Let’s be courageous, part 11

(… continued from Let’s be courageous, part 10, posted on 3 Oct 2016).

As a part of its inquiry The Economics of High Speed 2, the House of Lords Economic Affairs Committee (EAC) took oral evidence from a number of eminent transport economists and heard their views on the appropriateness of the initial passenger demand growth rate that had been assumed for the “Do Minimum” case:

  • Professor Tony Venables CBE told the Committee that “2.2% per annum … does not seem to me to be grossly inflated at all” (see footnote 1)
  • Professor Chris Nash said that the “best estimate is that the sort of growth that we have had in the last 20 years will continue” (see footnote 2)
  • Professor Peter Mackie advised that he did not find the assumption “completely outside the plausible ballpark” (see footnote 3)
  • Professor Dan Graham was more ambivalent, saying “you could construct an argument to say it is too high, you could construct one to say it is too low”, but that he did “not think 2.2% seems outrageous”. He did add, however, that the experience in France had been that “demand forecasts were always too high and cost forecasts were always too low, pretty much systematically” (see footnote 4)
  • Professor Stephen Glaister CBE thought that the [2.2%] forecast does not look unreasonable”, but added that he could not say “whether it is the best estimate” (see footnote 5)

Written evidence from the HS2 Action Alliance (HS2AA), well supported by reasoned argument, takes a contrary view to these academics (see footnote 6). HS2AA has also identified putative flaws in the Passenger Demand Forecasting Handbook model, which lies behind the Do Minimum” forecast, and points out that the Department for Transport’s own alternative tool, the National Transport Model, indicates that the UK domestic travel market is saturated (see footnote 7).

As we are consistently warned “past performance is not necessarily an indicator of future results”, and with long-distance rail passenger demand it is not even clear what past performance can tell us. As I reported towards the end of part 10, the recorded growth rate for individual years over the period 2002/03 to 2013/14 has varied widely, and what yearly growth rates since then have to tell us is also far from clear. Joe Rukin of Stop HS2 told the Committee that “growth in long-distance travel has completely bottomed out over the last four years”, that it has “been on a consistent decline” and “is now under 1%” (see footnote 8). The EAC Report, however, offers the “latest quarterly figures”; these, according to the EAC, “show an increase in growth for franchised long-distance rail journeys” (see footnote 9).

After a characteristically thorough review of the evidence, the EAC Report concludes that it is “difficult to assess the plausibility of the Department [of Transport]’s forecasts of future demand for long-distance rail travel” (see footnote 10).

Interesting as this debate about expected growth in passenger demand is, it is not the issue that Taxpayer’s Alliance Policy Analyst Harry Fairhead has in his sights in the Forecasting demand subsection of Section Two of his briefing paper, Rich man’s toy: The case for scrapping HS2. No, it is the position of the “zero-growth” section of the simplified demand “curve” that concerns Mr Fairhead. In order to explain the relevance of his concerns I need to refer back to the diagram that I introduced in part 10, and so I have reproduced it again below.

Source: HS2 Ltd (see footnote 11)

Source: HS2 Ltd (see footnote 11)

I explained in part 10 that the horizontal section at the right-hand side of the simplified demand curve defined by the black line represents, in a very rudimentary way the region of saturated demand. I also explained that the area contained under the acute angle subtended by the two black lines represents the total demand for long-distance rail services over a chosen time period.

The horizontal section of the simplified demand curve is referred to in the HS2 documentation as the “demand cap” (see footnote 12). Looking at this diagram, it appears to me that the total demand will possibly be influenced more by the positioning of the demand cap than by the angle of slope of the left-hand portion of the figure (which reflects the assumed demand growth rate). Perhaps then, Mr Fairhead is right to zoom in on this particular aspect of the demand assumptions that have been made, but an examination of that will have to wait until my next posting.

(To be continued …)

Footnotes:

  1. Professor Venables is BP Professor of Economics, University of Oxford. For the context of his comment see under Q21 on page 320 (Evidence Session 2, Tuesday 14thOctober 2014), Oral and Written Evidence, Select Committee on Economic Affairs, The Economic Case for HS2.
  2. Professor Nash is Research Professor at the Institute for Transport Studies, University of Leeds. For the context of his comment see under Q101 on page 712 (Evidence Session 9, Tuesday 11thNovember 2014) in the Lords EAC Oral and Written Evidence.
  3. Professor Mackie is Professor Emeritus at the Institute for Transport Studies, University of Leeds. For the context of his comment see under Q4 on page 666 (Evidence Session 1, Tuesday 14thOctober 2014) in the Lords EAC Oral and Written Evidence.
  4. Professor Graham is Professor of Statistical Modelling and Research Director of the Railway and Transport Strategy Centre at Imperial College. For the context of his comments see under Q21 on page 320 (Evidence Session 2, Tuesday 14thOctober 2014) in the Lords EAC Oral and Written Evidence.
  5. Professor Glaister is Professor of Transport and Infrastructure and director of the Railway and Transport Strategy Centre at Imperial College. He is also the director of the RAC Foundation. For the context of his comments see under Q45 on page 304 (Evidence Session 4, Tuesday 21stOctober 2014) in the Lords EAC Oral and Written Evidence.
  6. See paragraphs 53 to 62 of HS2 Action Alliance—Written evidence on pages 439 to 442 in the Lords EAC Oral and Written Evidence.
  7. See HS2 Action Alliance—Supplementary written evidence on pages 500 to 501 in the Lords EAC Oral and Written Evidence.
  8. For the context of Mr Rukin’s comment see under Q80 on page 459 (Evidence Session 7, Tuesday 4thNovember 2014) in the Lords EAC Oral and Written Evidence.
  9. See paragraph 95 in the report The Economics of High Speed 2, House of Lords Economic Affairs Committee, 1stReport of Session 2014-15, March 2015.
  10. See paragraph 109 in The Economics of High Speed 2.
  11. The diagram is Figure 14 in the publication The Economic Case for HS2, HS2 Ltd/Department for Transport, October 2013.
  12. See section 5.4 in The Economic Case for HS2.
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