The cost of not
addressing skills
issues in the rail sector
21st October 2015
The cost of not addressing skills issues in the rail sector
Table of contents
Chapter
Pages
1.
Executive Summary
1
2.
Introduction
2
3.
Current Profile of the Rail Sector
Size of Sector
Direct Value of Goods and Services
3
3
4
4.
Skills Challenges in Rail
Skills Issues in the Rail Industry
5
5
5.
Opportunity Cost of Skills Challenge
Estimated Cost to UK Employers
Estimated Cost to UK Government
Opportunity Cost of the Skills Challenge to UK Economy
Skills issues in the rail sector | 21st October 2015
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9
10
12
1.
Executive Summary
The UK rail sector is attracting significant government investment, given the ever growing demand
for rail travel and the undisputed boost to national and local economies brought about by enhanced
connectivity. However, the Department for Transport (DfT) acknowledges that the UK has “a skills
gap in railway engineering and advanced construction”. Unless the skills challenge is addressed,
skills shortages and gaps are forecast to continually worsen. Businesses will have to absorb
substantial costs and the national economy will lose out on latent growth and productivity gains.
Compared to the rail industry, some other major sectors in
the UK have been more successful in tackling their skills
shortages. The nuclear and aviation industries have
nurtured both industry and government support for coordinated and planned skills interventions. These actions
have resulted in the sectors operating more effectively
and efficiently. Government has been rewarded with
notable economic benefits.
The rail industry does display examples of good practice.
However, without adherence and commitment to an
information-rich, co-ordinated, and cross-industry
approach the industry will potentially face:
“We already have a
skills gap in railway
engineering and
advanced
construction.”
Department for Transport Economic Case for HS2
-
Costs to employers in the sector growing to £316m
per year by the end of Control Period 6 (2024) and £393m per year by the end of Control
Period 8 (2034).
-
Costs to the government potentially rising to £381m by the end of Control Period 6 (2024)
and £451m by the end of Control Period 8 (2034).
“Unprecedented investment
in rail and record passenger
numbers have placed ever
increasing demands for
skills across the sector.”
Neil Robertson, Chief Executive of the
National Skills Academy for Rail
Moreover, if the skills challenge is not
addressed in the short-term, the longterm effects of growing skills shortages
and gaps will result in significant delays
to or cancellation of major planned
railway investments. The opportunity
cost of such a scenario to the UK
economy is substantial with estimates
indicating that £1.1 billion GVA per year
could be lost if 20% of planned rail
investment is delayed or cancelled as a
result.
Skills issues in the rail sector | 21st October 2015
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2.
Introduction
The aim of this report is to support the ongoing work of Rail Safety and Standards Board (RSSB) and
National Skills Academy for Rail (NSAR) by providing estimates of the potential economic cost of the existing
and projected skills challenge in the rail industry.
The scope of the report is to identify and estimate the cost to UK plc associated with the skill shortages and
skills gap across the rail sector, under a do-minimum scenario.
In line with the client brief, this report used secondary data and sources without any large-scale primary
research being undertaken. However, it incorporates the views of industry professionals who were engaged
as part of our methodology. In calculating the economic cost we have drawn upon a series of reliable
evidence bases to identify the size of the industry, the current impact of skills gaps and shortages to industry,
the government and the economy, the response to skills gaps and shortages and possible future increased
costs if no substantive investment is made in addressing skills issues.
The report structure is:
-
Section 3 estimates the size of the sector. This represents the baseline of information which supports
our assessment of the skills gaps and shortage impact.
Section 4 briefly explores the key skills issues identified following a literature review.
Section 5 identifies the economic cost of skills issues to employers, government revenue and the
wider opportunity cost to the national economy.
Skills issues in the rail sector | 21st October 2015
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3.
Current Profile of the Rail Sector
The analysis set out in this section draws on several sources to provide a baseline profile of the industry to
support the economic analysis set out in subsequent sections of the report.
Size of Sector
Our assessment of the industry includes the following activities1;
Operations:
-
-
Train operating companies (TOCs) which are responsible for passenger transport (such as Virgin
Trains, Northern, First TransPennine Express) including light rail, and freight operating companies
(FOCs) who are responsible for train services which move goods and materials by rail (such as DB
Schenker and Colas Rail).
Operations (Infrastructure) - Infrastructure includes the bodies which are involved in the
management, maintenance, construction and renewal of the rail network including Network Rail, HS2
Ltd and relevant bits of Crossrail, Transport for London and London Underground.
Rail Engineering:
-
-
-
Signalling/Telecommunications (S&T) - S&T covers a broad range of disciplines including design of
signalling systems, maintaining the existing rail network; replacing and installing new signalling and
telecoms equipment; and planning of telecommunication networks.
Electrification/Plant – E&P includes the design, management and construction of rail power
requirements; track electrification, overhead line electrification (OLE) and lighting.
Other Non-Railway Specific – This includes those individuals not working in specific railway
engineering activities, such as civil engineering work such as bridges, embankments, station
refurbishment and platform lengthening.
Traction and Rolling Stock – Activities connected to the design, construction, maintenance and
operation of current vehicles, trucks, couplings and other vehicle elements.
Supply Chain:
-
Supply chain includes activities where rail is one part of the activities of an individual or organisation.
This includes SMEs (and larger companies) which service related rail and other sectors. Due to the
scope of this study we have not included those activities linked to police, security, heritage or leisure
rail.
The industry in total employs 235,000 in 2015, this includes 120,000 in the immediate supply chain.
Table 3-1
Estimated Industry Size
2015
Sub-Sector
Direct Rail Industry
Supply Chain
Total
Number of Employees
115,000
120,000
235,000
Number of
Organisations/Firms
250
2,670
2,920
Source: NSAR/ORR/Atkins 2015 Totals may not add due to rounding. Data limitation – some supply chain employment and firm
numbers may be included in the main industry sub-sectors although verification exercises deem this potential double-counting to be
minimal.
Due to the make-up of the industry and how it operates, the industry cuts across sectors and our approach
accounts for this in our estimates of firm numbers. The direct rail industry has a larger number of larger
employers (for example: Network Rail employ 35,0002) whilst the supply chain also contains many more
1
2
Drivers are captured in the two operations subsectors.
Network Rail Website – Accessed September 2015: https://www.networkrail.co.uk/the-quadrant-mk/
Skills issues in the rail sector | 21st October 2015
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SMEs. This has implications on skills interventions in the sector, with larger companies often more
responsive to skills gaps whilst SMEs due to their size, struggle to resource mitigation of skills challenges.
The size of the supply chain is dependent on the definition of it. Network Rail for example, have dealt with
6,000 individual firms as suppliers3. Reports such as Ekosgen’s (2010) into sustainable transport 4 identify the
employment size of the supply chain as 90,000. As a result we have assessed the supply chain on the basis
of employment data from the ONS’s Business Register and Employment Survey identifying activities which
are part of the rail supply chain. This is comparable to other economic studies including Oxera’s 2015 report
prepared for the Rail Delivery Group.
Direct Value of Goods and Services
We estimate the direct value of goods and services in the rail industry to be around £12.4 billion GVA in
2015. This is based on turnover estimates provided by ONS Inter-Departmental Business Register and our
assessment of the size of the industry. This is the direct contribution of the industry to the economy.
However, the industry is also a key economic enabler, ensuring people and goods can travel across the
country and enabling export and import activity. Therefore, the wider economic contribution is likely to be
more. This figure is comparable to previous estimates of the size of the industry. 5
3
Network Rail Supply Chain Strategy CP5 - 2013
Ekosgen – Employment in Sustainable Transport - 2010
5
Oxera – Contribution of Rail to the UK Economy -2015
4
Skills issues in the rail sector | 21st October 2015
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4.
Skills Challenges in Rail
Shortage of qualified staff and lack of appropriate skills in the current workforce are key concerns for the rail
industry. The DfT acknowledged recently that the UK has “a skills gap in railway engineering and advanced
construction”; and that a recent report had identified “a need to substantially increase the supply of engineers
in the UK.”6 A range of skills issues has been highlighted through our review of relevant literature. We
explore these key skills issues further in Section 4.1, and identify the responses to skills gaps and shortages
taken by the industry to date7.
Recently there have been important developments connected to skills gaps and shortages. Terry Morgan CBE
has been appointed to develop a transport and infrastructure skills strategy, to ensure a continuous pipeline
of skilled workers for the transport industry (including rail). This will build upon the 2015 National Infrastructure
Plan for Skills. This identified a series of key challenges for the rail industry including:
-
-
-
Expected large ‘ramp up’ in resources, with immediate demand in client, project leadership and
technical roles required to prepare the project for construction.
Competition for resources with other parts of the rail sector at a time of increasing investment.
New technology and delivery approaches, including the use of Building Information Modelling (BIM),
demanding non-traditional rail delivery skills.
Creating opportunities for local companies and disadvantaged and under-represented local people to
benefit from the investment in HS2.
Building a supply chain capable of
meeting the long-term demand for up to
50,000 concurrent jobs in the late
2020s. Helping the supply chain to
adapt, to develop the skills and products
to deliver the changing blend of works in
the future programme.
Delivering the long-term investment
programme while a large proportion of
those with critical skills are approaching
retirement age.
Ensuring skills built on Crossrail delivery
are not lost.
Improving the ability of workers to move
across sub-sectors and projects without
the need for bespoke training.
Neil Robertson, Chief Executive of the
“There are skills shortages,
now and forecast across the
Rail Industry as a result of new
infrastructure, electrification
and renewal programmes
combined with an ageing
workforce.”
These challenges draw upon and echo much of
the existing research, and highlight how skills
are critical to the future of the industry.
National Skills Academy for Railway
Engineering
Skills Issues in the Rail Industry
The following information summarises the key skills challenges facing the rail industry. It draws upon
research from a number of organisations. Research by People 1 st in 20128 highlighted the issues connected
to operations staff in the railway industry. As a result this research only identifies part of the picture, with the
footprint not identifying skills gaps connected to railway engineering. Despite this, the research provides
some insightful messages around workforce profile, skills gaps, and shortages which are consistent across
the rail industry.
6
Lords report cited in online article – Accessed September 2015: http://www.building.co.uk/skills-gap-driving-hs2-costs-sky-high-sayslords/5074595.article
7
These include reference to the need to differentiate skills gaps from skills shortages:
- A shortage occurs when an employer has difficulty in recruiting due to a lack of appropriately skilled people in the labour
market7.
- A skills gap refers to a situation where employers are hiring workers whom they consider under-skilled or that their existing
workforce is under-skilled relative to some desired level.
8
People 1st State of the Nation Passenger Transport – Rail - 2012
Skills issues in the rail sector | 21st October 2015
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The research highlights how the industry has low rates of staff turnover highlighting that a downside to
consistently high retention rates is that the rail industry’s workforce is getting older. For example, only 14% of
employees are under 30, compared to 24% across the economy; and 49% are over 45, compared to 42%
across the economy.
The industry’s workforce is male dominated. Among train and tram drivers 92% are male; and women
represent just 20% of the rail industry as a whole. The figure for railway engineering is lower at 4.4% of the
workforce. This is also an issue in the wider engineering workforce with only 6% of the current engineering
workforce, and only 12% in the wider STEM sector being made up by women9.
The industry workforce grew by 4% between 2010 and 2011 and forecasting work by NSAR and UKCES
indicates that the rail industry will continue to grow. People 1st notes that future increases are likely to be
driven by the construction and engineering side of the industry. For example, while rail construction and
maintenance operative positions have increased by 22%, the number of rail transport operatives fell by 20%
and rail travel assistants fell by 4%.
There is also increased competition for certain skillsets from abroad. Significant rail investment in Asia and
the Middle East has attracted workers abroad. Positions abroad often have a salary premium and have led to
a reduction in the size of the talent pool in the UK labour market. This is also set against a background of
offshoring for certain skillsets (such as design) by companies seeking to reduce their own staff costs.
There is also competition for skilled labour from other sectors, with sectors such as energy, construction,
advanced manufacturing, telecommunications and road transport needing engineers, engineering
technicians, operatives and other skilled staff. These sectors often compete for skilled staff and graduates,
with anecdotal evidence showing that labour costs are rising by 6-8% per year. There is also evidence that
careers in these sectors are perceived to be more visible than rail. Consequently, with cross-sector and
international demand for many rail-related skills ever growing, the outlook for the UK rail industry becomes
even more acute in terms of the growing costs of skills shortages and gaps. This reinforces the need to
develop robust plans for addressing the skills challenge in a co-ordinated manner.
4.1.1.
Skills Shortages
Skills shortage10 issues identified by People 1st show that employers reporting hard-to-fill vacancies
generally include specialist engineering, operatives and customer service positions. NSAR develops this and
forecasts key skills shortages in Signalling and Telecommunications, Electrification, Plant and Track, and
Rolling Stock of 10,000 jobs between 2014 and 2019. This research uses the NSAR Skills Forecasting
Model, which draws upon the employment demographics of the current workforce, current and future railway
engineering projects, infrastructure renewals and rolling stock procurements 11.
Furthermore, research by EngineeringUK estimates that the UK will need 100,000 engineering graduates
every year until 2020 just to maintain the current employment levels in all industries. In 2012 People 1st
found that many employers in operations feel that a ‘positive attitude and personality’ is more difficult to find
in new recruits than ‘technical skills’ (such as engineering utilisation). The research states that businesses
are starting to recruit based on personality or attitude, and then training new staff members in the technical
aspects of the role.
Linked to the skill shortages, People 1st highlights that one of the key reasons young people do not seek a
career in the rail industry is because there are few clear and easily accessible career development
pathways. People 1st sees that unless this is addressed “it is likely that the problem will continue and the rail
industry could ultimately face severe staff shortages as more people approach retirement age” 12.
Apprentices are seen as a key element in responding to skill shortages. However, research by People 1st in
2012 showed that only 9% of rail businesses employed an apprentice. When asked why they did not employ
apprentices, 83% of employers said that they only seek staff members with experience. Despite this there
EngineeringUK Report – State of Engineering 2014.
A shortage occurs when an employer has difficulty in recruiting due to a lack of appropriately skilled people in the labour market .
The model also uses this data to enable future projects, renewals and maintenance workloads to be tested against the existing
workforce numbers and skill levels. The model also predicts the number of additional people required to either meet anticipated growth
or to compensate for industry leavers and retirement.
12
People 1st State of the Nation Passenger Transport – Rail - 2012
9
10
11
Skills issues in the rail sector | 21st October 2015
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was some positivity, with 49% of businesses saying that they would take on apprentices. This figure refers to
the People 1st footprint and the picture is more positive across the wider railway industry. There are large
numbers of apprentices being taken on by Network Rail, Transport for London and Tier 1 businesses, with
figures in 2012 showing that the number of apprentices has exceeded 50013.
“‘There is a skills gap coming
with the introduction of fly-by-wire
technology and the European
Rail Traffic Management
System.”
NSAR has also undertaken research
which shows that further skills
shortages could be driven by the
introduction of the European Rail
Traffic Management System
(ERTMS), by digital railway, and by
the specific skills required for High
Speed Rail, which include advanced
construction methods.
There are several shortages of
workers expected in the future,
Steve White - Services Director, Siemens
linked to age of the workforce.
NSAR highlights that there is a
rising age profile in railway engineering, with Traction and Rolling Stock showing a workforce where 40% are
aged 50+, and 22% are 55+. Several thousand workers are close to retirement age, with Traction and
Rolling Stock expecting to see difficulties in the future due to the age of its workforce. Of the 10,000 skills
shortages identified by NSAR it is estimated that around 40% of these will be caused by people retiring. The
remainder will be due to the increase in numbers needed with growth arising from planned investment.
4.1.2.
Skills Gaps
In addition to skill shortages in the industry there are also several skills gaps 14 clearly evident in the existing
workforce. Evidence on skills gaps largely comes from the operational footprint of People 1st15. The most
frequently cited areas for skills improvement were team working (18%), safety management, and
management and leadership (both mentioned by 19% of employers). Around 44% of employers provided
training during 2012, most of which (84%) was carried out in-house through internal training and qualification
professionals.
Further evidence from People 1st in 201216 highlights that 42% of employers indicated that more than 50% of
their staff could benefit from additional training. Specific skills gaps facing employers in the rail industry
include:
-
Ensuring compliance with regulations (62%)
Professional communication skills (61%)
Ability to work across different teams (40%)
Ability to use automated and hand tools (38%)
Basic track maintenance (35%)
Cleaning (45%)
Control operations (43%)
Track maintenance (43%)
The Association of Train Operating Companies (ATOC) has also
recently undertaken an assessment of train drivers. It concluded
that 10,000 drivers need to be recruited and trained over the next
10 years. There are also associated skills gaps which are linked to
future skills requirements, with work by NSAR identifying the
impact from the introduction of ERTMS to the skill sets of the rail
workforce.
“The skills required
for HS2 are also
the types of skills
we will need to
drive further
economic growth.”
Department for Transport Economic Case for HS2
NSAR News Article – Accessed September 2015 http://www.nsare.org/news-room/latest-news/rail-industry-apprentices-exceed-the500-mark.aspx
14
A skills gap refers to a situation where employers are hiring workers whom they consider under-skilled or that their existing workforce
is under-skilled relative to some desired level.
15
People 1st State of the Nation Passenger Transport – Rail - 2012
16
People 1st State of the Nation Passenger Transport – Rail - 2012
13
Skills issues in the rail sector | 21st October 2015
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5.
Opportunity Cost of Skills Challenge
We have defined a conceptual, bottom-up model of the rail industry which identifies that the main costs of
the skills challenge fall to employers, government, and the national economy. Our approach to estimating
these costs draws on research undertaken by Lucifora and Federica (2002)17, Leitch (2006),18 and Haskell
and Martin (1993)19. The diagram below provides a basic illustration of the conception cost impact model.
Evidence on:
1. Firms in sector.
2. Labour market size.
3. National rail projects.
4. Skills gaps and shortages.
Responses and impacts of
skills shortages and gaps.
Monetise responses and
understand scale of skills
issues.
Current economic impact of
responses and impacts on
businesses, economy and
government.
Industry evidence.
Economic and labour market evidence.
Future economic impact of
responses and impacts upon
businesses, economy and
the government
Future scale of employment
and business base.
Future scale of skills issues.
Economic projections.
The model explores direct costs (as outlined below) suggesting that the actual costs could be larger if
indirect costs were to be included.
Direct cost impact
-
Higher recruitment costs.
Lower productivity levels and growth.
Lower production and customer service quality.
Higher skilled workers’ wage levels.
Greater turnover costs.
Loss of potential output and employment.
Higher costs associated with migrant workforce.
Indirect cost impact:
-
Innovation capacity.
Trade and competitive capacity.
Future economic growth.
17
Lucifora, Claudio, and Federica Origo. "The economic cost of the skill gap in Europe.", Milan, Italy (2002).
Leitch, Sandy. Prosperity for All in the Global Economy--World Class Skills: Final Report. The Stationery Office, 2006.
19
Haskel, Jonathan, and Christopher Martin. "Do skill shortages reduce productivity? Theory and evidence from the United Kingdom."
The Economic Journal (1993): 386-394.
18
Skills issues in the rail sector | 21st October 2015
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Estimated Cost to UK Employers
Using information on the size of the sector and likely responses to skills gaps and shortages, we have
estimated the current cost of the skills challenges to the employers. To show the stages and the sources of
information used we highlight the key elements in Table 5-1.
Table 5-1
Stages to Calculate Cost to Business Base
Broad Stage
Stage 1: Size of industry
(employers, employees
and goods and services)
Source and Information
Data supplied by NSAR supplemented by data from the Inter-Departmental
Business Register (IDBR) and BRES. These sources enable estimate of the
size and mix of the industry and its sub-sectors to be developed (see Section
3).
Stage 2: Number of
employers impacted by
skills shortages and gaps,
and number of employees
with skills gaps.
The information above is used to estimate the scale of employers and
employees affected by skills issues. Our research has shown that around 100
employers are impacted by skill gaps and 90 are impacted by shortages. This
is based on the UKCES Employer Skill Survey and People 1st research which
highlight that 36% of employers face skills shortages and 42% of employers
face skills gaps. These are used as the parameters for estimating the scale of
overall skills shortages and gaps in the rail industry.
Stage 3: Responses to
skills shortages and gaps
Using information from the Employer Skills Survey 2013, we assess how
businesses respond to skills shortages and gaps. Each response is monetised
to understand the impact. We draw upon information from a variety of sources
to understand and monetise this, including:
 Wages in the sector from Annual Survey of Hours and Earnings.
Provides information on organisational or capacity responses and
impacts (see Table 6-3).
 Cost of training from the Chambers of Commerce, SEMTA, People 1st
and Employer Skills Survey. Industry figures vary and include industry
training expenditure of £1,790 per worker (SEMTA), £3,330 per worker
(People 1st) and £1,280 (Skills for Logistics). This highlights the
additional costs which are needed to mitigate skills shortages and
gaps.
 Information on replacing employees or recruiting from abroad from
Oxford Economics Report, ONS and OECD. A response to skills
shortages and gaps is to recruit from abroad, this provides information
on likely cost of doing so. Our estimate is conservative as some
research has placed costs of outsourcing at over £20,000.
 Recruitment expenses and scale of recruitment methods from
UKCES, OECD and Centre for Global Research & Education. This
provides an understanding into the costs of certain methods (such as
recruitment consultants, advertising) used by businesses. This
includes costs relating to advertising the new role: £398 and HR time
spent processing replacement: £196.
Stage 4: Impacts of skills
gaps and shortages
Cost-related impacts on businesses from skills shortages and gaps are
identified through the Employer Skills Survey. The following sources are used:
 Wages from ORR, Annual Survey of Hours and Earnings (see Table
6-3). We make assumptions on the impacts upon future worker
salaries and impacts upon organisation or business capacity.
 Productivity impacts from OECD and Centre for Global Research &
Education. We make professional assessments into the likely impact
upon businesses from skills gaps and shortages.
 Society for Human Resource Management Human - Capital
Benchmarking Study to provide us with evidence on the number of HR
personnel per worker and the impact of organisational change from
recruitment or increased business costs.
 We explore the labour impact upon operating costs from ORR,
Network Rail, RSSB, and the Rail Industry Association. This provides
Skills issues in the rail sector | 21st October 2015
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Broad Stage
Source and Information
us with an understanding of the potential reductions in turnover for
businesses as a result of skills issues.
End Result:
This information provides a cost breakdown of the impact upon employers from skills gaps and shortages.
Undertaking the stages above, the estimated current cost of skills shortages and gaps to the rail industry
employers is £206m per year. The cost to the direct rail industry is £110m per year and to the supply chain
the cost is £96m.
The total figure also includes £90m from the impact of skills gaps and £116m of impact from skills shortages.
These are derived from our bottom-up estimates. To put the figures in context, a crude estimate on the cost
of training in the rail industry suggests that the industry spends between £250m and £350m20 on training. As
such, it is estimated skills shortages and gaps are adding almost another 50% to costs each year, on top of
existing training costs.
In forecasting the future, we have: used growth in employment from the UKCES Working Futures model;
assessed the likely growth of the economy using forecasts from the Office for Budget Responsibility; and
made assumptions around inflation and the likely scale of future challenges. We have also considered: the
impacts arising from an ageing workforce (increased skills shortages), increased spend on training, wage
premiums, impact upon employers; and responses on the basis of research from NSAR and People 1st
(which includes increased vacancies due to ageing workforce). This evidence shows that the cost impact
could rise by the end of:
-
Control Period 6 (CP6 – 2024) to £316m per year.
Control Period 7 (CP7 – 2029) to £349m per year.
Control Period 8 (CP8 – 2034) to £393m per year.
Supporting businesses in overcoming skills gaps and shortages can have significant impacts. Our estimates
show that a 10% drop in the incidence of skills gaps and shortages in the sector could save the business
base £60m annually. It could also provide a series of other benefits to businesses including the opportunity
to increase productivity, reinvest profits, or expand the business.
Estimated Cost to UK Government
To explore the cost to the government from skills shortages and gaps we have focused upon 3 key strands:
i. Costs to public bodies involved in rail.
ii. Loss of revenue from taxes (business and personal).
iii. Increased cost on National Rail infrastructure projects.
This is not designed to capture the loss of economic productivity to the economy, but represents the potential
costs to government from skill issues unless they are remedied.
Our model uses the following information and stages to analyse the cost to the UK government:
Table 5-2
Stages to Calculate Cost to Government
Broad Stage
Source and Information
Stage 1: Sector size, turnover,
costs and profit
To calculate the size of the tax base we used information on company
turnover & employment as outlined above as well as contribution to the
tax revenue using information on size of the market and conservative
assumptions on size of profit and operating costs in the industry
(Assumptions sourced from research produced by NSAR, Network
Rail, ORR, BRES and IDBR).
20
As stated previously, there are several estimates on expenditure per employee we could use in the industry including figures from
SEMTA which highlight expenditure of £1,790 per worker, People 1st estimates of £3,330 per worker and Skills for Logistics estimates of
£1,280 per worker.
Skills issues in the rail sector | 21st October 2015
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Stage 2: Tax receipts and
contribution
We assessed the potential loss of individual tax receipts from average
salaries, vacancies not filled, and national insurance tax, basic tax and
higher level tax rates. We also assessed the industry tax contribution of
the rail sector, drawing upon evidence available from HRMC and
OECD, sector turnover, and small profit and corporation tax rates.
Result: Business and Individual Tax Revenue
Stage 3: Rail projects and
workforce costs
Scale of investment in rail projects is assessed using investment
figures from industry research, DfT (committed funding for light rail and
other), HS2 (capital costs), and Network Rail (Control Period 5).
Stage 4: Impact of skills shortages Information on the impact of skills shortages and gaps to the workforce
and gaps
from cost to UK employers was brought forward and assessed against
size of rail investment and workforces involved.
Result: Cost to Publicly Funded Rail Infrastructure
Stage 5: Public sector employees
and organisations
Outline of the number of public sector employees in rail using
workforce information from Network Rail, DfT and other industry
publications. Cross checked against Business Register and
Employment Survey figures on public and private sector employment.
Stage 6: Impact of skills shortages Assess skills impact of skills shortages and gaps upon public sector
and gaps
organisations. Figures were assessed against the cost to the employer
market.
Result: Costs to rail public bodies – This has some overlap with cost to employers.
There is a cost upon the government from loss of tax revenue, linked to individuals and businesses. This
showed a figure of £100m per year cost of lost business revenue. The loss of tax revenue linked to
shortages of personnel is estimated to be £68m per year. This includes loss of income tax and national
insurance and lost tax revenue from migrant workers. There is a further cost to national rail projects which is
estimated to cost the government around £167m per year. The costs of skills shortages and gaps to public
bodies (such as Network Rail, HS2 Ltd, and Crossrail) are estimated to be £23m per year.
Drawing this together the estimated current cost of skills shortages and gaps to the UK government is
£358m per year. It is likely that the overall cost to the government is a lot more, with costs to the government
of constrained economic growth and increased expenditure linked to mitigating skills shortages and funding
for education and training not included.
To forecast this forward we calculated each individual cost base, considering the likely scale of growth of the
industry, inflation, and on prices and potential impact of costs. We also forecast the impact forward by using
information on the workforce size from UKCES, growth of the economy using forecasts from the Office for
Budget Responsibility, assumptions around inflation and future likely scale of challenges similar to those
used in forecasting the cost on employers. This also included information on the likely scale of skills
shortages and gaps, and the number of businesses and people this will impact.
We estimate that the cost of skills gaps and shortages could rise by the end of:
-
Control Period 6 (CP6 - 2024) to £381m per year.
Control Period 7 (CP7 – 2029) to £411m per year.
Control Period 8 (CP8 – 2034) to £451m per year.
Much of the cost to the government (and also the economy) from skills issues is driven by an inability to
deliver on the investment projects in a timely manner, and subsequent challenges to operate train services.
There is strong evidence that the skills challenges could be harmful to future investments in rail
infrastructure, including High Speed Rail, TransNorth, and electrification projects.
Our estimates show that a 10% reduction in the occurrence of skills gaps and shortages in the industry could
reduce costs to government by £67m (annually). At the same time while costs are being saved, significant
benefits will accrue to the government as well as the wider economy. For example, cost savings will enable
funds to be redirected and invested in other productive components of the economy.
Skills issues in the rail sector | 21st October 2015
11
Opportunity Cost of the Skills Challenge to UK Economy
Objective evidence has been reported which demonstrates the significance of the contribution of investment
in strategic rail infrastructure to the national economies. For example, the Oxera analysis conducted for the
Rail Delivery Group (September 2015) referred to in Section 3 highlights that:
-
The rail industry in GB and its supply chain generates £10.1 billion of GVA per year.
The sector returns up to £4 billion in tax to HM Exchequer per year.
The sector provides benefits worth up to £14.3 billion a year to its passenger and freight users.
The sector contributes up to £11.3billion per annum in the form of reduced congestion and facilitating
the development of clusters of economy activity.
Other recent research includes that of KPMG which estimated that HS2 (Phases 1 and 2) could boost the
country’s economy by £15 billion per year from a capital outlay of approximately £47 billion.
Whilst the debate regarding the scale of net benefit to the national and regional economies of investment in
rail will continue for many years, there is a general consensus that the provision of new or significantly
improved rail infrastructure has a significant effect on economic productivity, particularly in the context of a
densely populated country such as the UK.
The counter position of this is that should planned investment in rail infrastructure be significantly delayed or
even cancelled it will result in latent opportunities for economic growth, job creation and productivity
enhancements being lost. Our research indicates that this opportunity cost to the UK economy is potentially
substantial. This provides solid evidence that postponement or diversion of investment away from rail
infrastructure will result in major productivity gains not being realised, particularly in regions where the
potential to accelerate economic growth is greatest (for example, in the Northern Powerhouse). Planning for
and delivering the necessary quantity and range of skills needed to implement major rail projects in the UK is
one of the key factors in determining when and if the projects can be realised. In other words, without the
supply of skills to meet aggregate demand for labour needed to deliver major planned rail projects, the
associated latent economic benefit will not be realised or, at best, postponed.
Figure 5-1 summarises the major rail programmes over the next 20 years whilst Figure 5-2 provides an
indicated projection of capital investment associated with these programmes. This indicates that collectively,
investment in the rail sector could amount to an annual average of around £16 billion over the next 20 years.
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
Planned Major Rail Projects over next 20 Years
2014
Figure 5-1
Network Rail Specific
Digital Rail
TFL: Future Plan
Crossrail & (Crossrail 2)
HS2 Phase 1 (& 2)
Source: NSAR 2014
Skills issues in the rail sector | 21st October 2015
12
Figure 5-2
Estimated Capital Investment in Major Rail Projects
25
Network Rail
TfL Future Plan
HS2 (Phases 1 and 2)
Thameslink
Crossrail (1&2)
TransNorth
20
£ bn
15
10
5
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Source: Atkins, 2015.
Figure 5-3 sets out a high level indication of the potential annual economic contribution of planned schemes.
Drawing on the evidence provided by the Oxera and KMPG studies, we assume an annual contribution to
national GVA of £0.35 billion per £1 billion of capital expenditure in the rail sector. On average, this equates
to, on average, £5.7 billion per year added GVA to the national economy, resulting from implementation of
planned major rail projects.
Figure 5-3
Potential Economic Contribution of Planned Schemes (£ billion per year)
8
7
6
£ Bn
5
4
3
2
1
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Source: Atkins, 2015. Assumption: for every £1billion planned investment in the rail sector (per annum), an economic benefit of £0.35
billion measured in terms of GVA will be generated (per annum).
Skills issues in the rail sector | 21st October 2015
13
Table 5-3 sets out a range of scenarios which indicate the potential opportunity cost to the UK economy of
failing to plan for and fully address existing and emerging skills challenges in time. Our estimates indicate
that even a modest degree of delay or cancellation to major projects caused by skills shortages or gaps (say
20% of gross capital cost is deferred) would result in around £1.1 billion worth of GVA being lost to the UK
economy. This is equivalent to approximately 23,000 permanent jobs (assuming £50,000 GVA per job).
Clearly if the skills challenge is not aggressively addressed, the opportunity cost to the national economy
would be even more substantial.
Table 5-3
Potential Opportunity Cost to UK Economy
Degree of delay or cancellation of major rail
projects
GVA per year
opportunity cost
FTE jobs
opportunity cost
20% of capital investment delayed or cancelled as a
result of skills shortages or gaps 2015-2034.
£1.1 billion
23,000
40% of capital investment delayed or cancelled as a
result of skills shortages or gaps 2015-2034.
£2.3 billion
46,000
Source: Atkins, 2015.
Skills issues in the rail sector | 21st October 2015
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Richard Coburn
Euston Tower
286 Euston Road
London
NW1 3AT
Tel: 020 7121 2374
Email: richard.coburn@atkinsglobal.com
Jonathan Guest
Chadwick House,
Birchwood Park
Warrington
WA3 6AE
Tel: 01925 238 152
Email: jonathan.guest@atkinsglobal.com
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