Let’s be courageous, part 7

(… continued from Let’s be courageous, part 6, posted on 1 Sep 2016).

My previous posting promised that I would delve into the assumptions behind the value set for the per-passenger hourly benefit gained by business travellers from a shorter journey time that has been utilised in the benefit cost ratio (BCR) calculation– this value being a choice that has attracted much criticism. It should be appreciated however that this question goes beyond the HS2 project since, although the estimate of the number of passenger hours travel time that HS2 will save is a project-specific calculation, the value of each passenger hour is standardised across all transportation projects by the WebTAG guidelines.

This standard rate has been worked out using the “cost saving approach”, a process that the House of Lords Economic Affairs Committee explain (see footnote 1):

“It calculates the value of working travel time by adding the gross wage to non-wage labour costs. The gross wage rate is calculated for rail passengers using evidence from the National Travel Survey. A percentage increase is then applied to reflect non-wage labour costs such as national insurance and pensions contributions.”

The WebTAG guideline value for an hour saved of businessman’s time that was utilised for the original (2011) presentation of the HS2 business case was £47.18, based upon 2010 values (see footnote 2). One critic has calculated that, if the 24.1% mark-up that has been applied to account for non-wage costs is excluded, this equates to an average annual salary level for business rail travellers of about £70,000 in 2009 values (see footnote 3). That critic remarked that an average of £70k annual salary “does appear high” and I think that most observers at the time thought this to be the case. The problem seems to have been one of failing to keep up with the reducing elitism of business travel. The value was derived from “2002 earnings data applied to 1999-2001 National Travel Survey data” (see footnote 4) and, accordingly, reflected the situation as it had been more than ten years previously. Our critic opined that “it is unlikely that this high average income will be sustained in real terms over time” – indeed it is unlikely that it applied even in 2011 when the HS2 business case was first published – and that “if the market [for rail business travel] is to grow at the rate forecast, the composition of rail business travellers will be diluted by more people at the lower end of the income range and the average income of the group will gradually move towards mean income levels for business travellers by all modes” (see footnote 5).

This putative overvaluing of business rail users’ time, added to the overestimating of the productive value of the time saved due to questionable assumptions I identified in part 6, that journey time saved is used in the workplace, rather than for leisure, and that business passengers are not productive while travelling, combine to make the original calculation of business user benefits extremely dubious, to say the least. Confirmation that the DfT acknowledged the criticisms that had been levied at its methodology was provided in 2012, but the Department justified its assumptions as “a necessary simplification in the absence of robust evidence to underpin a more sophisticated approach” (see footnote 6). An indication that the DfT was at least considering an alternative approach came in 2013, with the publication of a report commissioned by the Department from the Institute for Transport Studies (ITS) at the University of Leeds reviewing the evidence for valuing working time travel savings.

The authors of the ITS report make clear that it is not their purpose “to provide a recommended approach to valuation but rather to provide an authoritative evidence base to allow the Department to make informed judgements as to the best way forward in the valuation of travel time savings for business travellers” (see footnote 7).

The report compares the pros and cons of the cost saving approach that had been employed for the HS2 business case analysis with two alternative methods: the Hensher approach, which the ITS characterises as providing “a conceptual framework for capturing a range of additional factors that might influence the value of business travel time savings to employers and employees”; and the willingness to pay (WTP) approach, which the ITS advises “could either be based on observations of actual behaviour (a ‘revealed-preference’ approach) or hypothetical choices (a ‘stated preference’ approach)”. The ITS cautions that the Hensher approach “has been widely examined but seldom implemented due to the difficulties and uncertainties involved”, but regards WTP as “relatively straightforward to implement” (see footnote 8).

Helpfully, the ITS report identifies nine different options from which the DfT was invited to select a way forward. The first two of these options, “do nothing” and “do minimum”, both retain the cost saving approach, whereas the other seven options all require a change to one of the two alternative approaches, or to a combination of approaches (see footnote 9).

An examination of what the DfT actually chose to do when it reviewed the HS2 business case in 2013 will be the subject of my next posting.

(To be continued …)

Footnotes:

  1. See paragraph 380 in the report The Economics of High Speed 2, House of Lords Economic Affairs Committee, 1st Report of Session 2014-15, March 2015.
  2. See Table 3 on page 43 of the publication The Economic Case for HS2, HS2 Ltd/Department for Transport, October 2013.
  3. See the second paragraph of the subsection The value of working time on trains on page 34 of the report Review of the Economic Case for HS2, Castles C and Parish D, RAC Foundation, November 2011.
  4. See paragraph 3.6 in the report Review of the Government’s case for a High Speed Rail programme, Oxera for the House of Commons Transport Select Committee, June 2011.
  5. See the third paragraph of the subsection The value of working time on trains on page 34 of Review of the Economic Case for HS2.
  6. See page 8 of the paper Review of the value of time assumptions for business travellers on HS2, Department for Transport Strategy Unit, April 2012.
  7. See subsection 1.1 in the report Valuation of travel time savings for business travellers, Wardman M, et al, Institute for Transport Studies, April 2013.
  8. The quotes from the ITS authors are all to be found on page 7 of Valuation of travel time savings for business travellers. Overviews of the three approaches may be found in subsection 2.4.1 of the ITS report.
  9. For an explanation and discussion of the nine options suggested refer to Chapter 5 of Valuation of travel time savings for business travellers.
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2 responses to this post.

  1. Posted by LesF on September 5, 2016 at 10:03 am

    Thanks Peter for your thorough study. The 2013 Leeds Uni study says that further research is needed. Some of the data in it was out of date when it was published.
    You mention that employee costs include NI and pension contributions, as does the Leeds study, but nowhere have I found mention of two of the major elements of employee cost, office space and management. If a manager is responsible for 6 employees then each employee should be allocated a sixth of the cost of their manager, and the manager will also share costs of his superiors right up to director level. What’s needed is a study of the total cost of an employee, broken down into all its elements. It may be these additional costs that resulted in the £70,000 annual valuation of an employee’s costs.
    While we debate the fine points of the value of travel time savings, there’s the bigger question of the impact of self-driving cars and the prospect of them becoming mobile offices. Should we embark on a destructive £60bn rail project when these questions remain unanswered?

    Reply

    • I fear Les that you are rather drifting into territory that I have yet to cover in upcoming parts. So, for example, in part 8 I will report that the DfT reduced the business travel time value from £47.18 to £31.96 when the HS2 business case was revised in October 2013, so there’s probably not much point in debating the reliability of the £70k estimate. However, I would make two points in response to your comments. The first is that the mark-up of 24.1% used by the RAC Foundation to discount the £47.18 business travel time value to arrive at an hourly salary rate is, as I understand it, the DfT’s own figure. The second is that the travel time saving should surely be arrived at as a marginal costing, since it is employee’s time that is being valued rather than saving “whole” numbers of employees.
      You are right to say that the ITS report recommended further work and the DfT has been seeking opinions and commissioning work on this topic ever since. Written evidence from Philip Rutnam, DfT Permanent Secretary, to the Commons Transport Select Committee in December last year (http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/public-accounts-committee/sale-of-eurostar/written/25692.pdf) promised that revised WebTAG guidelines would be published in May 2016, although I have not been able to find any record of a new version. Correction I have now located the update, which was published 28 July 2016.
      Again, in mentioning self-driving cars you are jumping ahead of me. The possibility that autonomous vehicles “may undermine demand for HS2 and reduce ticket sale revenues” is covered by Harry Fairhead in his briefing paper, and is therefore be a topic that I plan to cover also.

      Reply

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