EHS0065/EAC/14-15

KPMG LLP—Written evidence

Introduction

1. The House of Lords Economic Affairs Committee is conducting an inquiry into the Economic Case for HS2. Lewis Atter, Head of Infrastructure Strategy at KPMG, has been asked to provide oral evidence as part of the inquiry. This note provides supplementary written evidence to Mr. Atter’s oral evidence. 

2. The ‘written evidence’ in this note is concerned with the whole HS2 network (Phase 2 or Y-Network) given that this is the subject of the inquiry. A one page summary is provided below. Unless otherwise stated all financial figures are at 2013 prices.

3. In line with the questions raised in the ‘call for evidence’, published by the Economic Affairs Committee, we have structured this note so that the following questions are addressed:

• Is there an economic case for HS2?
• Should the Strategic Case for HS2 published in October 2013 by the Department for Transport and analysis from HS2 Ltd have taken account of any other factors in making an economic case for the project? Is the expected range of the benefit cost ratio persuasive?
• What are the likely economic benefits of HS2 to the Midlands, to the North of England and to Scotland? Do they also depend on complementary action by governments, local authorities and Local Enterprise Partnerships, for example measures to attract investment and skilled workers?
• Might some parts of the UK suffer economic disadvantage from HS2?
• Is London likely to be a main economic beneficiary of HS2?
• How might the expected benefits of HS2 to the national economy be realised?
• Does the prospect of HS3 affect the economic case for HS2?

Summary

4. The most recent update of the Economic Case for HS2 includes benefits to transport users and wider economic impacts, using the current wider impacts methodology. For the full HS2 network, the core benefit-cost ratio is 1.7 excluding wider economic impacts and 2.3 when these are included.

5. However, the conventional cost-benefit appraisal framework has some major shortcomings when applied to a national-level intercity network like HS2, particularly when it comes to addressing “real economy” impacts. WebTAG assumes that: the size of the economy is fixed by the DfT’s future employment forecasts; and the assumptions that underpin the WebTAG approach to measuring connectivity artificially reduces the impact of long distance travel improvements on productivity. In addition, a number of important impacts are not accounted for by WebTAG, including: the relationship between connectivity and regeneration; regional impacts; the international dimension; and freight markets.

6. Against this background, KPMG responded to a tender issued by HS2 Ltd in 2013 that focused on some of these issues, in particular the relationship between connectivity and the ‘real economy’ at the regional level. Our provisional analysis, published in September 2013 reported that HS2 could lead to an annual uplift of £15bn in 2037, equivalent to 0.5% of the expected size of the UK economy in 2037 (compared to the Office of Budget Responsibility’s trend growth forecast). The analysis, which did not assume an increase in total employment compared to the future employment forecasts employed by DfT, also reported greater proportionate impacts on the economies of the North and the Midlands compared to London.

7. Some commentators have challenged our analysis on the grounds that it employs relationships between connectivity and productivity that are out of step with those reported in the literature. As we explain in this note, we do not believe this to be the case. Inevitably, judgements were necessary in producing our analysis. We stand by these, and remain of the view that overall our impact assessments are conservative, although we continue to explore alternative approaches and new evidence.

8. We would also note that the overall economic impact of the project will be heavily influenced by what is done alongside the project and in parallel to help rebalance the economy. In practice this means the HS2 real economy debate is about much more than the project itself and appraisal methods. It is also about the extent to which as a country we really want to use investment to drive better and more balanced economic outcomes.

The Economic Case for HS2

9. The Government has set two key objectives for its High Speed Rail policy. The first one is the need for a step change in capacity across the UK’s rail network, specifically in the West Coast Mainline where capacity is set to be exhausted by 2024. The second is enhancing connectivity between the UK’s main cities which is expected to transform their economic prospects. In the context of the Economic Case, both objectives are important since they impact on transport users and the wider economy, albeit in different ways.

10. The most recent update of the Economic Case for HS2 was published by the Department for Transport (DfT) in March 2014, updating the evidence in the Strategic and Economic Case released by HS2 Ltd in October 2013. As a background, the ‘value for money’ appraisal (essentially the Economic Case) for HS2 is carried out in line with the DfT’s conventional cost-benefit appraisal guidance, as set out in WebTAG. The economic benefits are measured through two channels: first, the welfare benefits to transport users; and second the wider economic impacts of the transport investment.

11. The core benefit-cost ratio (BCR) for transport appraisals requires the estimation of impacts on transport users (sometimes referred to as economic efficiency or welfare), namely through:

a)      Journey time savings;

b)      Increased frequency;

c)      Reduced congestion; and

d)      Increased safety/reliability.

12. However, in recognition of the fact that benefits to transport users fail to fully account for a number of important economic impacts (SACTRA 2006), the DfT has developed guidance on the measurement of Wider Impacts (or wider economic benefits). The guidance on Wider Impacts provides methodologies to quantify the following:

a)      Agglomeration economies;

b)      Output change in imperfectly competitive markets;

c)      Labour supply impacts; and

d)      Move to more/less productive jobs.

13. Table 1 below shows a summary of the economic benefits, disaggregated by type of benefit and highlighting the major items within each benefit type for the full HS2 network. On the estimated net present cost of HS2 to DfT budgets, the core BCR is 1.7 excluding wider economic impacts and 2.3 when wider impacts are included.

Table 1: The breakdown of the estimated benefits of the standard HS2 case

Source: The Economic Case for HS2, October 2013

14. On this basis, HS2 provides medium value for money in the core case and high value for money when wider economic impacts are included.

The shortcomings of the conventional approach

15. In terms of what we would describe as the “real economy” (ie jobs, productivity, tax receipts)  impacts of HS2 the key issue with the conventional approach in WebTAG is  whether the methodologies used to measure wider economic impacts are fit for purpose. The WebTAG methods used for the HS2 appraisal were developed in the context of the wider economic benefits of Crossrail, essentially a relatively short distance commuter network. Whereas HS2 is a national intercity rail network, which will transform capacity and connectivity across large swathes of our rail infrastructure through dramatic reductions in long distance journey times; capacity release; integration with local transport networks and other transport modes; and will impact on freight services. It is expected to provide commuter network benefits as well, but a significant proportion of its impacts are of a very different type from those provided by Crossrail.

16. In the context of HS2, the WebTAG approach also suffers as an appraisal tool by imposing what amounts to a fixed economy assumption, under which the shape and make-up of the economy does not respond to the changes in connectivity that HS2 delivers. This means that although there are real economy impacts within the wider economic figures in table 1 above, they focus on productivity impacts at the national level (assuming a closed economy, and fixed total employment) and do not address the impact of HS2 on the distribution of economic activity across the country. This means that the appraisal cannot help answer questions about the potential impact on the north south divide or more generally about the likely impacts on the economic prospects of particular places.

17. Of these two issues, concerns about the appropriateness of the wider economic impacts methodology as a tool for addressing the productivity impacts of HS2 matter most when it comes to addressing the net national case for the investment, whereas the fixed economy assumption matters most in terms of its impact on issues such as the north south divide. (This said it should be recognised that the productivity question is also an important part of addressing the distribution impact of HS2.)

18. The principal concern about the approach to productivity impacts relates to the way in which WebTAG measures connectivity, particularly between businesses. This is likely to be the key driver of the impact of HS2 on productivity, and the concern is that the methodology used understates the significance of longer distance connectivity for businesses. In the context of something like HS2 this clearly matters.

19. The WebTAG approach to connectivity is derived from academic work that addressed the importance to a business of proximity to other businesses in terms of productivity on the basis of distance, with this work being converted to address travel costs (time and money) on the basis of a number of assumed relationships between distance and cost. While these assumed relationships may be appropriate for investment such as Crossrail, there are significant doubts about whether they hold for longer distance travel.

20. For this reason, KPMG’s preferred approach (which was used in our 2013 Regional Economic Impacts report for HS2) is to base these connectivity measures on a combination of cost data and what actual behaviour suggests the relationship between connectivity and cost really looks like. This means addressing what the data actually says about business people’s willingness to travel by rail at different cost levels.

21. To demonstrate the significance of this point we have looked at how business connectivity differs for Manchester under the behaviourally based method we used for our 2013 work for HS2 and the measure that we would have derived had we used the standard WebTAG method. Figure 1 below provides the comparison, in this case for the important producer services sector.

22. The contrast is stark, with differences in both the slopes of the two curves (which affects how responsive connectivity is to changes in cost) and their height (which affects the contribution of a given place to another’s total amount of connectivity) mattering in terms of the impact of HS2 on connectivity.

23. As an illustration of the importance of these differences, we find that while under our preferred method London contributes some 16% of Manchester’s total business to business connectivity once HS2 is in place, the comparable figure under the WebTAG method is less than 6%.

Figure 1: Comparison of business to business connectivity measures for Manchester (KPMG compared to WebTAG)

Source: KPMG Analysis

24. Figure 2 below shows the difference, again using producer services in Manchester as our example, between the impact of HS2 as a whole on business to business connectivity in our preferred method and what we would have found using WebTAG. The difference is substantial with the WebTAG method producing less than half the percentage impact of our behaviourally based approach. Other things being equal, this would mean less than half the expected impact on productivity.

25. With an eye to the discussions of elasticities below, figure 2 also includes an estimate of the impact on business to business connectivity we would have found had we used the assumptions about the relationship between cost and connectivity used in the SERC (Spatial Economics Research Centre) analysis of the impacts of rail improvements for the Northern Way. Here we find the SERC relationship to be much closer to the data on actual behaviour, although other things being equal, the SERC assumption would still result in materially lower reported impacts on productivity. 

Figure 2: Total change in Manchester’s business to business connectivity due to HS2 in 2037

Source: KPMG Analysis

Impacts not accounted for in the Strategic and Economic Case for HS2

26. The Public Accounts Committee (PAC) recently conducted a review of the progress of the Crossrail programme, published in July 2014. The review covered the progress of the programme as a whole and risks to delivery; it also considered the way investments in transport interventions are appraised in the UK. In the case of Crossrail, the conventional BCR was less than 2 and a number of other interventions actually scored higher. However, the business case for Crossrail involved an assessment of the wider benefits which improved the business case significantly. Without these wider assessments Crossrail may not have been approved.

27. This prompted the PAC to conclude that there was a risk that “transport projects are assessed using benefit-cost ratios that do not capture the full benefits, thereby understating the case for investment”. The Committee therefore recommended that the “Department needs a clearer understanding of the wider economic benefits of transport projects which should be included in its investment decisions”. 

28. As a result of our work for HS2 and others, we believe it is equally clear that the conventional BCR will not capture the full extent of the economic benefits of HS2. In addition to the points above in terms of productivity impacts, we believe the appraisal gaps include:

a)      Given rebalancing of the economy is an explicit Government objective, there needs to be a better understanding of business and household location decisions (our work on regional economic impacts was specifically concerned with this question and we discuss this in the next section of this note);

b)     The extension of the appraisal framework to account for localised regeneration impacts, which will come through better connectivity and new station developments, and which, under the right conditions, can mean additional connectivity and thus productivity benefits;

c)      The extension of the appraisal framework to account for impacts on freight, which is currently unaccounted for; and

d)     A better understanding of the international dimension, specifically around how HS2 could enhance the competitiveness of the UK economy through making it more attractive for international investors and increasing the competitiveness of UK companies in international markets.

29. In addition to the above, we would note that in keeping with all DfT appraisals, the debate should not focus solely on the benefits side of the equation; the approach to quantifying costs matters too. Currently, the costs against which benefit-cost ratios are measured define costs solely in terms of the impact on DfT (and related) budgets. This means that although farebox revenues over a 60 year appraisal will serve to reduce net costs (and thus increase a BCR) there is no allowance for either the short term (multiplier) or longer term (supply side) impacts of investment on total GDP and thus total tax receipts. Where a project has significant productivity impacts (which would mean significant GDP and thus total tax impacts), the current approach is likely to overstate total long term net costs to the taxpayer, and thus potentially significantly understate what a more complete BCR would be.

30. We would expect this more complete approach to increase the importance of wider economic impacts analysis within appraisals.

31. Some of these points having been made, it should be noted that the Strategic Case for HS2, published in October 2013 did expand the analysis to include a section on the potential regeneration benefits of HS2. At the time, the only available information related to some provisional work on the scale of potential property developments in the vicinity of the newly constructed HS2 stations.

32. This position should improve as the results of joint work between HS2, DfT and other departments and the HS2 cities progresses on local HS2 growth strategies becomes available early next year. This work draws on the work of the HS2 Growth Task Force, but (at least in terms of Whitehall engagement) is largely focused on the phase 1 programme. As things stand, this means it will be some time before this work can provide a full picture of the true local potential a comprehensive approach to HS2 could provide.

The regional economic impact of HS2

33. We suspect that the highest profile piece of work undertaken to date on the regional impacts of HS2 outside of conventional appraisal is KPMG’s analysis for HS2. This resulted in a provisional report in autumn 2013. This work was undertaken by KPMG in response to a tender from HS2 Ltd, who wanted to reach a better understanding of the likely impacts of HS2 on the ‘real economy’ and how these impacts may be spatially distributed. As noted above, these are questions that WebTAG is not designed to address. 

34. In order to address regional impacts, the KPMG work first addressed the impact of HS2 on regional productivity – a key driver of regional competiveness and thus the distribution of economic activity. As a by-product of this element of the work, KPMG generated a national net productivity estimate – in essence the sum of the regional impacts before competition between regions affected the distribution of economic activity.

35. It was this net total estimate of an additional £15 billion in annual Gross Value Added (GVA) from 2037 through productivity that received most attention in the aftermath of the publication of the report, including from the Treasury and Transport Select Committees in autumn 2013.

36. In order to understand this £15 billion figure it is first necessary to put it in context, and in particular to understand what it means against the background of forecast economic growth between now and 2037. By 2037, the Office of Budget Responsibility is forecasting total GDP to be nearly £3 trillion per annum at 2011 prices. This means our provisional estimate of a £15 billion increase as a result of HS2 amounts to an increase in 2037 GDP of only 0.5%. This is equivalent to 3 months worth of annual growth, or, to put it another way, it is equivalent to the OBR’s forecast for June 2037 being met in April of same year instead.

37. This means that although the estimate is significant in absolute terms (particularly given it would represent a permanent step up in annual output) and in relation to the total estimated costs of the project, it is relatively modest in relation to the size of the economy in 2037.

38. At the same time we believe it is also important to put the estimated costs of the project in the context of the likely total public sector investment over the construction period – ie to 2032/33. The 2013 Autumn Statement set a target of getting total public sector investment to 3% of GDP by 2017/18. If this target is delivered, and the ratio maintained (and we use the same OBR forecasts as above), total public investment to 2032/33 would have amounted to some £1.2 trillion. On the same price base, HS2 is currently expected to cost £42.3bn. This means it would represent perhaps 3.5% of potential total public sector investment spend between now and when it is expected to open, or to put it another way for every £ expected to be spent on HS2, £27 remains available for other things.

The scale of economic impact in the KPMG analysis of HS2

39. One of the key drivers of the results of our work, and in particular the £15bn figure is the estimation of productivity elasticities - ie the responsiveness of productivity to the kind of changes in connectivity HS2 would bring. For example, if the elasticity value is 0.05, this suggests that a 10% increase in connectivity would lead to a 0.5% increase in productivity, all other things equal.
40. Commentators have wrongly attributed the scale of our provisional £15 billion estimate to the use of significantly higher elasticities than found in the literature. For example, it has been suggested that the rail elasticity derived by SERC, as a result of their work for the Northern Way[2], suggests that our estimated GDP impact is six or more times too high. As set out below, when compared on a like for like basis, the elasticities we used in our work are not significantly above directly comparable estimates in the literature, including those derived by SERC.

41. Figure 3 below sets out the productivity elasticities used to provide our preliminary results on a basis that allows for a proper comparison to be made with other elasticities in the literature, and in particular the work undertaken by SERC for the Northern Way. The SERC work focused on the impact of rail journey time improvements between Manchester and Leeds on average wages. Although wages account for only 65% of GDP, we believe the wage impacts addressed in the SERC work serve as a good proxy for productivity and therefore provide the basis for a sensible comparison.

Figure 3: KPMG and other elasticities on a comparable basis

42. On this basis, the correct comparison is between our whole economy elasticity (labelled E), and the SERC equivalent (labelled G).Our whole economy elasticity reflects both a weighting between four sector elasticities (Labelled A, B, C, and D) and a further weighting to reflect the fact that these four sectors only account for 64% of total employment (our analysis assumes a zero impact on the remaining 36%). These weightings are necessary to provide a like for like comparison between the elasticities we used for our September 2013 report and the whole economy or average wage elasticities found in the literature. The weightings are based on 2010 employment levels.

43. Figure 3 shows both the KPMG business to business elasticities and the KPMG labour market elasticities, together with the combined totals. The relevant KPMG whole economy elasticities for comparative purposes (labelled E) are: 0.009 for labour markets and 0.035 for business to business; for a combined total of 0.041. This combined elasticity means that for a 10% increase in both labour market and business to business connectivity we would expect a 0.41% increase in average productivity.

44. We believe the comparable SERC elasticity to the above is 0.049. This is the elasticity SERC use to provide estimates of the impact on average wages of journey time improvements between Manchester and Leeds in the 2010 paper referred to above. This elasticity includes the downward adjustments SERC make following statistical analysis of labour quality and experience effects. It is important to note that the SERC elasticity reflects analysis of business to business effects, whereas the combined KPMG elasticity of 0.041 includes both labour market and business to business effects. We do not know what a SERC elasticity would be that included labour market effects but it is unlikely to be 0 (still less negative), suggesting that a SERC type combined elasticity would likely be higher than 0.049.

45. This comparison leads us to conclude that for a comparable proportionate change in connectivity the predicted impact using the KPMG elasticity would be lower than that generated by SERC. The SERC 2009 paper reports average wage impacts of between 0.2% and 0.5% across the Manchester and Leeds city regions as a result of a 20 minute reduction in the Leeds to Manchester rail journey time, with the range reflecting differences in the impact of this reduction in journey times on the SERC measure of connectivity across the two city regions. The average impact is some 0.35% for an average change of 7.1% in the SERC measure of labour connectivity. For the same percentage change in our measures of connectivity the comparable combined KPMG elasticity generates a productivity gain of 0.34%.

46. Figure 3 also includes:

• A productivity elasticity reported by Graham et al in 2009 (labelled H), although it should be noted that this is a distance based elasticity not a rail time and cost related elasticity. This elasticity is 0.04; and
• The rail business to business elasticity implicit in the sensitivity test reported in our 2013 report where we weight our road and rail elasticities by a mode share estimate (labelled F). This elasticity is discussed at page 51 in the September report. In Figure 3 it is weighted for employment shares in the same way as that at E in order to allow it to be compared with the other elasticities. On this comparable basis the elasticity is 0.014 - i.e. less than 30% of the SERC elasticity. As we set out in the September report, when applied to the connectivity improvements generated by HS2, and adjusted for changes in sector mix and background growth between now and 2037, this elasticity generated a national GDP impact of £8 billion.

47. In addition, there has been significant comment on the judgements we made in reducing the rail elasticities used in our report. We made these adjustments in the light of our statistical analysis which showed, for example, that these elasticities could be reflecting the impact of road connectivity, which is often correlated with rail connectivity. As we made clear in our original report, these adjustments were based on judgement and experience of similar work, rather than standard statistical methods. We applied these judgements because at that time we had found no statistical technique that did not bring with it equal or potentially greater challenges, because judgements (in practice less transparent ones) would still be required. A prime example of this would be an approach based on weighting between rail and road on the basis of market share. A sensitivity test based on this approach is included in our report, and, as noted above, produced a central estimated GDP increase of £8 billion in 2037 on an assumed rail market share of about 15%. While superficially attractive, this approach is heavily reliant on an accurate forecast of the split between rail and road business travel, accurate at the level of the individual places and business sectors most affected by HS2 some 25 years from now. Even small changes in these assumptions would have a significant impact on the forecast GDP impact, with even a one percentage point change in the assumed relevant rail mode share in 2037 changing the estimated £8bn GDP impact by £0.5 billion.

48. We stand by our judgements, although we continue to investigate alternative approaches. Where judgements are necessary, as is always likely to be the case in this kind of analysis, we believe they should be clear and transparent, as we highlighted in our report, rather than buried out of sight in the modelling. The detailed analysis presented above also showed that once comparisons are made on a like for like basis, the elasticities that our judgements produced are not out of line with those found in the literature, including the SERC study.

49. As noted in our September report, pending further work, all the results presented, including the £15 billion headline figure should be treated as provisional. There are a number of areas where we currently see potential for significant changes in the £15 billion figure:

a)      Updates to the HS2 and wider network plan. Our work reported in September 2013 was based on the 2012 definition of the network. This excluded the now planned station at Manchester airport and was based on early work of the use of freed-up capacity, which has since been updated. Other things being equal, we would expect the 2013 plan to increase the impact of HS2 on business and labour connectivity compared to that used for our preliminary work. If this is confirmed it would point to an increase in the £15 billion figure;

b)      The inclusion of freight capacity benefits. Rail freight delivers significant productivity benefits to UK businesses by offering, for a proportion of freight movements, a cheaper option than road. Increasing congestion on the rail network risks limiting the extent of these benefits, and the capacity released by HS2 could help to remove this constraint. Other things being equal, making an allowance for these benefits should increase the £15 billion;

c)      International impacts, including through improved terms of trade. Our preliminary work was based on the GB economy only, ignoring the international trade dimension. Including international trade should increase net national GDP impacts;

d)      Impacts over time. Our preliminary work was based on a single year – 2037, and we would expect the value of productivity gains to increase over time beyond 2037 as background growth continues, increasing the absolute value of productivity gains delivered by HS2;

e)      Labour participation impacts. Labour inputs were held constant in our preliminary work, and we would expect relaxing this assumption to affect the overall forecast impact of £15 billion. The SERC work on mobile labour suggests that the principal effect will be to redistribute the £15 billion rather than change it;

f)       Adjustments to the value of time. The sensitivity testing we carried out as part of our preliminary analysis suggests that GDP impacts are less sensitive to changes in the assumed value of time than conventional transport appraisals, with a 50% reduction in the assumed value of in-vehicle time for business rail travellers only reducing our headline impact estimate by £3 billion to £12 billion. DfT’s recently announced reduction in the business value of time for use in appraisals is less than our 50% sensitivity, but viewed in isolation we would still expect it to reduce the overall 2037 GDP impact figure to somewhere between £13 billion and £14 billion on a like for like basis;

g)      Further development of the methodology. We continue to consider alternative statistical approaches. This work is potentially showing ways through the problem of overlapping impacts (between road and rail and between business and labour market impacts) that do more than simply require one judgement to be substituted for another. At the same time, this work is suggesting that the relationship between connectivity and productivity may be non-linear, with a given change in business to business connectivity for better connected places delivering higher impacts than similar proportional changes to less well connected places. This would be consistent with a view that economies adapt to take advantage of higher levels of connectivity, and having adapted then become more sensitive to future changes in connectivity. If confirmed, this could increase the scale of our preliminary estimate of the impact of HS2 on future output, but it could also mean impacts are significantly more concentrated;

h)      We would also expect future work to extend our analysis beyond the four business sectors analysed to date (producer services, consumer services, construction and manufacturing). This matters, because by 2037 these sectors’ share of total employment is forecast to dip below 60%. If this work uncovers a positive relationship between connectivity and productivity for this remaining 40%, other things being equal, it could be expected to increase the £15 billion; and

i)        Updates to the underlying transport and socio-economic models and forecasts. Updated modelling can change the expected impact of any scheme, sometimes significantly, and in any direction. As yet we are not aware of any changes that would affect our analysis, but is possible that such changes will emerge as our work continues.

50. Taking these factors into account, we believe that our provisional £15 billion is conservative and any additional work that may be undertaken is likely to lead to an increase this figure.

The impact of HS2 on the Midlands, North and other parts of the UK

51. One of the key aspects of our work on regional economic impacts is that it allows for the estimation of spatial impacts. Although these are also provisional, they give an important contribution to the debate around whether HS2 is set to benefit London and the South East only. Table 2 below shows the estimate of the economic impact for those regions where an HS2 station as planned based on the 2012 definition of the HS2 network.

Table 2: GVA impacts by region

Source: KPMG Analysis

52. The key point to bear in mind in these provisional results is these should be measured against the size of the economy in each of these regions. For example, while the impact on London is the largest in absolute terms, it is not the largest in relative terms. For example, an uplift of £0.5bn to £0.9bn in South Yorkshire’s productivity is equivalent to 1.6% to 2.8% of its current economy, with an additional £1bn in GVA in West Yorkshire is equivalent to 2.3% of its current economy, and an uplift of £2.5bn to £2.8bn in London is less than 1% of its current economy. 

53. Our analysis has also shown that some areas of the UK will be disadvantaged by HS2. The key point to note is that it is unrealistic to expect that government interventions benefit everyone equally or that there is a straightforward mechanism to ensure that no one is disadvantaged. The current geographic distribution of government funded transport investment, which is perceived to significantly favour London and the South East, will also be having an effect on the distribution of future economic activity across the country.

54. Other comments on our September 2013 report have focused on the need for complementary measures and planning policies to support the cities in maximising the opportunities offered by HS2. While this is fair comment in terms of the distribution of the overall impact of HS2 across the country, it would not affect the £15bn productivity estimate, which is estimated before allowing for the redistribution of activity, which planning and other policies would need to support. We would also note that these supporting initiatives are precisely what the Growth Task Force initiative and the local HS2 growth plans now being developed are about.

Proposals for northern connectivity (HS3)

55. Recent proposals to enhance transport connections between cities in the North are an important development. Although these proposals are still in early stages, a look at the state of connections between cities in the North gives some perspective on the likely economic impacts of enhancing connectivity between these cities (see Table 3 below).

Table 3: Distances and travel times between cities in the North

56. In the context of HS2, the relevance of enhancing connectivity in the North is twofold. First, the economic benefits of HS2 itself are more likely to be shared across a wider geography as connectivity improves to Liverpool and Newcastle. Second, the proximity of the Northern conurbations to each other suggests that there is potential to create a polycentric economic area in the North, similar to some of the European regions. These include the Randstad in the Netherlands, the Rhine-Rhur in Germany and the Flemish Diamond in Belgium. The cities that sit within these regions have performed much better than the Northern English cities, benefiting from access to larger markets and increasing economic specialisation.

57. A similarly successful region in the North of England could provide a counterweight to London and the South East, which in the context of HS2 would mean that it becomes more able to attract businesses and workers than the current economies of the area are able to. The One North report provides a more detailed vision for these proposals, and makes the point that from the perspective of the North HS2 and One North can be expected to act as multipliers on each other: HS2 lowers the barriers to trade (and competition) between the North and South by boosting the productivity of the Northern cities. One North and similar initiatives mean the North would be better placed to take advantage of these lower barriers.   

September 2014