What KPMG ignored when arguing for HS2

 
Artists' impression of HS2

Today's report by KPMG on the alleged economic benefits of love-it or hate-it HS2 is based on a plausible assumption - that there are substantial economic benefits when businesses in a region have improved access to suppliers, customers and potential employees, and when consumers have a greater choice of potential suppliers of goods and services.

If a company can buy parts or services from a greater number of suppliers, the buyer ought to be able to obtain better quality stuff cheaper. The same argument applies when consumers have an improved ability to shop around - we get more bang for our pounds.

Also access to a wider, more diverse pool of labour has an equivalent benefit for businesses. They in theory are able to recruit better skilled, more productive people, for reasonable salaries.

These reductions in the price of goods, services and labour, coupled with improvements in the quality of goods, services and labour, should in theory have a dynamic self-reinforcing effect on output, on the GDP of the relevant region.

KPMG's report, commissioned by HS2 (just so that you know where it is coming from), then argues that HS2 will significantly improve the connectedness of businesses and people (labour) in many regions.

So, for example, it asserts that there will be a 15.7% improvement in "labour connectivity by rail" (horrible phrase) of the West Midlands, and a 21.1% improvement in "business connectivity by rail" there.

This in turn would translate, it says, into a productivity gain in the West Midlands of up to £3.1bn (in today's prices) and a 4.2% boost to annual economic output or GDP in the region by 2037.

KPMG calculates that the GDP gains would be a little bit bigger in the Derby/Nottingham area, a maximum 4.3% increment to GDP, but considerably smaller in Greater Manchester - where there would be an increase in GDP between 0.8% and 1.7%.

This differential gain between Derby/Nottingham and Manchester seems to stem from the differential impact on connectedness - according to KPMG, HS2 hardly improves labour connectivity by rail at all in Manchester.

At this point I need to point out that connectivity in KPMG's terms does not mean the ability to whizz to London from Manchester or Birmingham on a superfast train, although it partly means that.

The speed of HS2 seems barely relevant at all.

It is talking about a wider improvement in the capacity of the rail network to transport people and goods that will flow from the increased capacity provided by HS2. It is positing a big improvement in other local, regional and intercity services as a direct result of new opportunities to provide services on existing lines that should be created when much inter-city traffic moves to HS2.

Although some may argue that these benefits are a bit speculative, and could be generated by investment other than the many tens of billions of pounds being committed to HS2, they are plausible.

And the way to think of them is like this - a business in West Yorkshire, for example, will feel its local area for purchasing and recruiting much enlarged if there are more, faster, cheaper and less packed local train services.

Anyway, KPMG's two big claims are that HS2 will be disproportionately beneficial for economic growth outside of London and south-eastern England, doing something to narrow the north-south economic gap, and that for the UK as a whole HS2 will boost GDP by 0.8% by 2037.

Which also implies that the costs of building HS2 would be recouped from incremental tax revenues over 10 to 20 years.

But there is a bit of "but" here.

KPMG makes the following qualification, which made my jaw fall to the floor.

Start Quote

KPMG is ignoring one of the fundamental causes of lacklustre growth in many parts of the UK, which is a shortage of skilled labour and of easily and readily developable land”

End Quote

It says: "The methodology employed makes the implicit assumption that transport connectivity is the only supply-side constraint to business location. In practice, there could be other constraints that could inhibit the potential location effects, such as the availability of skilled labour and land in a given location".

I will translate. As I have mentioned, many of the gains to the regions that KPMG calculates are based on the reasonable notion that companies will be established in places where transport links are better. But it has taken no account of whether those regions actually contain available land to site new or bigger companies or have people with relevant skills to employ.

Which, some would say, is a flaw the size of Greater Manchester in its analysis - because KPMG is ignoring one of the fundamental causes of lacklustre growth in many parts of the UK, which is a shortage of skilled labour and of easily and readily developable land.

Or to put it another way, KPMG's calculations of the economic benefits of HS2 will be seen by many as spuriously precise, because they rest on the idea that the overwhelmingly most important impediment to narrowing the economic divide between north and south is poor transport.

Which is not to say that packed, scarce and unreliable trains are irrelevant to why much of the UK is poorer than London. But there may be other and more important causes of regional economic disparities,.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    -2

    Comment number 156.

    Lets forget KPMG for a minute as the HS2 argument is ongoing, irrespective of this report. I believe there is a more fundamental way to decide if HS2 is good for the economy and that is to answer a straightforward question; Why are our trains so packed with people wanting to travel the length and breadth of this country? Answer: Because there isnt enough of them! Period.

  • rate this
    +2

    Comment number 155.

    KPMG's report has been written as if it is a scientific paper (which is good because the methodology, assumption etc are clearly laid out). However, unlike a scientific publication, it has not been through independent peer review. We have no way of knowing how credible their results are (and there are some big potential flaws as RP has pointed out). We need a critical assessment of KPMG's results.

  • rate this
    +1

    Comment number 154.

    KPMG don't take into account that much of the UK's manufacturing capability was decimated due to the political dogma of a previous Tory government,

    This money would be better invested into regional rail projects that feed into the existing Inter-City infrastructure.

  • rate this
    +1

    Comment number 153.

    KPMG must have problems at the top. The US audit regulator is not too chuffed with their auditing prowess:

    http://economia.icaew.com/news/august-2013/pwc-and-kpmg-audits-fall-foul-of-pcaob

  • rate this
    +4

    Comment number 152.

    The motorway network completed in the Seventies did the work that KPMG is asserting that HS2 will do. You can't have two bites of the cherry.

    The assertion as to easier access to suppliers, customers and employees in a global economy is just utter bluster.

    It is now easy to see how the country is being ruined.

    HS2 Ltd should ask for their money back from KPMG and go into liquidation.

  • rate this
    +1

    Comment number 151.

    So worrying that the government are happy to back flawed reasoning in an attempt to save face at great expense to the nation. Surely we can spend the money better elsewhere?

    Perhaps we could give bonuses to the politicians when it is finished on time and under budget?

  • rate this
    +7

    Comment number 150.

    How much did it cost to put this package of lies together? Did anybody do a feasibility study to see if the benefits of these lies had been properly scrutinised?
    Was there a risk assessment done to make sure that anybody regurgitating these lies wouldn't injure themselves on their forked tongue?

  • rate this
    +5

    Comment number 149.

    This report will eventually be rubbished by any half decent university economics department. Can you imagine how many dissertations and Phd's will be launched by the opportunity to critique this rent a conclusion work?

  • rate this
    +10

    Comment number 148.

    KPMG are accountants and auditors - if you ask them to produce a report positively for HS2 they will do it. If someone else goes to them next week and asks for one damning of it , they will produce that - most of these large accountants and consultant groups are essentially a complete waste of space.

  • rate this
    +6

    Comment number 147.

    How can a single rail line with a limited number of stops improve connectivity?

    A major international airport in the Midlands, enhanced road systems to the east coast ports and improved current rail infrastructure bringing parallel routes and building in redundancy that will increase connectivity.

  • rate this
    +2

    Comment number 146.

    Everything that points to the fat cats who will undoubtedly get fatter from a pointless project that will surely become one of the biggest white elephants in history.

  • rate this
    +2

    Comment number 145.

    If the existing trains didnt have to stop at other stations on their journeys they would be a lot quicker, but it would upset those that would normally catch those trains, its the same for HS2, it would only serve those at the beginning and end of journeys and do nothing for those that live elsewhere,and would not help anyone not on those routes. As for £sd the figures dont add up.

  • rate this
    +7

    Comment number 144.

    HS2 is only relevant to those who can afford to use it

    The rest queue at the foodbank for a tin of beans and maybe dream of using the train, any train

  • rate this
    +1

    Comment number 143.

    Absolute suicide from a company with such stature of KPMG, completely incomprehensible. I can sense a severe case of brown nosing as I'm sure they will want to be in the pockets of certain self serving groups/individuals.

    The idea of HS2 has always baffled me; why not spend the money improving our current transport and systems, instead of spending billions on something destined for the same fate?

  • rate this
    +1

    Comment number 142.

    So it's all down to connectedness but not just anywhere just along the route of HS2. We are not told about the benefits of connecting Hull with Liverpool or London with Bristol or Liverpool with Bristol not to mention Newcastle with Manchester & so on. London is over 'connected' But Felixstowe/Harwich with Birmingham is under provided. Surprised Robert has not mentioned the opportunity cost of HS2

  • rate this
    0

    Comment number 141.

    139. prudeboy
    "The containers going back will be either empty...."

    Not necessarily. Despite media & political propaganda to the contrary, the UK is still one of the top manufacturing nations & with a population of 10 million +, along with this distribution infrastructure already operational the north west of England has huge potential for that to continue to be the case.

  • rate this
    0

    Comment number 140.

    At a rough estimate, 9 trains each way from Euston, 12 hours per day, 5 days per week gives £250,000 benefit to the economy per train journey. Say 1000 passengers per train, out and return, results in a boost to the economy of £500 per passenger per day. How can you not afford to build it for these benefits?

    Or, do the figures just not work?

  • rate this
    0

    Comment number 139.

    #46. A Seditious Malcontent

    I have had a look at your link.
    The increased capacity of the Manchester Ship Canal should be a warning to other ports. It will enable large ships to disgorge their cargoes directly into the road network. The goods will be made in the far east of course. The containers going back will be either empty or full of baled waste.

  • rate this
    0

    Comment number 138.

    @114.Botham80

    Tell that to the folk on the 8.10 from Woking to Waterloo or the 7.45 from Leeds to Manchester.

    ---

    Everybody knows that the 8.10 is not the train to get.

    I get the 6.01. That's fine.

    Anyway, I don't think that HS2 is supposed to help capacity on SWT.

  • rate this
    0

    Comment number 137.

    @130 J_f_H

    Best post I have ever seen from you, John. :-)

    @104 JM

    Locos from Japan, I think. Is it Toshiba? They are providing some of the new traction for existing UK trains.

 

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