Let’s be courageous, part 5

(… continued from Let’s be courageous, part 4, posted on 24 Aug 2016).

I finished my previous posting by suggesting that Department for Transport (DfT) analysts may be guilty of being over-optimistic when assessing project benefit cost ratio (BCR) values: some evidence that this may well be the case can be found in the BCR predictions that were made for the HS1 project.

As recently as January 2009, using the analysis methodology favoured by the DfT, the BCR for HS1 was rated at 1.76, including wider economic benefits, indicating, it was claimed, “strong value for money” (see footnote 1). Despite this, work commissioned by the Government only three years later concludes that the analysis at that time indicated that the BCR had fallen to 0.64, including wider economic benefits (WEI), or 0.53 if these benefits are excluded (see footnote 2). This reappraisal puts HS1 firmly into the low value for money category using the DfT’s own evaluation criteria.

In a report published in the wake of the HS1 BCR rework finally becoming available in October 2015, the House of Commons Committee of Public Accounts (PAC) expresses concern that despite “evidence [that] suggests that its methodology is inadequate for some types of transport projects” the DfT “continues to use it to assess new projects such as HS2” (see footnote 3).

Earlier in 2015, the Economics Affairs Committee of the House of Lords (EAC) levelled its own criticism at the BCR methodology and the way that it had been employed to evaluate the value for money offered by the HS2 project. The EAC accepts that “cost-benefit analysis is an important discipline” but, somewhat stating the obvious, the EAC also opines that “the reliability of the method for quantifying the benefits of a project depends upon the quality of the evidence used in the analysis” (see footnote 4). This is an important qualification, however, as the EAC is also of the opinion that the “cost-benefit analysis for HS2 relies on evidence that is out-of-date and unconvincing” (see footnote 5).

The DfT appears to be sensitive to the criticisms and, as the HS2 project has developed, has sought to accommodate its detractors. So changes to assumptions and parameters have been made, and the value of the BCR has fluctuated a little. However, whenever a change looks like it might diminish the BCR beyond what might be considered a politically-acceptable level, some balancing adjustment appears to have found to avoid this necessity, and embarrassment has been miraculously evaded. As I put it in my blog They haven’t been twiddling their thumbs, part 2 (posted 10 Dec 2013):

“It appears that, whenever a breach in the Government’s case is discovered, it compensates by constructing some new pretence.”

The DfT makes the point that “as with all business cases, the underlying economic case for HS2 will change over time” and that the assessment of the business case “will continue to develop in the months and years ahead” (see footnote 6). This is perfectly proper, of course, but I think that we have the right to expect that each new assessment will be approached with an appropriate degree of realism, and that dispassionate and reasoned logic will be at the fore, rather than any tendency towards window dressing.

The DfT also concedes that “there are challenges to appraising the potential benefits and costs of a transformational transport scheme such as HS2”, and that there is a degree of uncertainty with any predictions (see footnote 7). The DfT response to this uncertainty is to employ a combination of risk analysis and sensitivity testing to arrive at the “range of benefit cost ratios that could result from combinations of different assumptions” (see footnote 8). Some results of analysis of this type has been reported by the National Audit Office showing for example, that Phase 1 returns a low value BCR rating for 23 per cent of modelled scenarios (see footnote 9).

Whilst there is the obvious caveat that the value of this type of analysis depends substantially upon the credibility of the ranges of scenarios that are chosen, it is surely valuable to have some idea of the possible uncertainty associated with a BCR assessment. Unfortunately, it appears to be almost invariably the practice of HS2 advocates and detractors alike to quote point values of BCR without giving any consideration to the values over which the BCR can reasonably be expected to range.

The uncertainties in analysing the business case for a single specified project can be eliminated to an extent if the same set, or largely the same set, of assumptions can be utilised to compare the results for different projects; either in order to find the best of a number of strategic alternatives, or merely the most worthy candidates for funding. In this respect, the EAC describes cost-benefit analysis as “the best tool for comparing several projects to see which provides the best value for money” (see footnote 10). Work of this type was carried out for the DfT early on in the lifetime of the HS2 project and the BCRs that were determined for three strategic alternatives to HS2 (see footnote 11) are quoted, under the subheading The Benefit-Cost Ratio, by Policy Analyst Harry Fairhead in Section Two of his Taxpayer’s Alliance briefing paper, Rich man’s toy: The case for scrapping HS2. These BCRs, which all include WEI, range between 3.11 and 6.06, all comfortably better value for money than the HS2 solution.

Whilst the BCR calculations of the alternatives to HS2 were carried out prior to some significant changes in methodology being introduced by the DfT in the past couple of years, I think that it a safe assumption that there are alternatives to HS2 that represent much better value for money for the taxpayer, and any review of the HS2 project should bear this in mind.

(To be continued …)

Footnotes:

  1. See paragraph 6.1.3 of the report Economic Impact of High Speed 1, Final Report, London and Continental Railways, January 2009.
  2. See the final paragraph on page 140 (Section 6.4.1) of the report First Interim Evaluation of the Impacts of High Speed 1, Final Report, ATKINS, AECOM and Frontier Economics, October 2015. The publication of this report was originally promised for summer 2013, and its delay was criticised by the PAC.
  3. See paragraph 23 in the report The Sale of Eurostar, House of Commons Committee of Public Accounts Sixteenth Report of Session 2015-16, January 2016.
  4. See paragraph 366 in the report The Economics of High Speed 2, House of Lords Economic Affairs Committee, 1st Report of Session 2014-15, March 2015.
  5. See paragraph 10 in The Economics of High Speed 2.
  6. See paragraph 2.8 of the report HS2 Outline Business Case Economic Case, Department for Transport, March 2014.
  7. See paragraph 2.6 of HS2 Outline Business Case Economic Case.
  8. See paragraphs 5.4 to 5.7 of HS2 Outline Business Case Economic Case.
  9. See Figure 12 in the report Progress with preparations for High Speed 2, National Audit Office, June 2016.
  10. See paragraph 418 in The Economics of High Speed 2.
  11. The source of Mr Fairhead’s figures is Table 5.8 in the report High Speed Rail Strategic Alternatives Study Update Following Consultation, Atkins/Department for Transport, January 2012.

 

 

Let’s be courageous, part 4

(… continued from Let’s be courageous, part 3, posted on 20 Aug 2016).

In Section Two of his Taxpayer’s Alliance briefing paper, Rich man’s toy: The case for scrapping HS2, Policy Analyst Harry Fairhead examines the way that the business case for HS2 has been set out by the Department for Transport (DfT).

The aim of the work on the business case that has been undertaken by HS2 Ltd, on behalf of the DfT, is to “consider whether all of the collective impacts (including on existing transport networks) delivered by [the HS2 project] represent good value for taxpayers’ money” (see footnote 1). We are told that the work “adheres to the general guidance on evaluating proposals published by H M Treasury in the Green Book” and also follows “the more detailed advice” in the DfT’s own WebTAG guidelines that give instruction on “how to apply Green Book principles to transport investments” (see footnote 2).

This method “aims to capture all of the impacts – positive and negative – as well as the associated risks and uncertainty” associated with the project proposal and, “where possible”, to express these impacts “in units of money”. The output of this calculation for a particular set of assumed circumstances is a single figure, termed the benefit cost ratio, or BCR (see footnote 3).

Many of you will be familiar, possibly very familiar, with the concept of BCR, but just in case you are not, I will attempt a summary.

The analysis is undertaken for the whole life of HS2, which is assumed to be sixty years after service opens although it seems reasonable to expect, perhaps, that HS2, like its Victorian counterparts, will well exceed this life expectancy. The net present value of the monetary equivalent of direct benefits is totalled and the same is done for the net costs, this being the sum of capital and operating costs less the operating revenue: the BCR is the ratio of the value of benefits to costs. The method offers the option of adding the assessed value of “wider economic impacts” (WEI) to the benefits to modify the BCR: although, in theory, the WEI can be negative taking them into account will usually, as is the case with HS2, improve the BCR (see footnote 4).

In the early stages of the HS2 project the BCR was almost invariably quoted for both excluding and including WEIs, although the practice in recent times appears to favour using the higher value that results from taking WEIs into account. According to the National Audit Office (see footnote 5), the latest appraisals yield a BCR of 1.7 (1.4 excluding WEI) for Phase 1 and 2.2 (1.8 excluding WEI) for the full network (incorporating Phase 2a). According to WebTAG, this puts Phase 1 alone in the low to medium value for money category and the full network in the medium to high value for money bracket (see footnote 6).

According to the DfT (see footnote 7):

“WebTAG has been developed over many years and has benefited greatly from the UK’s long tradition of applying cost benefit analysis to transport infrastructure investment proposals. Comparisons show that the UK appraisal system compares very well with those in other countries and the UK has led the world in setting out its guidance on analysing the impact of proposals in an open and transparent way.”

In contrast, Mr Fairhead reflects that the HS2 business case has “received significant criticism”, that the methodology “has been accused of being simplistic” and that “there are inherent flaws in the assumptions” that have been made. He notes that an early critique of the business case “has suggested that the BCR for Phase 1 of HS2 could be as low as just 0.5” (see footnote 8).

There are two important features of the BCR methodology that has been employed for the HS2 business case that render the result wide open to criticism. In the first place, the calculation requires forecasting for a period that extends up to seventy years from today; this is just an impossible task, and puts the process well into fairyland. No matter how conservative an approach appears to have been taken, what Harold Macmillan is supposed to have described as “events, dear boy, events” (see footnote 9) will inevitably come along to undermine the best of forecasts. Who, for example, would have, five years ago, foreseen the UK leaving the European Union, and the consequent impacts upon the economic prospects for our country? Who, even today, is sure what those impacts will be?

The second ground for scepticism is that the process of assessing the impacts and evaluating them in monetary terms is, despite being presented as a scientific procedure, very much a matter of subjectivity. Mr Fairhead particularly identifies the monetary benefit attributed to journey time savings by business travellers, which he reports account for around one-half of the total transport user benefits, assessed at “just over £40 billion”. He claims that the DfT’s analysis is deficient in assuming that journey time saved is used in the workplace, rather than for leisure, and that business passengers are not productive while travelling: and he is far from alone in making these criticisms.

I fear that what we may have witnessed as the HS2 business plan has been developed and refined is a phenomenon that is the benefit equivalent of the cost optimism bias effect that I discussed in part 2 of this blog series, where those promoting HS2 may be, with the intention of defending the project, regarding the contribution to the BCR by some identified benefits as greater than a truly independent assessor would rate them: in my blog A work of fiction (posted 8 Sep 2012) I referred to this as producing “a more congenial result”.

(To be continued …)

Footnotes:

  1. See paragraph 2.4 of the report HS2 Outline Business Case Economic Case, Department for Transport, March 2014.
  2. See paragraph 1.1 of HS2 Outline Business Case Economic Case.
  3. See paragraph 1.5 of HS2 Outline Business Case Economic Case.
  4. For an explanation of WEIs see section 2 of the paper, Using the impacts of active traffic management rollout project to discuss wider economic benefits in transport appraisal, Bose R, Kohli S and van Vuren T, European Transport Conference 2008, Noordwijkerhout, October 2008. This paper defines WEIs as “benefits that are from accessibility improvements in the transport markets and accrue in form of productivity gains due to agglomeration effects, increased outputs in markets with imperfect competition and improvements in labour supply”.
  5. See Figure 11 in the report Progress with preparations for High Speed 2, National Audit Office, June 2016.
  6. See Table 17 in HS2 Outline Business Case Economic Case.
  7. See paragraph 1.3 of HS2 Outline Business Case Economic Case.
  8. Mr Fairhead’s comments can all be found in Section 2 of Rich man’s toy: The case for scrapping HS2. The business case critique to which he refers is Review of the Economic Case for HS2 Economic evaluation London – West Midlands link, Castles C and Parish D, RAC Foundation, November 2011. The revised Phase 1 BCR may be found in Table 1.
  9. According to the Daily Telegraph article, As Macmillan never said: that’s enough quotations, it has never been reliably established when he said this and to whom, assuming, of course, that he ever actually said it.

Let’s be courageous, part 3

(… continued from Let’s be courageous, part 2, posted on 16 Aug 2016).

Under the subheading Uncertain delivery in Section One of his Taxpayer’s Alliance briefing paper, Rich man’s toy: The case for scrapping HS2, Policy Analyst Harry Fairhead assesses the chances that HS2 will not be delivered on time.

He reminds us that the recent annual report from the Infrastructure and Projects Authority (IPA) reveals that the delivery confidence assessment (DCA) for the HS2 project is amber/red, meaning that successful delivery of the project is “in doubt”, and that the IPA’s predecessor, the Major Projects Authority (MPA), also rated the project amber/red in the years 2012/13, 2013/14 and 2014/15 (see footnote 1). Bearing in mind that the flagging of a project as amber/red implies that “urgent action” is required to address the situation (see footnote 2), it is surely of concern that HS2 has been condemned as such for four successive years – not a sign of the problems that have been identified being addressed with urgency, you might think.

That there has been no improvement is hardly surprising though given the Department for Transport’s project track record. The IPA report advises that there are nine major projects currently running under the Department’s control and looks at the change in the DCA for these projects since the previous year (2014/15). In no cases has the DCA been improved and the rating of three projects has worsened (see footnote 3).

In its June 2016 report on HS2 that I referred to in part 1 of this blog series, the National Audit Office (NAO) describes the “schedule for delivering the programme” for HS2 as “ambitious” (see footnote 4). If progress to date can be taken as an indicator of what is yet to come, then this judgement would appear to be reasonable: the report tell us that, “Across the programme as a whole, HS2 Ltd has missed 32% of planning and development milestones so far” (see footnote 5). The report gives three particular examples where the schedule has proved to be too optimistic.

Firstly, there is the target date for achieving Royal Assent for the Phase 1 hybrid Bill. This has been shifted by twenty-one months from the original date of March 2015 to December 2016. The NAO acknowledges that progress is “now on course to achieve Royal Assent by the revised target date”, and the Lords HS2 Select Committee appears to be doing its best to assist the Government in this respect, but the NAO ranks getting the Phase 1 Bill through Parliament, even to the revised schedule, as “a significant achievement” (see footnote 6).

Secondly, HS2 Ltd has failed to clear the first of three defined review points, originally scheduled for July 2015. As HS2 Ltd was not ready then, the Department for Transport (DfT) delayed the examination by ten months, to May 2016, by which time, according to the NAO, “HS2 Ltd had met the capacity requirements, but did not pass review point 1 due to ongoing concerns about cost and schedule” (see footnote 7).

The NAO warns of potential knock-on effects from failing to clear review point 1, as the “main objective” of this review was “for HS2 Ltd to gain delegated authority to carry out all procurement activity up to, but not including contract award without first having to seek approval from the Department [for Transport] and H M Treasury”. According to the NAO, the consequence of HS2 Ltd failing to obtain these delegations is that “all procurement milestones will therefore have to go through more governance and approval stages than originally anticipated, which adds time to the process” (see footnote 8).

Thirdly, the NAO reports that “risks are starting to emerge” as the capability of HS2 Ltd is being built up to that required to meet the tasks in hand. The NAO reports, in particular, that “land and property acquisition has fallen behind schedule, partly as a result of having too few staff to meet the demand, and the volume of work required to develop the route plan and business case for phase 2 is placing a greater strain on resources than originally anticipated” (see footnote 9).

Despite these front-end delays, and the NAO report advises that “the main civil engineering work is now scheduled to begin in mid-2018 rather than early-2017 [as was the case] when [the NAO] last reported [in 2013]”, the ready for service date of December 2026 has, so far, been maintained. Further time pressure has resulted from the decision to bring forward the “deadline for completing construction” by around twelve months “to allow time for commissioning and testing the railway” (see footnote 10).

The NAO report also warns of future timescale risks, noting that these are “particularly high” for certain project elements: the construction of the HS2 station at Euston; the reconfiguration of the Euston Underground station; moving the Great Western depot at Old Oak Common; and, relocating the Heathrow Express depot to Langley (see footnote 11).

Perhaps most worrying is that the NAO report notes that the timely delivery of the HS2 project “is dependent on Network Rail and other stakeholders delivering projects on the existing network in preparation for construction of the new railway” (see footnote 12). Network Rail, in particular, has a poor record for the delivery of projects on time.

Given this background, it is no surprise that HS2 Ltd currently (April 2016) advises a sixty per cent confidence level of opening, on time, at the end of 2026 – described by the NAO as a “low confidence level”. Also no surprise is that the DfT has, according to the NAO, asked HS2 Ltd to work on upping this to eighty per cent “while remaining within available funding”, but has also shown at least a degree of realism by asking the Company to advise whether or not the programme should be extended by up to twelve months (see footnote 13). That this request had been made was confirmed to the House of Commons Public Accounts Committee (PAC) by the DfT’s David Prout, Director General High Speed Rail Group. That we will have to wait for the outcome was made clear, at the same PAC session, by Simon Kirby, Chief Executive of HS2 Ltd. He told the PAC that advice on this matter will be delivered to the DfT in “September or October” this year, but that it will “ultimately be a matter for Ministers to take decisions on what the timetable is” (see footnote 14).

You might wonder whether slipping the opening date of Phase 1 by up to a year is really significant in the grand scheme of things, aside that is from prolonging the agony for residents along the route and passengers trying to use trains in and out of Euston station and delaying the receipt of any fares revenue to help pay for the thing. Well the Chairman of HS2 Ltd, Sir David Higgins, believes that timescale and ultimate project cost are linked. In his first report on HS2 he said (see footnote 15):

“Put simply, the shorter the timescale, and the more certainty about the timescale, the lower the costs will be.”

I think that, bearing in mind Sir David’s extensive experience of the executive management of large civil engineering projects, we should heed his view and regard this area of performance against timescale, both past and anticipated, and any consequent impacts on project costs that might be expected as matters that should definitely be included in any review of the project.

(To be continued …)

Footnotes:

  1. See Figure 18 (on page 29) in Annex A to the publication Annual Report on Major Projects 2015-16, Infrastructure and Projects Authority, July 2016.
  2. See the definitions on page 25 of Annual Report on Major Projects 2015-16.
  3. See Figure 19 in Annex A to Annual Report on Major Projects 2015-16.
  4. See paragraph 3.1 in the report Progress with preparations for High Speed 2, National Audit Office, June 2016.
  5. See paragraph 3.6 in Progress with preparations for High Speed 2.
  6. See paragraphs 3.3 and 3.4 in Progress with preparations for High Speed 2.
  7. See paragraph 3.8 in Progress with preparations for High Speed 2.
  8. See paragraph 3.9 in Progress with preparations for High Speed 2.
  9. See paragraph 3.10 in Progress with preparations for High Speed 2.
  10. See paragraph 3.13 in Progress with preparations for High Speed 2. The earlier report is High Speed 2: A review of early programme preparation, National Audit Office, May 2103.
  11. See paragraph 3.15 in Progress with preparations for High Speed 2.
  12. See paragraph 3.16 in Progress with preparations for High Speed 2.
  13. See paragraph 3.14 in Progress with preparations for High Speed 2.
  14. See Q55 and Q60 in the transcript Oral evidence: High Speed 2, HC 486, Commons Public Accounts Committee, 11thJuly 2016.
  15. See page 16 of the report HS2 Plus, HS2 Ltd, March 2014.

 

 

Let’s be courageous, part 2

(… continued from Let’s be courageous, part 1, posted on 12 Aug 2016).

Under the subheading Rising costs in Section One of his Taxpayer’s Alliance briefing paper, Rich man’s toy: The case for scrapping HS2, Policy Analyst Harry Fairhead quotes data on the comparative per-kilometre costs for high speed rail projects, country by country, that has been extracted from an article in the Daily Telegraph. This newspaper article dubs HS2 “the most expensive high speed project in existence” and claims that the £42.6bn budget (excluding rolling stock costs), that was the appropriate figure when the article was written, “makes it more than ten times the cost per kilometre of some global counterparts” – in fact, it is sixteen times the lowest figure quoted in the article (for Turkey).

In my blog A bad deal at any price (posted 28 May 2016) I reported on some reasons for this cost disparity that had been put forward by the Acting Technical Director of HS2 Ltd, Giles Thomas in an interview with BBC Radio. The key element to this explanation appears to be that HS2 is required to transit some “very expensive” and densely populated parts of the UK. Now I can readily see that building a line across rural China is a totally different proposition from traversing the Chilterns, and might justify some of the six to one UK to China cost difference that the Telegraph’s figures display. However, I would have thought that high speed train constructors in Japan face many of the same problems as their UK counterparts, and perhaps even greater problems, and yet they manage to build their high speed railways for an eleventh of the cost of HS2. The newspaper also tells us that the per-kilometre cost of HS2 even manages to exceed the projected cost of the Californian high speed rail project by more than half as much again.

What is clear is that, for some reason or reasons, the UK is not able to construct high speed railways at the lower costs that apply everywhere else. Any review of the HS2 project should, therefore, take this inescapable fact into account, and judge whether the higher construction costs that apply in these islands mean that the taxpayer can ever get good value for money from high speed rail.

In his Section One, under the subheading Bold assumptions, Mr Fairhead makes some comments about optimism bias. I feel that these comments will benefit from some clarification, and attempt to provide this elucidation below.

“Historically”, according to the National Audit Office, “the majority of major projects in government have not delivered the anticipated benefits within original time and cost expectations” and there is “endemic over-optimism which characterises decisions to commit to projects and the subsequent management of them” (see footnote 1).

H M Treasury requires that “project appraisers” in government departments to “make adjustments of their estimates of capital and operating costs” by adding an “adjustment percentage” to them (see footnote 2). This addition is referred to as the “optimism bias adjustment”. The Treasury recommends values for optimism bias adjustment “that should be used in the absence of more robust evidence”: for “non-standard civil engineering” projects, like HS2, the recommendation is that the bias should be in the range 6% to 66% (see footnote 3). The Treasury Guidelines recommend that the upper bound value is used “as the starting value for calculating the optimism bias level”, but allows for the value to be reduced below this upper bound “according to the extent to which the contributory factors have been managed” (see footnote  4).

According to documentation published at the time of the ministerial decision to go ahead with HS2 Phase 1, this is the procedure that was adopted to determine the optimism bias adjustment for that part of the route, and it was determined that the optimism bias adjustment should be reduced from 66% to 34% for HS2 Phase 1, as reported in Mr Fairhead’s paper (see footnote 5): as far as I can determine, no detailed justification for making this reduction has been published.

H M Treasury appears to recognise the limitations of the data upon which its recommendations have been made and, “in the absence of a more specific evidence base”, encourages departments “to collect data to inform future estimates of optimism, and in the meantime use the best available data” (see footnote 6). In keeping with this advice, the Department for Transport (DfT) commissioned one of the world’s leading experts on megaproject management, Professor Bent Flyvbjerg, to investigate evidence of optimism bias levels in past transportation projects and make recommendations for appropriate adjustments to be employed in future project planning by the Department. It is from this work that Mr Fairhead obtains the 68% optimism bias adjustment recommendation that he quotes (see footnote 7).

Despite this departmental specific guidance being available to the planners of HS2, I can find no evidence that it has been employed in determining a suitable optimism bias adjustment for the project.

When considering the appropriate level of optimism bias adjustment to apply to a project an important factor is the level of risk that this adjustment will prove to be inadequate – in other words the risk that the total actual spend will exceed the project budget, including the optimism bias adjustment. For the HS2 contingency calculation, which includes optimism bias adjustment, this is turned around and the figure has been derived on the basis that there is a 95% confidence that the budget, including the contingency, will not be exceeded in practice. Accordingly, it seems appropriate also to consider the level of optimism bias adjustment that reflects a degree of confidence that it will be sufficient in 95% of cases.

Unfortunately the Treasury Guidelines make no reference to confidence levels, and Professor Flyvbjerg tells us that the data from which the guideline values have been derived, sourced from Mott MacDonald, has “no probability distribution or percentiles available” (see footnote 8). Professor Flyvbjerg’s recommendations do, however, stipulate confidence levels: he tells us that a 68% adjustment will give us 90% confidence and provides a graph that indicates that extending this to 95% (5% risk of cost overrun) requires increasing the optimism bias adjustment to around 80% (see footnote 9).

Another important factor when deciding the appropriate level of optimism bias adjustment is the stage that the project implementation has reached. Professor Flyvbjerg stipulates that the levels that he recommends “refer to, and should be applied to, estimated budgets at the time of decision to build” (see footnote 10). He also recommends that “if a project has moved beyond the approval stage to the stage of detailed design or construction, uplifts should normally be adjusted downwards” (see footnote 11). However, this expectation that uncertainty will reduce as the project matures appears to be challenged by the indications that I referred to in part 1 of this blog series that HS2 costs are rising.

What we can conclude from all this, I think, is that it is not easy to get the optimism bias adjustment right and that the calculation process used by HS2 Ltd/DfT appears to be shrouded in mystery. Yet very large adjustments to the HS2 budget, measured in £billions, are involved.

Clearly, any reviewer of the HS2 project should be satisfied that the optimism bias adjustments that have been included in the project budgets are set at an appropriate, and fully justifiable, level.

(To be continued …)

Footnotes:

  1. See paragraphs 1 and 2 of the report, Over-optimism in government projects, National Audit Office, December 2015.
  2. See paragraphs 2.1 and 3.1 of the paper, Green Book supplementary guidance: optimism bias, HM Treasury, April 2003.
  3. See paragraph 3.1 and Table 1 in Green Book supplementary guidance: optimism bias.
  4. See paragraphs 3.11 and 3.12 in Green Book supplementary guidance: optimism bias.
  5. See paragraphs 7.8 and 7.9 of the publication, The Economic Case for HS2: Value for Money Statement, Department for Transport, January 2012.
  6. See paragraph 1.2 in Green Book supplementary guidance: optimism bias.
  7. See Table 6 (entry for “Rail” and “90% percentile”) in the report Procedures for Dealing with Optimism Bias in Transport Planning Guidance Document, Flyvbjerg, B in association with COWI consultancy group, June 2004.
  8. See the footnote to Table 6 in Procedures for Dealing with Optimism Bias in Transport Planning Guidance Document.
  9. See Figure 9 in Procedures for Dealing with Optimism Bias in Transport Planning Guidance Document.
  10. See the first paragraph of Section 4.2 of Procedures for Dealing with Optimism Bias in Transport Planning Guidance Document.
  11. See the second paragraph of Section 4.3 of Procedures for Dealing with Optimism Bias in Transport Planning Guidance Document.

Let’s be courageous, part 1

The decision taken by the new Prime Minister to pause and review the go-ahead for the Hinkley Point C nuclear power station is a welcome indication that the new regime will not blindly take on the sacred cows of its predecessor government. I recall the fictional Whitehall mandarin, Sir Humphrey Appleby, telling his PM that going with a particular decision – one that Sir Humphrey didn’t want him to take – would be “extremely courageous”, and expect that something similar was said in 10 Downing Street about pausing Hinkley Point.

If the desire to review is genuine, and I can’t see why the political risk of pulling out at the last minute would have been taken if it was just window dressing, then it is possibly a welcome indication that the potentially even bigger mistake of indulging in HS2 may also be subjected to a final review before the green button for Phase 1 of the project is pressed. Some fuel was added to this particular fire recently by a keynote speech delivered at the Institute for Government by the National Audit Office Comptroller and Auditor General, Sir Amyas Morse. In his speech, Sir Amyas said that “the Government’s portfolio of major projects is enormous” – he identified that the “estimated whole-life value” of this portfolio stood at £405bn in September 2015 – and that he felt that this had led to the civil service being “over-committed”. In the light of this, he posed a question:

“We need to ask ourselves, can the public sector deliver Hinkley Point C, a third runway, HS2, a northern powerhouse, nuclear decommissioning, Trident renewal and restoration and renewal of the Palace of Westminster, and many more, all at the same time?”

If a review of the HS2 project were to be commissioned – and whoever this is entrusted to should be totally removed from, and independent of, the duplicitous analysts of the Department for Transport and Network Rail – then a briefing paper that has recently been published by the Taxpayer’s Alliance might be a good starting point on which to base a critique.

Yes, I know that the Taxpayer’s Alliance is hardly a nonpartisan player when it comes to the HS2 project. It describes itself as a “grassroots campaigning group dedicated to reforming taxes, cutting spending and protecting taxpayers” and, as such, is hardly likely to be in favour of a £50billion plus planned government disposal of taxpayer funds. The title of the briefing paper, Rich man’s toy: The case for scrapping HS2, rather gives the game away, and the Taxpayer’s Alliance has been steadfastly opposed to the HS2 project from virtually the day that it was first announced. However, the briefing paper, which has been authored by Taxpayer’s Alliance Policy Analyst Harry Fairhead, is a very well-researched and comprehensive summary of the economic and business case against the project and, as such, wouldn’t be a bad starting point for anybody tasked with carrying out a review; after all it is the merits of the case against that would drive any decision to change course on HS2. The one critical area that the paper does not address to any extent is the strategic value of HS2 to the railway network, important in view of the pro-HS2 mantra that the project is about capacity, but it is hardly surprising that the Taxpayer’s Alliance has, on the whole, avoided this territory and stuck to what it knows best.

Of particular value to anybody reviewing the project will be the copious footnotes that Mr Fairhead has provided, enabling his assertions to be checked in his source documents and giving the curious the ability to delve deeper into the subject.

In Section One of his paper, under the subheading Rising costs, Mr Fairhead documents the rise in the total cost of HS2 from around £33bn in 2010, if rolling stock costs are included, to £87.95bn in July 2016 and warns that “given the recent rises it should be assumed that [costs] will rise higher”. However, his analysis conflates three separate mechanisms:

  • True changes in the estimated cost of building HS2 and procuring the rolling stock
  • A shift in the cost base from 2011 to 2015 prices, which is not, of itself, a real price rise
  • The additional cost of mitigation and funding transportation projects designed to support HS2, based upon the analysis prepared by Dr Richard Wellings for the Institute of Economic Affairs in August 2013

The third of these, it should be emphasised, is speculative and controversial.

What there does appear to be recent indications for, however, is Mr Fairhead’s warning that costs will rise higher. In its June 2016 report on HS2 the National Audit Office (NAO) has identified a funding shortfall for Phase 1 of £204m, based upon a P95 estimated cost (i.e. including contingency) of £27,384m, but this estimate is contingent upon making £1,470m of “efficiency savings”, which are “planned” but not “secured” (see Figure 6 in the report). The NAO figures reveal that the point estimate cost of Phase 1 has increased by around 3 per cent in real terms since the last Autumn Statement.

The NAO report reveals that the P95 cost estimate for Phase 2 is £6,974m in excess of its agreed funding. The NAO reports that £2,130m of savings has been secured towards meeting this shortfall, and that the potential for a further £7,018m of savings has been identified (see Figure 7 in the report).

The convenience of identifying these cost savings caused some obvious scepticism amongst Members of the House of Commons Public Accounts Committee and led to the Chief Executive of HS2 Ltd, Simon Kirby, admitting that “we have identified how we are going to drive down costs; we have yet to drive down the costs, which is obviously not unimportant” (see footnote). It will, I suggest, be a key task for any review of the project to determine how realistic are the prospects of securing these savings, and whether costs are really under control or are showing signs of inexorably rising.

(To be continued …)

Footnote: Mr Kirby made this remark at the public oral evidence session of the Commons Public Accounts Committee held on 11th July 2016. It is recorded under Q155 of the transcript.

PS: According to a blog posted on the Stop HS2 website after this current piece was authored, “Whitehall sources have revealed that the new government are currently reviewing all projects”.

 

Knowing a hawk from a handsaw

A couple of weeks ago I received a telephone call from BBC TV at Birmingham requesting that I attend the filming of an interview with one of my neighbours for the Midlands Today regional news programme. The neighbour concerned is Bob Edwards, who operates a falconry experience business from his home property and who I first introduced to you in my blog Westminster comes to Cubbington, part 4 (posted 26 Oct 2014).

The reason that I had been invited to take part was that Bob had been kind enough to sing my praises to the BBC for some help that I had given him in pursuing his claim for compensation from HS2 Ltd and preparing his evidence for his petition hearing in the House of Commons. So I duly attended and gave the BBC’s Business and Transport Correspondent, Peter Plisner, the benefits of my views on the way that Bob had been (mis)treated by HS2 Ltd in a short interview that we recorded: this interview ended up on the cutting room floor, but I was happy to help out and the news item was not about me, anyway, it was about Bob.

That Bob’s plight was still newsworthy in mid-2016 points to a major failure in HS2 Ltd public relations, as we all assumed that the matter had been resolved by Bob’s appearance in January 2015 before the House of Commons HS2 Select Committee, which I was present at and reported in my blogs A matter of respect, part 1 (posted 11 Feb 2015) and A matter of respect, part 2 (posted 15 Feb 2015).

To summarise Bob’s situation as it was described to the Committee then: he will be completely surrounded by HS2 construction works – the construction drawings prompted Committee Chairman, Robert Syms MP, to comment that the area around Bob’s home “looks like Stalingrad” (see footnote 1). Despite this, his property is not within the safeguarded area and, being some 175 metres from the trackline, it is also outside the rural support area. The HS2 construction operations will severely curtail, or more likely totally preclude, Bob’s ability to fly his birds over the land that he uses at present, and, in addition to the risk to his birds’ health that stress will pose, there is an appreciable risk that spores of aspergillosis released into the air by earthmoving operations will kill them.

It appeared on that January 2015 day that Bob was home and dry. Before his Commons Select Committee appearance he was in a position where all he was getting from HS2 Ltd was sympathy and “sorry but we can’t help you”. At the hearing the Promoter’s Lead Counsel, Tim Mould QC, conceded that Bob had a prima facie case for compensation for the relocation of his business. Since it had also been demonstrated that business and residence needed to be side by side, Mr Mould was also able to agree, “absolutely”, with Committee Member, Ian Mearns MP, that this implied “a move lock, stock and barrel for the household and all the other things that link up with it” (see footnote 2).

The silk agreed that HS2 Ltd would “have some serious discussions with the petitioner about compensation” and would report back to the Committee on progress in March 2015 (see footnote 3). HS2 Ltd subsequently agreed, to its credit, to fund professional advice to assist Bob with these discussions. In the light of this I agreed with Bob that I would step back and leave the professionals to advise him.

Despite the promise that had been made by Mr Mould, I can find no reference in the public record of any report on the progress of discussions about compensation for Bob having been made before the Commons Select Committee stood down in February 2016.

I contacted Bob in March this year to see how things were going, and learnt that his dispute with HS2 Ltd remained unresolved. The problem area was the compensation package on offer to Bob for his house, in that HS2 Ltd were not prepared to include a resettlement package in line with what claimants under the Express Purchase Scheme receive. Government policy is that claimants under the discretionary compensation packages on offer for HS2, such as the Voluntary Purchase Scheme, are entering into “property sale which is at the discretion of the individual involved”. In the case of the Need to Sell Scheme, the Government view is that claimants are “individuals who would have had a need to sell their property regardless of HS2”. So the policy is that, in neither case, is it “reasonable to suggest that additional payments be made to compensate for costs incurred or emotional distress caused by a property sale”: the Government position is that it is offering a “means of enabling property owners to move should they wish to and in no way does it imply that the Government wishes to force the property owner into a sale” (see footnote 4).

It was this policy that appeared to be the stumbling block: HS2 Ltd felt bound by it, despite it being obvious that Bob had no option but to move to preserve his business, and would have no desire to move were it not for the impacts on his business that would result from the construction and operation of HS2.

I suggested to Bob that it would be prudent for him to deposit a petition with the Lords Private Bill Office, regarding this as only a precaution as I fully expected that his claim would have been resolved long before the time came for him to appear before the Lords Select Committee. I was wrong in this expectation, which led to Bob having to travel to Westminster in July.

Introducing his Midlands Today piece about Bob, Peter Plisner described the outcome of his appearance before the Lords Select Committee as “a major victory”; if so, it was the defeat of an enemy who didn’t put up any fight. Tim Mould QC, representing the Promoter once again, said that he “would very much welcome the Committee’s view”: he virtually told the Committee, “Tell us to pay the man, and we will” and suggested that the Committee might feel able to act “relatively swiftly” (see footnote 5). It was almost like an undisciplined child seeking moral guidance from a parent.

Committee Chairman for the day, Lord Freeman, was happy to oblige Mr Mould, describing the moment as “the first time in the proceedings of this Committee where I think we sense the need for moving quickly” and promising a judgement after lunch that day (see footnote 6).

This judgement was duly announced first thing in the afternoon session, and surely came as no surprise. Lord Freeman told Bob that he should be paid (see footnote 7):

“… any additional costs such as home loss payment, stamp duty land tax on a replacement residential property, domestic removal costs and similar extras that might be payable, had your property been located within the safeguarded area.”

The BBC reports HS2 Ltd as confirming that it “respects” the Committee’s decision, so presumably Bob will receive the additional payments. Bob told Peter Plisner that he was “massively relieved” at the judgement, but that he was “going to be even more relieved once the money’s in the bank”.

Bob’s caution may be well-founded because, as others have found, there may be a sting on the tail when it comes to property valuation.

My verdict, for what it is worth, is that this matter should never have gone to the House of Lords: in the light of the outcome of the hearing in the other place HS2 Ltd should have agreed to make the additional payments long ago, and it is shameful that this wasn’t done.

Footnotes:

  1. See paragraph 29 of the transcript of the morning session of the Commons HS2 Select Committee held on Tuesday 20th January 2015.
  2. Mr Mould’s analysis of the case for compensation is reported in paragraphs 70 to 80 of the transcript of the morning session of the Commons HS2 Select Committee held on Tuesday 20thJanuary 2015. The exchange with Mr Mearns is reported in paragraphs 81 to 84 of that transcript.
  3. See paragraph 86 of the transcript of the morning session of the Commons HS2 Select Committee held on Tuesday 20thJanuary 2015.
  4. See paragraphs 5.3.49 and 7.3.14 of Cm 8833, Property Compensation Consultation 2013 for the London-West Midlands HS2 route: Decision document, Secretary of State for Transport, April 2014.
  5. See paragraph 55 of the transcript of the morning session of the Lords HS2 Select Committee held on Wednesday 20thJuly 2016.
  6. See paragraph 74 of the transcript of the morning session of the Lords HS2 Select Committee held on Wednesday 20thJuly 2016.
  7. See paragraph 4 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Wednesday 20thJuly 2016.

Important Note: The record of the proceedings of the Lords HS2 Select Committee from which the quotes reproduced in this blog have been taken includes uncorrected transcripts of evidence, which are not yet an approved formal record. Neither witnesses nor Members have had the opportunity to correct the record in such instances, and it may therefore be subject to changes being made in the light of any such corrections being requested.

Environmental understatement, part 2

(… continued from Environmental understatement, part 1, posted on 31 Jul 2016).

Having shown that the bulk of his village of Offchurch, far from experiencing HS2 operational noise below the lowest observed adverse effect level (LOAEL) as the maps in the Environmental Statement would have us believe, will actually be above the LOAEL LAMax threshold, Cllr Burgun asked a very pertinent question that is entirely consistent with the noise policy aim of the Noise Policy Statement for England to “mitigate and minimise adverse impacts on health and quality of life” (see footnote 1):

“… what further mitigation measures could the promoter consider, which would reduce this operational noise effect, and which of them does he intend to implement?”

Typically, the response that the councillor received from the Promoter’s Lead Counsel, Tim Mould QC, was to play down the importance of Cllr Burgun’s revelation: after all Mr Mould is being paid to represent his client’s interests, not to assist petitioners who are seeking better mitigation (see footnote 2). Whilst he admitted that “the Lmax predications (sic) in the environmental statement do show that there are some assessment points where we’re predicting Lmax emissions in excess of the 60dB threshold” and that there was “some evidence of predicted exceedances of the lowest observed adverse effect level”, his careful choice of words appears designed to convey the impression of minor and infrequent “exceedances”, rather than the wholesale underestimation of the properties that would experience HS2 operational noise above the LOAEL threshold that Cllr Burgun had made evident (see footnote 3).

Mr Mould’s attempt to gainsay the importance of the “exceedances” included pointing out that, in the strict terminology employed in the NPSE, none of those that had been identified by Cllr Burgun were “significant”. In virtually the same breath, however, he showed this to be irrelevant to Cllr Burgun’s request by admitting that the “design objective” set by HS2 Information Paper E20 is “to take steps, through design and operation of the train, to reduce impact so that they are at or below that LOAEL threshold”, which is precisely what Cllr Burgun was requesting (see footnote 4).

Nevertheless, what Mr Mould had to say next did appear to address Cllr Burgun’s request directly, and came, at least to me, as something of a surprise. He reminded the Committee that the “direct purpose” of the 60dB LOAEL threshold is “to govern the operation of the train during the night-time, and train operation of the nighttime period for these purposes is between 11 o’clock in the evening and seven o’clock in the morning”. He asserted, although without providing any support for his claim, that “the period between 11 and 12, it’s that hour that we’re particularly concerned with” (see footnote 5).

Mr Mould reminded the Committee that the Promoter’s expert witness on noise, Rupert Thornely-Taylor, had told them that (see footnote 6):

“… there will be opportunities for the promoter, for the Secretary of State and for those who are the nominated undertaker, to consider, for that particular hour, 11 and 12 in the evening, if, following design and coming into operation, trains are still generating levels which exceed that 60dB Lmax and there is evidence that there is some degree of disturbance being generated to people living along the route, then there are options available, one of which, as Mr Thornely-Taylor frankly explained to you, was for that last hour of the operation of the train, to consider whether there should be some degree of adjustment of speed”.

From a context that he had provided earlier (see footnote 7), it is clear that Mr Mould was referring to the occasion on 6th July when Mr Thornely-Taylor had given a presentation on sound to the Committee and then hosted a visit to the Arup SoundLab. Since I have been unable to find any reference to the tentative proposal to mitigate operational noise by a limited speed reduction in the transcript of the public session, I assume that Mr Thornely-Taylor’s comments were probably made during the informal SoundLab session and, regrettably as a consequence, are not on the public record, so we are not party to his thoughts on the matter.

The possible imposition of night-time speed restrictions is an interesting proposition: reducing the maximum speed allowed by 30km/hr, or so, should allow a decrease in the worst peak operational noise of around 3-4dB. The operational impacts are likely to be slight, as the need for late-running trains to overspeed in order to catch up with the timetable is probably less pressing for the final handful of services. As a mitigation measure it has the considerable advantage of bringing relief to all those living close to any section of the line where a speed restriction is imposed, rather than just benefiting a few. Notwithstanding, it would be wrong, I think, to restrict any such measure to the last hour of the operational day: any perceived need for mitigation that might lead to a speed restriction being applied would, surely, be just as essential during the first two hours of the operational day, between 05:00hrs and 07:00hrs – a point which Cllr Burgun made to the Committee, although I suspect that he was thinking more in terms of mitigation for all hours of operation, day or night (see footnote 8).

Irrespective of whether the speed reduction proposal would be beneficial to the residents of Offchurch, or not, it was clearly not one that Cllr Burgun was able to count upon. Mr Mould told the Committee that he wasn’t prepared to commit to such a step “at this stage”. He referred the Committee to the “Secretary of State’s commitment that he will take steps during design and operation to design and operate the railway to those LOAEL thresholds that are set out in [Information Paper E20]” and described this as one made “to all the world”. He expressed that, in view of this, to give an assurance to one particular parish council would “simply be to duplicate that design commitment the Secretary of State has given” (footnote 9).

I suspect that Cllr Burgun, who regards his community as currently “one quiet area”, will not be too confident in relying upon the Secretary of State to determine its future noise environment.

Footnotes:

  1. See paragraph 1.7 of the March 2010 Defra publication, Noise Policy Statement for England. Cllr Burgun’s request is recorded in paragraph 34 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016.
  2. According to an article in the Daily Mail, “Barrister Tim Mould, who has been employed to block growing opposition to the project from residents, businesses and MPs, has been paid £679,675.10 by the Department for Transport since 2013, not including around £136,000 in VAT”.
  3. See paragraphs 51 and 52 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016.
  4. For Mr Mould’s comments see paragraphs 52 and 53 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016. According to Table 1 in Appendix B to HS2 Information Paper E20, the significant observed adverse effect level (SOAEL) for Offchurch, where we can expect more than twenty nightly train pass-bys, is 80dB LpAFMax at the façade. The highest level shown in Cllr Burgun’s tabulation for Offchurch is equivalent to 73dB at the façade.
  5. See paragraph 54 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016.
  6. See paragraph 55 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016.
  7. See paragraph 52 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016.
  8. See paragraph 82 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016. That a general reduction of the maximum operating speed would bring noise mitigation benefits was a proposal suggested by petitioners appearing before the Commons Select Committee.
  9. See paragraphs 56 and 57 of the transcript of the afternoon session of the Lords HS2 Select Committee held on Tuesday 19thJuly 2016.

Important Note: The record of the proceedings of the Lords HS2 Select Committee from which the quotes reproduced in this blog have been taken is an uncorrected transcript of evidence, which is not yet an approved formal record. Neither witnesses nor Members have had the opportunity to correct the record in such instances, and it may therefore be subject to changes being made in the light of any such corrections being requested.

Follow

Get every new post delivered to your Inbox.

Join 36 other followers