The Greater London Simulator C2E Analysis

Transcription

1 The Greater London Simulator C2E Analysis

2 Background The London Simulator is the result of a four-year collaboration between the Greater London Authority and Greenwood Strategic Advisors industry leaders in the field of system dynamics. As a model, it is unique in its ability to simulate the complexity of urban systems, in particular the social and economic impacts of new investment alongside its counterfctual absence. In short, the cost of not investing. The London Simulator is the platform for major ongoing analyses, with greater resolution being added as the model develops. In July, Greenwood and the GLA published Mind the Gap, a report testing the socioeconomic viability of five proposed infrastructure programmes, including Crossrail to Ebbsfleet (C2E). This initial work suggested that C2E could be expected to expand London s economy by up to 1.4bn/year in 2040 and up to 2.4bn/year in Attractiveness of city Growth of city Figure 1. A simplified schematic diagrame of the London Simulator Mind the Gap marked the conclusion of the London Simulator s initial development and application. Based on it, the GLA and TfL concluded that C2E is the best programme for pilot-testing a new approach to funding and financing London infrastructure with the aid of private capital. In August the C2E Campaign engaged with Greenwood and the London Simulator for a more detailed analysis of benefits from the C2E extension. This included updating housing numbers in line with the SOBC. This short paper reports on that analysis, which uses SOBC inputs. The simulations anticipate social, economic and public fiscal impacts from C2E on the whole of Greater London. These impacts are naturally larger than those reported in the SOBC, which focuses on the C2E corridor. Analytical approach With assistance from the GLA, TfL, and the C2E Campaign, Greenwood used the Greater London Simulator to analyse various C2E investment options. The simulator is a whole-city virtual twin or computer model of London s urban system, as shown above in schematic form. The London Simulator and counterparts in other cities are neutral test-beds for urban investments, objectively measuring their long-term social, economic, environmental and fiscal impacts. These simulators more accurately value public investments by measuring how each city-system monetises resulting social and other non-financial impacts. The reported C2E valuations are based on simulated social, economic and fiscal impacts that can be expected from four C2E investment options; the analyses measure C2E s self-funding capacity and value each option based on cash flows to Central Government. Simulating the whole-city impact of the C2E investment options reveals that they will be amply self-funding through the long-term social, economic and fiscal growth that can be expected. C2E s ability to self-fund brings the possibility of new financing approaches and private investment capital to help relieve public budget and borrowing constraints that could otherwise delay C2E or prevent it from happening. The simulations described explore how

3 Greater London responds to each C2E investment option, using a tailored wholecity model validated against London s recent history. These simulations do not predict London s future, which would require simulating other investments and macroeconomic scenarios in combination with C2E. But testing shows that London and UK benefits from C2E are little affected by a range of other investments and potential Brexit impacts. Options Simulated This report covers three C2E investment options, along with a low cost alternative. These are detailed below in order of increasing scope, investment cost, and impact in Greater London and the UK. Low Cost Alternative (LCA) Add rail services from Northfleet to a turnback facility in the Plumstead to Abbey Wood area, extend current Southeastern services to Northfleet. Option C Extend Crossrail services from Abbey Wood to Ebbsfleet on existing National Rail infrastructure shared with Southeastern and Thameslink services. Make minor changes to Southeastern services to accommodate Crossrail train paths on the National Rail route. Option D Extend Crossrail services from Abbey Wood to Ebbsfleet on a new, dedicated two-track railway between Abbey Wood and Dartford (four-tracking), with shared running on existing National Rail infrastructure from Dartford to Ebbsfleet, allowing existing National Rail services to remain unchanged. Option A Build a dedicated two-track railway from Abbey Wood to Ebbsfleet to run extended Crossrail services, operating in addition to and fully segregated from existing Southeastern and Thameslink services along the same National Rail corridor (four-tracked entire route). Housing input Low housing availability is the largest dynamic constraint on population growth and job creation in Greater London, which makes housing a high-leverage point in the city s dynamic system. Investments that enable new housing and relieve these constraints can be expected to deliver disproportionately large social, economic and fiscal gains. The table below characterises C2E investment options based on SOBC targets for local added housing and business space, and their investment cost; these are simulator inputs for each investment option. Input LCA C D A Local target: added residential units (thousand) Local target: added business space (thousand m2) Public investment ( bn) These SOBC investment characterisations are intentionally conservative: new housing is only counted within one kilometre of each C2E station; investment costs are increased by a multiple of 3 to offset assumed optimism bias, despite the low risk of cost growth in non-tunnelling projects. Findings Systemic investment impacts Least cost alternative (LCA) 2050 social and economic impacts to London. Figures below are as of or in 2050 Scenario C Scenario D Scenario A Population 42,000 68, , ,000 Total Housing Units 20,000 33,000 57,000 69,000 Jobs 30,000 48,000 74,000 88,000 Business Space (m2) 166, , , ,000 Greater London s Economy (real, bn/y) HMT 1 London tax revenues (real, bn/y) Increase in HMT s London tax surplus 2 (real, bn) Socio-economic impacts moneitsed in fiscal impacts. Figures below are cumulative over a 50-year economic life Less interest 3 imputed ( bn) Added HMT London Cash flow (real, bn) NPV of added HMT London cash flow (real, bn) 4 Less public investment cost ( bn) Cash surplus for HMG ( bn) Ratio of HMG cash surplus to investment cost Her Majesty s Treasury 2 Added HMT tax revenues less increased HMT spending back into a faster-growing London (based on Oxford Economics % spending forecast) 3 Imputed interest on public investment in the project, at 3.44% recent average 10-year Gilts rate. 4 Net present value, discounted at 3.44% recent average 10-year Gilts rate

4 Social Impacts 20,000 to 69,000 new London homes (1-3 years worth of recent housing development) 30,000 to 88,000 new jobs 166,000 to 409,000 new m2 of new business space Population Population New Housing New Jobs Population growth Understanding the results The three graphs above show social impacts from the four simulated options: C2E-driven growth of housing, jobs and population. In each option targeted local housing (left hand graph) is developed quickly and in parallel with C2E construction from The wave of new housing brings surging population growth to 2031 (right hand graph). London jobs grow modestly until the new commuting capacity is in operation (central graph). Then accelerating job growth from C2E sustains more rapid London population growth, and vice versa. Sustained population growth increases housing demand that, beginning in 2033, propels a pronounced but more gradual second wave of Greater London housing growth. Higher population growth from C2E increases demand for housing; in turn, higher demand propels a second C2Edriven wave of Greater London housing growth. When housing is sharply constraining Greater London s population and job growth, investments that enable new housing create social and job growth that spur even more housing, population, and job growth. The dynamic relationships that connect housing, population and jobs are at the heart of the socioeconomic engine in Greater London and other cities. Housing constraints on systemic growth create frustrated unmet demand; the C2E investment eases these constraints and unleashes self-sustaining growth. Thanks to this self-perpetuating growth dynamic, by 2050 London housing growth resulting from the C2E investment is almost double the locally targeted added housing (true for each of the four options). The housing crisis fuels a vigorous city-wide response to C2E-enabled housing; the result is a dynamic multiplier effect on total housing from C2E.

5 Fiscal Impact Added GVA (real, annual) Real GVA added Increased HMG tax revenues (real, annual) Net of imputed interest Increased HMT Cash flow (real, annual) Net of back-spending into a larger London LCA LCA LCA 20-year cumulative total ( ) 20-year cumulative total ( ) 20-year cumulative total ( ) Understanding the results The C2E investment options will deliver a London economy that is bigger in real terms by 2.9bn to 8.5bn per year in All four investment options expand tax revenues and substantially increase Central Government cash flows; the more ambitious C2E investment options produce much more government cash. The additional cash is many times larger than the cost of the C2E investments. Increased Central Government cash flows from the four C2E options have current values that range from 5.6bn to 15bn. These far exceed C2E s investment costs, demonstrating that over time C2E will fully fund its own investment and produce surplus government cash worth 4.5 to 7 times the public investment costs. The so-called Low Cost Alternative (LCA) turns out to be the most expensive option because it produces the smallest HMG cash surplus (just 5.6bn). The highestcost C2E option (option A) is actually the least expensive because it yields an additional 9.4bn in HMG cash surplus after investment cost. This analysis does not count other C2E fiscal benefits such as added TfL cash flows, increased council tax revenues, and potential new revenues from public sharing in the uplift of land values. We can confidently expect the C2E investment to be self-funding and to produce additional funding for other public investment projects based solely on increased cash flows to Central Government.

6 Financing Cities around the world face a growing shortage of funding and financing for public investments. Cities have huge unmet needs for infrastructure and other investments. Even cities like London are able to fund and finance only a fraction of the investments needed for resilience and sustainability in the face of continued growth. Government tax revenues, funding and borrowing have been insufficient to meet these needs and this is unlikely to change. Institutional investors have huge unmet needs for safe and long-lived investments, but few public investments are currently available to them. The missing link is a framework in which private investors, ranging from individual citizens to pension funds, can play a larger role in financing public urban investment. The head of a leading asset management firm recently observed, The [unmet] investor demand for long-dated assets is shocking. Cities own and need to invest in many long-lived infrastructure assets, and these are well matched to the long obligations of pension funds and other institutional investors. But the status quo has delivered very few such projects in the forms or with the scale that such investors need. In late 2015 then-chancellor George Osborne set out to change this when he announced that 89 Local Government Pension Schemes (LGPS) in England and Wales would be required to pool their assets regionally. Pooling was aimed at delivering cost savings, increasing efficiency and scale, and increasing investment financing for UK infrastructure development. In 2016 LGPS assets totalled 217bn, constituting one of the ten largest global sources of capital; by 2018 assets of the eight consolidated LGPS regional pools had risen almost 20% to 259B. While the pools are achieving significant cost savings, increased LGPS infrastructure investment has been slower to materialize. As of April 2018, a cross-pool platform dedicated to infrastructure investment (GLIL) had invested a little under half of its 1.275bn in rail, onshore wind, and Anglian Water Group. Although the increased scale of the LGPS pools is an important enabler of increased infrastructure investment, commentators cite several other factors that are limiting the pace of such investments in England and Wales: The illiquid nature of infrastructure investments and resulting risk of losses, which limits the portion of LGPS portfolios that can be allocated to such investments; The general shortage of infrastructure investments on offer to private investors; The LGPS desire for existing UK investment assets with established revenue streams, and the strong competition for such investments from overseas investors; The difficulty of investing in new infrastructure projects, which are more complex and slower to deliver cash flows These structural challenges are not unique to the UK, and an innovative investment and financing platform has been established to address them. The platform is open to a wide range of lenders, investors, and borrowers and is being introduced in many jurisdictions, including the UK. The financing instruments are called Credit Participation Certificates or CPCs ; they can be used to fractionalise almost any type of credit, essentially slicing up individual loans into standardised smaller pieces so they can be easily purchased by investors. The CPC platform was developed and is administered by UFT Commercial Finance LLC. The platform and a suite of CPC types were designed following the 2008 financial crisis to provide a more reliable, flexible and transparent investment alternative to traditional securitisations. CPCs are being used in trade finance, receivables lending, mid-market credit, and private equity. In combination with dynamic valuation analyses like those described in this report, the CPC platform and instruments are equally relevant to infrastructure investments. Infrastructure-linked CPCs incorporate a public-private partnership structure with rules that fundamentally and beneficially alter the characteristics of such transactions. For an individual city infrastructure investment: CPCs make flexible use of globally standardized platform components and processes, which can greatly speed the financing process; No public monies are involved until after the design/build effort, which helps relieve public budget and funding constraints; Investors earn returns throughout the design/build effort, making it much easier for pension funds to participate; Project debt is held by private sector participants, avoiding public borrowing and relieving government balance sheets; The infrastructure asset and related debt come onto the public books when the asset s value (as evidenced by increased public cash flows) outweighs the debt being assumed. In the broader market for city infrastructure investment financing: CPCs are designed to be traded, which enhances liquidity, reduces duration and other risks, expands the investor audience, and ultimately improves market efficiencies that can reduce the cost of private financing for public infrastructure investments; Dynamic analyses like those described in this report provide regular risk-based infrastructure valuations that are critical to CPC tradability and market liquidity; UFT has completed preparatory work for the launch of the first global exchange for CPC trading - formal regulatory approval will begin when total CPC market volume has achieved target levels (expected in 2018). Infrastructure investments that are abundantly self-funding, like C2E, sharply reduce risk for all stakeholders and can attract private CPC TM - based financing for these public investments. New flows of private capital can substantially increase the rate of public infrastructure investment in Greater London without new taxation and public borrowing. Cities have the assets in which capital markets need to invest on behalf of their common principals the people and future pensioners who live and are insured in those very cities. CPC TM fractionalization enables investors of almost any size to invest in large or small slices of individual infrastructure investments. Standardized CPC TM instruments and exchange trading based on up-to-date valuation information from dynamic city simulation enables investors to confidently buy and sell infrastructure investments. That confidence can be the foundation of a liquid global market for infrastructure investment. The combined capabilities of dynamic city analysis and the CPC financing platform represent a new chapter in infrastructure finance; together they have potential to make new-build infrastructure projects accessible and attractive to a much broader base of private global investors including pension funds. Greenwood and the Greater London Authority and Transport for London have agreed to work together with UFT Commercial Finance and appropriate lenders in assessing the feasibility of private CPC financing for the C2E investment.

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