Transport efficiency and regional policy
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PROFESSOR K. J. W. ALEXANDER, of Stiathclyde University, opened his paper "Transport efficiency and regional policy" by commenting that economists had paid too little attention to distribution, transport and travel, and that the number of academic economists specializing on transport problems in Britain could probably be counted on two hands.
He continued:—
There has been a welcome, though small, increase in interest recently which has been reflected in a few important books. But the scope for study is enormous, and the issues to be explored of great importance with their own intrinsic fascination. The two main areas of economics in which some attention has been paid to transport costs have been international trade and the location decisions of firms. In the first area the attention paid has been very slight, with transport treated as an incidental constraint rather than a major influence. It is with the second area — locational decisions within a country — that this paper is concerned.
The conventional wisdom says that transport costs are not an important influence on locational decisions. Indeed it goes further and argues that transport costs will become of less and less importance. This is somewhat difficult to square with the fact that the annual rate of increase of expenditure on the transport of goods by road has been approximately 10 per cent. However, if the conventional wisdom has got it right there is no reason for despair among transport men. If transport costs are of decreasing importance, the consequence will be that locational decisions will be less and less influenced by spatial considerations and will pay little attention to the transport cost implications of locational decisions. Thus industry will become more widely and evenly dispersed, and so will population, and the demand for transport services will increase.
Transport men. while encouraged by the good news, might reasonably express a little scepticism. Why, if transport costs are of such little significance, do commercial managers believe that those who buy transport services are highly price conscious? Why do they try to exact such strong downward pressure on the prices charged by those who supply these services? Once again, conventional economic wisdom has an answer — that the keenness of prices and the pressure on them does not reflect demand factors so much as supply factors and in particular the existence of many competing suppliers of transport services and the existence of considerable over-capacity in relation to the volume of demand. This condition of over-supply of services is to be explained by the comparative ease of entry to the road haulage sector, the fairly low capital requirements, the negligible economies of large scale which exist in that industry and by the large state railway sector shielded from the harshest of competitive pressures which would have "re-shaped" the railway sector far more radically and more speedily than ever did Dr Beeching's notorious axe.
I am sceptical myself about this particular element of conventional economic wisdom which regards transport costs as unimportant in locational decisions and therefore for regional policy. One of the foundations on which the wisdom rests is the low proportion which transport costs bear to total costs or selling price in most industries. The evidence for this is based on surveys of firms and on the Census of Production data. But even the most perceptive analysts seem to have overlooked that unless such data are related to variations in the distance goods move to and from different firms and different regions they may reflect the importance of transport costs rather than their unimportance.
Totally misleading?
To take a particular example which relates to manufacturing industry in West Central Scotland, the 1963 Census of Production shows that as a percentage of net output, transport outlays amounted to 5.9 per cent, con-esponding to a UK figure of 5.5 per cent, with 3'7 Scottish industries having lower transport costs than their UK counterparts. To conclude from these figures that distance costs cannot be an important cause of Scotland's economic difficulties may be totally misleading. An alternative explanation of the figures could be that the small difference in transport costs as a proportion of sales revenue between Scotland and the Midland region reflects either an inability to sell far afield because of transport costs or the need to cut profit margins to absorb transport costs and keep selling prices competitive. The third explanation would suggest that firms would tend to be smaller in regions suffering a transport cost disadvantage, but it would be necessary to look at the data firm by firm, relating transport costs to the distances raw materials, components and finished products are transported to get at the facts. Your
close acquaintance with the transport industry would probably have led you to greater caution than I showed when I launched a modest enquiry to explore this relationship. It proved difficult to define precisely the data one required, and even more difficult to extract them from industry once the definitional hurdles were cleared. Nevertheless information is now becoming available.
There are other reasons for questioning the argument that because transport costs are a small proportion of total costs they are unimportant for locational decision-taking. The first is that such costs need only be important for a fairly small proportion of all industries to create a considerable difference between regions in their capacity to attract firms and in the growth of new employment. It is also possible that the failure to attract one firm may deter another which would suffer only very small cash disadvantages but which needs proximity to the first firm for speedy servicing facilities or some other external economy of location. A refinement of the survey carried out for the Toothill Committee shows that for 18 per cent of firms migrant to Scotland, transport costs were in excess of 4 per cent of gross output, which by itself could be a major factor inhibiting either attraction or growth once attracted to the region.
The emphasis on transport costs as a proportion of total costs or total revenue overlooks the important fact that if locational choice is free, and transport costs are a function of distance, then some part of them are an avoidable cost (in a way which no other cost — e.g. labour costs — can be avoided, without the necessity of substituting some other factors of production — e.g. machinery for labour) and that if market price is taken as given, the avoidance of such costs can enhanee profit margins. Thus it may be much more relevant to relate transport costs to profits than to total costs and revenues.
The importance of relating transport costs to profits and in particular to the rate of profit earned on capital tied up in a business is illustrated by an example in which a selling price including transport costs from outside a region is below the selling price which producers within the region must charge (to compensate, say. for lower productivity) but the rate of return on capital invested is greater in the high-cost-of-production region. Thus if we assume a producer aiming at a market in the high-cost-of-production region he will, if guided by rate of return on capital invested crite-ia. prefer to locate in that region despite the fact he knows that it would be possible to locate in a more efficient regien. meet the costs. of importing into his market region and sell competitively there.
Importance of transport costs Aggregate figures for profits and transport costs suggest that the relationship between them for industrial firms can be very important. Figures for 1963 show that taking net profits for UK manufacturing industries as 100. transport costs were 38. It has been calculated that between 1957 and 1967 expenditure on the transport of goods by road alone increased from a figure equivalent to 31 per cent of gross company trading profits to 53 per cent. The view that transport costs are of little importance in locational decisions is difficult to reconcile with these figures. Take the average of all transport costs as 40 to net profits at 100. Vey approximately, survey data indicate that 10 per cent of respondent firms in Scotland had transport costs at least twice as high as the average when related to gross output and when the firms surveyed were narrowed to incoming m■grants only. 15 per cent of respondent firms had transport casts of at least twice the average. Now the level of transport costs may not be related to location in Scotland. but if it is — or i thought to be — there is plainly a considerable cash disadvantage to be overcome, either by lower costs under some other heading or by higher prices. Without these, net profits will be pulled down by at least 40 per cent. The view that transport costs are unimportant for locational decisions seems decidedly shaky. on both theoretical and empirical grounds. In contrast there can be no doubt that regional policy in so far as it affects locational decisions and the distribution of industry (and therefore of population) is of importance for the transport industry. If the tendencies to agglomeration were allowed to proceed unchecked by physical controls and uninfluenced by financial inducements to locate in the more peripheral regions, population and economic activity would cluster even more closely in the "coffin" of the economic geographers which runs from South Lancashire through the West Midlands to London and the Home Counties. No doubt even without regional policy there would be some natural costs of agglomeration — land prices, congestion costs, travel to work times etc — which would provide some countervailing forces. but without the battery of regional economic policies there can be no doubt that people and production would move away from the periphery and towards the centres to a greater extent, and the necessary movement of people and goods — particularly goods — be correspondingly reduced.
Thus one would expect transport men to support regional policies which favour dispersal. Certainly the transport and regional lobbyists have converged on one issue of importance to each, that of improved infrastructure expenditure on transport and in particular road improvements. Not unnaturally, transport men pay particular attention to improvements which will relieve the worst congestion and thus help reduce the high costs of transporting the greatest volume of goods. Taking a somewhat longer view, however, and recognizing the importance of checking agglomeration and achieving a wider industrial dispersal. an emphasis on improving the transport facilities and reducing the cost of moving goods to and from the less favoured regions would seem to be much in the interests of the road transport industry. If the industry had been more active on this particular aspect the conversion of Government to its importance might have come before 1963. An economist would apply different criteria, of course, and would be concerned to minimize the use of resources in transporting goods between different centres and regions unless there were other cash advantages in the dispersed locations which exceeded the costs of the consequent transportation. But there are few economists who do not see long-term economic advantages in preventing further agglomeration, even although it must be admitted that some of the benefits which are claimed for regional dispersal are difficult to define precisely and impossible to value.
Taking regional dispersal as an agreed aim, and recognizing that polices designed to achieve it are good for the transport industry, can we now ask what can the transport industry do to encourage regional dispersal? First. and most obviously, road haulage seen as a technological innovation promotes the decentralization of industry, partly because it reduces shorter-haul transport costs and partly because it has brought down the costs of transporting small loads relative to large bulk loads. It seems probable that technological developments in road haulage, and in particular containerization and larger vehicles, will together provide some counteracting tendency away from decentralization, but even with these fully developed the flexibility of road transport makes for greater decentralization than one could attain without that mode.
Not price alone The essential aim relating the operational efficiency of road haulage with regional problems is the extent to which the cost (per mile) of carrying freight over longer rather than shorter distances can be kept down. Analysis of the costs for the two modes, rail and road, suggests that the breakpoint of the cash advantage of rail over road comes at approximately 100 miles. We know that the choice of modes is not made on price alone, reflecting the high value that users place upon speed of delivery among other things. There is thus a fairly high proportion of all freight journeys in excess of 100 miles being made by road despite the higher cost compared with rail. Any reduction in the cost of such
longer journeys would be a gain to manufacturers who buy materials and sell products at distances in excess of 100 miles — and in particular, of distances in excess of 300 miles, for which the cost per consignment by road appears to be twice that for distances of 100 miles. Another comparison between road and rail charges is that when the length of haul is doubled, rail charges rise by 20 per cent and road haulage charges by 30 per cent. Distance apart, as between regions there do not appear to be marked regional differences in the costs of moving freight by rail but there is a suggestion that road haulage rates do reflect differences in the volume of traffic generated by different regions and that, in particular, consignments originating in Scotland and in East Anglia bear higher charges than those originating in other regions. It seems entirely possible that there are good "real cost" reasons for ,this, but in so far as these costs can be reduced and these price reflections cut, the road transport industry would be helping to encourage a wide dispersal of industry.
The effects of technical change in road haulage on relative distance costs are by no means clearcut, but the growth of containerization should reduce the higher cost elements of the long haul as a result of the increased proportion of fixed costs to total costs. Improved roads and, in particular, motorways and trunk roads must also make their contribution to reducing distance costs with these reductions disproportionately favouring the greater distances.
Speculation' about how far trends in transport costs may help reduce relative distance costs must not be seen as a leaning towards direct transport subsidies as an element in regional policy. Of course we already have indirect transport subsidies in the form of infrastructure spending on roads (and on rail subsidies) which are high relative to the tax yields from some regions. But then we also have negative subsidies or taxes on distances, which operate against dispersal and in favour of agglomeration. These are not particularly high — their elimination would probably reduce freight costs by road by about 7 or 8 per cent — and the incidence of any such reduction would benefit longer hauls more than shorter ones, for example cutting the cost of carrying a 20-ton load from Glasgow to London by approximately £15, but the cost from Birmingham to London by only £4. The extreme form of transport subsidy which has been advocated is the "postalization" of freight rates, reducing them all to flat rate charges irrespective of distance. This is to fly in the face of economics and, even more heinous, of geography itself. If any such policy were introduced and it were believed that it would last, location decisions would be unaffected by distance costs — with the inevitable effect that the resources used to transport goods (and people) would far exceed those necessary for any given level of real national income (and population). This would be an extreme distortion of transport prices and cannot be argued for on rational economic grounds. My concern has been to ask whether distance costs to the operator could be reduced, thus reducing distance costs to the manufacturer. Additionally it may be asked whether the pricing structure adopted by road hauliers when compared with the costs they bear introduces any distortions which militate against dispersal and over-favours agglomeration. Does the extent of rate tapering truly reflect the tapering of costs, or does some combination of accounting practice and profit-maximizing pricing introduce distortions, and if so in what direction and to what extent? The studies of the industry are not helpful on this point, so that the possible influence of the road haulage industry on the distribution of industry is inadequately understood. One factor which is at work is the preference of manufacturers for uniform delivered prices for their products. There has been a tendency to regard this as favouring dispersal, but the actual result is likely to favour agglomeration. The abolition of distance costs to distant consumers
may begin on the basis of averaging them out between all consumers, but is likely to end by encouraging manufacturing locations which reduce the total distance over which goods must be transported and thus reduce transport costs.
The best known and most important example of uniform delivered prices in Britain has been that operated by BSC for steel products. Such a scheme removes any incentive for steel consumers to locate near steel plants. (The opposite possibility, that it may encourage steel plants to locate near consumers exists, but given the importance of the other constraints on steel, location is not very important.) The basing point system of the European Coal and Steel Community also underreflects real transport costs, but to a lesser extent. Whereas the insistence on "transparency" of transport rates, making them known to all producers, consumers and transport companies, appears to favour rationality and competition, this is much weakened by the adjustments by which the producer may "absorb" (or pay) freight charges greater than those from the basing point and appropriate transport savings ("phantom freight") when the actual freight cost is less than the theoretical freight from the basing point. With such distortions operating in the market for moving goods it may be asked whether objections on economic grounds to transport subsidies to discourage agglomeration is not excessively purist. The answer must be that the tendency towards greater liberalization and competitiveness within the EEC will accelerate, and that consequently the possibility of transport rate distortions designed as an instrument of regional policy will become less rather than more appropriate or likely.
Channel impact Having brought the issue of transport and of EEC together it would be impossible not to comment upon the Chunnel. We should guard against exaggerating the impact of the tunnel on road haulage. It is expected to carry less than 10 per cent of freight between Britain and the Continent. Nevertheless, the effect on regional policy will be to reinforce the efforts of the French government to develop the North West and counteract the effort of the UK Government to halt agglomeration and encourage dispersal. The second, counteracting, effect would be true of any tunnel located in the southeastern tip of this island, but will be more true if all containers and road vehicles using the tunnel join the train in the South East rather than at terminals dispersed throughout the UK. This extra mileage by road may not be entirely unwelcome to road hauliers but any ultimate increase in agglomeration will be to their disadvantage. But transport infrastructure is not to be determined mainly according to regional considerations, and the economic case for the Chunnel is a strong one. There has been a suggestion that the cost of construction should be cut by reducing the tunnel size and excluding lorries from its use, but it seems improbable that such a reduction in size would make economic sense if any but a very short-term view was taken.
Transport is such a pervasive and heterogeneous factor in modern complex economics that there is no end to the possible connections between it and any particular policy question. Starting with the location of industry and with regional policy designed to influence, we have examined a few of these possible connections. To conclude with, there are two broader issues affecting transport to touch upon. The first is the rate at which we may expect the demand for freight transport to grow in the future. Already it has been noted that the degree of industrial dispersal will be an important influence. The increased distance over which goods would be moved given a more dispersed pattern of economic activity could be counterbalanced by reduced congestion, which is a major explanation of the rapid growth of expenditure on transport in recent years. Both recent experience and the most up to date discussion of likely future trends suggest that "expenditure on road goods transport will increase . . . at a rate greater than the Gross National Product". This conclusion is reached without regard to one important influence which has led economists to expect the opposite result, that as high-value products (both consumer goods and capital goods) increased in importance with rising real income the resources used for transporting goods would, expressed as a proportion of national product, decline. This seems to be the most fundamental of all the possible influences on the future demand for transport services, particularly those internal to a national economy, and must give rise to speculation regarding if and when it will ever become quantitatively dominant and establish a tendency for the importance of road freighting to decline within the economy — decline relatively, not absolutely, that is.
An economist finds particular interest — and perplexity — in the art of choice between modes to the prices charged by these modes. The most thorough study suggests that when the price of both modes is known the price difference is not a significant influence on the actual choice of mode. The specific result indicated that when the charge by rail was 25 per cent above that for road the probability of road haulage being the mode chosen increased by only 4 per cent. Adding this result to the very substantial proportion of decisions regarding use of transport mode which are made without information about the costs of modes other than the one traditionally used, the impression left is of an industry in which price competition is unimportant. But this is not the impression one gets when talking to commercial managers in road haulage or in British Rail, Even allowing for the importance of non-price qualitative factors in determining choice of modes there is a puzzle here in the gap between the results of quantitative analysis and the situation which the industry sees itself as being in. It would be interesting to hear the road haulage sector of the industry's comments on this puzzle. Certainly if price is of such little importance this would strengthen rather than weaken the view that transport costs are of little importance in decisions about location and for regional policy. The general tenor of my paper has been to the contkary, and for the rehabilitation of transport costs in broader economic decision-taking.