IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
The Heathrow Expansion
On the night of the 25th of June, the UK Parliament voted in favour (415 to 119) of the £14bn expansion of Heathrow airport in London. This decision represents the latest episode in a decade-long national debate on the creation of third runway at Heathrow. Those is favour of the expansion argued that more aviation capacity will attract more global business and investments. In particular, those who aspire to create a global economic role for the UK after Brexit see in this not just an opportunity, but an essential step toward the realisation of the project. It is indeed evident that the UK needs more airport capacity and the country is lagging behind other European competitors (Amsterdam has five runways, Paris and Frankfurt four) that are now attracting business away from the UK. The fact that the number of flights managed at Heathrow was almost the same as 10 years ago is also indicative. Leaving aside future political debates and potential practical pitfalls, it is expected that construction start in 2021 and the new runway be operative in 2026.
Undoubtedly, a better port of entry to the country is a critical factor to attract business. Supporters of the project, first of all brexiteer Mr Grayling, the Transport Secretary, argue that increasing the number of flights each year from 480,000 to 740,000 will enhance the credibility of the nation (especially after Brexit) to become a global economic player. Of course, simply expanding the aviation capacity of the country does not guarantee more business for Britain. Due to the uncertainty over the terms of the UK leaving the EU (and it particular the country’s future membership to the European Single Market), it is apparent that global companies currently based in UK (e.g. Airbus) are growing increasingly concerned about the costs and risks involved, and are seriously considering relocating in other EU countries. Rather ironically, Ferrovial, Heathrow’s operator, announced on the 26th of June that it will be relocating outside of Britain.
Not surprisingly, the project faces some serious criticism. In particular, critics point out the immense costs, both monetary for taxpayers and environmental for the residents of West London.
In terms of financial costs, it is expected that the bill will reach at least $14bn, but this number could significantly increase. At the same time, the expanded airport will require an upgrade of the local transport to Heathrow and it is expected that the sum may be similar, if not greater, to the one of the runway itself. In the event of costs larger than expected, who will pick up the bill? British Airways argued that an escalation in costs may have to be passed on to passengers in future.
Moreover, local authorities, Greenpeace and the Mayor of London himself, Sadiq Khan, have stressed the significant environmental costs (in terms of air quality and noise) involved. They are prepared to fight the project strenuously, and take legal actions that would follow the same script that stopped the expansion proposal in 2010.
The State of the Transport Network
The Transport Secretary Mr Grayling is correct to argue that if Britain wants to play a global economic role in the future, it requires a significant upgrade in its infrastructures. However, the Secretary does not seem to recognise that no business will find the UK more attractive simply because of an improved aviation access. The railway network is in critical conditions. Portions of the country are not yet served by electrified services and the planned upgrades are taking longer than expected. On top of this, the recent, centrally planned, reorganisation of the national railway timetables has been an embarrassing disaster, with commuters and tourists stranded, dealing for months with long delays and cancellations. Why should an international commercial partner find the UK more attractive because of better and larger airports, when moving goods and people across the country is a failing business?
The rail regulator has already exhorted Network Rail, the owner (controlled by the Government) of the UK’s rail infrastructure, to spend additional £1bn just for emergency updates to the network. The situation has deteriorated to the point that a few weeks ago, the Government has had to nationalise the East Coast railway. It seems very likely that a similar fate may be shared by northern providers such as Transpennine and Greater Anglia. This is of course in part the result of a failed privatisation of the system, so that private providers cannot control the modernisation of the network and continue to face price caps imposed by the regulator. Be that as it may, this situation it is clearly embarrassing for a Tory government that has championed private enterprise and scorned the Labour proposal to nationalise public transports. It seems obvious that Britain cannot hope to deliver a successful Brexit and become a global economic player with a railway network in disarray and often in a state of crisis. An additional third runway at Heathrow will not change this, and that fact that it is very expensive — financially, environmentally and politically – will just make the entire issue more problematic.
The Need for More Devolved Responsibility
What does the transport sector require then? It definitely needs a long run vision and a clear commitment to modernising a network that it is not fit for purpose anymore. Clearly, credibly completing the privatisation of transportation and allowing private providers to invest in infrastructures and freely pricing their services would be essential. Short of that, the sector badly needs significant devolution. Central planning agreed in — and operated by — London has clearly delivered very disappointing results. The Secretary and the current Government seem to have forgotten about the Northern Powerhouse project. The project aimed at moving spending and planning responsibilities from London to a large metropolitan area in the North of the country, with Manchester at its centre. It is regretful that citizens outside of the London area cannot decide how and where to invest. Real devolution would ensure that different regions in the country would be best placed to identify infrastructural needs and priorities; at the same time, local leaders will be more accountable for keeping their electoral promises.