Appendix 2: Economic Benefits

APPENDIX 2: ECONOMIC BENEFITS

CONTENTS

IntroductionPage 2

Part 1:Policy frameworkPage 2

IntroductionPage 2

National PoliciesPage 2

Regional PoliciesPage 10

Conclusions on the policy frameworkPage 15

Part 2:Economic benefitsPage 16

Defining economic benefitsPage 16

National benefitsPage 19

Regional benefitsPage 23

Local BenefitsPage 24

Part 3: ConclusionsPage 31

INTRODUCTION

1. The following text on economic benefits has drawn closely on the ‘Report on Economic Benefits’ set out at Appendix 1 of BAA/1/A. This is quite intentional. That text was intended to be a review of Government policy and analysis relevant to the G1 project.

Part 1: Policy Framework

Introduction

1. The primary benefit of any investment lies in the flow of goods or services which it provides. However, major transport infrastructure projects such as G1 play a much wider role in facilitating economic development and in securing the achievement of relevant government policy objectives. This section considers the government policies and policy objectives relevant to the G1 development. These objectives relate to national economic policy, transport policy and policies for regional development. It will be shown below that the proposed development is required to ensure the achievement of government objectives in all of these areas.

National Policies

Economic Policy

1. The Government’s principal economic objective is “to build a strong economy and a fair society, where there is opportunity and security for all”. This objective is set out in paragraph 1.1 of the 2007 Budget Report [BAA/1/C App. 1 paragraph 2.2.1]. The Budget Report also sets out the long term goals (paragraph 1.6 BR 2007) of the Government which are:

1. maintaining macroeconomic stability;

1. raising the sustainable rate of productivity growth;

1. providing employment opportunity for all;

1. ensuring fairness;

1. delivering world class public services; and

1. addressing environmental challenges

1. The importance of transport investment is recognised in the Budget Report. At paragraph 1.26 it is stated that public services including “a fast and reliable transport network provide the essential foundations for a flexible economy”.

1. The Budget Report identifies globalisation and the integration of the world economy as key forces in Britain’s economic future and acknowledges the importance of productivity growth to long-term economic performance. The report further states [paragraph 3.1] that “progress on fostering productivity growth depends critically on building a flexible, open economy, with a highly skilled workforce, and well-developed infrastructure”.

1. The Budget Report thus recognises that transport infrastructure supports the efficient working of the economy. The report further links this investment to Britain’s capacity to compete in global markets – stating “Sir Rod Eddington’s Study, published on 1 December last year, reaffirmed the importance of well-targeted investment in transport to the continued success of the UK economy in the global marketplace. The Government has endorsed Rod Eddington’s strategic analysis.” [paragraph 3.131]. The Budget Report also places great emphasis on the importance of the UK attracting inward investment in order to ensure that the opportunities from globalisation are realised. Particular emphasis is placed on London’s role and the report states [paragraph 3.166] that “Supporting and promoting London, and the UK, as a centre for financial and business services remains a priority for the Government. London is the world’s most competitive financial centre and is in a strong position to benefit from opportunities presented by continuing global economic growth and integration”. Finally, it may be noted that the Budget report advocates that planning authorities should seek the maximisation of the use of existing infrastructure [paragraph 3.153].

1. The G1 project would increase the capacity of the London airport system which provides the greater part of the UK’s international air connections. Maximising the use of the capacity of Stansted airport would thus contribute to provision of the transport network which government policy identifies as critical to the UK’s economic success. Strengthening international linkages would benefit the development of the global role of London and serve the aim of making the UK a favoured location for international investment.

Transport Policy

Air Transport White Paper

1. The ATWP was published in December 2003 and provides a strategic framework for the development of airport capacity in the UK over the next 30 years.

1. As is common ground between the parties, the publication of the ATWP was informed by a series of research and consultation papers including the 1999 OEF report [CD/242 - Oxford Economic Forecasting - The Contribution of the Aviation Industry to the UK Economy. November 1999].

1. The ATWP makes it abundantly clear that aviation is seen to be of great importance to the UK economy. The following few quotations should suffice to make the point:

“airport development is a matter of great significance at both national and local levels. The provision of adequate infrastructure and capacity is important for national competitiveness, for regional development, and for people’s ability to travel quickly, easily and affordably to where they want to go” [paragraph 1.5].

“in an increasingly competitive global marketplace, Britain’s continuing success as a place in which to invest and do business depends crucially on the strength of our international air transport links” [paragraph 2.5].

“not providing additional capacity would significantly damage the economy and national prosperity” [paragraph 2.18].

“the availability of sufficient airport capacity is an important constraint on future growth. Our starting point is that we should make the best use of existing airports before supporting the provision of additional capacity” [paragraph 2.11].

1. The ATWP also describes the wider context within which the aviation industry operates and makes the following points:

1. Aviation and tourism: “Consumers have benefited greatly from the growth in foreign travel” [paragraph 4.21]. In-bound tourism is estimated to account for 4.4% of GDP in 2002 [paragraph 4.22] and out-bound tourism “although sometimes presented as encouraging people to holiday abroad to the detriment of the domestic economy, also contributes significantly to the economy through revenue earned by tour operators and the air transport sector” [paragraph 4.22]. “British travellers have little alternative to air travel for long haul, and many short-haul destinations, and limits on air capacity would greatly disadvantage incoming tourism, through decisions by travellers from overseas to switch to more convenient and lower cost destinations away from the UK” [paragraph 4.23].

1. Airports and regional economies: the benefits of airports to local and regional economies are recognised – “They attract business and generate employment and open up wider markets” [paragraph 4.24].

1. Air freight: the role of airports in the supply and distribution of goods is recognised and “The speed of delivery that air freight can offer is an increasingly important factor for many modern businesses, especially where just-in-time practices and high value commodities are concerned” [paragraphs 4.28 and 4.29].

1. Within the South East, the ATWP makes it clear that the“first priority” is to make the best use of the existing runways at the major South East airports. The ATWP states that “making full use of the available capacity at Stansted will be essential to avoid stifling growth” [paragraph 11.26]. The ATWP also states that “The Government believes the realisation of its regional and sub-regional growth objectives would be strongly complemented by expansion of Stansted” [paragraph 11.28].

1. The ATWP thus offers unambiguous support for the G1 proposal which would contribute to meeting an identified need for increased airport capacity in line with the ATWP priority of making best use of the existing runways in the South East. The ATWP included a commitment to report on progress on the policies and proposals by the end of 2006.

Air Transport White Paper Progress Report

1. The ATPR[CD/88] was published in December 2006 and followed the publication of the Stern Review [CD/157], the Eddington Study [CD/111] and a 2006 OEF Report [CD/120]. As the ATPR draws on the Eddington and the 2006 OEF Reports, brief overviews of these reports are provided below.

• The Eddington Study

1. On behalf of HM Treasury and the Department for Transport, Sir Rod Eddington was commissioned to advise on the long-term links between transport and the UK’s economic productivity, growth and stability within the context of the Government’s commitment to sustainable development. His report [CD/111], which was published in December 2006, found that “there is clear evidence that a comprehensive and high performing transport system is an important enabler of sustained economic prosperity” [paragraph 1, The Case for Action]. The report advised that the Government should prioritise action on those parts of the system where the networks are critical in supporting economic growth and where there are signals that these networks are not performing such that transport constraints could “hold back” economic growth [paragraphs 1.80 – 1.81, The Case for Action]. The strategic economic priorities were identified in the report as:

1. congested and growing urban areas;

1. key international gateways; and

1. key inter-urban corridors.

1. The report is consistent with the ATWP in identifying aviation gateways as a strategic priority and recognising “the vital role of aviation in supporting the international competitiveness of the UK’s high-tech manufacturing and financial services sectors” [paragraph 4.112 Main Report Volume 3]. The report also recognises that aviation needs to be sustainable and take full account of its environmental costs. Eddington therefore, suggested that the Progress Report on the ATWP should test a wider range of carbon price scenarios.

1. The Eddington Study emphasises the growing importance of globalisation to the UK economy and the adverse impacts for the economy if there is insufficient capacity to meet the demand. Indeed the ATPR refers to the Eddington Study to highlight that “a healthy economy must have excellent transport systems at its backbone, and that infrastructure investment is needed to deliver global connectivity and drive economic development…as globalisation accelerates, aviation has a crucial part to play in maintaining the UK’s strengths in import and export, trade and service industries” [paragraph 4.16].

• The 2006 OEF Report

1. The 2006 OEF Report [CD/120] found that aviation is a substantial industry in its own right and concluded [Executive Summary, pages 5 & 6] that the industry:

1. Supports tourism: air is the predominant mode of transport for international tourists to the UK whose spending is equivalent to 1.1% of GDP. Air services also allow UK tourists to enjoy a much wider range of overseas holidays than would otherwise be accessible.

1. Supports trade: aviation plays a central role in fostering UK trade and air services are particularly important for the UK’s trade with the fastest growing regions of the world economy.

1. Influences where companies invest: better air transport services encourage more business to locate in an area as well as affecting the investment decisions of existing companies.

1. Is important for key growth sectors: many of the growth sectors on which the future of the UK economy depends are particularly dependent on air services for competing in the global economy e.g. London’s international financial services.

1. Supports business efficiency: air services help to improve the competitiveness of almost all aspects of companies’ operations e.g. sales, logistic, production.

1. The ATPR refers directly to findings of the 2006 OEF study stating “According to the latest research by Oxford Economic Forecasting (OEF), access to air services is an important factor for 25 per cent of companies across the whole economy in influencing where they locate their operations within the UK. Access to these services also affects the decisions by 10 per cent of companies as to whether to invest in the UK at all” and “There is also evidence that aviation is particularly important for service industries and other key growth sectors of the economy. The hi-tech knowledge-based sectors are heavily reliant on aviation to develop and maintain an international client base”[CD/88 paragraphs 4.14 – 4.15].

• The Stern Review

1. The Stern Review [CD/157] was commissioned by HM Treasury and conducted by Sir Nicholas Stern. The review sought to assess the likely economic consequences of climate change and of measures to mitigate or manage change.

1. The Stern Review begins from the scientific premise that human activity is increasing the level of atmospheric carbon, and that increases in that level bring about climate change. Climate change has, in turn, various adverse effects which impose costs on humans. At the same time, action to limit carbon emissions also has economic costs. The basic economic principle at the heart of the Stern analysis is that Carbon emissions should be restricted to the level at which the costs of additional carbon emissions are equivalent to the benefits of the activities which produce the emissions.

1. The key policy measure endorsed by Stern to achieve this balance is the pricing (and trading) of carbon emissions. This is explained in the introduction to Part IV of the report as follows ”Putting an appropriate price on carbon, through taxes, trading or regulation, means that people pay the full social cost of their actions. This will lead individuals and businesses to switch away from high-carbon goods and services, and to invest in low-carbon alternatives.” Stern also supports the introduction of policies to foster new technologies and policies to educate people on the nature of climate change.

1. The key term here is “an appropriate price” – activities whose benefits are sufficiently high will be able to bear the price of carbon emissions. It is important to note that the approach recommended by Stern, and accepted by HM Government, involves no judgment as to which activities should reduce their carbon output or by how much. The aim is to set a price which will constrain carbon output to the atmosphere to a socially optimal level and then, as with any other resource, to allow market signals to determine how and where that carbon will be produced. In such a framework we should expect to see carbon output fall most rapidly where that outcome can be most economically achieved. Stern notes that the costs of reducing carbon emissions in transport are high and states “Transport is one of the more expensive sectors to cut emissions from because the low carbon technologies tend to be expensive and the welfare costs of reducing demand for travel are high. Transport is also expected to be one of the fastest growing sectors in the future. For these two reasons, studies tend to find that transport will be among the last sectors to bring its emissions down below current levels” [CD/157 Annex 7c]. The implication is that even under a tax regime designed to reduce carbon emissions, the Stern review expects aviation to expand.

1. This conclusion follows also from the analysis in the ATPR. A range of alternative demand forecasts for air travel were produced by the Department for Transport under alternative assumptions relating to the cost of carbon (as reflected in taxes which would be paid by the industry) and other demand factors. This work included analysis of the effects of setting a price on carbon of £140 per tonne emitted in a year. The analysis concluded that “changing the assumptions within reasonable bounds does not alter the conclusion that air travel demand is forecast to grow strongly” [CD/88 Annex C paragraph 8]. Thus even with a cost of carbon of £140/tonne, air travel demand in 2030 was forecast to be 97% of the central case forecast.

1. The ATPR re-affirms the strategy of the ATWP, stating that “the Government remains committed to the strategy set out in the White Paper: it strikes the right balance between economic, social and environmental goals” [CD/88 paragraph 1.2]. In relation to Stansted, the ATPR reiterates the conclusion of the ATWP by stating that “The White Paper made clear that the first priority at Stansted should be to make best use of the existing runway” [CD/88 paragraph 5.7].

Conclusions on National Policies

1. Transport is recognised by the Government as being essential to the efficient functioning of the economy and playing a critical role in trade and growth by integrating domestic and world markets, and attracting foreign direct investment to the UK. Air transport is of particular importance in the context of economic globalisation as it is by far the principal means of international transport. The Eddington Study made specific reference to the importance of development of international gateways and key intra-urban corridors. Stansted is a key international gateway and almost centrally located within the important urban growth corridor running through London, Stansted, Cambridge and Peterborough.

Regional Policies

1. Economic development policy for the East of England region is set out in two key documents – the Regional Economic Strategy and the Regional Spatial Strategy. The Regional Economic Strategy is produced by the East of England Development Agency in partnership with the Regional Assembly and other partners. Its purpose is to assist regional development partners – including local authorities – in identifying and taking appropriate action to promote development of the regional economy. Since the coming into force of the 2004 Act, the RSS has formed part of the statutory development plan. It follows that these two documents define planning and development priorities and set a framework for local authority decisions on matters including planning and investment.

East of England Regional Economic Strategy

1. The economic vision for the East of England, as set out in the 2004 Regional Economic Strategy (“RES”) is for “A leading economy, founded on our world-class knowledge base and the creativity and enterprise of our people, in order to improve the quality of life for all who live and work here” [CD/119 page 9]. The RES identifies three ‘building blocks’ [CD/119 page 9] for achieving this vision, being:

1. build on the region’s strengths;

1. improve areas of average or poor performance; and

1. capitalise on the distinctive opportunities and challenges.

1. In terms of building on the strengths of the region, the vision is for the East of England to continue to build on:

1. the region’s global leadership in science and technology, research and innovation – this includes areas such as biotechnology, pharmaceuticals, engineering, advanced manufacturing and information communications technology (ICT);

1. its international gateway roles and transport corridors - these include some of the fastest growing ports and airports in the country and major transport corridors; and

1. the region’s landscapes and environmental assets – these particularly act as a national resource for food, farming and renewable energy.

1. The RES identifies eight strategic goals of which Goal 6 – making the most from the development of international gateways and national and regional transport corridors – is of particular relevance to Stansted. The RES states that “The government’s agenda is supporting the sustainable expansion of ports and airports as gateways to international markets. The regional economic strategy seeks to capitalize on the economic and employment opportunities provided by these developments while securing positive and meaningful mitigation measures to address environmental impacts” [CD/119 page 64]. Within Goal 6, Priority One is “to take advantage of the opportunities from sustainable airport expansion in the region” [CD/119 page 65]. This priority itself recognises that the “region’s airports are important assets which act as drivers for growth and regeneration and will play an important role in improving the region’s competitive strength and attractiveness as a business location and tourism destination” [CD/119 page 65]. An action from this priority is to “sustainably develop the potential of the region’s airports to support job growth and provide business opportunities” [CD/119 page 65].

1. In October 2006, the East of England Development Agency published a review of progress against the regional economic strategy goals and priorities and an assessment of the current state of the regional economy (“East of England: State of the Regional Economy” East of England Development Agency, October 2006). This progress report acknowledged that the importance of regional airports has grown since the ATWP and that “the recognition of the importance of the airports and ports as employers and strategic locations for other development in the region has increased since the regional economic strategy was published” [BAA/1/C App. 1 paragraph 2.3.8].

1. The RES is unambiguous in its support for development of the region’s airports - Stansted is the major airport within the region and it is BAA’s case that the G1 proposal will be required to deliver the goals of the RES.

Regional Spatial Strategy for the East of England