Gresham Lecture 1 May 2013 Sorting out transport in London ... · 5/1/2013 · ‘Sorting out transport in London’ Sorting out transport in London S eventh Gresham Lecture

Gresham Lecture 1 May 2013

‘Sorting out transport in London’

Sorting out transport in London

Seventh Gresham Lecture

Douglas McWilliams

Mercers School Memorial Professor of Commerce at Gresham College

Centre for economics and business research ltd

Unit 1, 4 Bath Street, London EC1V 9DX

t: 020 7324 2850 f: 020 7324 2855 e: [email protected] w: www.cebr.com

Introduction

London is the only one of the major world cities to have been mainly developed in the age of the

horse and cart.

© Centre for economics and business research ltd, 2013

To describe how the London economy is changing

To understand the transport needs of the changing

economy

To suggest how London transport could be better

managed

Objective

When it needed more rapid transport, it had to be innovative and so the Victorians and their

successors created the world’s first urban underground railway system.

London is still a major world city but needs now to cope with both a huge international economic

change and with its own development. Critical to how it copes will be its transport system.


The international context

The new London economy – City still important but not as

much so

The rise of the ‘flat white economy’

The transport needs

The state of transport in London

The cost of transport in London

The management of the road network

How to make it better

The economic benefits of making it better

Overview

My past Gresham lectures have showed that ‘the world’s greatest ever economic event’ – the

industrialisation of the emerging economies is creating massive pressures for Western

economies, who have got used to operating on a high cost basis.

It is also changing the structure of these economies. I will highlight some of these changes

before looking specifically at the role that transport can play within this and what benefits this

might bring.


Implications of global shift

Intense international trade competition – the new economies are not just competitive but ‘supercompetitive’ because they have an entirely new cost basis

Rising real prices of natural resources – food, energy, fuel, materials

Slower growth in the Western world and faster growth in the emerging economies

Lower interest rates as a result of savings glut (see currencies and interest rate section later)

More volatile international economy

I have argued that we cannot easily cope with the supercompetitive economies and that we

should not just hang around waiting for their growth to slow. China’s growth has already slowed

down as its labour force has started to shrink (by 3.5 million people last year) – but even the

disappointing growth in Q1 this year was 7.7%. Because of the cultural tradition and because

economies in Asia have learned from some of our mistakes, I expect supercompetitiveness to

remain a feature for a long time, though it may adjust its flavour as some of the economies –

and China is an example – move from being abundant in labour and short of skills to having less

but more skilled labour.

One of the consequences of the supercompetitiveness is that it puts downward pressure on

wages in the developed world. When the West had a monopoly of skilled labour, we paid

ourselves a lot and also built up an expensive superstructure of state provision.

the prospects service

Stripping out effects of population growth, spending per

household in 2013 will decline to lowest level since 2002

Real consumer spending per household (constant 2009 prices)

Source: ONS, Cebr

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Now our wages are under downward pressure and the demand for energy, food and raw

materials is pushing up the cost of living. This is squeezing real disposable incomes.


Transport and housing costs are taking up a rising share of

household spendingPercentage of total expenditure on selected goods categories in the UK 1965-2030

Source: ONS Consumer Trends, Cebr analysis

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Not only are disposable incomes per household down, but within that squeezed total the costs of

essentials are eating up a much larger share.

So if the UK is to minimise the adverse effects of the rise of low cost competitor economies, we

need to adjust our high cost way of living in the West to something less wasteful and more

affordable in the new competitive environment.


‘Essentials’ are costing more in relative terms – and emerging

market growth means this trend will continueEssential spending as a share of total expenditure in UK current prices, 1965-2030

Source: ONS Consumer Trends, Cebr analysis

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My fourth Gresham lecture showed areas where this could be done for housing and energy. This

lecture focusses in a lot more detail on an area that I know quite a lot about – transport in

London and looks at what can be done to bring down the cost.

The London economy and the special factors that characterise it

© Centre for Economics and Business Research, 2013 The Prospects Service

London, City and Regional Prospects

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UK overview

Real London and UK gross domestic product, annual percentage change (London in blue, UK in red)

Source: Office for National Statistics, Cebr analysis

London’s economy continues to outperform the UK’s even after

the financial crunch

Meanwhile, we live in an amazing London economy.

Let me start first with definitions. Most international bodies define cities based on the World

Bank definitions, which decide on the boundaries of urban agglomerations based on where the

population densities drop below 400 persons per square kilometre (in the US 1,000 persons per

square mile which is virtually identical). Most of us think of cities from a tourist perspective and

we think of the city centres which are often historic. But from an economic point of view, the

agglomeration is a more appropriate definition. In London’s case, the official Government region

definition, the local authority definition and the commonsense definition (within the green belt or

within the M25) more or less coincide so it fits perfectly.

If you looked at a map of London before the age of the car started at the end of the 19th

century, about 70% of it would look very familiar to someone who knows London today. John

Betjeman’s ‘metroland’ was the only major development during most of the 20th century before

the late 20th century and early 21st century development of East London. So most of London was

developed before the age of the car and lorry. Many of its streets are extremely narrow and

certainly not designed for large vehicles.

Compare this with Paris. More than half of the Paris agglomeration was developed post World

War 2. And even the centre was modernised by Baron Haussmann between 1853 and 1870.

Notably he was responsible for the wide avenues, allegedly to allow troops a straight line of fire

in case of rioting mobs….

Surprisingly, the Lower Manhattan part of New York was planned in 1811, although only built up

over the subsequent 50 years. Although designed well before the age of the car, the

specification of streets of minimum width 60 feet and some avenues of 100 feet suits modern

traffic. Again the reason for the wide streets was not modern transport – it was felt that wide

streets would act as a firebreak. In those times that was a serious issue as we will know from

London where the Great Fire had taken place not much more than a century earlier. But of

course most of the New York agglomeration was not developed until the 20th century.

Beijing was the first City to have a population of over 1 million and was the world’s most

populous city from about 1600 until it was overtaken by London around the 1820s. But again, if

you go there, other than the Forbidden City (which is about a mile square by the way, absolutely

huge), most of the main streets are modern.

London is a world city. It is the most cosmopolitan city in the world and its predominantly

immigrant work force has created an impressive economic dynamic. Yet, uniquely among world

cities most of the London agglomeration was planned in earlier days, when mobility was less and

people did not expect to move around so much.

I first got interested in the London economy when my father was Lord Mayor of London. As I

was then the Chief Economic Adviser to the Confederation of British Industry, he asked me to

carry out some economic research on the London economy for his Lord Mayor’s Banquet Speech.

I thought this was an afternoon’s work but then discovered that there was so little information

that I ended up spending a pretty long fortnight trying to estimate some of the key items of

data. Things are much better now, but even so, there still is a need for much improved regional

economic statistics.

Among other things I discovered the success of the City led economy post Big Bang which

caused London to become the Tiger Economy on the Thames.

From 1990 to 2012, London’s economy grew at an annual rate of 4.4% compared with annual

growth of 3.2% for the UK as a whole over the period.



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Finance & Insurance Business Services

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Central London employment *, by industry, index 2004 = 100

Central London Employment

Business services to help boost Central London employment alongside ailing

City economy

Source: Office for National Statistics, Cebr analysis* Absolute numbers and definitions can be found in the appendix

But the City’s day of leading the London economy has come and gone. The model of using

money from the retail banks to finance investment banking and some of the racier end of City

activities is no longer possible – the money isn’t there and even if it was it wouldn’t be legal.

The number of people working in City jobs has declined. We think the job losses have been

about a third, but government statistics show a lower decline.

Whether the jobs exist or not, the collapse of City bonuses is more definite. These peaked at £12

billion in 2008 and are now about £2 billion. That collapse demonstrates the extent to which the

financial sector has lost its leading position. Moreover bankers have suffered some reputational

damage which makes them scarcely less unpopular than paedophiles.

I sense that the tide might be starting to turn and the country needs all the successful industries

it can get. But the increasing critical mass of the Eastern markets in Singapore, Hong Kong and

Shanghai among others means that the City will have to settle for a secondary position as the

financial capital of Europe rather than the financial capital of the world. This is not to be sniffed

and there will still be many subsectors in finance where the London can lead the world.

When the City was doing well, not only was it expanding its numbers of jobs but also because of

the fabulous wealth and incomes that it was generating, its knock on effect through spending

was huge. Our studies for Canary Wharf indicated a multiplier effect of 4 for financial service

employment which is about twice the normal number.

But now it has lost both its number of jobs and also its spending power, let alone its dynamism.

And with interest rates and hence investment yields set to be low for a long time, the customary

1% fee for fund management must be squeezed down which will make the City a less profitable

place.



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Central London employment *, MIC sectors, thousands

Emerging technological and creative sectors to become increasingly

important for central London’s economy


Forecast

Central London Employment

But London never ceases to surprise.

Just as one industry loses its dynamic, another one comes to take its place.

Britain has one of the most highly developed internet retailing sectors in the world and is also

one of the world’s leading online marketing economy. Cebr is close to the retail sector – we work

with all the leading retailers except Tesco and we have been tracking the move to online retail as

it has happened.

Britain is also a leader in on-line marketing. Cebr produces the advertising forecasts for

Associated Newspapers and the Guardian as well as the strategic forecasting for BskyB and have

been tracking and forecasting the online marketing economy for some time. In 2011 online

overtook conventional advertising.

And what has emerged is a new digital economy combining IT, communications and online

marketing and sales, with a dash of cultural activities thrown in.

My colleagues have christened it the ‘flat white economy’ partly after their most frequent coffee

order and partly because it describes the colour in which their offices are decorated.

The new jobs are skill driven and employ predominantly young people from all around the world.

Although the businesses are dynamic, many of them are yet to achieve sustained profitability

and so salaries are low, though promises of future gain through share options or profit shares

are common. The businesses tend to locate close to each other – near ‘Silicon Roundabout’ at

Old Street Station, in Covent Garden and Soho.

In theory this type of work could be done at home, placing no extra demand on London’s

transport system. But because house prices are high and salaries low, employees flatshare and

have little spare space to work from home. They go to their offices not just to work but often to

shower and even eat.

This economy creates spinoffs all around London as well as in the rest of the UK.



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UK overview

Number of employees in London, thousands


The number of employees in London continues to rise rapidly

So London’s number of employees continues to rise – by about 50% over just under 40 years.

One consequence of this continued economic success is that London subsidises the rest of the

UK economy. Even after taking into account the fact that public spending on transport in London

is much higher than elsewhere in the UK, Londoners still pay relative more in tax and receive

less in spending relative to GDP than anyone else in the UK. After adjusting for the country’s

overall deficit, the net subsidy from London to the rest of the UK amounts to one pound in five

earned in the capital – a full 20% of London’s GDP.

The current state of transport in London

The increase in employment has been matched by increased travel in London. The number of

trips taken in London rose by 11.3% in the decade to 2011, roughly matching the rise in

employment.


And in fact Transport for London has done an impressive job in providing the capacity to match

this growth.

They have grown bus trips over the period by 60%. Rail and underground trips have grown by

25% reflecting the success of the Jubilee Line Extension, the East London Line, Thameslink and

other increases in capacity.


London’s bus fleet is now by far the largest in any major

developed city in the world

Source: Singapore Land Transport Academy Journal November 2011

They have also introduced an enormous quantity of buses. According to the Singapore Land

Transport Academy, we have in London nearly 8,000 buses. New York, which covers a much

wider and more populous area only has 4,500. Even Beijing, which has a population of 20 million

has only about twice the number of buses that we have in London.


The growth in travel volumes in London has largely come through increased public transport and

cycling. But although car usage is declining, it is still the most widely used single mode of

transport.


Despite measures to encourage public transport, the car

remains the single most used mode of transport in London

Any analysis of mode share shows that more than a third of travel in London depends on the

private car.

It is interesting to examine the use of different modes of transport by different income groups.


Higher income groups place great value on individual modes of transport

One of the interesting factors is the dependence of the higher income groups on individualised

transport. Those earning more than £75,000 a year walk as much as the poorest income group

and they both walk much more than the income groups in between. The over £75K group cycle

more than any other group. They use motor cycles twice as much as the average. And they use

cars more too, though only about a quarter more than the average.


Tax shares paid by London’s higher income groups

Annual income % of taxpayers % of income tax

>£200,000 1.5% 40.1%

>£150,000 2.3% 45.2%

>£100,000 4.0% 52.8%

>£70,000 7.6% 61.5%

The behaviour of the higher income groups in London is important because London – to a

greater extent than most other cities – is dependent on its movers and shakers who initiate a lot

of the economic activity on which the rest of the economy depends. One interesting reflection on

this is that as much as 40% of the income tax paid in London is paid by the 1.5% of the

population who earn more than £200,000 a year. And the over £75,000 group, which is the

highest income group for which transport statistics are available, comprises 7.6% of taxpayers

but pays over 60% of income tax.

The cost of public transport

Although TfL have done well to increase the supply of public transport in London, they have

done less well on cost. It is well known that Bob Crow’s tube drivers now earn more than

Ryanair pilots!


Source: http://www.alanhowesworld.com/topics/support/bus-industry-performance/

The cost of bus services in London has exploded…..

The cost of running London’s buses in real terms has more than doubled in the past decade.

Some pretty cosy deals with the bus companies were made in the Livingstone years and bus

drivers’ salaries grew strongly. And tubes, although largely unsubsidised on an operating cost

basis, faced large fare increases.


Source: Singapore Land Transport Academy Journal November 2011

London’s tube fares are about double those in other major

Cities

So part of the down side in the impressive expansion of capacity which was achieved was the

very high costs.

Road management

The other down side of the management of the expansion of public transport has been the

traffic jams for everyone else – lorries, vans, taxis and cars as well as to a lesser extent

motorcycles and bikes.


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The ratio of running costs to purchase costs for cars has changed dramatically

Source: Retail Prices Index

One important point to note in this is that typically transport economists argue about the need to

reduce car ownership as their route to reducing car usage. This is because traditionally cars have

been expensive to own but cheap to run and so people who owned cars would tend to use them.

But this has changed. The RPI figures show that last year 2012 was the first ever year in which

the running costs of cars exceeded the purchase cost – and this does not take account of the

cost of time spent in them. So policy needs to take these changed facts into account. Car usage

can now be controlled more directly than by simply trying to reduce car ownership.


New data shows falling vehicle usage in London

The data on London road usage shows that vehicle usage has in fact fallen sharply and started

to do so before the congestion charge came in as economic and other factors started to apply.


The fall in vehicle usage in Central London has been especially sharp

It is now clear that there has been a dramatic fall in vehicle usage in London and especially in

central London where the drop has been by nearly a fifth.


GPS data seems to show no change in traffic speeds since 2006

The puzzle is that this drop in road usage has not been matched by any reduction in congestion.


Cebr European congestion study – areas of study

Transport for London’s own GPS data shows no increase in traffic speeds. And this is backed up

by Cebr’s European congestion study carried out for the data company INRIX. This study looked

at the major cities in Europe and found by far the most congestion in London.


Large Urban Zone (LUZ)

Annual wasted hours per vehicle (2011)

Employment (2011)

London 66.1 4,107,500

Manchester 45.1 1,162,300

Liverpool 38.8 519,200

Birmingham 34.0 972,300

Belfast 33.8 107,000

Newcastle upon Tyne 32.9 510,600

Nottingham 32.1 216,100

Bradford-Leeds 30.3 999,500

Edinburgh 29.3 448,700

Sheffield 28.9 557,000

Portsmouth 28.3 115,500

Glasgow 27.3 796,500

Bristol 25.6 564,500

Cardiff 25.2 204,500

Coventry 25.2 168,700

Stoke-on-Trent 25.0 97,700

Leicester 24.2 191,900

Kingston-upon-Hull 23.0 151,000

United Kingdom (LUZs only)

39.2 11,890,500

Annual wasted hours per vehicle and total employment for Large Urban Zones in UK, 2011

Source: ONS, INRIX,Cebr analysis

The study showed that the average vehicle in London wasted as much as 66.1 hours each year

idling in traffic jams.

Using traffic jams as a way of regulating traffic usage makes appalling economic sense. But it

also makes bad environmental sense as well, since static vehicles create the very worst kinds of

concentration of pollution.


Aggregate, €m Individual (per car-commuting

household), €UK London UK London

Direct costs (higher fuel and value of time costs)

€3,620 €1,358 €442 €994

Indirect costs (higher costs of goods & services)

€1,320 €539 €124 €163

Total €4,940 €1,896 €566 €1,157

Table 4 Direct and indirect household impacts of idling in traffic in UK, euros per year, 2011

Source: INRIX, Cebr analysis

The Cebr study showed a cost in London of €1,896 million from the effects of stationary traffic.

This does not include the cost of traffic moving much more slowly than it ought.


Transport for London themselves in the latest report on Travel in London (Report 5) are

disarmingly frank about why traffic speeds have been so low when vehicle numbers have

dropped – ‘the primary reason for the continued reductions to traffic speed, which would

otherwise have been unexpected given falling traffic levels, was a substantial increase in

interventions that reduced the effective capacity of the road network for general traffic.’ In other

words, it is TfL itself who are responsible for traffic jams, according to their own research report!

I bet the spin doctor would have cut that out had he bothered to read that far into the report!


A picture saves a thousand words. And the front cover of the latest TfL report on transport

demand tells the story.


Spot the car, lorry or van…..

You can see it better in closeup. I think the caption says it all – even though cars are the largest

single mode for personal transport in London, the cover of TfL’s latest report completely ignores

them. Clearly even though Boris is Mayor, the spirit of Ken lives on in TfL.


The best use of road space?

One example of the bad use of road space is bus lanes.

It would not be sensible to get rid of bus lanes, but some balance is needed in imposing them

where bus usage is relatively little and where other transport users are being delayed.

Transport improvements

So what can be done to make transport in London better, cheaper and enable it to cope with the

pressures that will be put on it from growing employment?


1) A new roads authority that is charged with maximising the benefits

from the roads in an ideology-free way and ensuring roadworks and

construction minimise their negative impact

2) New cycle lanes to segregate cyclists from vehicles (especially buses

and heavy lorries) on arterial routes

3) Securing new private sector investment in underground roads

4) Continuing TfL’s programme of investment in tube and rail networks –

eg Northern Line Extension; CrossRail 2 from Chelsea to Hackney

and other tube and rail capacity increases

5) Achieving TfL’s plans to reduce costs by £9.8 billion cumulatively to

2017/18 – and extending the cost cutting programme over the next 10

years

6) Economic congestion charging to limit vehicle demand

7) Limits on vehicle size – or if not then heavy taxation of large vehicles

The solution to optimising London’s transport

First, there needs to be a separation of the powers of TfL from running the road system and

providing the bus services. They do the latter well, the former badly. Because of their focus on

providing buses they seem to ignore the other demands on road space, whether for cyclists or

for cars.

A new authority needs to be set up to run the roads. This must be tasked with the priority of

keeping the traffic moving, making good use of bus lanes, managing the cycling strategy (with

some better ideas than simply creating a cycle lane on the Westway), building underground

roads (when they are both possible and economic) and regulating demand through congestion

charging.

There is private investment available to build underground roads and the new authority should

move quickly to start creating an underground road system like the Victorians became innovative

to create underground railways.

Too many cyclists are being killed on London’s roads and this tragedy will continue until cyclists

can be segregated away from London’s arterial roads. This can only be done through the

provision of better cycle lanes.

The new body should also regulate London’s roadworks and ensure that those who block

London’s road system for unnecessarily long are heavily fined. The same system could be used

to ensure that there is a strong financial incentive for one utility to use the roadworks of

another’s to do any necessary maintenance. Construction work that affects road usage should

also be monitored. It may eventually be possible to organise timed movements for heavy lorries

for construction sites as is already the case in Canary Wharf.

The other part of the strategy has to be to build on TfL’s past success and support its continuing

programme. Currently TfL has a programme for cost reductions building up to savings of about

£2 billion a year by 2017/18. This programme needs to keep going for another 10 years at least

as it incorporates innovations such as driverless trains.

Increased volumes and loading factors should enable fares to be reduced in real terms.

Meanwhile, there is an extensive programme of new investments for rail and underground that is

required. CrossRail 2, which is the latest name for what used to be the Chelsea Hackney line is a

priority as is (on an even earlier timescale) the Northern Line extension.

On the road network, some rationing by price will be necessary. Economic congestion charging

should be the quid pro quo for giving motorists more control over the roads that they have

already paid for. And these charges should accurately reflect the economic costs of different

modes of transport and their contribution to congestion. Receipts from such charging should not

in general be available to subsidise other modes of transport from those generating the charges.

Small is beautiful

One area where traffic management might be able to improve is by trying to reduce the size of

vehicles in London to suit the scale of London’s streets. Too many vehicles have expanded to the

very maximum permitted under the Construction and Use Regulations, which were not designed

to cope with London congestion. Failing that, congestion charges should more properly reflect

vehicle sizes and the congestion that large vehicles cause.

The benefits


1) Cost reductions - £2 billion per annum already

planned – another £2 billion realistic

2) Gains from underground roads - £6 billion to London

GDP from complete system

3) Net benefits from improved tube and rail – scaled

from Crossrail – c £2 billion

4) Control bus usage by price - £500m plus congestion

reduction

5) Smaller benefits – Boris bikes, better control of

roadworks and contruction etc c £500m

Total benefits c £13,000 million or c £4,000 per

household

The benefits

Cebr has studied the potential benefits of a system of underground roads and found

considerable gains.

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Centre for Economic and Business Research

Agglomeration and business travel efficiency benefits

Socio-Economic Impact

There are further benefits to employment.

Vinci Paris 16 February 2011

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Socio-Economic Impact – UK GDP

And we estimate that there would be a boost to London’s GDP building up to £6 billion once the

system was in operation.

Vinci Paris 16 February 2011

Socio-Economic Impact

And although the major benefits in job growth will be central, other areas benefit as well.

And there are other potential benefits – we think that the Barclays bike scheme – which over its

first five year will cost a staggering £25,000 per bike in both capex and opex – could either be

better managed or better sponsored.

Conclusions

When I planned this lecture a year ago, my aim was to set out a programme of transport

improvements that would reduce costs or boost economic activity to an amount that would

improve household disposable incomes by at least £1,000 per household.

The list below gives my rough quantifications, using Cebr’s London Travel Model and Cebr’s

London economy model:

1) Cost reductions - £2 billion per annum already planned – another £2 billion realistic

2) Gains from underground roads - £6 billion to London GDP from complete system 3) Net benefits from improved tube and rail – scaled from CrossRail – c £2 billion 4) Control bus usage by price - £500m plus congestion reduction 5) Smaller benefits – Boris bikes, better control of roadworks and construction etc c

£500m This adds up to £13 billion of cost savings and GDP boosts (which I have taken as a proxy for disposable income boosts). As London has 3.4 million households this gives a gain of £3,800 per household. Benefits on such a scale cannot be ignored and on that I rest my case.

Douglas McWilliams

Gresham Professor of Commerce

May 2013

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Gresham Lecture 1 May 2013 Sorting out transport in London ... · 5/1/2013 · ‘Sorting out transport in London’ Sorting out transport in London S eventh Gresham Lecture