Rail developments and economic growth

I spoke at a recent conference in London on Rail Station Regeneration and Development, which considered how economic growth and urban regeneration might be unlocked through station developments. This article is based on my presentation.

Construction of new railways has always been important for economic growth by making land accessible for development. In 1850 the United States’ economy was not much bigger than Italy’s. Forty years later, it was the largest in the world – the result of the railways that linked the east of the country to the west, and the interior to both. Land was developed for farming, mining, industry and homes, and both population and productivity boomed.

Something similar, albeit on a smaller scale, has been happening in East London, Docklands and beyond, where public investment in urban rail – Docklands Light Railway, Jubilee Line Extension, Overground, with Crossrail under construction – has made brownfield land accessible for development by the private sector as new commercial and residential property. This helps accommodate London’s fast-growing population, for both employment and homes, and illustrates how investment in transport can facilitate economic growth.

Transport economics

This direct relationship between transport investment and economic growth via changes in land use, with resulting uplift of land values, is not how transport economists see matters. They suppose that improvements to the transport system allow users to save travel time – time which is valued because it allows more productive work or more desirable leisure. However, travel behaviour has been monitored for the past forty years through the National Travel Survey, a key finding of which is that average travel time has remained unchanged at close to one hour a day. This shows clearly that in the long run there are no time savings from new investments. Time savings are short run and disappear as people take advantage of improvements that permit faster travel to venture further for more opportunities and choices – which in turn gives rise to changes in land use, as we see in East London.

The nineteenth century was the great era of the railways in which the energy in coal was harnessed to allow speedy travel between stations according to the timetable. But in the twentieth century, the motorcar became dominant, allowing door-to-door travel at any time of choice. However, its very success has limited car use in cities on account of traffic congestion, and the railways are undergoing a revival. National rail passenger numbers have doubled over the past twenty years, as have rail trips within London.

Growing demand for rail travel

This growth of rail demand is expected to continue, driven by population growth. In London and other big cities, the population is increasing, partly the result of the growth of the service sector which prospers in the dense agglomerations of city centres. But successful cities do not attempt to provide for more car use – rather, they invest in rail that offers speedier and more reliable travel for work journeys than the car on congested roads. So car use falls as the population grows. For instance, the car was responsible for 50 per cent of all trips in London in 1990, now down to 37 per cent. Car ownership in London and driving licence holding by the urban young are both declining, which boosts demand for national rail for interurban travel. And the growth of economic activity in city centres leads to more commuting by rail from beyond the city.

So rail travel is in a growth phase, driven by population growth and revival of city centres, which seems likely to run for as far as can be seen. This prompts investment in the rail system, both public investment in infrastructure and private investment in rolling stock. This in turn means more passengers on existing routes as well as on new routes. Hence there are many opportunities for land and property development adjacent to stations.

Opportunities for development

Two recent reports review the opportunities for development at or near stations.

Network Rail commissioned a study from the consultants Steer Davies Gleave in 2011 on the value of station investment. One interesting finding concerned the uplift in rateable values of property adjacent to station improvements in Sheffield of 67 per cent, which is more than three times the corresponding increase for the city as a whole, reflecting increase in the quantity of commercial development and the value per square foot. Analysis of the developments following station investment at Manchester Piccadilly indicated an increase in annual rental value of about £10m.

The Independent Transport Commission issued a report in 2014 about the spatial effects of High Speed Rail, based on evidence from European experience of how such major infrastructure investment can transform urban landscapes and their hinterlands. Lessons include creating opportunities for development by the private sector through partnership working with multiple funding sources.

However, the Department for Transport’s approach to economic appraisal of transport investments focuses on the saving of travel time and disregards changes in land use and enhancement of land value, since to include the latter would be double counting. But disregarding land use change means neglect of real, observable changes in market values that reflect the increased economic value of land and property made more accessible by the transport investment. Such economic benefits have spatial distribution of central interest to decision makers, as well as socio-economic distribution, including potentially big gains to existing property owners who might be induced to contribute to the financing of the investment.

Dissatisfaction with the DfT’s approach led Transport for London (TfL) and Transport for Greater Manchester to commissioned a report from the economics consults Volterra Partners that highlights the mismatch between the standard approach to transport appraisal, which focuses on welfare benefits to travellers, mainly as time savings, and the impact of transport investments on wider economic potential, both spatial and temporal developments. TfL is preparing a business case for Crossrail 2, the planned new SW-NE rail route across London, consistent with the Volterra report.

Need for new thinking about investment appraisal

At present, the officially endorsed methodology for economic appraisal of transport investments, which focuses on time savings benefits, is at odds with the business case which takes account of changes in land use. For real world decision makers, the latter is what matters, as exemplified by the plan to extend London’s Northern line tube to the Nine Elms development beside the River Thames. About a quarter of the £1 billion will be provides by the developers of the new residential and business properties, with the remainder from earmarked enhanced business rates. This business plan has been endorsed by all concerned. In contrast, the formal economic appraisal was barely relevant to decisions, being based on notional time savings by those travelling to the location in the future, plus an estimate of notional agglomeration benefits.

The problem with the DfT appraisal methodology is exemplified by the economic case for High Speed 2, the planned new rail route linking London to the cities of the Midlands and the North, where the benefit:cost ratio is about 1.4 based mainly on time savings. However, the political case for this very large investment is focused on its potential to promote economic development in the cities beyond London. But the time savings benefits tell us little about where and to what extent economic development may be expected to arise.

Part of the difficulty in estimating economic benefits from HS2 is that it will improve the connectivity of London with the cities to the north, such that there is inevitable uncertainty about where the benefits will accrue. Will there be a net gain to the UK economy as a whole, or will activity be shifted from one place to another? Will London suck in economic activity from elsewhere? Will the other cities, with lower property values, gain at the expense of London? These are difficult questions that involve much uncertainty, where outcomes will depend on a variety of supporting measures that the cities concerned might implement.

What is clear is that the standard analytical framework is not up to the task. Reform is needed, focusing on understanding the occurrence and value of changes in land use that arise from transport investment. Transport economists need to get out of the mental silo that has allowed them to disregard changes in land use. They need a wider framework for investment appraisal, comprising both methodology and practice, which recognise that the benefits of transport investment are seen as developments to which other stakeholders will commit. Such a framework would foster partnerships between transport authorities, developers and planners, which standard methodology fails to do.

The problem of spatial distribution is not unique to HS2. Consider the car park at the station of a town well located for commuting to the big city. Its existence allows a flow of economically active people out of the town. Is there potential to create a reverse flow on otherwise under used trains by developing the air space above the car park into a business centre with rents lower than in the city?


The standard DfT approach to appraising rail investments is not fit for purpose since it disregards changes and land use and enhancement of land values that are the main long term benefit. Rethinking is needed.

There are good prospects for continued growth of demand for rail travel and good opportunities for developers to work with planning authorities and transport undertakings to realise benefits from rail investment.