DO INFRASTRUCTURE PLANS HELP STRUGGLING AREAS?
20 August 2015 | Author: Professor Henry Overman, Director, What Works Centre for Local Economic Growth

Henry Overman

Since the financial crisis of 2007, there has been a renewed focus on the economic gap between London and other UK cities, and how investing in transport could help narrow those disparities.

Supporters of projects like HS2 or HS3 have claimed that these schemes will help bridge the gap and rebalance the economy, an argument that underpins the Government's "Northern Powerhouse" initiative – hence the £50bn committ ed to HS2, and the initial £30m promised by the chancellor to Transport for the North in last week's Budget.

These arguments are based on the premise that investing in transport infrastructure for struggling areas is a cost-effective way to stimulate new economic activity. Unfortunately, however, our recent review for the What Works Centre for Local Economic Growth suggests that there is no clear evidence to support some of these claims.

For the review, we looked at more than 2,300 policy evaluations and evidence reviews of the economic impact of transport investment, but found only 29 that met our minimum evidential standards.

That's a problem in itself – there is very little high quality evaluation evidence about the impact that transport projects have on local economies. But the findings we do have at best paint a mixed picture.

The clearest evidence is about the benefits of transport infrastructure spending for property prices. Studies show that both road and rail projects have a positive impact on residential property prices (although these effects vary by distance and time).

We also found evidence that roads can have a positive impact on local employment, wages and productivity. However, the impact is not always positive, and the majority of evaluations show no (or mixed) effects on employment.

Considering rail projects, we found no high quality evaluations that demonstrated impact on employment, wages or productivity. The same was true for trams, buses, cycling and walking schemes.

In short, the basic message that emerges from the review is that the economic benefits of transport infrastructure spending are not as clear-cut as they might seem.

Thinking about the broader empirical and theoretical literature in this area doesn't help settle the debate either. There are two main ways of thinking about the likely impact of infrastructure investment. The first views public sector infrastructure investment as a capital investment (much like a firm would invest in building or machinery). This investment should make firms and workers more productive.

But infrastructure is expensive, so the cost of putting it in place can outweigh the productivity benefits, especially in areas which are struggling economically. It is also durable, and so places where growth has been slow oft en already have relatively large amounts of infrastructure per person. The key issue in these areas may have much more to do with the skill levels and the sectoral structure of the local economy. Building more infrastructure is not necessarily a solution to these problems.

The second approach looks at infrastructure as providing a network that connects different places. In this view, investing in public sector infrastructure reduces the transport costs between places. But this approach offers more mixed messages, particularly when considering connecting rich and poor regions. For example, lowering transport costs can encourage firms to move to richer markets, to the disadvantage of poorer areas.

The reality is that decisions about spending on transport are usually based on political priorities, rather than good quality evidence, and that's likely to continue to be the case. But that doesn't mean there is no role for better evidence in improving policy decisions about future transport schemes.

So whether or not initiatives like the Northern Powerhouse deliver the economic benefits their supporters suggest, they certainly offer an ideal opportunity to thoroughly evaluate the economic benefits of investing in transport infrastructure.

That might seem boring and tech-y, and is unfortunately little use to us in making strategic decisions right now. But it will help future generations make the right decisions about spending on transport – much more so than theoretical arguments about what the balance of transport spending should look like.

Reference: Transport Times, July-Aug 2015 Issue

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