Sorting out Transport in London

1 May 2013   Sorting out Transport in London   Professor Douglas McWilliams   London is the only one of the major world cities to have been mainly developed in the age of the horse and cart. 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.   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.   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. 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.   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.  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 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.   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.   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 colleague Charles Davis 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.   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.   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.   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.   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.   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!   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.   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.   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.   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.   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.   The puzzle is that this drop in road usage has not been matched by any reduction in congestion.   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.   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. 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. 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.   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?   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 Cebr has studied the potential benefits of a system of underground roads and found considerable gains.   There are further benefits to employment.   And we estimate that there would be a boost to London’s GDP building up to £6 billion once the system was in operation.    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: Cost reductions - £2 billion per annum already planned – another £2 billion realistic Gains from underground roads - £6 billion to London GDP  from complete system Net benefits from improved tube and rail – scaled from CrossRail – c £2 billion Control bus usage by price - £500m plus congestion reduction 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.     © Professor Douglas McWilliams 2013