Property Value Uplift misses the point

A month ago, the Institute for Fiscal Studies released a new product developed for the National Infrastructure Commission. Under the heading Estimating the benefits of transport investment, the new web-based software tool estimates how land values respond to transport changes. Specifically, it shows how much land values rise across English regions/sub-regions in response to new or improved road and rail infrastructure.

The work aims to help local authorities in their planning negotiations with developers – which is to be welcomed – but also to 'help inform government investment decisions by providing estimates of the size and distribution of specific project benefits'. It's this second use which needs to be called out as an endeavour which risks creating a new and misleading basis for transport appraisal and project prioritisation.

Why these words of caution at a time when so many are crying out for 'the true beneficiaries' of transport investment to pay up? And when so many commentators condemn 'conventional transport appraisals' as being narrowly obsessed with measuring user time savings?

When the IFS tool is applied, it shows very different results depending on the region of transport investment, with property value uplifts in Yorkshire barely over a quarter of those from an equivalent investment in the Cambridge-Oxford corridor. This is plausible enough, but it's not the right basis to decide where to make transport investments.

Back in the 19th century, when legislators turned their minds to such questions – late on, when private sector investment in canals and then railways had largely run its course – they too looked to property value uplift as a measure of transport benefit. Was it a good idea for Government to fund the building of railways in remote western Ireland? No matter whether anybody used a new transport facility, did rents go up? This approach fell out of favour when it was realised that while rents may indeed go up in the vicinity of a transport investment, they may go down elsewhere, a second order impact neglected then and now under an 'all else equal assumption' in the IFS approach.

What was really needed was a means of measuring how – moving on to the 20th century – all of society might benefit from transport improvements and the evolution of ways of valuing these impacts. Achieving this leap forward rested on a whole body of economic theory now so taken for granted its importance needs to be re-stated. Welfare Economics – a now inappropriately named sub-genre of the work of Marshall and other micro-economists that followed him – examined how supply and demand models worked in the social as well as market realm. From this work came the notion of consumer (and producer) surpluses – the economists' measure of how much we value things (like being able to make a specific journey net of the costs of undertaking it). These costs comprise cash outlays – fares, fuel and parking charges – and the time taken to make the journey. Adding these components together, we have so-called generalised costs. Add up the costs of the travel decisions made by individuals in with- and without- investment cases (that's why have transport demand models), take the difference and we get an estimate of economic benefit.

Remember this when you hear people decrying the use of time savings in appraisal. They are measured as just one part of welfare economics' value of the benefit to the national economy.

So much for traditional benefit appraisal techniques in use 50 years ago and applied to cases such as the M1 motorway, the Victoria Line and the Tyne & Wear Metro. What's happened since? Well, it became the fashion to think in terms of user pays, so the questions of users' preparedness to pay for the time savings offered by a specific scheme – and of beneficiaries' participation more widely (say property owners) – complicated the appraisal landscape. It's back to the 19th century if we are not careful.

The Department for Transport could reasonably say: but we are careful – and cite an interest in the distributional consequences of transport investment policy decisions and a more recent requirement to have regard for regional equality impacts. None of which yet trumps the appealing simplicity for Ministers in seeing project benefit cost ratios. Yet a continuing Government desire for rising property values as a supposed motor of the British economy could yet distort spending decisions: there is a bigger property value return in the South and East than in the North and West.

What can be taken from the IFS work for the National Infrastructure Commission is that it would be wrong to apply similar requirements for third party funding of transport projects in differing regions, where the property uplift values differ so widely, along with income and productivity levels. Regional rebalancing will remain unachievable if (say) 50% investment funding from non-Treasury sources is required everywhere.