A great reckoning …

According to Touchstone, “a great reckoning in a little room” could be a cause of death. It is believed that Shakespeare was referring to the death of Christopher Marlowe in a tavern brawl. In my view, “reckoning” should also be the cause of death for the HS2 proposal, because on any independent reckoning the Benefit Cost Ratio (BCR) will be below the critical threshold of 1.

Following the publication last month of the HS2 Ltd document Updated Economic Case for HS2, which I discussed in my blog A work of fiction (posted 8 Sep 2012), the official BCR for Phase 1, without wider economic impacts (WEIs), stands at 1.4. I think that it is fair to say that I expressed some scepticism in that blog about the reliability of that assessment.

So how can we draw up a more accurate “reckoning” for the HS2 economic case? If we start with Phase 1 and the current official BCR of 1.4, we can then take account of the other factors that HS2 Ltd has chosen to ignore or undervalue and adjust the BCR accordingly. Conveniently, this work has already been done by the HS2 Action Alliance (HS2AA) and summarised in a table that appears in the August 2012 version of HS2AA’s document Why the business case is flawed and HS2 is not in the national interest (here), which I have reproduced below.

(Source: HS2 Action Alliance)

This table identifies five factors which have effects on the BCR calculation.

The first of these is “latest demand (PDFHv5.0) model”. I mentioned this is my blog … and round the bend … (posted 15 Aug 2012); the issue is that HS2 Ltd is not employing the latest version of the rail industry standard Passenger Demand Forecasting Handbook for the HS2 passenger demand forecasts that it is employing to calculate the BCR. I said in that blog that this seems inexplicable, as the latest version of this handbook (v5.0) was published as long ago as August 2009.

The accuracy and appropriateness of the demand models used by the rail industry is under ongoing review and, occasionally, proposals to change aspects of the models are agreed and implemented by the adoption of a revised version of the Handbook. Why then would HS2 Ltd choose to employ an out of date version?

According to HS2AA, the version of the demand model currently employed by HS2 Ltd “overestimates long distance rail growth” and there is “compelling evidence that the basis is discredited”. Herein lies the probable answer to my question; it is a device employed by a modern-day Christopher Tietjens to “produce a more congenial result” (see my blog A work of fiction, which was posted on 8 Sep 2012). In fact, the HS2AA estimate is that refusing to adopt version 5.0 has made the BCR an appreciable 0.4 more congenial.

The second factor in the HS2AA table is “assuming time not wasted on trains”. I have dealt with this subject at length in my blogs … and out to sea … (posted 23 Aug 2012), … to sink without trace … (posted 27 Aug 2012), … with barely a ripple … (posted 31 Aug 2012) and … disturbing the surface (posted 4 Sep 2012). In my blog … and out to sea … I calculate that replacing the current assumption that all time on trains is wasted by the recommendation made by the SPURT reports would reduce the BCR by between 0.2 and 0.25. In the table above, HS2AA identify this correction as 0.3; broadly similar to my figure, but knowing HS2AA’s work, probably more accurately derived than my figure.

Now I cannot for the life of me see how any independent and fair-minded person would be able to deny that HS2 Ltd is totally wrong to refuse to make these two corrections. It is easy to see why they do not want to – these two items alone halve the Phase 1 BCR from 1.4 to 0.7 and crash it below the critical threshold of 1 – but that does not make it right.

This is not the end of it however, because there are three more factors in the HS2AA table which further reduce the BCR.

Factors three and four are matters which I have not covered in my blogs.

Factor three is identified in the HS2AA table as “incorrect use of 41% optimisation bias”. This is explained in footnote 17 to Why the business case is flawed and HS2 is not in the national interest and the effect, according to HS2AA, is to reduce the BCR by 0.07.

Factor four is “underestimate in PM/prelim costs”. This refers to an item which was identified by the Department for Transport (DfT) in its own peer review of HS2 Ltd’s own cost estimates, and reported in paragraphs 7.3 and 7.4 on page 15 of the January 2012 document The Economic Case for HS2: Value for Money Statement. Paragraph 7.3 explains:

“… there are a small number of residual points where we believe that it could be appropriate to make an additional allowance for cost risk. This additional risk relates to items where the DfT’s review noted that the percentage allowances proposed by HS2 are lower than those currently being experienced by other existing major rail projects including Thameslink, Crossrail and King’s Cross.”

In paragraph 7.4 these items are identified as “project management, preliminaries and site supervision and design” and we are told that the impact on the BCR is to reduce it by approximately 0.05.

The final item in the table is “updated businessmen’s earnings”. I discussed this matter, generally, in my blog … disturbing the surface (posted 4 Sep 2012); the item in the table relates particularly to the error introduced by the use of data from the outdated 1999 – 2001 National Travel Survey. In my blog I reported that the consultants to the Commons Transport Select Committee, Oxera, had identified that this item reduces the BCR by approximately 0.3. In order to avoid double counting with the effects of the second factor in its table, HS2AA has reduced this to 0.15.

So the “great reckoning”, according to the HS2AA, is that the BCR for Phase 1 is not 1.4, but 0.43 – well below the threshold of 1 set by Philip Hammond.

HS2AA has been kind enough to make a similar calculation for Phase 2; here the BCR falls from 1.9 to 0.9 – still below the “Hammond threshold”, you will observe.

PS: The HS2AA document Why the business case is flawed and HS2 is not in the national interest is regularly updated and you may find a more recent version here.

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