Let’s be courageous, part 6

(… continued from Let’s be courageous, part 5, posted on 28 Aug 2016).

In my previous posting I reported that Policy Analyst Harry Fairhead had, under the subheading The Benefit-Cost Ratio, in Section Two of his Taxpayer’s Alliance briefing paper, Rich man’s toy: The case for scrapping HS2, made the comparison between the latest BCR estimate for HS2 Phase 1 of 1.7, including wider economic benefits (WEI), and similar estimates for three strategic alternatives to HS2, which were all in the BCR range 3 to 6 (about), including WEI.

In its March 2015 report on HS2, the House of Lords Economic Affairs Committee (EAC) attempted to place the value for money expectations for HS2 in the wider context of government spending on transportation projects. The EAC quotes one of the witnesses that gave it evidence, Professor Henry Overman Professor of Economic Geography at the London School of Economics, as finding it “surprising that we refer to projects as medium value for money when they are probably in the bottom 10%, say, of transport projects that we have on the books as doable” (see footnote 1).

The truth of the professor’s observation is demonstrated by data provided to the EAC by the DfT, which is summarised in a table provided in the EAC’s report and reproduced below.

Source: Lords Economic Affaits Committee (see footnote 2)

Source: Lords Economic Affaits Committee (see footnote 2)

It appears from this table that none of the DfT’s spend in the years 2011 and 2012 went on projects rated lower than high value for money, and in 2013 a mere 6% of spend was for projects rated medium value for money. The figures in the tabulation give a strong indication that projects like HS2 that hover, at very best, around a BCR of 2 to 2.5 will rate within the lowest decile of value for money across the range of projects that have received DfT funding in recent years.

In a letter to the EAC, David Prout, Director-General of HS2 Group at the DfT, chose to place a different slant upon the data in the tabulation, claiming that the value for money category into which HS2 falls is the same as for “the majority of transport spending by DfT over the past three years”.

Since the table gives some support to both Professor Overman’s and Mr Prout’s interpretations, the EAC asked the Secretary of State for a further breakdown of the “high” category into the two value for money ranges 2.0-3.0 and 3.0-4.0. In its report, the EAC expresses surprise that the SoS was unable to furnish this information, commenting that “while the [DfT] is able to provide a breakdown between projects of low value for money (1.0–1.5) and medium value for money (1.5–2.0), it is apparently unable to distinguish between projects with a value for money of 2.0–3.0 and 3.0–4.0”. Apparently feeling that there may be a degree of convenience associated with this inability to satisfy its request, the EAC adds the speculation that the inability, or perhaps unwillingness, to break the high value for money category down further may be “because the majority of projects in the 2.0–4.0 range (80 per cent of all projects in 2013) were, unlike HS2, in the 3.0–4.0 range” (see footnote 3).

Under the subheading Criticism of government BCR assumptions Mr Fairhead examines the familiar ground of the criticisms that have been levied against the values utilised by the DfT to ascribe a monetary value to transport user benefits. These have been calculated on the basis of a set amount for each passenger hour saved by using HS2. Three different values of time have been employed: one for user travel undertaken during the course of work (business travel); one for workers travelling to and from their normal employment location (commuters); and, one for those travelling for leisure purposes.

Mr Fairhead concentrates his attention on the benefits that have been calculated as accruing from time savings for business travellers, which is justified by his claim that around one half of the total transport user benefits result from this single mechanism (see footnote 4). As I mentioned in part 4 of this blog series, Mr Fairhead feels that the monetary value of the benefit to business travellers from the travel time savings that HS2 will offer has been overvalued and cites two “inherent flaws” in the assumptions that have been made:

  • That it is “a questionable assumption that passengers are not productive while travelling”
  • That the DfT has assumed that “journey time saved is time that would now be spent in the workplace”, whereas it is likely that workers will utilise time saved for leisure.

Similar criticisms of the assumptions behind the value utilised for the per-passenger hourly benefit gained by business travellers from a shorter journey time have come from a number of quarters and, over the life of the HS2 project, the DfT has moved some way towards addressing these, but this topic will have to wait until my next posting.

(To be continued …)

Footnotes:

  1. See paragraph 352 in the report The Economics of High Speed 2, House of Lords Economic Affairs Committee, 1st Report of Session 2014-15, March 2015. The original comment is recorded under Q49 in the Revised transcript of evidence taken before the Select Committee on Economic Affairs Inquiry on The Economic Case for HS2, Tuesday 28thOctober 2014.
  2. The tabulation is Table 22 in The Economics of High Speed 2.
  3. See paragraph 355 in The Economics of High Speed 2.
  4. Mr Fairhead’s source is Table 15 in Appendix 6 to the publication The Economic Case for HS2, HS2 Ltd/Department for Transport, October 2013. Examination of this tabulation indicates that total transport user benefits are predicted to be £59.8bn, of which £40.5bn accrues from savings by business travellers. This indicates that Mr Fairhead has erroneously underestimated the importance of business travel to the HS2 business case, as it actually accounts for around two-thirds of the claimed benefits.

 

 

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