Transport Infrastructure and Economic Growth - Report (international version)
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Transport Infrastructure and Economic Growth Report (international version)
This report is a short international version of our main report on Russian released in 20191. The report classifies and describes the main types of socio-economic effects, both direct and indirect, arising from implementation of transport projects. The given list and classification of effects do not claim to be exhaustive, and our proposed methods do not claim to be universal and exceptional. In the report, some formulas and approaches are given for calculating various effects from the development of transport. We have set the task to accumulate existing and create some new approaches in terms of maximum applicability «here and now». As it will be shown in the review of world experience, there are sufficiently developed software products with complex mathematical models for evaluating the effects. At the same time, there is a lack of literature on this topic that carry a direct physical meaning of these effects. We deliberately omit all complex formulas (for example, in I/O models for estimating multipliers or calculating elasticity and damping coefficients for agglomeration effects) in order to focus on the semantic description of effects types. The report may be of interest to all researchers and experts of the transport sector, economists, and statesmen. Scientific guidance Petr Lavrienko, Pavel Chistyakov Authors Anton Vlasov, Anastasiia Glazunova, Mikhail Dmitriev, Valerii Dymov, Nikolai Isain, Ekaterina Kozyreva, Vladimir Kosoi, Karina Malaia, Aleksandr Morozov, Tatiana Pavlova, Anna Romashina, Vladimir Sviridenkov, Igor Smirnov, Pavel Stepanov, Maksim Fadeev, Oksana Filippova, Aleksandr Shirov, Dmitrii Shults Special thanks to Tatiana Mikhailova and Natalia Trunova as well as Institute of Economic Forecasting, RAS https://infraeconomy.com/effecty 1
Content Key findings 4 Dialog with an opponent 6 1. Investment in the transportation industry 11 2. Existing methods and models for assessing the impact of transport projects on economic development 15 2.1 Methodological approaches 15 2.2 Models for assessing economic effects 16 3. T ypes of socio-economic effects of transport development and suggestions for their assessment methodology 19 3.1 Effects of investment demand related to the implementation of infrastructure projects 20 3.2 E ffects that have a direct impact on the transportation industry 22 3.3 Agglomeration effects 22 3.4 Effects of industrial output growth, associated with the elimination of infrastructure constraints 27 3.6 Effects of Increasing the Reliability of Freight Transport (Reliability Effects) 31 3.7 Projects of integrated territorial development 34 3.8 Environmental effects 36 3.9 E ffects of increasing transport accessibility to global markets 38 Conclusion 40 References 42 Quantitative analysis of socio-economic effects. The Yekaterinburg–Chelyabinsk high-speed railway (HSR) 46
4 INFRASTRUCTURE ECONOMIC CENTRE
Key findings
It is difficult to overestimate the impact of the transportation industry on the economy. Transport provides
the ability to move people and goods, being a necessary condition for creating a single economic space.
Transport is the basis of trade infrastructure; it has a significant impact on the competitiveness of certain
industries in countries and regions. Imperfections in the transport system (for example, bottlenecks,
limited multimodality, high tariffs) negatively affect the efficiency of the country’s economy as a whole.
Conversely, accelerated development of transport infrastructure and improvement of transport and
logistics systems can have a significant impact on economic growth and, ultimately, on the well-being
of the population.
Transport projects affect a wide range of sectors of the economy during the construction period by creating
an order for industry and services. However, it is the operational stage that transport causes the main
socio-economic effects due to the impact on transport costs (in the broad sense) and factor productivity.
Not only passengers and cargo-interests benefit from transport projects. For example, acceleration
of commuter traffic and inclusion of new cities in agglomerations provides an economic effect for
companies by expanding the labor market and sales, and all employees of a company benefit from this,
including those who live in the suburban and do not commute. If a remote area of a city or region has
become “closer” to the center, where “life is in full swing”, this leads to an increase in the population’s
involvement in the economy, creates new incentives for personal development, for example, due to arrival
of new residents with a higher level of education and consumer standards. Thus, indirect effects at the
operational stage are obtained not only by direct users of the infrastructure, but also by organizations
in which they work and localities in which they live.
Assessment of the socio-economic efficiency of transport projects should be mandatory when making
decisions regarding their implementation. The results of quantitative assessment of effects allow us to
assess the feasibility of project implementation more meaningfully, compare projects with each other, and
choose between different technical solutions. Indirect effects can play a significant role in determining the
structure of project financing, the size and format of state support for the project.
For a long time, the liberal economic agenda included the task of minimizing public expenditure on public
infrastructure and, if possible, replacing it with extra-budgetary investment. The first victims of such
economy were often transport projects due to their capital intensity. Understanding indirect effects allows
us to conclude that direct budget savings should not always be the main criterion for choosing a particular
project. In some cases, assessment of indirect effects shows that a project that is cheaper for the state
may be less profitable than a project that is more expensive, but more in demand from the population
and businesses. This seemingly trivial principle is critical in shaping the country’s infrastructure policy.
It follows that the more universal a project is and the more people and companies will experience positive
changes in transport communication (reducing travel time, reducing costs, improving the reliability and
safety of transport, and so on), the greater the indirect effects on the economy are. Conversely, other
things being equal, projects that benefit one particular company are less valuable for the country’s
development.TR ANSPORT INFR ASTRUCTURE AND ECONOMIC GROW TH 5
The socio-economic effect depends not only on the scope of population and business coverage
by changes in transport, but also on the intensity of these changes. For example, the shorter the travel
time between major cities is, the higher the indirect effects are, and in some cases, this relationship
is not linear, but exponential. This means that in order to achieve greater economic effects, it is better
to concentrate investment in space in a smaller number of areas, but with more appreciable gains for
users to improve transport accessibility, than to “spread a thin layer” across the country by implementing
local events. For example, other things being equal, it is better to reconstruct one road and improve its
category throughout its entire length than to make a dozen four-lane road sections of several kilometers
apiece in different parts of the country.
The two conclusions listed above about population coverage and the intensity of changes are, above
all, important for countries with a low initial level of transport infrastructure development, which include
many CIS countries (especially Russia), countries of South America, Asia (especially India), and others.
This is also relevant for China, which already has a significantly developed transport infrastructure and
with that, great opportunities for its further development. Based on these principles, one can identify the
project classes for each country and region that have the greatest impact on the economy since they
improve transport accessibility.
In the EU countries, the U.S., Australia, and some other countries, methodological state-level work
to assess the indirect effects of infrastructure development was started 20–30 years ago. As a result,
today they have a whole set of proven, approved methods, the use of which makes it possible to effectively
evaluate infrastructure projects in a comprehensive manner. In Russia, this area of research has remained
exclusively the subject of interest of academic economists for many years. Only in 2019, the Ministry
of Economic Development of Russia developed a Methodology for assessing the socio-economic effects
of transport projects, which is a huge advance in this issue. Our team participated in the development
of the Methodology, and many of the provisions of this Report correspond to the approaches of the
Ministry of Economic Development. At the same time, we try to expand these approaches.
Over the past 10–15 years, several specialized software products have been developed around the
world to assess the impact of transport projects on the economy at the city, regional, or national level.
These software products are used by infrastructure companies and government authorities when forming
infrastructure policies and making decisions on particular infrastructure projects. Infrastructure Economic
Centre has also followed this path. Using the gained international experience and Russian data, we have
created and are now improving the TMF software product2, in which the assessment of socio-economic
effects is one of the functional blocks.
2
https://infraeconomy.com/tmf-transport-mobility-forecast6 INFRASTRUCTURE ECONOMIC CENTRE
Dialog with an opponent
We have decided not to write the introduction to the report in the classicgenre of a short
“essay”. There are many similar essays on the impact of transport on the economy in the
world literature on that topic. The Report itself is devoted to it. We decided to make the
introduction informal and devote it to criticizing our own approaches. And to present it as
a conversation with an opponent. The arguments and counterarguments given below are
taken from real dialogs in which the authors of the Report participated.
A: You claim that there are transport projects that have more B: After the NEG theory was formulated, it turned out that
budget effects than the budget costs for them. The need for it perfectly fits the statistics of trade not only between
transport infrastructure is obvious, but how can we quantify countries, but also between regions. When it comes to
its contribution to economic growth, and even more so trade between countries, total costs are slightly broader
compare different projects in regard to this contribution? than merely transport costs. They include issues of
customs, duties and taxes, perception of foreign products,
B: What usually springs to mind when it comes to the effects of and so on. When we talk about trade within a country
transport projects? Reduction of transport costs in a broad and between cities, the factor of net transport costs
sense. Paul Krugman created the theory of New Economic come to the fore, and all other barriers are low. In other
Geography (NEG) in the 1990s. According to this theory, words, according to both theory and practice, changes
two countries trade with each other in a volume inversely in transport costs within a country have an even greater
dependent on transport costs. Before Krugman, Ricardo, effect than when we talk about world trade. That is why
the well-known classical economist, presented a theory NEG can perfectly help us deal with this issue.
according to which Russia buys tea and exotic fruits from
Vietnam and sells metal structures and gas, as the climate, А: Net transport costs are more or less clear. It is easy to
technology, and other factors thus predetermined the calculate fuel savings, vehicle depreciation, wages, and
specialization of these countries. In reality, everything is even working capital savings. Moreover, it is important
more complicated, and we see that Germany and Belgium to take into account not only the effects directly in the
trade sewing machines with each other, because these transport sector, but also in all sectors of the economy
machines are slightly different. Italy and Greece mutually that have transport costs, as well as the effects on related
trade all possible types of food. The real economy shows industries and on export growth. But these are all fairly
that countries that are closely located (which means that small effects. You say that infrastructure affects economic
growth not only by reducing total transport costs, and
other effects are even more significant.
B: First, if a country implements projects that radically
change its transport accessibility (or its individual parts),
these effects can be very significant. An example: the
acceleration of container traffic on the Trans-Siberian
Railway between Asia and Europe up to 7 days and the
costs are low) and have a similar production structure creation of high-speed road corridors. According to our
trade more. Lower transport costs lead to an increase in rough estimates, the increased accessibility of Russia’s
trade, which means an increase in economic activity. The landlocked continental regions to global markets through
first answer to the question: we can compare transport these projects provides almost a third of all the effects
projects in regard to their contribution to economic growth on economic growth from the currently implemented
by assessing their impact on trade costs. Comprehensive Infrastructure Development Plan. There
are many examples like this within individual countries:
A: How does the theory created to describe world trade help everyone knows what a boost to economic development
to assess the impact of transport on trade between regions was given by the construction of high-speed railways in
and cities? It seems like it is only relevant to the export China or France.
infrastructure.TR ANSPORT INFR ASTRUCTURE AND ECONOMIC GROW TH 7
As a rule, a reduction in total transport costs gives a one particular line is not linked to a fixed list of shippers
diminishing return on growth in production and exports. in the long term. Even regarding raw materials (coal, ore),
If transportation by all modes of transport is developed, if it is not always obvious who exactly will take goods and
speeds are close to the limit on these modes of transport, where will they take them in the long term for over 5 years.
and fares are competitive, it is difficult to get large effects Assessment of effects should be based on assessment of
from further investment in infrastructure. But there are the market situation “from above”, and not on the plans
also reverse cases, which in some sources are called of a particular shipper, because the planning horizon for
under-delivery. This refers to situations in which the lack such projects is always long. In addition, infrastructure
of infrastructure or the exhaustion of its capacity does not helps to overcome export barriers.
allow increasing production volumes, regardless of how
favorable the factors of demand and competition are. Finally, infrastructure development will benefit not only
An example of this situation is the impossibility of further shippers, but also all their contractors; the investment
increasing coal exports from the Central regions of Russia climate of a region as a whole will improve by increasing
to Asian countries through the Far Eastern ports without transport accessibility to global markets, and so on. Large-
debottlenecking on the Baikal–Amur Railway and Trans- scale transport construction projects launch entire sectors
Siberian Railway. Theoretically, coal can be exported of the economy themselves. But here we turn to the effects
to Asia via Saint Petersburg, but such transport costs are of investment demand, which are caused by the order for
excessive. In such situations, reducing transport costs as a industrial products and services that is formed during the
result of debottlenecking can lead to the creation of new construction stage.
large enterprises and a significant increase in output at
existing ones. In today’s Australia, further growth in coal А: You mean, the more expensive the project is, the more
exports is hindered by insufficient capacity of dedicated effects there are? It is difficult to agree with this judgement.
coal railway corridors. In India, many ports through At least, if investment is budgetary, private investment may
which coal is imported are characterized by excessive be replaced in the productive sectors of the economy, and
congestion at entrances/exits, which may soon provoke real economic growth will be slowed down, rather than
an energy disaster. accelerated.
B: Correct project estimates are required to correctly assess
the effects. Overstating the cost of projects, of course,
leads to overstating the effects. Therefore, you should use
different multipliers for different types of projects. With this
principle, projects that have more high-tech products and
fewer imports in their capital expenditure structure get a
higher rating. But the impact of the project scale on the
value of investment demand effects cannot be denied,
especially if there are no overestimates.
А: Elimination of under-delivery is taken into account in the
direct effects, the revenue of operators, and it could be
calculated even better if the so-called investment tariff
was introduced, in which the development of infrastructure
focused primarily on the export of raw materials is paid for
by the exporters themselves. And if the modernization of
the infrastructure for exporting the same coal cannot be
paid off by the tariff, then the country does not need such
an increase in production volumes. In this case, this growth
is essentially subsidized, and it is not necessary that Replacing private investment with public investment?
subsidies are received by an industry with a sustainable Yes, we agree that there is such a risk. To minimize these
return on economic growth. negative processes, we need tools that involve locked-
up market financial resources to a greater extent and to
B: First, even if there is an investment tariff, and it is still a lesser extent compete for debt and equity financing
profitable for the producer to increase production as a that can be directed to the real economy. In the today”
result of the appearance of additional freight capacity, world practice, there are many tools to attract private
the effects received by carriers can be correctly summed financing for long-term infrastructure projects, including
up with the effects received by producers (at least if we TIF and infrastructure bonds. But for now, this is relevant
are talking about effects on gross value added). Second, in the most developed countries of the world, where
not all infrastructure costs need to be covered by the the infrastructure investment market itself has existed for
tariff burden on shippers. The principle of infrastructure many decades. In Russia, for example, these tools are
development is network-based, i. e. the improvement of only at the stage of discussions, which are so far not very8 INFRASTRUCTURE ECONOMIC CENTRE
successful. In 2017–2018, the mechanism of infrastructure
mortgage was widely discussed in Russia; this mortgage
was supposed to direct the liquidity of financial institutions
to infrastructure through specialized securities guaranteed
by the state. The size of such state support was planned
to be determined by taking into account the contribution
to economic growth due to socio-economic effects. We
hope that this discussion will resume, but it should be
noted that this is only possible for countries with a low
debt burden on the state budget, which include Russia.
The topic of attracting extra-budgetary investments in
Russia has become particularly relevant today. First, the
country is implementing an ambitious plan to increase the
share of investment in GDP to 25 % from the current 20 % А: But causes and effects are mixed up here! On the
in just 5 years. Second, the coronavirus epidemic in 2020 contrary, we must first achieve a high level of economic
and the resulting global economic crisis have shown a development (through policies that are mostly outside the
great vulnerability of the transport industry. Using mainly physical infrastructure), and this will allow us to invest in
budget funds for its development is not suitable for the new infrastructure. Agglomeration effects are caused by a long
development model. historical process of urbanization and, in general, by the
formation of a settlement system, rather than by transport.
А: The effects of developing infrastructure for cargo
transportation are a much clearer thing than the effects of B: This question boils down to the concept of endogeneity,
implementing projects aimed at passenger transportation. which is also important for other types of effects.
Projects like HSR or subsidizing air transportation —all Endogeneity is a complex of internal environmental factors
these activities meet significantly more resistance than that significantly affect the evolution of phenomena,
cargo projects. What effects are there? Or are these just as well as industrial, technical, commercial, and other
examples of projects where the more expensive the project economic structures. In simpler terms, endogeneity
is, the more effects you think it gives? is a process when the cause-and-effect relationship
operates in two directions, direct and reverse. As for
B: This is primarily about agglomeration effects. They arise agglomeration effects, how do we understand what
from the fact that economic ties between localities are comes first: scale or performance? And then we face the
being strengthened or expanded due to the growing question: does population growth in the agglomeration
density of economic agents. Due to increasing density of lead to an increase in labor productivity? If so (i. e.
the population and business, the efficiency of labor (and the connection is direct), then agglomeration effects
total factor productivity) is increasing. Why? A. Marshall exist. We should understand that there can be no such
answered this question by identifying three key groups
of factors: a larger sales market, a larger labor market,
and net agglomeration externalities —the best exchange
of experience and information. Many researches on that
topic are aimed to the elasticity coefficients assessments,
which shows how productivity increases as population
grows in the agglomeration. On average, foreign
estimates indicate an increase in productivity by 5–10 %
while doubling population in a zone of 1.5–2-hour extreme in reality: either yes (1) or no (0). Endogeneity
accessibility to the center. French and English economists, exists, but we need to understand what proportion of the
such as Graham, Combes, and others, can be called estimated agglomeration effects (elasticity coefficients)
pioneers in the study of agglomeration effects. is due to the direct effect (net effect), and what is due to
the reverse effect (just because of endogeneity). When
The agglomeration effect can occur for two reasons. first publications on agglomeration effects appeared
First, because of direct population growth in the in France, researchers immediately began to study this
agglomeration without expanding its borders. Second, issue. They used various instrumental variables, historical
the increase in population may depend on the expansion data first. In their econometric analysis, they took current
of the border of 1.5–2-hour accessibility from the center production data (gross value added) and population
of the agglomeration and the inclusion of additional data from 100 years ago. The premise was that today’s
localities in these borders. And it is here that a new or productivity does not depend much on factors that were
reconstructed transport artery (road or railway line) and 100 years ago. Thus, past settlement does not significantly
the organization of transport services along it are the affect today’s technologies (and hence productivity), but
cause of agglomeration effects. it correlates well with today’s population due to the inertiaTR ANSPORT INFR ASTRUCTURE AND ECONOMIC GROW TH 9
of this indicator. As a result, by eliminating endogeneity,
they found that instead of 8–10 % elasticity of productivity
in terms of population, it became 5–6 %. This 5–6 % for
Europe is the net direct agglomeration effect.
А: It follows that in countries with underdeveloped transport
infrastructure, agglomeration effects should be 2 times less
than you think now using the example of Russia, doesn’t it?
B: Not really. Similar studies in Russia have shown that there
is almost no reduction in agglomeration effects as a result increase in labor productivity, and in municipalities where
of eliminating endogeneity. First, cities in Russia were often speed train stops were organized, the growth rate was
formed for strategic reasons, and second, there is more higher than the average for the region. The reason for the
distance between major cities; there are also long winters demonstrated rapid development of these municipalities,
and historically less developed infrastructure, including in our understanding, is the obvious economic advantage
transport. As a result, one kilometer of distance “costs’ of high transport connectivity with the Moscow
more, which means that it is much more profitable for us agglomeration. At the same time, high frequency of
to be closer, and we get more agglomeration effects. This communication during peak hours (and this is really
can be regarded as a “low base effect”. The larger the determined by the presence of demand), as well as low
gap between the center and the periphery, the greater costs of travel, was important. In any case, you need to
the agglomeration effect. We rather underestimate these understand that transport is only a tool, and economic
effects. Closer location and lower transport costs have a growth cannot occur without certain prerequisites.
major impact on the economy, and we have not learned
how to quantify most of this impact yet. А: But population growth will be accompanied by an
increase in the cost of housing and the cost of living in
А: It looks like agglomeration effects are a panacea. Just general where it was previously cheaper.
build roads connecting cities that are already developed,
and everyone will be fine. Even if agglomeration effects B: This is often the first argument that is advanced by
exist, it is necessary to take into account the demand for opponents of the idea of monetized effects from the
movement, otherwise it will turn out that you need to build development of transport networks. Let’s consider it in
roads in the desert. more detail. The real estate market is inelastic in the short
term, both residential and commercial sectors.
B: Of course, it’s much more complicated. Some industries
benefit best from increased connectivity, primarily trade, With accelerated transportation, it is assumed that the
the financial sector, the insurance sector, and the real economic situation in the new agglomeration areas will
estate sector. It’s very simple: the more people there begin to improve. This will lead to a gradual increase
are, the more money moves in the economy. But there in the cost of housing due to greater demand from new
are also industries that will have a negative effect, such residents of the agglomeration.
as raw materials and low-processing industries. Some
industries do not get the effect. Generally, we can say,
that half of the agglomeration effects are provided by
population growth, and the other half by the fact that this
industry is already developed in this city. For example,
let’s say there is a factory in City A that produces paints.
If the city becomes 2 times larger, then the effect will
take place: let’s say, 50$ due to the fact that the labor
market will become larger, and the sales market will
become larger. If a new competitor plant appears in
City A, the effect will also be 50$ due to the fact, that
there will be competition and exchange of experience
(although naturally in the longer term). And if there is a
population growth and new competitors appear, the
effect will be 100$. The agglomeration effect is greatest In the short term, sellers (and these are the current owners
where the economy is already developed and there are who will get a net gain) will, of course, benefit, but is this a
prerequisites for further growth. We conducted a study bad thing? Existing residents of the area will increase their
in the suburbs of Moscow to identify the impact of the wealth (their property will become more expensive). New
launch of speed trains (100–160 km/h) on economic residents understand the increased costs due to proximity
development, and found that after 2015, there was an to the center, this is their conscious choice. In the longer10 INFRASTRUCTURE ECONOMIC CENTRE
term, construction of new housing will begin, therefore, the
price will fall. As a result, the new equilibrium will be purely
better than the old one: higher prices, more housing.
А: What about purely negative effects? We all know about
the formation of “sleeping towns”, in which nothing good
usually happens. At best, they are a burden on the budget
(people in them generate little taxes, while the cost of
social services must be borne in full). At worst, they turn
into deprived ghettos. An example is a suburb of Lyon
some time after the launch of the first HSR in France. Will
these negative effects outweigh the positive ones?
B: Here we turn to New Economic Geography again. First,
let’s talk about suburbs. With reduced travel time to the development of transport, small towns do not disappear
center, indeed, more suburban residents will rush to work from the map. Moreover, they can get a new impetus
in the center. Moreover, in the suburbs where housing to development. In the long term (and this is important,
is cheaper, there will be new residents, commuters. But because negative effects are inevitable in the short or
soon a part of offices will move from the center after the even medium term), a new equilibrium is achieved, and
residents, and large shopping centers will be created, it is more profitable than the previous one for both an
because commercial real estate is cheaper here too. There agglomeration and a small remote town. As in the case
will be a new balance of jobs and population. The right with the development of processes within a city, other
urban planning policy is a prerequisite for the formation of policy areas, in particular, the balanced development of
prosperous suburbs while speeding up transportation to the social sphere, play a great role.
the center in the long term. Tax policy and administrative
measures should increase the attractiveness of commercial This favorable scenario, of course, is not universal. If
real estate construction relative to housing. an industry experiencing an outflow of personnel does
not have a natural competitive advantage, owners
In the long term, migration from less productive territories will be unlikely to have incentives to invest in improving
to more productive ones has a positive effect on both. productivity.
Imagine that a young man after graduating from a college
moved from a small rural town to a large agglomeration. About 10 years ago, for the first time in history, the
In the town, he worked at a sawmill and received a salary proportion of the world’s urban population exceeded
of €800. In the agglomeration, he got a job at a furniture that of the rural population. Today, the world’s urban
factory and began to receive €1,500, increasing its population has reached 4.2 billion people, or 55 % of the
productivity. In the town, due to the outflow of personnel, world’s total population. The process of urbanization is
sawmill owners will experience certain difficulties, but if especially typical of a country like Russia, where about
their business has a good raw material base and is able 75 % of the population lives in cities today, and this
to arrange sales, they will be able to purchase more proportion will not stop growing (in long-term even with the
productive logging equipment and even increase revenue Cov-2). The today’s task is only to ensure that there were
and productivity with a smaller staff. Working with more not one or two cities that “raise” the economy of the entire
complex equipment will require higher qualifications and country —the centers of economic growth —in Russia, but
appropriate remuneration. Thus, as the agglomeration much more (which is typical of most developed countries).
expands and attracts more migrants, employees in this In order for economic growth to be more uniform, it is
field who remain in small towns will receive higher salaries necessary to imagine that all potential growth centers
and more incentives to stay in the town. Thanks to the in the country are districts of one large city. In order for
a city to develop and have few internal social conflicts,
its districts must be connected by transport infrastructure
properly. A developed transport system is a necessary
condition for economic growth, but not a sufficient one.
The smartest transport policy will not have any effect
without simultaneous measures to increase human capital
and improve the investment climate.
А: I’m not convinced yet. Let’s take a closer look at the
methods…TR ANSPORT INFR ASTRUCTURE AND ECONOMIC GROW TH 11
1. I nvestment in the transportation
industry
According to the long-term economic forecasts of the Organization for Economic
Co-operation and Development (OECD), the average annual growth rate of the
world economy will be 3% for the period until 2035. Thus, the global GDP will
almost double by 2035 to US$130 trillion.
Key drivers of growth will be as follows:
growth of the global population up to 8.3 billion people (+20 % by 2035);
urbanization of the global population: increasing the proportion of people
living in cities from 52 % as of today to 58 % by 2030 and 70 % by 20504
(while for OECD countries these values are 15–17 % higher);
outpacing growth in real income;
development of international trade and tourism.
E X P E C T E D C OM P OS I T I O N O F I N F R A S T RU C T U R E I N V E S TM E N T WO R L DW I D E U N T I L 20 30
%, MGI
2,6 2,6 10,5 15,8 15,8 23,7 28,9
Seaports Airports Railway Water transport Telecommunications Roads Electricity
Such changes in the global economy and population will lead it has historically been underfunded (which was especially
to a multiple increase in the burden on infrastructure in most observed in the BRICS countries). According to MGI, the total
countries of the world. value of infrastructure assets should be at least 70 % of GDP
on average in order not only to maintain but also to develop
According to McKinsey Global Institute (MGI) estimates, the infrastructure. Those countries that have a lower share (for
minimum need for infrastructure investment in the world is $66 example, Brazil —16 %, Russia —61 %, India—58 %, and even the
trillion 5 for the period of 2017–2030 (with an average of $3.7 United States —64 %) should increase investment in infrastructure
trillion per year). At the same time, this is only the minimum level at a faster pace, while those that have a higher share (Japan—
that is necessary to maintain the current growth rate. These figures 179 %, China —76 %, Germany —71 %) can slightly reduce
are based on the historical volume of investment in infrastructure investment in the coming years.
over the past 20 years at the level of 3.5–3.8 % of GDP, and by
2030, this figure may reach a value of 4.1 %. At the same time, it should be borne in mind that investment
in infrastructure has two directions: first, for the repair and
These forecasts do not take into account the outpacing growth maintenance of existing infrastructure, and second, for the
in demand for infrastructure due to increasing real incomes and construction of new facilities. This ratio varies from country
improving the quality of infrastructure in those countries where to country6. For example, in France, an average of 75 % of
3
ECD Economic Policy Papers —“Looking to 2060: Long-term global growth prospects”.
O
4
OECD —“Trends in Urbanization and Urban Policies in OECD Countries: What Lessons for China?”
5
McKinsey —“Bridging global infrastructure gaps. Has the World made progress?”
6
O ECD.Stat—Transport infrastructure investment and maintenance spending, Infrastructure Economic Centre estimates.12 INFRASTRUCTURE ECONOMIC CENTRE
investment in railways has been spent on the construction of new picture is observed in regard to highways. Russia has one of
facilities over the past 5 years. In Canada and Norway, this ratio the lowest rates among developing and developed countries.
is approximately 50:50. China has the most impressive figures: Only 40–45 % of the investment is directed to the construction
up to 95 % of investment is directed to the construction of new (including modernization) of new road facilities. In Canada,
transport infrastructure (in the sphere of railways). India has one Mexico, France, the United States, and Australia, 70–80 % is
of the largest railway networks in the world (4th place), however, directed to the construction of new roads. The figures in Russia
up to 80 % of investment is spent on the maintenance and current are comparable to those in India, where only 40 % is spent on
repair due to high wear and tear. In Russia, 80 % of investment new construction in the road sector.
is spent directly on the construction of new facilities according
to the annual reports of Russian Railways. But it is necessary to The indicator of infrastructure investment volume as a share of
keep in mind that this item includes not only new kilometers of GDP is often used to assess the long-term prospects for economic
railways, but also the modernization of existing tracks or the development (along with other indicators, such as investment in
construction of duplicate lines to increase capacity. A different human capital).
S H A R E O F I N F R A S T RU C T U R E I N V E S TM E N T A S % O F G D P
Global Infrastructure Outlook
9
5,64 China
8 4,08 India
7 3,65 World
6 3,12 World (demand)
5 3,02 S. Korea
4 2,80 Russia
3
2,42 Italy
1,55 USA
2
1,53 Germany
1
2007 2009 2011 2013 2014 2015 2016 2017 2018 (F) 2019 (F) 2020 (F) 2021 (F) 2022 (F)
The forecasts made by the G20 INITIATIVE researchers confirm Group indicates that if the current pace of infrastructure
McKinsey’s findings that there is a significant gap between spending continues, there will be a significant deficit of long-
actual (2.9 % of global GDP) and necessary (3.6 % of global term investment resources required annually for sufficient and
GDP) infrastructure investment. Not taken into account here, balanced reproduction of the corresponding infrastructure in
but 2020 is likely to show a drawdown due to the crisis in the many countries of the world in the next two decades. This deficit
global economy and restrictive measures due to the pandemic. A is estimated at US$1–1.5 trillion annually7.
drawdown will mean a more significant drop in investment amid
a general economic decline However, it should be borne in mind that investment in
infrastructure is itself a source of economic growth, which is the
The indicator of infrastructure investment volume is quite complex main theme of this Report.
from the point of view of calculation, since there is often no
data on investment in the repair, modernization or expansion of The long-term effects of infrastructure investment on the economy,
transport infrastructure. According to the official data from the including productivity and output growth, have been assessed
Russian Federal State Statistics Service, the total investment in the for quite some time. In 2018, the European Parliament released
Russian economy over the past 10 years has averaged 17–20 % a study on the impact of infrastructure investment (through the
(₽19.3 trillion in 2019) of GDP annually. Transport (other than indicator of fixed capital investment in infrastructure-related
pipeline transport) accounts for about 13 % of all investments industries). So, all EU countries were divided into 5 groups with
today, which is 2.3 % of GDP (₽2.5 trillion in 2019). pronounced links between GDP growth and investment growth:
Many countries underfund the development of national
infrastructure due to a lack of resources on the part of the
government. A study conducted by the Boston Consulting
7
T he Boston Consulting Group—“Bridging the Gap. Meeting the infrastructure challenge with public-private partnerships”.TR ANSPORT INFR ASTRUCTURE AND ECONOMIC GROW TH 13
C LUS T E R I N G O F E U C O U N T R I E S BY G D P G ROW T H A N D I N F R A S T RU C T U R E I N V E S TM E N T,
A N AV E R AG E F O R T H E P E R I O D O F 20 0 9–2015
%, Council of Europe Development Bank
GDP Investment
10
5
3 3 3
2
1
0 –8 –1
Group 1 Group 2 Group 3 Group 4 Group 5
Spain France Latvia Denmark The U.K.
Cyprus The Netherlands Belgium Slovakia Iceland
Ireland Czech Republic Finland Hungary Sweden
Portugal Lithuania Bulgaria Poor GDP growth Switzerland
Greece Slovenia Norway Strong investment Strong GDP growth
Croatia Estonia GDP growth growth Growth of investment
Italy Austria Growth
Zero GDP growth Germany of investment
Dramatic fall Romania
in investment Poland
Poor GDP growth
Slight decrease
in investment
According to McKinsey analysts, in the long term, an additional 1 % of GDP
of investment in the country’s infrastructure will help to create:
3.4 million 1.5 million 1.3 million 0.7 million
new jobs in India jobs in the USA jobs in Brazil jobs in Indonesia
McKinsey also claims that $1 of additional investment in the elasticity coefficient of output in the economy as a whole to
infrastructure can increase GDP by 20 cents in the long term only the level of transport infrastructure development is 7 %.
due to the indirect effect of increasing labor productivity, without
taking into account other effects, including construction itself. The World Bank claims9 that an increase in assets in infrastructure
sectors of the economy by 2 times leads to GDP growth by an
Columbia University in the United States, after conducting average of 15 percentage points (pp), but this applies only to
a study8 of 95 countries around the world, claims that doubling developed countries. And the elasticity of output to the level of
the density of highways on average leads to an increase in infrastructure development is from 7 to 10 %, which surprisingly
economic growth by 1 % annually. An increase in the “total correlates with the data from Columbia University.
infrastructure provision” of the economy by 10 % leads to an
increase in economy output by 1 %. According to their estimates,
T he Effect of Transportation Networks on Economic Growth (1993), Columbia University.
8
9
World Bank—How Much Does Infrastructure Contribute to GDP Growth?14 INFRASTRUCTURE ECONOMIC CENTRE
We made similar calculations using the example of Russia. Today, Russian transport industry. As a result, it was found that the increase
the key strategic document for infrastructure development in the in investment in transport of 1 % of GDP (about ₽1 trillion or $14
short and medium term in Russia is the Comprehensive Plan for billions) today will provide GDP growth of 0.2 % of GDP over a 15-
Modernization and Expansion of Transport Infrastructure for year horizon annually. Taking into account the long-term forecast
the period up to 2030 (hereinafter referred to as KPMI)10. KPMI of the Ministry of Economic Development of the Russian Federation,
defines the development direction of the country’s transport we can calculate that each ruble of investment in transport today
system for a period of next 10 years. Total investment expenditure will bring up to 4 rubles of GDP growth over 15 years in total. It
under the Comprehensive Plan will amount to about ₽10 trillion should be taken into consideration that according to KPMI, most
(or about $140–150 billions), which will amount to an average of of the projects imply construction of new infrastructure facilities,
0.85 % of the anticipated annual GDP volume. Based on our own that is, implementation of capital investment, which always has
methodological developments, we calculated the expected future a much larger multiplier compared to the costs of repairing or even
effect of KPMI, which will total some ₽ 45 trillion by 2040. Based modernizing existing facilities.
on the results obtained, we assessed the investment multiplier of the
AV E R AG E MU LT I P L I C ATO RS F O R T R A N S P O R T I N D US T RY
up to 0,7 rubles
up to 4 rubles 1 ruble
for budget
for GPD in transport
revenues
T Y P I C A L S C H E D U L E O F E F F E C T S O N T H E E X A M P L E O F A S U BU R BA N C OM MU N I C AT I O N D E V E LO PM E N T P ROJ E C T
Effects during the construction phase Effects during the operational phase
≤ x1.5 on GDP ≤ x 2.5 on GDP
The main effects of the dramatic increase “Eternal” effects after reaching the design
in business activity (agglomeration effects) capacity, expressed in the growth of transport
work, tourist flow, costs saving etc.. All indicators
are relative to the “base” scenario without project
implementation
1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year 11 year 12 year 13 year 14 year 15 year
Construction phase Operation phase
In fact, the approach of developing such “packages” that determine the exact direction of infrastructure investment by project and year is now widely used in the world.
10
In particular, Canada, the United States, Australia, Mexico, and other countries have similar versions of the Comprehensive Plan.TR ANSPORT INFR ASTRUCTURE AND ECONOMIC GROW TH 15
2. E xisting methods and models for
assessing the impact of transport
projects on economic development
2.1 Methodological approaches
In world practice, there are three key approaches for assessing, or meet delivery requirements in a shorter period of time, which
comparing, ranking, and selecting ongoing projects in the affects their productivity. However, saving time for personal
transport sector 11: travel (i. e. vacations or visiting friends and relatives) is more likely
to fall into the second category —effects that have real value for
Benefit-cost analysis (hereinafter referred to as BCA); people but do not lead to noticeable changes in the structure of
income or expenditure in the economy.
Economic impact analysis;
The BCA assesses only those indicators that can then be
Multi-criteria analysis. compared with the costs incurred —mainly income (public or
private). At the same time, the economic impact analysis also
According to the benefit-cost analysis, effects should be includes an analysis of many other economic categories (jobs,
measured quantitatively with the possibility of monetary income, mobility of the population, and so on), which do not
assessment, as well as taking into account the distribution over necessarily need to be compared with the costs incurred. Thus,
time, which makes it possible to calculate the present value of all the “benefit” component of the BCA is a stripped-down analog
benefits and costs. Then, the results obtained can be expressed of the total economic impact.
as a net benefit from the project implementation (positive effects
minus costs) or as a ratio of total positive effects to costs incurred. The multi-criteria analysis is a fairly specific method used
for particular purposes, most often for comparing projects
When conducting the economic impact analysis, the impact of and compiling ratings. According to this approach, effects are
projects is usually assessed in terms of the following indicators: assessed through quantitative ratings or qualitative assessments.
This approach allows us to consider and assess the widest range
increase in output; of positive and negative effects, as well as analyze the impact
of project implementation on the activities of households and
net income growth; businesses. This can include such assessed categories as:
creation of new jobs; The competitiveness of the business (changes in operating
expenses of businesses);
investment growth.
Capacity and efficiency of logistics systems of a business
This assessment method includes the following effects: (increased reliability in cargo delivery);
direct effects that lead to changes in cash flows; Availability of jobs (changes in the labor market);
effects that are aimed at the social sphere but do not have Export markets (changes in intermodal connectivity).
a direct impact on cash flows.
The approaches considered above include a set of indicators
The effects of the first category include skimping on operating necessary for assessing an infrastructure project. The choice of
expenses or net income. This can include 0 on the cost of an approach is determined by the goals of assessing effects.
operating vehicles, as well as on working time for freight and For example, if an assessment is initiated by a state, the relevant
commercial transportation. Cost reduction is due to the fact that regulatory body usually needs an assessment conducted in
employees can serve more customers during the working day accordance with approved methods and based on official or, at
For classification and general description, see “Development of Tools for Assessing Wider Economic Benefits of Transportation”, National Academy of Sciences, 2013.
1116 INFRASTRUCTURE ECONOMIC CENTRE
least, easily verifiable data. In this case, as the world’s experience on all areas of the country’s life is often necessary (investment
shows, the BCA approach is more often used. At the same time, justification, business plan, concession application, and so on).
the most complete assessment of the impact of a planned project In this case, the economic impact analysis effect is usually used.
2.2 Models for assessing economic effects
The models used to assess future effects may differ significantly Input-output models (I/O models);
and include different calculation algorithms and input data sets.
The main categories of models used in different countries to assess Land-use transport interaction models (LUTI);
the impact of infrastructure projects on the economy of a region
or country may include (there are many classifications based on Computable general equilibrium models (CGE);
different criteria):
Econometric models.
Input–Output Models
This model type is used to calculate interindustry relationships The advantages and disadvantages of the input–output models
resulting from increased demand and consumption in a particular are widely known.
sector. For example, the construction of a transport facility leads
to an increase in production, consumption, and employment in In the world’s practice, there are a number of elaborate,
manufacturing industries such as metallurgy, building materials, developed input–output models used at the state level, including
glass, and so on, which are suppliers. In addition, the described RIMS-II (Regional Input–Output Modeling System)12, IMPLAN
models can also track indirect effects that occur due to reduced (Impact Analysis for Planning)13, REMI (Regional Economic
transport costs and travel time. Models Inc.)14, and RIM (Russian Interindustry Model)15.
LUTI Models
These models are based on the assumption that improving One of the most well-known models is MEPLAN16, a mathematical
accessibility can increase the attractiveness of the territory for algorithm and software product designed to model the economic
people, positively affect the development of economic activity in the and geographical development of cities and regions. The
regions under consideration, and increase the cost of real estate. MEPLAN model was developed by Marcial Echenique &
Partners Ltd, a private company, in the early 1980s. The model
Thus, the key area of LUTI research is understanding long-term uses input–output model data as input. This model was used to
household behavior in terms of choice of residence, work, determine the effects of the development of transport systems in
and spatial movement. In fact, LUTI models are used to assess London and Helsinki.
agglomeration effects. These models are also used to model the
possible consequences of implementing new policies and projects
(primarily in the field of transport) in existing urban systems.
12
https://www.bea.gov/resources/methodologies/RIMSII-user-guide
13
https://www.implan.com/
14
https://www.remi.com/
15
http://eng.macroforecast.ru/
16
https://www.semanticscholar.org/paper/The-MEPLAN-models-of-Bilbao%2C-Leeds-and-Dortmund-Eche%C3%B1ique-Flowerdew/6f2904b0a234c447f44560eb72fe349d857adc5fTR ANSPORT INFR ASTRUCTURE AND ECONOMIC GROW TH 17
Computable General Equilibrium Approach
Computable General Equilibrium Approach (CGE) is a type of An important advantage of CGE models is the ability to
non-linear models that describe interaction of economic sectors: analyze welfare effects. Due to this ability, they are used for the
households, industries, the rest of the world, and the public sector. development and optimization of state economic policy measures
as well as for calculating compensations to various population
The effects of transport infrastructure development are taken groups and subsidies to enterprises in the real sector.
into account through the impact on total factor productivity
(economies of scale), lower production prime costs and The reverse side of using CGE models is their complexity and the
prices, increased competitiveness, increased production and need for special software, as well as some subjectivity in terms of
employment, increased investment and foreign trade. hypotheses about the value of certain coefficients. For parameter
calibration, special data (social accounting matrix) is required,
Thus, CGE models are a complex system of non-linear equations which is a separate methodological task. A serious limitation of
describing simultaneous equilibrium in the labor, capital, goods, CGE models is the assumption that the entire economic system is
and services markets. The result of the solution to this system is an in equilibrium at each period of time. To overcome this problem,
equilibrium of production and prices, employment and wages, a different class of models is used —dynamic stochastic general
exports and imports, investment, interest rates and exchange equilibrium models.
rates.
The most well-known models of this category include Modelling
Some CGE models include the unobserved sector and take into International Relationships in Applied General Equilibrium (MIRAGE),
account the interaction of the economy and the environment as The Centre of Policy Studies VU-National model, The Regional
well as the impact of scientific and technological progress. Economy, Land Use and Transportation Model (RELU-TRAN).
Econometric Methods
Econometric methods are quite extensive in terms of application equilibrium models or LUTI models. In this regard, it is difficult to
possibilities. In fact, using econometrics, you can perform call econometrics a separate approach for assessing effects —it is
independent research, including forecasting indicators, analyzing rather a tool, both independent and auxiliary. However, the use
historical data, searching for elasticity coefficients, and so on. You of econometric methods is widespread in the creation of software
can also perform auxiliary calculations within creating general products for assessing the effects of infrastructure development.
TREDIS
We are convinced that the most promising direction in the model is a comprehensive tool for assessing and predicting
development of assessing the socio-economic effects of transport socio-economic effects. TREDIS includes an econometric
projects is the creation of integrated software. Such programs analysis system, but, like the CGE method, it includes elements
already exist today. We see TREDIS as extremely successful of cost and price analysis, as well as their dynamic changes. This
in terms of user friendliness. TREDIS is a commercial product, approach, in our opinion, is the most suitable for a comprehensive
however, it is widely used by government agencies in the field assessment of transport effects. All such programs have a single
of transport regulation in the USA, Canada and Australia. This general scheme for constructing the calculation.
I/O Econometrics Equilibrium
Block “Initial data of
Initiators
the project”
BCA
Block “External data Block “Effects Assessment” Block “Results Analysis”
Recommendations Economic impact
for calculation”
Effect type 1
Effect type 2 Recommendations
Effect type 3
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