… disturbing the surface

At the end of my blog … with barely a ripple … (posted 31 Aug 2012) I posed the question whether the value of time saving used in the Benefit Cost Ratio (BCR) calculation should be the “resource cost” or the “market price”.

Paragraph 1.1.7 on page 1 of WebTAG Unit 3.5.6 (here), gives the following advice on this issue:

“The factor cost unit of account expresses prices in resource costs. Resource costs are costs that are net of indirect taxation. The prices paid by Government for goods and services are not subject to indirect taxation as any tax that is paid by Government bodies such as the Highways Agency is recovered by Government and thus may be ignored. Government expenditure is therefore in the factor cost unit of account. Business costs and benefits are also assumed to be in the factor cost unit of account as businesses are free of indirect taxation because they can claim it back.”

The last sentence appears to be saying that the value of business time should be calculated on the basis of the resource cost, so the average salary cost should be increased by a mark-up of 21.2%, in accordance with paragraph 1.2.4 of WebTAG Unit 3.5.6 (see … with barely a ripple …). Fortunately we can test whether this assumption is correct, since the HS2 Ltd document QA77483 that I referred to in … with barely a ripple … tells us that the “appraisal value of time” to be used of £50.18 per hour is “equivalent to a salary of around £34/hour”. These two figures imply a mark-up of around 47%, so it is clearly not the resource cost that HS2 Ltd has used.

The use of the market price would, however, be consistent with the figures in QA77483, since the market price is the resource cost marked-up by a further 20.9%, in accordance with  paragraph 1.1.8 of WebTAG Unit 3.5.6 (again see … with barely a ripple …), giving a total mark-up of the salary cost of  46.5%. So it appears that HS2 Ltd has used the market price; the economists there obviously don’t agree with my interpretation of paragraph 1.1.7 of WebTAG Unit 3.5.6.

Let’s return to what Mr Gooding said to the House of Commons Public Accounts Committee (PAC), as I reported in … with barely a ripple …:

 “It is the cost to the business, so it is not a salary cost”.

If he had wanted to be more helpful, he could perhaps have told the PAC that, assuming that the figures in QA77483 are right, the salary cost that had been assumed was around £34 per hour, which equates to £1,275 for a week of 37.5 hours or £57,375 for a 45-week year.

So, on this basis, he was right. The salary level assumed is not as high as £70,000 per annum, but at knocking on £60,000 per annum it is still in a range that most employees can only dream of.

I think that the members of the Public Accounts Committee were right to raise an eyebrow at the salary figure assumed for the HS2 calculations; it is very hard to accept that a head check on the average train would yield anything like this average. So where on earth did HS2 Ltd come by what appears to be a very inflated figure?

It comes, of course, from of WebTAG Unit 3.5.6 and its derivation is explained in paragraph 1.2.5 on page 2:

“Values … were derived from the 1999 – 2001 National Travel Survey (NTS), based on individual incomes.”

Whilst salary levels taken from WebTAG Unit 3.5.6 and used in the HS2 calculations have been adjusted from 2002 to 2009 levels to account for inflation, the problem lies with the 1999 – 2001 NTS. The number and mix of business travellers has changed considerably since the NTS was compiled and more recent data would probably yield a much lower average salary level due to “dilution” by lower paid travellers.

In order to examine the impact that a suitable correction to average salary might have on BCR, Oxera, in its June 2011 report to the TSC that is reproduced as Annex 1 to the TSC’s November 2011 report to Parliament on High Speed Rail, assumed a reduction of one-third (paragraph 3.7 on page 65).

Based upon the yearly average salary that I calculated above using the hourly figure in QA77483, this one-third reduction brings the average business rail user salary down to circa £38k, which does not seem unreasonably low (unless of course you have a top-level management job at HS2 Ltd).

Oxera reports that this assumption reduces the BCR by approximately 0.3.

I should however point out that Oxera provides a fourth figure to add to the three different values for the value of time saved that I quoted in … with barely a ripple …; this figure can be found in paragraph 3.6 on page 65 of Annex 1 to Volume 1 of the TSC’s report and is £45 per hour “in 2009 prices”.

Oh what a tangled web we weave …

And, in case you hadn’t noticed it, we have found another legitimate reason to reduce the BCR by a substantial amount.

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3 responses to this post.

  1. Peter, I’ve recently discovered your entertaining blogs and hope you see this comment on an old one. You have rightly questioned the value of time saved but you have concentrated on the value to the business traveller. HS2L forecast that most of the additional passengers will be leisure passengers. This begs the question, “What is the value of time saving to the leisure traveller?” The answer I think is, much less than the value to the business traveller. This assumes of course that HS fares will not be higher than WCML fares. If they were, then leisure travellers would be likely to use the WCML, just as many travellers prefer to use London Midlands’ slow services to Virgin’s premium fare service.

    Reply

    • Welcome to the site Les; I am pleased that you have been interested enough to delve into the archives.

      I agree with your comment about leisure users probably preferring to use WCML, particularly if HS2 has a price premium (which of course it will, sure as eggs is eggs). The WebTAG document that I refer to in my blog “… disturbing the surface” (at http://www.dft.gov.uk/webtag/documents/expert/pdf/unit3.5.6.pdf) does give figures for the value of “non-working” time in Table 2 on page 5. These are 2002 values and are slightly less than £4 or slightly more than £4, depending upon whether “resource cost” or “market price” is used – in the blog I said that I thought that the former was appropriate, but that HS2 Ltd appeared to have used the latter. The table also treats time travelling by commuters as “non-working” time, but values it about 50p higher.

      The reason why I concentrated on business travellers in my blog is that this is where the vast majority of the value of time savings claimed by HS2 Ltd comes from.

      Reply

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