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.
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