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”

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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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 276.

    If capacity is the real issue then there are other ways of increasing capacity. Double decker trains might require a programme of bridge alteration, platform reconstruction in station served by double deckers. What would this cost? And what happened to the earlier proposal to rebuild the Midland Mainline to take freight?

  • rate this

    Comment number 275.

    The fact that this report is predicated on someones best guess of the labour pool and the ability to expand is a con. The assumption that connectivity is the only constraint on expansion is eye watering. This is another attempt by the government, who studiously avoid telling us any of this, to con us into believing HS2 is essential. How can anyone trust anyone who continually does this.

  • rate this

    Comment number 274.

    HS2 would not make the regions better off - at least that would not be the major effect. London would be the major recipient of benefits as it becomes even easier to hoover up business and talent.

  • rate this

    Comment number 273.

    What we have is a project built on spurious assumptions. No one has yet published the projected cost of travelling on HS2 or the extent of public subsidy. All high speed train networks are subsidised by government. Also will Mr Branson run the West Coast line when HS2 has taken most of his passengers
    This expensive financial folly should be killed now before more good money is thrown after bad.

  • rate this

    Comment number 272.

    The Government and highly paid executives in HS2Ltd have their backs against the wall so appoint a friendly consultant to find the answer they would like!. If the government really believes in this level of benefit invite private financiers to build it - they will snap it up if the report's findings are credible.

  • rate this

    Comment number 271.

    We need infrastructure investment across the country, not just London centric policies.
    As any network analyst will tell you, the way to improve overall network performance is to improve capacity and reliability of multiple paths, not just build one high capacity link which becomes a single point of failure. This is an ego project which will not help the regions grow a bean. Some good ideas here.

  • rate this

    Comment number 270.

    And from Spiegel how the Germans get it wrong
    With overruns of €2.3 billion, the German federal government says it sees no reason why it should pay the extra costs of a major railway project in Stuttgart. Officials are accusing Deutsche Bahn of providing inaccurate information.

  • rate this

    Comment number 269.

    Why are the Con-Dems continuing Nu-Lab's obsesssion with overpaid management consultants anyway?

    In my opinion, one of the best things Milliband could do was announce policies that minimised the use of these parasites by any future Labour govt.

    Why is tax money used to pay huge sums to overpaid management consultants just so the govt can release documents full of wild speculation & blatent spin?

  • rate this

    Comment number 268.

    Cameron and his cronies are really taking the mickey. HS2's registered office is in the same building as other government departments/agencies and to quote from their financial report for 2012/2013

    HS2 Ltd has no borrowings and its activities are entirely funded by grant from the DfT

    Just look at their website to pick up more info

  • rate this

    Comment number 267.

    @264 Two fundamental questions
    1) How do you know?
    2) Who benefits?

    1) They don't
    2) Not you

  • Comment number 266.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 265.

    How come the assumption is made that rail and road are the only methods of travel for commuters?

  • rate this

    Comment number 264.

    Two fundamental questions
    1) How do you know?
    2) Who benefits?

    If you cant get a good answer to question 1 number 2 is always helpful

  • rate this

    Comment number 263.

    If this Government continue to treat me like this I'll start to think I really am stupid !

  • rate this

    Comment number 262.

    They said on the news that even though Derby and Nottingham will have to share a station (that is 12 miles from Derby and 5 miles from Nottingham) that they will benefit more than any other cities.

    Do our MPs (and BBC reporters) think we all came down with the last shower?

  • rate this

    Comment number 261.

    KPMG/UK have a banner which reads: 'Cutting through complexity'

    Maybe it should read 'Making it all up'

    HS2 Ltd is a PLC set up by the government with many stakeholders who are the intended beneficiaries, that doesn't include Joe Public or anyone living in it's wake of course !

    When will this bunch of Condem crooks give up ! (2015 hopefully)

  • rate this

    Comment number 260.

    Surely we should also be considering the opportunities for more people to work from home rather than increasing the distance travelled by employees? Fewer office based employees means lower overheads, more relaxed/less stressed employees. I think somebody getting up and logging into their home workstation would beat travelling by HS2 hands down

  • rate this

    Comment number 259.

    What this report fails to address is whether this huge sum of money could get an even bigger return if it were invested elsewhere. And if the argument for HS2 has shifted from speed to capacity - whether raising all the bridges to allow double deck rolling stock would achive the same capacity gain for a fraction of the price. The problem with political projects is they they have no reverse gear.

  • rate this

    Comment number 258.

    The report is scattered with assumptions that people will want to travel further for work, thus extending their working day. Surely it would be cheaper and easier to create real jobs in the areas where they have been lost to off-shoring and economic downturn. There are so many meaningless tables and graphics in the report which provide no real data - I can do these, gissa job

  • rate this

    Comment number 257.

    I wonder what KPMG's report would have said if they had been retained by the opponents of HS2.

    Spin, spin, spin: yawn, yawn, yawn.

    Does anybody really care? Will anyone be able to afford the tickets when they are available?


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