects in core cities to be financed through Tax Increment Financing" as well as announced budgets for superconnected cities.  The freedoms and income potential that Manchester has won through the Earn Back Deal could be useful elsewhere and other cities are discussing similar models with government.

What about the rest?

So the big localism changes continue to start in the go-ahead cities.  This is no surprise as city economies and populations tend to be more dynamic and change more easily embraced.  But it doesn't stop at cities.  Many non-urban areas also have growth potential that is restricted through lack of infrastructure.  While the City Deals Inititiative is the current vehicle, it is easy to see how pressure from the shires could see similar schemes extended across the country.  In the meantime, growth generating cities will continue to hollow out parts of the rest of the economy.  Worse, by rewarding growth with cash for those that have jumped at the opportunities, the exchequer will have less left over for the rest.  If Greater Manchester's new infrastructure diverts some businesses from other areas, Greater Manchester will take Treasury tax income that would have gone elsewhere.  In this game, first mover advantages are important.

So the budget signals the further rapid expansion of devolution and is led once again by the go-ahead cities.  But they don't have a monopoly on economic growth or good ideas.  The sooner more widespread localism takes off, the less chance there is that some will get left behind.

Devolved transport budgets: Not enough to bank on?

16th March 2012

Dominic WalleyWhat can you buy with a devolved major scheme budget?

Plans to devolve local transport capital funding risk spreading it too thinly.  Major local transport projects such as new roads, light rail schemes or interchanges come with price tags and cost profiles that that need large dollops of capital funding rather steady trickles.  If funding devolution is to happen, it needs to go hand in hand with long term certainty over budgets.  If it doesn’t, some important local projects offering great value for money may never be able to come forward.

So how much can you expect from devolved major transport scheme budgets?  Let’s play with some numbers.  Over the CSR period, capital funding for major projects was intended to average £386m per year, although rising substantially in the final year (2014-15) to £417m.  Being optimistic we can assume that the pressure for austerity is a short or medium term problem that will slacken, so perhaps we may end up with around £500m per year to play with after the end of the current CSR period.

Taking a rural example from the South West, Devon receives around 3.6% of local transport capital block funding (excluding the unitary authorities).  If this is a guide to its share of major local scheme funding, Devon could expect around £18m per annum, or about £72 million in the next CSR period.

For decades, a major transport priority for Devon has been the upgrade of the A380 South Devon Link Road (SDLR) with a price tag of £108m.  On this basis, Devon could not fund the road within a single CSR period.  A natural collaboration with Torbay unitary authority might only increase available funding by around £1m per year.  Fortunately, funding for the SDLR was agreed in the Chancellor’s last Autumn statement, but it is a useful way of thinking about some of the challenges that devolution will bring.  Similarly, Leeds’ proposed trolleybus system comes at a cost of £250m, but West Yorkshire Integrated Transport Authority takes 4.1% of the total local transport capital block funding, implying devolved major scheme funding of only around £21m per year.

What if it isn't enough?

With devolved funding, Devon and Torbay would essentially have two options.  First, they could reach critical mass by forming a larger partnership of authorities.  However, this risks forcing together some odd and awkward combinations.  How does a new road that supports the economies of Devon and Torbay benefit places further afield like Plymouth or Somerset?  Indeed, there is a risk that economic growth released in Torbay and Devon might otherwise occur in these places instead.  With the new financial ‘rewards’ for achieving economic growth, a consensus across more partners would be difficult to reach except where:

  • schemes have wide geographical effects that benefit all partners (perhaps rail improvements);
  • schemes are individually small enough so that all authorities can benefit from a package of projects (in which case why the need to collaborate?); or
  • authorities are thinking more broadly, so support for a transport scheme in Devon could be traded for support for, say, a housing or regeneration scheme in another area.

Option c essentially solves the problem of lumpy capital requirements in transport by combining it with funding for other areas. The government is inexorably driving things in this direction, for example, through the formation of Local Enterprise Partnerships, Growing Places Funds, Local transport boards, etc.  However, it will be a long road to get there.

Alternatively, Devon and Torbay could save or borrow for longer.  If they began a six year saving programme, they would need confidence that budgets would continue to be available under the next government and in the next CSR period.  If they borrowed, they would similarly need the confidence that the budget would be available in the longer term to repay the loan.  Currently only Transport for London benefits from an agreed 10 year funding deal with central government, although others have started to act as if they do.  A large part of Greater Manchester’s transport package, for example, was based on the projections of central government funding with no explicit guarantees that this would be provided.

Longer term certainty

Longer term certainty about capital funding sits uneasily with our democratic terms, but is essential in infrastructure planning.  It is no surprise that a spotlight report by KPMG in 2010 found that “Public Authorities should set a long-term strategy and then work continuously towards it.  When they do this, the prospects for the delivery of successful transportation project outcomes increases substantially.”  At a local level, greater certainty would free planners to put together coherent long-term funded plans for supporting economic growth. It makes more sense where the financial benefits come back around to local authorities in the longer term through the tax system.  New homes bonus lasts for six years and plans for localised business rates have 10 years between resets.

So by all means encourage collaboration across local authorities where projects are of mutual benefit, but the fundamental need is for longer term funding certainty.  With this in place everything becomes easier and local infrastructure planning really can start to break new ground.

Are local authorities ready to manage their local economies?

6th March 2012

The delivery of local infrastructure is changing.  The coalition government’s policy of localism is providing more autonomy to councils to set their own criteria for success, manage their own budgets and deliver infrastructure that better meets local needs.  Some of the changes are set out in:

  • The local government resource review: setting out how councils will be affected more directly by income raised locally through development via business property taxes;
  • The Prospectus: describing the Growing Places Fund, jointly funded by DfT and DCLG and paid to Local Enterprise Partnerships to support infrastructure funds targeted at promoting economic growth; and
  • Devolving local major transport schemes: setting out central government’s approach to devolving responsibility to local areas for local major transport schemes.

Alongside these major changes are smaller initiatives designed to increasingly incentivise local areas to support economic growth, for example through the New Homes Bonus or the Regional Growth Fund as well as the introduction of Local Enterprise Partnerships.  Together this package of measures amounts to a major change in how local areas plan and develop their economies.  And it may only be opening move in a much longer game.

Taken together, this policy agenda is a radical change for how local authorities think about transport, define their priorities and weigh these up against other demands on local expenditure.  Local areas can be more joined up when considering local plans for investment and economic growth, but need to act more strategically and with partners to develop a coherent local programme that delivers value for money

Some local authorities are well advanced towards this integrated local policymaking goal in support of economic growth.  Greater Manchester, for example, pioneered a Transport Fund amongst the ten local authorities that make up the City Region as a first step towards this vision.  Now, GM is broadening this vision into an infrastructure fund for the region where transport and other spatial development initiatives vie for the same local funding.  For these authorities, more local freedom and accountability will be eagerly awaited.

Other places are much less well adapted to the coming changes.  The capacity and culture for strategic infrastructure planning has withered in many places as central government has monopolised key decisions for decades.  Technical and analytical capacity in particular will be a struggle for many, particularly where local priorities need a new cross-disciplinary approach covering transport, housing and regeneration.  Another great challenge in some areas will be a need for a culture of collaboration.  New found freedoms over local budgets should be a fine opportunity for local rivals to replace old feuds and competition for central government favours with a new incentive to work together where there is a community of interest.  Even within local authorities there is work to do to break down boundaries and start closer working between teams.

The tide of localism and devolution are a real opportunity for local authorities to rediscover their voice in planning our communities, but it would be a shame if some places couldn’t develop the skills or make the leap to grasp it. 

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