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LONDON NEEDS£100BN TO MAINTAIN WORLD CITY STATUS - 'STARVE IT AT YOUR PERIL' BUSINESS TELLS GOVERNMENT

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In order for London to maintain its world city status, and to continue to compete with Tokyo and New York,£100bn o...
In order for London to maintain its world city status, and to continue to compete with Tokyo and New York,£100bn of investment, from both the public and the private sector, needs to go into the capital's transport, housing, health, and education services over the coming 15 years ??? that's the conclusion of research carried out for business group London First in the run up to the chancellor's comprehensive spending review.

Commenting on the results of the research Jo Valentine, chief operating officer of London First said:

'The objective of this research was to cut through the political rhetoric and put some hard figures on policy aspirations. In the battle between priorities for health, education, transport and other services, the overall needs of London must be properly taken into account, not only for the benefit of the capital but for the UK as a whole.

'London currently contributes of the order of£20bn a year net revenue to the rest of the UK. If the UK were a company, London would be its brand leader. As any business person knows you must continually re-invest in your leading brand, not treat it as a cash cow to be milked until it is worthless.

'We want to see a London in 2015 where the three million plus journeys a day on London Underground are safer, cleaner and more reliable, where citizens and visitors enjoy better buses, more reliable trains and less congested roads. We want London's population growth to have been matched by increased capacity and better facilities in the capital's schools and hospitals. All these extra people will need homes.

'This vision may seem remote - but the challenge is not insurmountable.£100bn ??? or£7bn a year - is achievable. Annually it represents only 6% of London's GDP. Nevertheless, historic and current investment is nowhere near that figure.

'We recognise that even record levels of planned public sector investment will not be sufficient to achieve£100bn. There is therefore a clea r and significant role for private sector investment which could contribute half this amount if the right environment is created by Government. However that environment will not be created by assuming that the private sector will pay for everything. There must be a genuine partnership with the Government committed to finding its share of the increased investment that is needed.'

Additional information on the study:

The study was carried out by Brook Lyndhurst Ltd for London First. It concludes that the total investment required will be between£90bn and£100bn in 2000 prices. The results are summarised below:

WORLD CLASS SERVICES BY 2015 - LONDON'S ESTIMATED INVESTMENT NEEDS ??? TO COME FROM BOTH PUBLIC AND PRIVATE SECTORS

2000 prices£bn

(public sector)£bn

(private sector)£bn

(total)£bn (annual average)

Transport21 - 2228 - 3049 - 52

Housing5.5 - 917 - 1922.5 - 28

Health5.5 - 6.52+7.5 - 8.5

Education4 - 4.56 - 6.510 - 11

TOTAL36 - 4253 - 57.589 - 99.56.5 - 7

Source: Brook Lyndhurst estimates

Transport

The study is based on the 'London' component of the Government's 10 year transport plan and assumes that the average annual rate of investment in the second five years will continue. It also includes BAA's plans for airport investment, but excludes rail investment outside London that serves the capital.

Housing

The study takes account of a range of estimates of the number of new homes (between 31,600 and 43, 000) that will be needed each year to meet demand and of different housing types. It also looks at the potential need for spending on maintenance, which could range from£6bn to£18bn.

Health

The study draws on the NHS Plan, published in 2000 and the Wanless report of November 2001. However both of these sources are national in scope and cover different periods, so a good deal of extrapolation is needed to produce estimates for London up to 2015.

Education

There are no longer t erm estimates of need or investment plans for schools. Estimates are therefore based on replacing half the school stock over the period up to 2015. A similar estimate is made for Higher and Further Education.

Outstanding issues

The report invites others to consider, test and explore the figures it has produced and also provides a basis for discussion of the scale and nature of the private sector's contribution.

It raises a number of general issues for further consideration and research, including:

- How to define world class public services

- How can investment be defined in a consistent way over time across both public and private sectors and across many areas of expenditure

- How to account in a consistent way for maintenance spending that extends the life of capital assets

- How to account for other spending that enhances the long term sustainability of public services but does not constitute 'investment' e.g. human capital

- How should investment outside London to serve London's needs be taken into account e.g. Channel Tunnel Rail Link.

The Mayor of London is only partially responsible for the public services needed in London and there is no central Government responsibility for looking at the overall investment needs of public services in London. The extent of forward planning varies considerably between services. The study has therefore had to draw on a variety of sources and approaches.

Notes

London First is a business organisation supported by over 300 of the capital's major businesses. Our mission is to improve and promote London. London First's business members are in key sectors such as finance, professional services, property, IT, creative industries, hospitality and retail. Our membership also includes virtually all the higher education institutions, as well as further education colleges, NHS trusts and independent hospitals

London First's principal sponsors are Argent Group, BAA, British Airways, Berwin Leighton Paisner, BT, Canary Wharf plc, CIT, Clifford Chance, Deloitte and Touche, Ernst & Young, HSBC, Sainsbury's, KPMG, Land Securities, Minerva plc, MWB Business Exchange, Paddington Basin Developments, PricewaterhouseCoopers, Quintain Estates and Development and Resolution Property.

Towards Better Public Services for London

A report commissioned by London First

CONTENTS

Page

Executive Summary 3

Introduction 5

Part One ??? Context & Caveats 7

1.1Policy

1.2Statistics

1.3Definitions

Part Two ???Investment Needs 13

2.1Transport

2.2Housing

2.3Health

2.4Education

Part Three ??? Summary & Closing Remarks 31

Brook Lyndhurst warrants that all reasonable skill and care has been used in preparing this report. Notwithstanding this warranty, Brook Lyndhurst shall not be under any liability for loss of profit, business, revenues or any special indirect or consequential damage of any nature whatsoever or loss of anticipated saving or for any increased costs sustained by the client or his or her servants or agents arising in any way whether directly or indirectly as a result of reliance on this report or of any error or defect in this report.

Executive Summary

London, along with New York and Tokyo, is one of three world cities. With a progressive shift in activity nationally from manufacturing to services, London's economic strength is increasingly driving the UK's economic performance.

At the same time London has also led the UK's population growth. Uniquely among major cities in the developed world, its population has increased by 600,000 since 1989, equivalent to the population of Sheffield. The GLA forecast a further increase of 700,000 by 2016, equivalent to the population of Leeds.

During this period of growth, London's public services have suffered from under-investment by successive governments. Maintenance backlogs have built up in transport, public housing, education and health, while capacity has failed to keep pace with increasing demand - new housing construction is at its lowest level since the1920's. Further population growth will put still more pressure on public services.

London will not be able to maintain its world city status if it is not supported by world class public services. However, there has been no estimate of what investment in key public services will be required to make up for past neglect, raise standards and meet increasing demand. London First therefore commissioned this study to estimate the capital investment required to deliver world-class public services in London by 2015. It focuses on four areas of expenditure: transport, housing, health, and education.

The study concludes that the total investment required will be between£90 billion and£100 billion in 2000 prices. The results are summarised below:

World Class Services by 2015 - London's estimated investment needs ??? to come from both the public and private sectors

2000 prices£bn

(public sector)£bn

(private sector)£bn

(total)£bn (annual average)

Transport21 - 2228 - 3049 - 52

Housing5.5 - 917 - 1922.5 - 28

Health5.5 - 6.52+7.5 - 8.5

Education4 - 4.56 - 6.510 - 11

TOTAL36 - 4253 - 57.589 - 99.56.5 - 7

Source: Brook Lyndhurst estimates

These figures indicate that world class public services for London by 2015 will require sustained levels of capital investment well above historic trends. The public sector element is broadly based on a continuation of planned levels of expenditure for 2003/04, which is much higher than historic trends. The need to sustain London's success should be recognised in the Government's current spending review. In the battle between priorities for health, education, transport and other services, the ov erall needs of London get overlooked, even though its economy is bigger than that of Portugal or Greece.

However even record levels of planned public sector investment will not be sufficient to make up for past under-investment and cater for growth. There is therefore a clear and significant role for private sector investment in addition.

The study was a quick, desk-based exercise and raises a number of important issues for further discussion and research. The Mayor of London is responsible for only a part of the public services needed in London and there is no central Government responsibility for looking at the overall investment needs of public services in London. The extent of forward planning varies considerably between services. The study has therefore had to draw on a variety of sources and approaches.

Transport

The study is based on the 'London' component of the Government's 10 year transport strategy and assumes that the average annual rate of investment in the second five years will continue. It also includes BAA's plans for airport investment, but excludes rail investment outside London that serves the capital.

Housing

The study takes account of a range of estimates of the number of new homes (between 31,600 and 43, 000) that will be needed each year to meet demand and of different housing types. It also looks at the potential need for spending on maintenance, which could range from£6bn to£18bn.

Health

The study draws on the NHS Plan, published in 2000 and the Wanless report of November 2001. However both of these sources are national in scope and cover different periods, so a good deal of extrapolation is needed to produce estimates for London up to 2015.

Education

There are no longer term estimates of need or investment plans for schools. Estimates are therefore based on replacing half the school stock over the period up to 2015. A similar estimate is made for Higher and Further Education.

The report invites others to consid er, test and explore the figures it has produced and also provides a basis for discussion of the scale and nature of the private sector's contribution.

It raises a number of general issues for further consideration, including:

- Howto define world class public services

- How can investment be defined in a consistent way over time across both public and private sectors and across many areas of expenditure

- How to account in a consistent way for maintenance spending that extends the life of capital assets

- How to account for other spending that enhances the long term sustainability of public services but does not constitute 'investment' eg human capital

- How should investment outside London to serve London's needs be taken into account eg Channel Tunnel Rail Link.

Introduction

This report has been prepared by Brook Lyndhurst Ltd on behalf of London First, as an input to its 'Building Better Services for London' project.

The report presents broad estimates of the capital investment required to deliver world-class public services in London by 2015. It focuses on four areas of expenditure:

- transport

- housing

- health

- education.

The figures presented in this report take the form of an OUTLINE BUSINESS CASE FOR LONDON PLC. Their purpose is three-fold:

- to give a broad indication of the scale of capital investment ??? that is, in buildings and equipment - likely to be required if London were to aim for world-class services by 2015

- to invite others to consider, test and explore the figures we have prepared

- to provide a basis for consultative discussion on the scale and nature of the private sector's contribution to future investment in London's public services

This has been a desk-based exercise, and the information upon which the estimates are based has come from four broad sources:

- statements and/or spending plans from Central Government Departments

- historic statistical data from ONS and Government Departments

- statements and/or plans from the GLA

- sundry other statistical sources

From none of these sources is there a clear statement of investment needs to 2015 at either national or regional level. Neither is there anywhere a clear, common definition of 'world-class'.

This current exercise has been conducted in slightly less than one month. There has, as a result, been only limited opportunity to explore the very many issues involved in considering this wide and complex subject. The exercise has similarly been restricted to data that is readily identifiable from published sources, including the Internet. Considerably more work would be required to refine the data and to develop these estimates more fully; and, indeed, to develop a detailed definition of 'world-class services'.

Accordingly, throughout the report we highlight the key questions that further work would need to address; and we invite those reading this report to consider how these questions could best be addressed.

Structure of the Report

The main body of the report begins in Part 1 by setting out the context within which the estimates have been prepared, and the important caveats surrounding, and limitations upon, the estimates.

Each of the four investment areas is then considered in turn in Part 2. For each of transport, health, housing and education, the report presents:

- indicative estimates of total investment required by 2015;

- a detailed explanation of the methods and reasoning used in reaching the estimates;

- a list of the sources relied upon;

- a brief commentary, drawing attention in particular to issues that influence the reliability of the estimates

- and a list of the key questions t hat would need to be addressed in a more fully developed set of projections.

The various estimates are brought together in Part 3. As well as the data themselves, Part 3 presents a further commentary, highlighting issues that are common to all four investment areas; re-states the more general caveats and limitations upon the data; and re-iterates the questions raised throughout the report.

Part One: Context & Caveats

1.1Policy

At national level, the current administration's commitment to public services has led to an apparently significant shift in the parameters of policy debate. Whether in terms of the NHS, transport or education, debate now focuses upon how best to finance increased expenditure rather than on how best to trim expenditure in order to cut taxes.

Through devices such as the Comprehensive Spending Review process, and the publication of long term strategic plans, the government is being more explicit about both the intentions to spend and invest in the future, as well as the justification for those intentions.

Furthermore, following the period during which the Labour Government adhered to the previous administration's spending plans (i.e. 1997-1999), the last few years have seen rapid increases in total government spending in some key areas.

At a rhetorical level, these increases are justified on the basis of an apparently widespread belief that, across a wide range of provision, there has been chronic, and in some cases acute, under-investment in the past. With limited exceptions, however, no formal quantification of these arguments has been made public.

It is therefore assumed ??? for the purposes of this report, at least ??? that significant increases in public spending (and, inter alia, investment) are intended both to 'catch up' on historic under-investment, as well as to ensure that future services are maintained at an acceptable level (see definitions, below).

For London, the policy position can be more directly presented, through reference to four key documents:

'Towards the London Plan' May 2001 ??? the Mayor's proposals for London's Spatial Development Strategy, which sets out the main parameters for demographic, economic, social and environmental change over the next ten years.

'Investing in London: The Case for the Capital' July 2001 ??? in which the GLA argues the general case for investing in London.

'Public Services for a Growing City' December 2001 ??? in which the Mayor sets out the strategic issues facing public service provision in London over the next ten years.

'Planning for London's Growth', March 2002 ??? in which the Mayor sets out the 'statistical basis for the Mayor's Spatial Development Strategy'.

These documents, too, employ a mix of statistics and rhetoric to justify 'massive' increases in investment and expenditure in the future. Furthermore, although a range of data are projected (such as population, employment and housing need) few, if any, figures are given on the actual spending required or, indeed, the scale of the backlog of under-investment.

Preparation of the first-mentioned of these four documents is a statutory requirement: the remainder are very much intended to contribute to and/or influence the policy relationship between central Government and London government.

There currently appear to be two key areas of disagreement between central and London government.

The first concerns the origin and management of investment, in particular the issue of PPPs. This issue is being separately tackled by London First, and we do not rehearse the arguments here. (We have, however, in the investment estimates given below, endeavoured to distinguish between public and private investment where possible.)

The second difference appears to be concerned with the level of investment/ spending, rather than its form. In general, statements from London government suggest that proposed national government spending is insuffi cient. However, since in many areas central government is vague or opaque about intended spending, and the GLA/Mayoral publications are completely silent on the sums of money needed, it is difficult to be precise about the nature of the disagreement.

Indeed, it may be unreasonable to characterise it as a disagreement. Rather, there is a broad policy consensus at present, which can be summarised as follows:

Following a long period of often severe under-investment, London (and the UK) needs a sustained period of very significant investment if its citizens, businesses and visitors are to enjoy the standard of public services to which a world class city is entitled, and if London is to continue making its vital contribution to the overall success of the UK

The question is: how much is 'very significant'?

1.2Statistics

Two well-established homilies collide in this piece of work: 'lies, damned lies and statistics'; and 'multiple announcements', whereby government announces spending intentions on several occasions and it becomes difficult (especially for general business or lay people) to distinguish between new money and old money.

In terms of the statistics available, we may usefully distinguish between those that refer to the past, and those that refer to the future. Historic data is affected by changing definitions, changing structures of government departments, changing accounting methods, statistical revisions and, it would appear in some cases, deliberate opacity. Explanations for the historic pattern of government investment in, say, education, are affected by all of these factors, as well as by features of the wider environment ??? the number of school-children, the numbers staying on into further and higher education, the relative responsibilities of local authorities and central government, the state of the economy and so on.

Examining historic data also raises questions about trends, levels and step changes. A cursory examination of UK public invest ment in education during the 1990s, for example, quickly leads to the conclusion that 'there is no trend' ??? making it extremely difficult to be clear about what sort of 'trend' would be realistic to suggest for the period out to 2015.

Turning to future data (or forecasts or projections or plans), many similar factors apply. Three additional factors are also relevant.

The first is to understand the extent to which wider circumstantial factors are taken into account. It is difficult to establish, for example, whether the 10 year Transport Strategy is consistent with the UK economy growing at its trend rate throughout the period, or whether it could cope with higher growth, or whether lower growth would undermine the financial case.

Secondly, it is not always clear in either projections or plans whether inflation is being accounted for. Thus a ten year plan may suit the rhetorical purposes of being able to announce that a very large amount of money will be spent ??? but even modest inflation can have a profound effect over a ten or fifteen year period. For example, annual inflation of 2.5 per cent over a fifteen-year period would reduce the true value of a year's investment by around one fifth.

Thirdly, future plans and projections are significantly affected by the phenomenon of multiple announcements. Multiple public announcements tend to be accompanied by a similar number of documents, and disentangling these overlapping and sometimes contradictory sources is a major challenge in its own right.

As we suggested in the Introduction, fully taking account of all these factors is beyond the scope of the current exercise. In particular, a more in-depth analysis would need:

- to take account of a wider range of data sources

- critically unpick the detailed statistical basis of headline spending sums

- to read and appraise a wider range of official and other reports

- to consult with those responsible for data and reports, as well as those responsible for formulating policy on the basis of these

We have attached many caveats to the data presented here, but have been as explicit as possible in justifying the estimates we have made. Wherever necessary, and following the example of Ernst & Young in their work on the investment needs of the UK's waste industry (see 'Public Services for a Growing City', pp 37) we suggest ranges for the investment required, (and for both housing and education, where the estimation processes have been particularly challenging, we have prepared scenarios).

1.3Definitions

Investment

In pursuing the notion of an OUTLINE BUSINESS CASE FOR LONDON PLC, we have restricted ourselves, as far as possible, to a simple definition of investment. Subject to certain caveats in individual cases (see Part 2), the estimates presented refer to the investment, in 2000 prices, that will need to be spent on new buildings and equipment. In some instances, a separate figure for maintenance has been calculated.

Broadly speaking, this definition of 'investment' is the same as the public sector definition of 'capital spending'.

In distinguishing between 'capital' and 'revenue', care needs to be taken in

three key respects.

Firstly, there is scope within the parameters of PPP and PFI in particular for a blurring of boundaries between capital and revenue spending. Indeed, a specific advantage of PPP and PFI would appear to be the fact that traditional demarcations in public sector financing are dissolved, allowing greater freedom of manoeuvre for PPP partners.

Secondly, some revenue spending in fact constitutes 'investment'. In particular, revenue spending on training develops 'human capital' rather than physical capital. World-class services require high levels of human capital, as well as physical capital, not only as part of the service itself, but also as the means of ensuring that physical capital is well managed and delivered. T his kind of investment is, arguably, as important as capital investment, but it is much more difficult to quantify and evaluate.

Thirdly, there is a complex relationship between revenue spending, maintenance spending and capital spending. In general, expenditure on maintenance extends and enhances the useful life of a physical asset. In principle, therefore, a stream of maintenance expenditure should reduce the volume of capital expenditure, when considered over a sufficiently long period of time. (The period involved will vary from asset to asset) Maintenance expenditure may take the form of either capital or revenue spending. Long run estimates of capital spending are therefore in part dependent upon future levels of maintenance and thus revenue spending.

Once again, the full complexities of this relationship lie beyond the scope of this current exercise, but form an important backdrop to an appreciation of the estimates presented.

QUESTION: Can 'investment' be defined in a consistent way, that works for both public and private sector, across many different areas of expenditure, and in a way that is stable over time?

QUESTION: How should spending that enhances the long-term sustainability of public services, but does not constitute 'investment' spending in the conventional sense, be accounted for?

World Class

The notion of London as a world class city is well established; and the expectation that a world class city should have world class public services is gaining ground.

Precisely what is meant by such terms is more difficult to establish; and converting such a definition into a sum of money, as required in this exercise, is not straightforward. (An explicit attempt has recently been made for the NHS in the Wanless Report ??? see Part Two, below.)

Rather than formulate a definition (through, for example, a consultation process) we have made the assumption that, in each of the four areas of investment we have investigated, projected spending , or projected levels of provision, are intended to deliver world-class services. Thus, the Transport Strategy is assumed to be aiming for world-class provision (and the Commission for Integrated Transport welcomes the 10 year Transport Plan as a step towards providing world class infrastructure). Similarly, the GLA's projections of housing need are assumed to be aiming for the same.

Projections of this kind could be contrasted with investment levels required to maintain provision at its current level. (Where possible, we have made use of historic investment levels to indicate what this level might be.)

However, even this 'steady state' picture is misleading, not least because London's population is expected to grow ??? according to the projections from the Mayor and the GLA ??? from its current level of 7.4 million to 8.1 million by 2016; and is expected to age over this period, too, as the proportion of the population over 60 rises. 'Steady state' investment would therefore represent a declining standard of provision, since the number of users of public services would be going up.

For each of the four investment areas, we have therefore taken account of expected population changes, either explicitly or implicitly. We have relied upon a mix of GLA and ONS projections in order to estimate the composition of the expected population growth. (Composition is important because different groups in the population have different needs from public services ??? more young people would imply more educational provision, more older people would imply more health care provision, and so on.)

QUESTION: Can 'world class' be defined more precisely?

QUESTION: Can and should scenarios be developed (and made widely available) comparing 'baseline' with 'steady state' with 'world class'?

QUESTION: Should a more detailed analysis consider more fully the impact of variation in the composition of population growth, employment growth, housing need and so on?

Oth er Definitions

Four areas of investment were selected for investigation, partly because they represent major areas of need for the capital.

There are, of course, many other areas of public spending, and many other areas of public investment. For example, there is a very significant portfolio of government (both national, regional and local) buildings in London, which will certainly require significant investment over the period to 2015. Future work could investigate this and other potential investment streams.

Finally, we have generally taken London to mean the administrative area of Greater London. The caveats we would attach to this decision, and indeed to all the estimates presented, are perhaps best summarised by this extract from HM Treasury's own analysis of regional investment data:

'It is important to recognise the limitations of this approach. In addition to practical difficulties that limit the extent of disaggregation possible, there are also significant definitional problems associated with allocating expenditure to particular areas on the basis of 'who benefits'. For example, hospitals and health facilities are not used solely by the residents of the region in which the facility is located and roads serve the needs of more than the geographical area through which they pass. Definitional and border problems become increasingly significant the smaller the geographical unit considered.'

Source: Public Expenditure, Statistical Analyses 2001???02, Cm 5101

Thus, London's future ability to function as a world class city depends not only on the investment within its borders, but also on a much wider set of investments, in the surrounding regions and beyond ??? for example in the housing and public service provision for London's workers who live outside the capital.

Despite all these issues and caveats, however, we have used a variety of robust sources to provide an indication of London's investment needs, and it is to these that we now turn.

QUESTION: Can/should this work be conducted for other areas of public service investment?

QUESTION: Should London's 'consumption' of investment located in other geographical areas be included?

Part Two ??? Investment Needs

2.1Transport

2.1.1Estimates

- Total investment required, 2002/3 to 2015/16 ??? approximately£50bn

- Of this, approximately 60% is expected to come from the private sector, with a very significant element coming from the Tube PPP.

- The 10 Year Transport Plan sets out most of the detail behind this headline figure. It indicates that investment is intended both to overcome the backlog of maintenance and under-investment, as well as to increase the quality of infrastructure towards world-class standards.

2.1.2Methods and Reasoning

The recent DTLR 'Ten Year Transport Plan' clearly identifies intended investment in the publicly managed component of London's transport infrastructure.

The Plan covers the period 2001/02 to 2010/11. It covers road, major rail track investments and the London Underground PPP. A full listing of the investments covered is provided in the Plan .

The Plan distinguishes between public sector investment, public sector resource (which comprises revenue spending, mainly to train operators, covering maintenance, administration and subsidies), and private investment. As the table below shows, the Plan assumes a steady annual rate of investment in the second half of the period. It thus appears to take no account of inflation. (We have assumed, as a result, that these figures are broadly consistent with an estimate of spending in 2000 prices).

Planned Transport Investment in London

01/0202/0303/0404/0505/0606/0707/0808/0909/1010/11TOTAL

£bn

Public sector invest0.60.80.90.90.70.70.70.70.70.77.4

Public sector resource0.60.70.70.80.80.80.80.80.80.87.6

Total Public1.21.51.61.71.51.51.51.51.51.515.0

Private1.21.51.71.71 .51.51.51.51.51.515.1

TOTAL 2.43.03.33.43.03.03.03.03.03.030.1

Source: DTLR, 10 Year Transport Plan

Notes: The 10 year total includes an allocation of£6.8 billion private sector contribution via the London Underground PPP; in the more recent PPP announcement, this figure has been revised to£4bn.

For the period beyond 2010/11, we have followed the DTLR's example, and assumed that investment will continue at the average annual rates prevailing in the second half of the 10 year plan.

These further five years give overall totals as follows:

Investment Needs ??? 2002/3 to 2015/16

£bn

Public Sector10-11

Public sector resource11

Total Public21-22

Private21-22

TOTAL42-44

Source: Brook Lyndhurst estimates

The other major area of transport investment in London is the airports. These are privately owned and are not included in the 10 year Plan.

BAA's Annual Report for June 2001 identifies investment plans at its London airports (Heathrow, Gatwick, Stansted) with a value of£6bn, including£2.5 billion for Heathrow T5. (No specific figures are given for planned expansion at City Airport.) We have assumed, in addition, that further runway capacity will be required within the timeframe, and that investment with a value of£4bn-£5bn will be required for this .

Totalling the figures derived from the 10 year plan (£42bn-£44bn), together with the airport estimates (£10bn-£11bn), and adjusting for the latest estimate of private financing for the tube (i.e. ~£3bn below the original figure), gives a total investment estimate of£49bn-£52bn.

Of this, some£21bn-£22bn is identified as public investment, and£28bn-£30bn as private sector investment.

2.1.3Sources

The main sources used and referred to are:

- Ten Year Transport Plan, DTLR

- DTLR web-site

- Transport Strate gy for London, GLA

- SRA Ten Year Plan

- TfL web-site

- BAA Annual Report

2.1.4Commentary

Although the 10 year plan offers an unusual degree of clarity about future spending intentions, there remain a number of key areas of uncertainty.

First and foremost is the relationship between the Mayor's transport plans and Central Government's. The Mayor's strategy, for example, argues that an additional£500 million per annum by 2006/7 and£350 million per annum by 2010/11 is required to implement the Mayor's plans .

Part of the justification for this additional money concerns London's rising population. The Mayoral strategy relies upon the LRC/GLA projections of population ??? which show higher population growth compared to the ONS projections upon which the 10 Year Transport Plan is based.

We have been unable to verify whether this is the case, and so have not amended the investment estimates.

In addition, it is not clear how much of the Mayor's additional funding is for revenue (e.g. fare subsidies) and how much for capital purposes. The scale of additional funding will also be affected by revenues raised from proposed congestion charging ??? the more raised from congestion charging, the less additional funding will be required.

A second area of uncertainty concerns the relationship between new capital investment and maintenance and upgrade. The 10 year plan clearly refers to a range of maintenance and upgrade projects, as well as new developments such as the CTRL and the East London Line. However, particularly when thinking about the period beyond 2010/11, new investments will in part depend on the success or otherwise of investments in the first ten years, and the extent to which maintenance during the period has been effective.

Our assumption about a stable rate of annual investment in the 2011/12 ??? 2015/16 period could therefore be either too high ??? if high maintenanc e levels reduce the need for continued investment ??? or too low ??? if insufficient maintenance and/or higher population growth increases the need for further new investment.

Also of note is the fact that the London figures in the 10 year plan do not include the rail system serving London. It is very difficult to define this as it involves some investment outside London to remove bottlenecks on the system. However, 7 out of 10 rail journeys start or finish in London and the old Network South East accounts for about 40% of total rail business. The 10 year Rail Strategy provides for£33.5bn public investment and assumes£34.3 private.

Despite these issues, in broad terms the investment estimate ??? of something in the region of£50bn - seems to be a reasonably robust one, based as it is on the extensive and detailed work conducted by the DTLR and TfL, and announced plans from BAA.

2.1.5Further Questions

- To what extent do different projections of population and/or employment impact on the required investment?

- How will additional funding from congestion charging impact on both private sector investment and central government investment?

- What is the relationship between maintenance spending (as revenue) and subsequent capital spending?

- Has full account been taken of inflation?

- Which individual schemes need to be taken explicit account of, and what might the effect be of different development priorities?

- What account should be taken of the reliance of London on wider rail investment?

2.2Housing

2.2.1Estimates

- Depending upon the precise mix of housing development, it is estimated that world class housing provision in London by 2015 will require investment in new dwellings of between£22.5bn to£27.7bn.

- Of this, between one quarter and one third is expected to be funded from the public sec tor (£5.6bn -£9.2bn).

- Estimates of investment spending on maintenance are more difficult, and could lie in a wide range of£6bn -£18bn over the period.

2.2.2Methods & Reasoning

Unlike transport, there is no current long-term projection for housing investment in either London or the UK .

Our approach has therefore been to build up from the estimates of housing need presented in the Mayor's 'Towards the London Plan', together with submissions made to the Mayor's Housing Commission , and calculate the investment required to deliver this number of dwellings by 2015.

We have then compared these figures with information from a variety of sources that tell us something about the recent pattern of housing investment in London. This enables us roughly to 'calibrate' the estimates ??? i.e. to ensure that there are not wildly optimistic or pessimistic.

Figures in 'Towards the London Plan' suggest that, given the LRC/GLA's expectation of population growth in the capital and current trends in household formation rates, the number of households is projected to grow from 3.1 million now to 3.6 million in 2016, an increase of 500,000 households in 15 years.

The Plan warns: 'these figures are based on recent trends, so should not be seen as a prediction of how many households there will be in 15 years. Nor should they be seen as an estimate of the number of new houses required???.'

Despite this warning, this rate of new households ??? 31,600 per year ??? we have taken to be a close approximation to the need for new housing. Households and houses have a variable relationship. A household is defined as a group of people regularly eating together, and it is common in many urban areas for there to be more than one household per dwelling. Numbers of new houses may not therefore need to be as high as the number of new households.

However, since we are, for current purposes, looking at the in vestment needed to deliver 'world class' provision, it seems reasonable to aim for a situation in which households are not compelled to share a house, and that to calculate investment needs on the basis of 31,600 new dwellings per year, as a starting point, is not unreasonable.

A further dimension concerns the existing pattern of accommodation, in which many households are already sharing dwellings. A Cambridge University study for the Mayor's Housing Commission concluded that 43,000 dwellings a year to 2016 would be needed to cope with the expected growth in household numbers, and to catch up on the backlog (i.e. current levels of over-crowding and homelessness).

An important consideration is the composition of these dwellings. Well known is the Mayor's objective of ensuring that 50% of new dwellings are 'affordable'. Should this be achieved, the investment costs will be very different from an outcome in which, say, 25% of dwellings are 'affordable', sincethe costs of developing 'affordable' dwellings are generally lower than for market-price housing. (Of course, the returns on the dwellings are also lower.)

In addition, there are dramatic variations in the investment (i.e. development) costs depending upon the different kinds of dwelling ??? whether they are detached houses, terraced houses, high rise flats etc ??? and their size.

And, on top of this, there is the question of whether dwellings are built by private sector developers or developers funded in some way by the state (local authorities, housing associations etc).

On the last of these, figures from DTLR suggest that, in London during the 1990s, private sector housing completions ran at a rate of between 3:1 and 2:1 compared to state-funded housing developments i.e. for every local authority or housing association dwelling completed, between two and three private dwellings were completed.

In terms of different kinds of dwellings, we obtained development cost estimates (in 2000 prices, for London and the South East) for three types of dwelling: social, normal and luxury, for dwellings of different sizes.

With these findings, we formulated three investment scenarios. The first estimates the investment cost of building 31,600 dwellings per year, with 50% being social housing. The second uses the same number of dwellings per year, but looks at a situation in which 30% of the total is social housing. Scenario 3 explores a situation based on the Cambridge University study submitted to the Mayor's Housing Commission, in which 43,000 dwellings are built each year, 28,200 of which are 'affordable'.

In all three cases, costs per dwelling are an average figure for each type ??? there is, of course, a range of costs depending upon the actual size of dwellings.

Scenario 1 ??? 31,600 dwellings per year, 50% social

Cost per dwelling (£000s)Annual average new buildAnnual investment cost (£mn)Total 2002-2015 (£bn)

Social35.3158005577.8

'Normal'55.479004376.1

'Luxury'77.579006128.6

TOTAL160622.5

Source: Brook Lyndhurst estimates

Cost per dwelling assumes an 'average' size house; distribution between 'normal' and 'luxury' is assumed at 50:50

Scenario 2 ??? 31,600 dwellings per year, 30% social

Cost per dwelling (£000s)Annual average new buildAnnual investment cost (£mn)Total 2002-2015 (£bn)

Social35.395003354.7

'Normal'55.41105078611.0

'Luxury'77.579006128.6

TOTAL173324.3

Source: Brook Lyndhurst estimates

Social housing figure taken directly from Towards the London Plan. The Plan also identifies 'intermediate' housing, which we have allocated to 'normal'.

Scenario 3 ??? 43,000 dwellings per year

Cost per dwelling (£000s)Annual average new buildAnnual investment cost (£mn)Total 2002-2015 (£bn)

Social35.32820099413.9

'Normal'55.474004105.7

'Luxury'77.574005738.0

TOTAL198027.7

Source: Brook Lyndhurst estimates

Cambridge Universi ty study cited in Mayoral Housing Commission, identified'affordable' need as 28,200 per year; remainder split 50:50 normal and luxury

These scenarios therefore suggest that capital spending on new dwellings in London over the period 2002-2015 will need to be in the range£22.5bn to£27.7bn.

If historic patterns of private/public splits on the number of housing completions continue to apply in the future, then:

Possible Private/Public Splits 2002-2015

£bnAt 3:1At 2:1

Total PrivatePublicPrivatePublic

Scenario 122.516.95.615.07.5

Scenario 224.318.26.116.28.1

Scenario 327.720.86.918.59.2

How do these figures compare with recent investment levels?

Some data are available on public sector investment. The Audit Commission's report 'Local Authority Management of Capital Projects' indicated that local authorities spend around 40% of their capital budget on housing, suggesting a London wide figure of ~£500mn per year during the 1990s.

The DTLR gives a figure of£613 million public sector capital spending on housing in London for 2000/2001, 'a 53% increase on the previous year'.

Both these figures are broadly consistent with the estimates we have prepared. Fourteen years of investment at£500 million per year gives a total of£7bn on public housing ??? in line with the figures in the table above. At£613 million per year, a total of£8.6bn is achieved, also consistent with the range we have calculated.

This comparison has two, contradictory, weaknesses. On the one hand, housing completions in the 1990s were, according to the GLA and the Mayor's Housing Commission, well below the rates required in future, such that we might expect to see higher investment levels in the future. On the other hand, the historic data include spending on maintenance, which is not included in our estimates of investment in new dwellings, suggesting a lower rate of spending.

We have no evidence to judge the extent to wh ich these factors balance.

We have explored the potential scale of investment spending on maintenance. As explained in Part One, this is a complex area, and we have drawn on two sources merely to give an indication of the potential scale of need.

The DTLR recently announced a£9bn programme for the 'modernisation' of 1.5 million council houses, over three years. This equates to£6,000 per dwelling, and 500,000 dwellings per year.

If London were to secure its fair share of this (around 13% on the basis of its share of household numbers) then this equates to 65,000 houses and£390mn per year. Were this to be sustained over the 2002-2015 period, it would tackle just under 1 million homes (from a total stock of just over 3 million dwellings), at a cost of something under£6bn.

An alternative perspective can be derived from the Family Expenditure Survey, the 2001 Edition of which reveals that average weekly spending on 'repairs, maintenance and decoration' by all householders in London is£8.40. Grossing up ??? from weeks to years, and for London's approximately 3 million dwellings, produces a figure of£1.3 bn per year. Over a 14 year period (2002-2015) this would give a total of£18.3bn, spent by householders.

Thus, one route suggests that a third of London's housing stock could be 'modernised' by 2015, for an investment of£6bn. Alternatively, the 'normal' spending of householders will produce spending of£18bn on maintenance, repair and decoration.

A formal, robust statement of maintenance need seems, with just this data, impossible. What rate of investment in maintenance would be consistent with 'world class'? More research is necessary to answer this question ??? but it seems likely that the answer will lie in the£6bn-£18bn range.

2.2.3Sources

The major sources used in this section are:

- 'Towards the London Plan', GLA

- www.housing.dtlr.gov.uk

- www.london.gov.uk/mayor/housing_commission

- Regional Trends (various), TSO

- Family Spending 2000-2001, TSO

- London Housing Unit, www.lhu.org.uk

2.2.4Commentary

In keeping with the 'world class' provision approach, the estimates presented here endeavour to put a price on 'solving' the problems of London's housing identified by the Mayor and his Housing Commission.

Many factors have not been considered. We have not considered whether there is sufficient room to develop these dwellings, for example; nor considered the links between any potential spatial pattern of development and the transport (and other) infrastructure that would be necessary to support such a distribution.

We have not considered the issue of house prices themselves, nor the effect on house prices of changes in the relative supply of housing (as a result of rapid housing development). Issues of land prices have not been considered, neither in terms of the inter-relationship between housing and other forms of development, nor in terms of the investment required to buy and where necessary remediate land.

Furthermore, as the scenarios illustrate, different patterns of development ??? a bias towards bigger or smaller dwellings, a greater or lesser reliance on social housing ??? have significant impacts on the overall value of required investment.

Nevertheless, as the comparison between the scenarios and historic evidence shows, the projections appear sensible, and investment of perhaps£25bn on new build will be required to 2015.

2.2.5Key Questions

- A more accurate assessment of maintenance spending is required; and, as for transport, a more thorough understanding of the relationship between expected/feasible levels of maintenance, and subsequent investment needs

- What further data sources ??? such as the Housing Federation, Construction Forecasting Research, etc ??? could or s hould be used?

- Supply-side constraints need to be considered ??? is there enough room for all these dwellings? And what differences (to total investment) are implied by different patterns of development - higher density development, development at transport nodes, etc?

- More analysis may be required to look at investment scenarios associated with dwellings of different sizes, of different tenure mixes etc

- Further account may need to be taken of the role and effect of land and house prices, both in terms of development rates and the value of investment.

2.3 Health

2.3.1Estimates

- On the basis of the NHS Plan, it is estimated that between£7.5bn and£8.5bn will need to be invested over the 2002 to 2015 period to deliver a 'world class' NHS in London.

- This figure includes a component for 'catch up', as well as growth and improvement to services.

- Of this, at least£2bn will need to be privately-funded through PFI.

2.3.2Methods and Reasoning

The NHS Plan, published in 2000, is similar in many ways to the 10 Year Transport Plan. Its overall intention is to set out a strategy by which the NHS will become 'world class'. However, it is much less specific than the Transport Plan, and does not set out detailed investment intentions except for the shorter term (i.e. the period to 2003/4).

As with education, the health sector has recently seen a sharp increase in expenditure, in terms both of revenue and capital. As a result, it is difficult to deduce meaningful trends from the pattern of investment spending through the 1990s. The NHS Plan projects that expenditure will continue to grow rapidly to 2003/4.

The projected spend takes account both of recent under-investment - 'the NHS will have cleared at least a quarter of its£3.1 billion maintenance backlog, accumulated through two decades of under-investment, by 2004' ??? as well as future needs.

Figures on health investment ??? both historic and projected ??? are available at the regional level. They currently distinguish between locally managed investment: PFI investment; and other investment.

Locally managed investment is distributed among the regions according to formulae based upon patient numbers and clinical need. London typically receives around 19% or 20% of the England total on this basis .

PFI investment has so far been driven by the availability and suitability of projects. By the end of 2001, of 66 major PFI schemes with a combined value of£7.54bn implemented since 1997, 14 schemes, with a value of£2.23bn (30% of the total) are based in London.

'Other' investment is managed centrally. Figures on the regional pattern of 'Other' investment are not available, largely because their regional pattern varies from year to year depending on the focus of investment effort. Over a long period, however, it is assumed that this 'Other' investment will mirror the pattern of regionally managed investment, and that London will secure around 20% of the England total.

In 1998/99, total capital investment nationally stood at£1.84bn, of which some£310mn was PFI investment. By 2000/01, the total had risen to£2.5bn, with the PFI component at£710mn; and by 2003/4, the projected total is expected to exceed£3bn .

Whilst the NHS Plan does not specify what total investment in the NHS is expected to be over the 2000-2010 period, it does specify that PFI investment is expected to be£7bn.

PFI investment is thus expected to average£700mn per year; and other NHS investment has varied between£1.5bn and£2bn during the past few years.

If these rates were to be maintained ??? and, since they include a mix of catch up, modernisation, maintenance and new build, it seems a reasonable assumption ??? then over the period 2002 to 2015, a total of between£34bn and£42bn w ould have been invested nationally.

London's share of this ??? assumed to the 20% figure mentioned above ??? gives a figure of£7.8bn to£8.4bn, of which around£2bn would be PFI investment.

As we have seen, PFI deals worth£2.23bn have already been signed for London ??? but since this figure dates back to 1997, a fair proportion of this figure has already been accounted for. Nevertheless, to reach the Government's objective of 100 major and medium-sized PFI deals for the 2000-2010 period, a further 34 projects need to come on stream, some of which could well take place in London. (It is difficult to be precise here ??? London has already had more than its 'share' of PFI ??? 30% compared to its normal investment share of 20% - so it may get less of the remaining PFI deals.)

In the light of this, it may be that the presumed PFI total to 2015 of£2bn may be too small.

An important calibration for these figures comes from the Wanless Report . Published in November 2001, the report from the former Chief Executive of NatWest Bank investigated the future of the NHS, and presaged the national debate on the long term funding of the NHS.

Wanless compared the proportion of national income spent on health and healthcare in the UK and other leading economies. He concluded that, over the period 1972 to 1998, compared to the EU average, the cumulative underspend in the UK stood at£267bn (in 1998 prices). That is to say, over a 27 year period, had the UK spent an extra£10bn on health each and every year, we would now have an NHS that matches the European average.

This is a very bald and bold statement of 'underspend' ??? and it offers a very concrete calculation of the cost of 'world class'. With it, it is possible to estimate how much might need to be spent to 'catch up'.

Drawing on data from the DoH , we estimate that investment spending typically accounts for 4% or 5% of annual spending on the NHS. The 'Wanless inve stment gap' is therefore likely to be between£11bn and£13.5bn.

This is comfortably below the£34bn to£42bn estimate of total national investment to 2015 ??? suggesting that the projected investment levels are, indeed, capable of delivering world class health care services. Perhaps the key question ??? as Wanless pointed out and as the government accepted ??? is how such investment will be funded, over a long period of time.

2.3.3 Sources

Principal sources used were:

- NHS Plan, 2000

- www.doh.gov.uk

2.3.4Commentary

As with other investments, there are uncertainties surrounding these estimates.

It is not clear, for example, whether the current investment burst can, or will need to be, maintained over a long period. It seems likely, given the endlessly rising demand for health services in advanced economies, that once higher levels of investment become established, it will not be possible to 'go backwards' even if policy makers recommend it.

(In the Wanless report, calculations are presented ??? covering both revenue and capital spending in the NHS ??? which show that, if the recent rates of NHS spending growth are maintained, and overall economic growth continues at its present trend rate, within 30 years we could expect more than 90 per cent of income tax to be spent on the NHS!)

The changing size and age structure of the population also offers an area of uncertainty. London's share of investment spending may well rise as its population increases ??? except that its historic share has in part been based upon levels of deprivation and ill-health which may no longer apply in the future. (There is an irony here ??? a 'more successful' NHS which managed to improve health, rather than merely treat the sick, would attract less funding, because there would be fewer people to treat... )

2.3.5 Key Questions

- Are recent spending figures a reasonabl e guide to the future? Should more explicit account be taken of potential cycles in investment? (And the economy?)

- Does the Wanless figure of cumulative underspend offer a good guide, or not, especially in relation to London?

- More work may need to be done to assess the implications of changing population composition; and, as with other sectors, further work may be necessary to understand more fully the relationship between revenue spending (particularly on maintenance) and capital spending (i.e. investment).

2.4 Education

2.4.1Estimates

- On the basis of scenarios developed using data from DfES, we estimate that the investment in London's schools required for 'world class' provision will need to be in the region of£5bn -£6bn over the period to 2015.

- With rather less confidence, we estimate that investment of perhaps a further£5bn may be required for the capital's HE and FE sector.

2.4.2Methods and Reasoning

Preparing satisfactory estimates for education investment has proven to be significantly more difficult than for other investment areas. Unlike either transport or health, there is no 'ten year plan' for the country as a whole, nor for London, from which investment intentions can be deduced.

In addition, no 'statement of need' akin to that available for housing enabled a (relatively) straightforward estimate of the investment required to meet that need.

On top of this, the powerful focus of government policy upon the education system, particularly since 1997, has led to significant changes in the scale, pattern and method of funding investment in educational provision.

For these reasons, we have prepared a series of scenarios, produced on the basis of varying assumptions.

For schools, we have prepared several scenarios, all driven principally by the historic ratio between investment levels and the size of the school age population.

Looking firs tly at the number of pupils, the 5-19 population in London is projected to be virtually the same in 2015 as it was in mid-2000. During this period, however, the 5-19 cohort is expected to grow by 48,000 (3.6%) up until mid 2007, then fall by 42,000 over the next 8 years to 2015.

Turning to investment, we began by using data from the DfES to examine the relationship between Total Managed Expenditure (TME) and TME managed by LEAs. We then explored the proportion of LEA TME that is spent on investment, to derive, initially, LEA investment in London. From this, we could deduce total investment in schools in London .

Investment in London Schools

£mn 2000 prices

1990/1297.6

1991/2176.2

1992/3125.4

1993/4116.8

1994/5171.1

1995/6169.2

1996/7150.2

1997/8130.8

1998/9210.7

1999/2000222.9

Source: Brook Lyndhurst, reflating nominal figures from DfES/Regional Trends

We then looked at the DfES's published figures for investment plans for the period 2000/01 to 2003/4 for the whole of England [official outturn data for 2000/01 are not yet available]. Applying to these the historic average of London's share of total capital spending, we obtain:

Planned Investment in School Buildings (£mn)

EnglandLondon

2000/012,000273

2001/022,100287

2002/032,500342

2003/043,200437

Source: Departmental Investment Strategy, DfES, & Brook Lyndhurst estimates for London

Thus, the planned capital investment in London's schools for 2003/4 is approximately three times the level of investment in 1996/7.

This massive increase in expenditure is a clear manifestation of the government's commitment to educational investment. The DfES is quite clear, in addition, that this increase in expenditure is intended both to address the backlog of under-investment, as well as growth to cater for increasing need.

DfES analysis of the first tranche of LEA AMPs (Asset Management Plans ) in 2000 indicates for England, a backlog of£6.989 billion of repairs, of which£754 million are priority 1 (i.e. work to prevent immediate closure of premises).

Based on London's share of pupils in 2001, and working on the assumption that the backlog is evenly spread across the country, then London's backlog might be in the order of£955 million. This is equivalent to 7 years worth of capital expenditure at the rates of the mid-1990s, and 4 years worth at the current rate of investment.

However, it is uncertain how long investment at this level might need to be maintained in order to deliver 'world class' educational provision.

We have therefore prepared four scenarios to explore the range of possibilities:

- Scenario 1 ??? estimates the amount of investment that would go into London's schools over the period to 2015 if the average investment levels of the last ten years were to be maintained (and allowing for the changing numbers of school age children)

- Scenario 2 ??? estimates the spend if investment per school age child were to be maintained at the average achieved during the recent up-surge in investment spending under New Labour, in the 1998-2000 period

- Scenario 3 ??? estimates the spend to 2015 if investment per school age child was maintained at the average of the 1999-2004 planned expenditure

- Scenario 4 ??? estimates the spend to 2015 if investment per school age child was to be maintained at their (currently projected) peak in 2003/4.

The results are presented below.

Projected School Investment - 2001-2015

£mn 2000 pricesTotalAnnual average

Scenario 1 - 90s average2811187

Scenario 2 - late 90s average3335222

Scenario 3 - average projected4634309

Scenario 4 ??? projected peak6134409

Source: Brook Lyndhurst estimates

Data from two other sources helps to contextualise these results.

Firstly, data from the DfES Departmental Investment Strategy reveals the current e stimated value of the UK's capital stock of schools, and the estimated like-for-like replacement cost, at£98bn and£66bn respectively. On the basis of London's share of schools and pupils, this would suggest that the value of London's capital stock is in the region of£10.5bn, and the replacement cost£7bn.

From the current DfES investment strategy (2001-2004), we know that '90% of school buildings in England pre-date 1976' and, more importantly, that 'over half of the school stock is in its replacement period'.

Replacing half of London's estimated stock would imply an investment of£3.5bn ??? comfortably in the range suggested by the scenarios.

A second, anecdotal source , suggests that the cost of building a new school [under the auspices of PFI] runs at between£10,000 and£15,000 per pupil. London's school population stands at around one million ??? suggesting that, should half of all schools need replacing (as the DfES imply), an investment required of between£5bn and£7.5bn over the period to 2015. Again, this figure is consistent with the scenarios.

In the light of these contextual results, and given the likelihood that considerable political priority will continue to be attached to investment in the educational system, our judgment is that estimates at the upper end of the range are the most likely.

For HE and FE, it has not been possible to produce estimates with the same degree of confidence in the time available. Investment funding into HE and FE is the responsibility not only of central government but also the institutions themselves, and there are numerous potential funding streams involved.

The 2001-2004 education plan does give a clue, however, since it indicates that the replacement value of national FE capital stock stands at£12bn; and that theHE sector's capital assets are insured for a total of£18bn.

London accounts for approximately one third of the UK's HE and FE institutions (see 'Public Services for a Growing City'), implying a replacement value for HE and FE assets in the capital of around£10bn. If the HE and FE sector's buildings are in a roughly similar condition to schools ??? i.e. that around half of them are into their replacement phase ??? an investment requirement of£5bn is implied for the period to 2015.

2.4.5 Sources

Most of the material used in this section comes from various DfES publications, as well as data from the ONS:

- www.dfes.gov.uk

- Departmental Investment Strategy (DIS) 2001-2004

- Annual Abstract of Statistics 2002, ONS

- Schools in England, DfES

2.4.4Commentary

Although there are neither long run projections of either intended investment or expected need, and only limited historic data on actual capital spending in London, we have been able to derive a set of estimates for investment in London's schools.

It has not been possible to be as clear as with other investment areas in terms of the degree to which these estimates capture the full needs of 'catch up', new build, maintenance and so on.

The focus upon built capital is also a concern. We have noted above that investment in human capital is a vital component of world class services ??? and schools and education are clearly the principal method by which we invest in human capital.

Also, it has not been possible to be especially clear about the role of ICT as an investment. By 2015, we may still be following the current model, in which education is still a classroom-based activity, with a regular cycle of upgrading the ICT equipment. Alternatively, very different patterns and places of learning may have evolved ??? with potentially significant consequences for the nature and scale of investment (see, for example, the government's current exploration of ideas around the 'Classroom of the Future'). Again, an exploration of these possibilities lies beyond the scope of the present work.

Unlike other sectors, we have been unable to estimate the potential split between public and private investment in educational provision, principally because of a lack of suitable data.

Also because of a lack of historic data, information on planned expenditure and profound changes in the way in which they are funded, it has not been possible to derive estimates for the HE and FE sector with the same degree of confidence.

The size and structure of the HE and FE sector is much less straightforward to project that that for schools: changing participation rates (with official targets for massively increased participation), for example, and changes caused by the progressively more effective use of ICT, will have significant impacts on the scale and nature of investment needs.

As is the case with transport and housing, London's economy draws heavily on educational investments made in other geographical areas. In particular, continuing access to a large pool of graduate labour from universities across the UK is probably essential if London is to maintain it's 'world class' role in financial, professional and business services. The number of graduates needed to support London's role, and the level of investment required, is beyond the scope of this exercise but is clearly an important consideration.

Broadly speaking, however, we estimate that, on the basis of the material we have been able to gather and judgments we have made, some£10bn-£11bn will need to be invested in London's educational system over the period to 2015 if we are to be able to claim 'world class' status.

2.4.5 Key Questions

- Is it possible to be more explicit about 'catch up' investment, 'steady state' investment and 'world class' investment?

- More account needs to be taken of forms of capital in addition to buildings ??? particularly human capital. There needs to be a greater understanding of the 'return' on investment i n education (and, indeed, for the other areas of investment in public services).

- What scope is there for profound change in the pattern and nature of delivering education, given the evolving role of ICT, and what implications are there for investment spending?

- How much of the projected investment might be expected to come from the private and public sectors?

- More work needs to be done for the FE and HE sector; and scenarios may need to be explored that look at different levels of participation.

- How much needs to be spent on higher education, and where, to provide for London's demand for graduate level skills? What is the role for business funding of human capital investment?

- The statistics used for the estimates of school investment may need further refinement and cross-checking.

Part Three ??? Summary & Closing Remarks

Using a variety of approaches, we have produced OUTLINE BUSINESS CASE estimates for the investment needed in four major areas of London's public services.

The intention has been three-fold:

- to estimate the sums of money required to put 'world class' services in place by 2015, based on others' assessments of the scale of need.

- to invite others to consider, test and explore the figures we have prepared

- to provide a basis for consultative discussion on the scale and nature of the private sector's contribution to future investment in London's public services

In some cases, we have been able to draw directly on long-run investment plans prepared by government. The stated intention behind these plans is to dramatically improve the quality of public services, and we have taken this to imply 'world class'.

In some cases, we have had to work from the 'bottom up', using scenarios to derive a total investment figure. We have generally leant towards the upper end of these scenarios in costin g 'world class'.

There are many caveats to and limitations on an exercise such as this. We outlined these in Part One. We stressed ??? and stress again ??? that much more extensive work would be required to move from this set of outline estimates to a set of figures suitable for detailed business planning. Some of the key questions that would need to be addressed by such work have been set out through the report, and are summarised below.

Despite the caveats, we judge that the estimates give a reasonable indication of the kinds of sums of money that London may need over the next fifteen years or so if it is to have the quality of services it deserves. These results are summarised below:

World Class Services by 2015 - London's ESTIMATED Investment Needs ??? TO COME FROM BOTH PUBLIC AND PRIVATE SECTORS

2000 prices£bn

(public sector)£bn

(private sector)£bn

(total)£bn (annual average)

Transport21 - 2228 - 3049 - 52

Housing5.5 - 917 - 1922.5 - 28

HEALTH5.5 - 6.52+7.5 - 8.5

Education4 - 4.56 - 6.510 - 11

TOTAL36 - 4253 - 57.589 - 99.56.5 - 7

Source: Brook Lyndhurst estimates

We separately identified a potential further need for£5bn-£10bn for the maintenance and upgrade of housing ??? adding perhaps£0.5bn/yr to the average total figure.

In short, we estimate that investment of between£90bn and£100bn, in 2000 prices, will be required.

There is no doubt that these are large sums of money. To put it into context, there are two reasonable comparisons.

Firstly, London's GDP is currently estimated to be some£118.5bn (source: ONS). The investment estimates prepared for this report are equivalent to between 6% and 7% of the capital's annual GDP ??? well above the long run average investment rate for the UK.

(Of course, over the period in question, GDP can be expected to grow very considerably. If GDP were to grow by 3 per cent per annum, for example, it w ould increase by something approaching 50 per cent over the period to 2016. Assuming that the investment estimates did not themselves grow at these rates, then they would slowly diminish as a proportion of GDP.)

Secondly, gross public sector investment for the UK as a whole in 1999/2000 stood at£18.2bn, and is projected to reach£35.3bn in 2003/4. The 2003/4 figure will be the highest level of government investment since the 1960s.

London's 'share' of the UK varies, depending upon whether one is considering population, poverty, wealth etc, but is normally close to one sixth. London's share of total government investment might therefore be expected to be around£3bn for 1999/2000, and almost£6bn by 2003/4. This figure, of course, refers to all public sector investment, not just the areas of transport, housing, health and education upon which this exercise has focused.

Against this background, the potential scale of 'world class' provision becomes clear. According to our estimates, investment in four key areas of London's public services will need to be in the region of£6.5bn -£7bn per year, consistently over a fourteen to fifteen year period. This is not only greater than any recent level, it is also comfortably above the peak investment year expected for 2003/4.

Some of the gap is already scheduled to be filled by the private sector; we have been able to identify clear needs or expectations in the case of both housing and transport, equivalent to perhaps£3bn -£3.3bn per year.

Overall, there appear to be two conclusions:

- that world class public services for London by 2015 will require sustained levels of capital investment well above historic trends

- that even record levels of planned public sector investment do not appear sufficient to achieve this, and there is therefore a clear and significant role for private sector investment

We also wish to stress that capital investment is onl y part of the picture for 'world class' services. Investment in human capital is at least as important. Without world class people, world class buildings and world class equipment will not be able to provide world class services. (Also important is the management of resources, as well as the quality of those resources ??? world class management is another target to aim for.)

The Outstanding Questions

Further research work will be needed both to refine the overall estimates we have prepared, and to be more specific about where and how private sector investment is most appropriate. Other questions of affordability may also need to be explored, including the link between rates of investment, the growth of the economy and the extent to wish increasing wealth facilitates increasing investment.

In particular, further work would need:

- to take account of a wider range of data sources

- critically unpick the detailed statistical basis of headline spending sums

- to read and appraise a wider range of official and other reports

- to consult with those responsible for data and reports, as well as those responsible for formulating policy on the basis of these

Other questions, drawn from the report, include:

General

- Can 'investment' be defined in a consistent way, that works for both public and private sector, across many different areas of expenditure, and in a way that is stable over time?

- How should spending that enhances the long-term sustainability of public services, but does not constitute 'investment' spending in the conventional sense, be accounted for?

- Can 'world class' be defined more precisely?

- Can and should scenarios be developed comparing 'baseline' with 'steady state' with 'world class', and made widely available?

- Should a more detailed analysis consider more fully the impact of variation in the composition of population growth, employment growth, housing need and so on?

- Should London's 'consumption' of investment located in other geographical areas be included?

- Can/should this work be conducted for other areas of public service investment?

Transport

- To what extent do different projections of population and/or employment impact on the required investment?

- How will additional funding from congestion charging impact on both private sector investment and central government investment?

- What is the relationship between maintenance spending (as revenue) and subsequent capital spending?

- What account has been taken of inflation?

- Which individual schemes need to be taken explicit account of, and what might the effect be of different development priorities?

- What account should be taken of the reliance of London on wider rail investment?

Housing

- A more accurate assessment of maintenance spending is required; and, as for transport, a more thorough understanding of the relationship between expected/feasible levels of maintenance, and subsequent investment needs

- What further data sources ??? such as the Housing Federation, Construction Forecasting Research, etc ??? could or should be used?

- Supply-side constraints need to be considered ??? is there enough room for all these dwellings? And what differences (to total investment) are implied by different patterns of development - higher density development, development at transport nodes, etc?

- More analysis may be required to look at investment scenarios associated with dwellings of different sizes, of different tenure mixes etc

- Further account may need to be taken of the role and effect of land and house prices, both in terms of development rates and the value of investment.

Healt h

- Are recent spending figures a reasonable guide to the future? Should more explicit account be taken of potential cycles in investment? (And the economy?)

- Does the Wanless figure of cumulative underspend offer a good guide, or not, especially in relation to London?

- More work may need to be done to assess the implications of changing population composition; and, as with other sectors, further work may be necessary to understand more fully the relationship between revenue spending (particularly on maintenance) and capital spending (i.e. investment).

Education

- Is it possible to be more explicit about 'catch up' investment, 'steady state' investment and 'world class' investment?

- More account needs to be taken of other forms of capital in addition to buildings ??? particularly human capital.

- What scope is there for profound change in the pattern and nature of delivering education, given the evolving role of ICT, and what implications are there for investment spending?

- How much of the projected investment might be expected to come from the private and public sectors?

- More work needs to be done for the FE and HE sector; and scenarios may need to be explored that look at different levels of participation.

- London's demand for graduate level skills? What is the role for business in funding human capital investment?

- The statistics used for the estimates of school investment may need further refinement and cross-checking.

There are two final remarks.

Firstly, if there is to be a more generally shared understanding and appreciation of the issues and statistics raised in this report, then common and readily understandable methods of presentation need to be developed. At present, the methods and techniques used in commercial business planning and those used in government planning do not readily integrate. If partnerships in the future are to be effective, then all partners need to be able to work on a common footing.

Secondly, and finally, another question that may warrant further investigation is the notion of 'return'. For the private sector, the rate of return on investment is an established and well-understood concept. But what is the rate of return on public sector investment? And if public and private investment are to collaborate most effectively in the future, what sort of returns ??? both types and levels ??? should we be looking for?

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