… and round the bend …

(Some changes to, and deletions of, the text of this blog have been made from the version originally posted, to reflect the issue of the August 2012 Updated Economic Case for HS2).

In this blog I shall continue to chart the slide of the BCR for Phase 1 of the HS2 project (without wider economic inputs); a narrative which I began in Going down the pan … (posted 11 Aug 2012). In that blog I described how this BCR had dropped from 2.4 when the project was first announced to 1.6 at the start of the public consultation last year, but this downward trend continued into 2012.

The next revision to the BCR was announced in the document The Economic Case for HS2: Value for Money Statement (here), which was in the mountain of documentation that was release to coincide with the January 2012 announcement that HS2 was to go ahead. In paragraph 8.5 on page 18 of this document the Phase 1 BCR (without WEI) is revised downwards by a further one-eighth to 1.4.

The reasons for this revision being necessary may be understood by referring to Table 1 on page 17 of The Economic Case for HS2: Value for Money Statement and paragraph 8.4 on page 18. The factors identified are a mixture of positive and negative influences, which largely cancel each other out. However, one of these factors, revised GDP forecasts, is again shown to be the major change that is responsible for the downgrading of BCR.

So Mr Hammond’s 1.5 threshold that I pointed to in Going down the pan …was officially breached in January 2012, but there was a further announcement, and associated downward revision of the BCR, in April 2012. This came in the document The Economic Case for High Speed 2 Next Steps and Future Updates (here). In paragraph 2.7 on page 3 of this document the admission is made that there was a technical inconsistency in the basis of the BCR calculation used before the consultation and in the documents published after the consultation. In order to correct this error, we are told in paragraph 2.8, the Phase 1 BCR (without WEI) should be reduced by 0.2. So the revised official figure became 1.2.

We are also told in paragraph 2.1 on page 2 of The Economic Case for High Speed 2 Next Steps and Future Updates that a further revision to the BCR calculation will be published “in the early summer”. This revision will “include the latest economic growth forecasts published by the Office for Budget Responsibility in late March”.

The BCR for Phase 1 is, it would seem, sailing perilously close to the point at which the DfT is forced to admit that its value is less than 1 and the costs will exceed the benefits. What happens then? The previous Transport Secretary, Philip Hammond, told the Commons Transport Select Committee what he thought in September 2011 (see Q554 in the transcript):

“I have a general principle that I do not allow the Department to consider projects with a benefit-cost ratio that is negative, i.e. “Let’s spend £1 to get 90p.” You might think that is obvious, but that has not always been the practice in the past and projects have been approved that have benefit-cost ratios below 1. We have taken the view from last May that we will not consider projects of that nature, however attractive they may be for other reasons.”

So this seems very clear, no ifs or buts, if the HS2 BCR does go below 1, the project must be axed “however attractive [it] may be for other reasons”. Assuming that the new Transport Secretary subscribes to the policy of her predecessor, I think that we can expect all sorts of slight of hand from the DfT to prevent this show stopping threshold being crossed.

In truth, such slight of hand is already happening to get the BCR as “good” as it as present. In its document Why the business case is flawed and HS2 is not in the national interest (here) the HS2 Action Alliance (HS2AA) points out that the DfT is not employing the latest issue of the rail industry standard Passenger Demand Forecasting Handbook for its HS2 passenger demand forecasts. This seems inexplicable, as the latest version of this handbook (v5) was published as long ago as August 2009. However, the reluctance of DfT to employ the latest perceived wisdom as the basis for its calculations may be explained by the calculation made by HS2AA that if this was done the BCR would be reduced by a massive 0.4 (see the third table on page 8 of Why the business case is flawed and HS2 is not in the national interest).

In my blog Going down the pan …I questioned whether HS2 will make efficient use of public funds. I suggest that the evidence that I have presented on the BCR calculation indicates that it seems highly unlikely that it will and, believe me there is even worse to come.

In my next blog I will move on to look more specifically at the claims made that HS2 will support economic competitiveness.

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One response to this post.

  1. Posted by chriseaglen on August 15, 2012 at 7:33 am

    If the phase 1 is a trunk of 4 tracks or ultimately two routes each of two tracks th tunneliing viaducts and cutting/embankments will cost much more than any addtiional revenue so the BCR for two tracks will be well below the SOS 1.5. The key is what damage costs results from the location of the trunk phase 1. If Britian requires a new truck the least long distance cost for this is to the East of the nations from HS1/London to Edinburgh. Cross links then connect to the Western Cities and Ports. It is improtant to provide the collective costs and losses to others of the HS2 phase1 2 track trunk and the added costs and losses if this becomes a 4 track trunk.

    The word sustainable HS2 is used in literature but there is some confusion about how sustainable applied to the amenities and areas lost to HS2 land take temporary and permanent. Some clarity on the current owners and occupiers loss of sustainablity will be helpful. The AOS is not clear or accurate on the sustainability matters being on both sides at times. How could this AOS be used to select route selection and optimising the locations of parts of the route through amenities and farms and homes as well as alongside these.

    Reply

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