Economics of proposal to build a bridge from Northern Ireland to Scotland

Description

Articles on front page (and page 3) Irish News based on my press release.

Subject

The Press release

Release: Immediate Thursday 24 January 2019

 

Starting to think about the economics of a Bridge from Northern Ireland to Scotland

“As we come to Burns Night it is a good time to think about not just the cultural connection across the North Channel but also the economic question as to whether a physical connection (a bridge) [Note to Editors 1] should be built to Great Britain.

Let’s ask some pertinent questions:

1. Is a bridge technically feasible? [Note to Editors 2]

Probably yes. At least, there are now bridges of similar length in other parts of the world: Lake Pontchartrain Causeway (US) 24 miles and Runyang Yangtze Causeway (China) 22 miles.

1. The monetary cost?

We don’t yet have a precise figure and it is worth remembering that large engineering projects often suffer considerable cost over-runs [Note to Editors 3]. The British architect Professor A. Dunlop argued recently (2018) that the cost could  “conservatively” be £20bn. Such a figure does not include the considerable sums which might have to be spent on improving infrastructure connections (roads) to/from the bridge (possibly amounting to at least £1bn).

3. Where would the bridge be placed?

Most likely starting in either the Larne or Bangor areas over to the vicinity of Port Patrick (21 miles). There is a strong argument for saying it should NOT be from North Antrim (say Ballycastle) across to the Mull of Kintyre: only 12 miles of sea but implying the need to use a very long and slow road to drive on to Glasgow- about 150 miles or 3.5 hours.

4. How large might the economic benefit be?

I think we should ask how far a bridge would lower transport costs (by comparison to existing ferry links) and then how far that might lead to growth in output (GDP or GVA). Since the traffic  would be two ways there would probably be a gain to GDP in GB as well which should be factored in.

Under generous assumptions [see Note to Editors 4] this gain through reduced transport costs could add about £130m to Northern Ireland’s annual output.

That sum could be doubled to £260m if we assume a comparable gain to GB’s GDP.

Admittedly, this does not exhaust the “narrower” economic benefits-

• there might be some increase in Northern Ireland’s exports to continental Europe (in terms of the traffic sent via GB) [Note to Editors 5],

• there would be the “welfare gains” to people travelling by road transport between Northern Ireland and GB in terms of reduced travelling time [Note to Editors 6],

• and there would be a gain to both freight and passenger users to the extent that a bridge was in fact more reliable than a ferry [Note to Editors 7].

However, all these additional narrower economic benefits would probably sum to a relatively small value (say, less than £100m annually).

So, based on optimistic assumptions, an annual gain to the UK economy of up to £400m (of which more than half would be in Northern Ireland).

5. Would the economic benefits exceed the economic cost?

This is a crucial question which could be considered by a conventional cost benefit and project appraisal. The cost would obviously be very large- say £20bn- and to a large extent (although the construction period might be, say, 10 years) is “up front”.

Obviously, the economic benefits (like the cost) need to be verified by a rigorous study. As indicated above- answer to Question 4- I think it might be a struggle to identify and quantify economic benefits totalling more than, say, £400m p.a.

This then raises the question of what length of life we should assume for the bridge: how many years before it has to be replaced? HM Treasury’s official guidance relating to cost benefit analysis is that large scale assets should normally be assumed to have a  life of “up to 60 years”. Interestingly, the 1964 construction Forth Road Bridge has recently been relegated to the status of a public transport crossing having been supplemented by a new suspension bridge- it had a practical life of about 50 years.

On a generous assumption that the bridge could be used for 50 years that might seem to imply that the total economic benefit could be up to £20bn, i.e. £400m p.a. times 50. Unfortunately, this straight multiplication massively exaggerates the true benefit- the stream of “annual benefits” should in fact be discounted to convert it into the equivalent sum of value in 2019 money [see Note to Editors 8]. There are good economic reasons why benefits yielded in the distant future should be regarded as much less valuable than costs felt today. It begins to look much less likely that the discounted value would reach the £20bn cost figure (admittedly, given a long construction period the £20bn cost would also be discounted down a bit but a smaller amount than the benefits).

6. Could there be any broader economic benefits?

Some pieces of recent economic theory suggest that there could be broader benefits especially to the extent that Northern Ireland’s economic growth rate was accelerated. Unfortunately, these are difficult to quantify and the likelihood is that such transformative or catalytic effects would be quite small in practice.

For example, there is an argument much favoured by HM Treasury in its recent claims as to the (large) economic costs which might follow from the UK’s exit from the EU’s Single Market that access to a larger economic market automatically translates into higher productivity. Unfortunately, a more careful reading of the data suggests the strength of this relationship has been exaggerated.

Then there is the related argument about agglomeration economies, e.g. consider two cities and build a motorway or high speed railway between them, it is as if businesses in the two cities now have access to a much bigger local labour market. All sorts of gains to efficiency and productivity could follow. An example of a bridge which probably led to agglomeration is the Malmo-Copenhagen bridge which was built in 2000 [Note to Editors 9]. 

However, the characteristics of the Denmark-Sweden link may be so particular that it does not provide a model that Northern Ireland-Scotland could follow. It is notable that the Danish capital and the Swedish are now only 45 minutes apart in terms of driving time. Both cities are large and include large number of high tech companies. Someone driving across the bridge to Scotland would still face a road journey of nearly 100miles which given the current quality of the roads could take 2 or more hours. We are constrained by geography: if Glasgow was situated where Girvan is or Edinburgh were placed on Whithorn (the ancient ecclesiastical capital of Scotland) the case for a bridge would be a lot stronger. As it would if the bridge “landed” on Merseyside and gave easy links on to Liverpool, Manchester and the English Midlands. But, we really are where we are!

7. How would the bridge be paid for?

Importantly, notwithstanding appearances, this is NOT the same as the question of the balance of costs and benefits. Even with a high level of tolls it is unlikely the bridge could be made into a commercial proposition. We would be relying on public funding. Is it at all likely that “outside funders”, such as the US or EU would make a significant contribution to the £20bn? Probably not.

So, the question becomes one of how funding would be balanced between the London Exchequer and the Northern Ireland block grant. (A good case could be made for a contribution from the Scottish government given that Dumfries and Galloway would probably gain as much, if not more, from the bridge than East Antrim or North Down but the Edinburgh government may judge their responsibility should be limited to, say, upgrading the A75 and A77 roads which could be very costly.)

Aspects of the proposed Corporation Tax reduction could be relevant. HM Treasury might be willing to make a sizeable contribution but might make this conditional on a matching “Northern Ireland contribution” in the form of an annual deduction from the Block Grant- say £300m for 30 years. Such a funding model would certainly concentrate the mind- would the bridge be worth such a sacrifice? A more positive interpretation is that this policy would help towards the re-balancing of the regional economy away from the public sector and towards the private sector.

Some tentative conclusions

Perhaps the key conclusion is that statements by spokespersons for the London and Scottish governments who have talked about the bridge proposal being subject to a detailed consideration should be actioned. We do need a rigorous and detailed evaluation.

In indicative terms, I think it is hard to see how the quantified (and properly discounted) economic benefits could in fact exceed the cost. That need not imply that a bridge “should not” be built but it does suggest we need to think very carefully about whether there would be any broader catalytic or transformational effects and how big they might be.

The construction phase of the bridge which might take about ten years could imply a major boost to employment and output in Northern Ireland. That by itself is not necessarily a strong argument for going ahead- the £20bn could be spent in other ways which could have similar or even bigger construction activity implications. Also, importantly, it is likely that the Northern Ireland construction/civil engineering sector would not be sufficiently large to absorb more than a (small?) proportion of the total £20bn spend- a lot of the benefits would “leak” across the Irish Sea.”

Notes to the Editor

1. Geology, the deep Beaufort Dyke which contains Second World munitions, probably means that a tunnel solution as per the Channel Tunnel is unlikely to work in this case.

2. Something can be technologically feasible without providing economic benefits greater than the costs. The Concorde supersonic aircraft and post-War British atomic power stations may have been engineering marvels but they were far from commercially viable and might well have “failed” the test of an economic cost benefit analysis.

3. Many major civil engineering projects have been characterised by substantial cost over-runs: the HS2 proposal and Crossrail. This is not inevitable, the Queensferry Crossing (the replacement for the Forth Road Bridge) was finished below earlier costings.

4. According to the Broad Economy Sales data, in 2016 the total sales from Northern Ireland to Great Britain amounted to £14bn. Assume that half of those sales would use the bridge. What might be the reduction in transport costs which the bridge might produce? An admittedly very dated  research report by the old Northern Ireland Finance Department (PPRU in DFP in 1987) suggested that average transport costs for businesses in Northern Ireland amounted to 4.2% of turnover compared to 2.6% in Scotland: a cost advantage equivalent to 1.6% points of turnover. But, if total costs, transport and other, make up, say, 90% of turnover then the percentage reduction in total costs would be 1.8%. So, the implied boost to sales as a result of the lower transport costs given use of the bridge would be: £7,000m times 1.8% times one (assuming, a price elasticity of demand of one). This implies a sales and hence output gain of £126m. For simplicity, we assume an equal gain to traders selling from GB to Northern Ireland. Leaving to one side the point that the DFP/PPRU transport cost data is 32 years old, there are plausible grounds for believing the assumptions made err in the direction of over-estimating the gains to the Northern Ireland economy:

1. Would the proportion of Northern Ireland sales going to Great Britain which would use the bridge really be as high as one-half? (Freight transport going on to, say, Manchester or Birmingham or London is surely likely to continue to use the Belfast-Liverpool sea route?)

2. To the extent that there was a toll for using the bridge then the cost advantage relative to the ferry drops.

3. The assumed price elasticity of one, i.e. that a 1.8% reduction in costs leads to a 1.8% increase in sales probably exaggerates the impact (apart from the possibility that the true elasticity could be smaller there is also the possibility that some of the transport cost reduction would NOT be passed on in the form of lower prices).

4. The latest Broad Economy Sales figures, those for 2017, indicate a much lower level of total sales from Northern Ireland to GB (down from £14bn to closer to £11bn).

1. In 2016 Northern Ireland sales to the EU other than the Republic of Ireland were about £2.3bn, i.e. less than one-sixth the sales to GB. Hence the grounds for saying any consequential impact from lower transport costs across the Irish Sea could be relatively small.

2. There are about 2m annual passenger sea journeys across the Irish Sea. If, say, one-half of those (1m) opted to use the bridge (people driving or busing on to, say, the Midlands or South East England may still prefer to use the ferry to Liverpool) and the time saved per journey was 2 hours then the “value” of the total time saved might be 1m times 2 times, say, £20 per hour (well above the Northern Ireland average earnings rate) or a total of £20m.

3. The reliability point may be moot- any winds strong enough to stop the ferries might also imply the bridge had to be closed.

4. In the Green Book, HM Treasury recommends a discount rate of 3.5%.

5. The Ǿresund Bridge constructed between 1995 and 2000 (length 7 miles) at a cost in the prices of that time of euros 3bn.

Ends

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