Let’s be courageous, part 13

(… continued from Let’s be courageous, part 12, posted on 11 Oct 2016).

The proposition upon which the HS2 business case is predicated is that the number of passengers making long-distance trips on the rail network will be greater if HS2 is built than the “Do minimum” scenario predicts otherwise. Two mechanisms have been identified that drive this increase in demand (see footnote 1).

The first is that the comfort and journey time savings offered by HS2 will successfully lure air and car travellers out of the air and off the roads and onto the train. The predictions for this “modal shift” are relatively modest, at 1 per cent of HS2 passengers transferring from air and 4 per cent from car to HS2 (see footnote 2): I suppose that these low expectations are the result of the heritage rail network already commanding a generous share of the total travel market for many of the city to city journeys offered by HS2 – I, for one, wouldn’t give any consideration to using my car to travel to central London; it has to be the train every time.

The second is the expectation that HS2 will attract “new trips”. I have failed to find an explanation of any kind of what journeys this term encompasses, but take it to mean journeys made by travellers on HS2 that would not have been made by any means had the HS2 option not been available. Such journeys could be made, presumably, by genuinely “new” travellers, or could be the result of additional journeys being made by travellers on a route that they already use on occasion. To this extent “new trips” may be regarded as passenger demand stimulated by the drawing power of HS2 that is in addition to the total travel by all modes that is predicted by the “Do minimum” scenario.

The HS2 prediction is that “new trips” will contribute 26 per cent of the total passenger demand for the HS2 service (see footnote 2). Transport Watch, in written evidence to the House of Lords Economic Affairs Committee (EAC), translates this percentage to “76,000 new passengers-journeys per day”, which corresponds, according to that organisation, to “roughly 22.8 million per year” (see footnote 3). This sounds a lot of trips, but Transport Watch has calculated it to be equivalent to 1.5 per cent of all surface-rail journeys and 0.05 per cent of all passenger journeys by any means. Transport Watch clearly regards this as an insignificant portion, since it has used the fact to dispute the claim that the economic effects of people using HS2 will be “transformational” (see footnote 4).

Notwithstanding, whether you regard the predicted “new trips” that HS2 will generate as significant or a mere flea bite in the greater scheme of things, the claimed level of trip generation surely requires justification, and I have been unable to find any.

If the additional travel demand that is predicted to be generated by HS2 is added into the “Do minimum” demand “curve”, then the resultant prediction is termed the “Do something” demand curve or, as it has also been referred to more accurately as the “with scheme” or “with HS2 scenario” prediction. The HS2 documentation tells us that the difference between the two demand curves “tells us the impact that HS2 will have” (see footnote 5).

Of course, HS2 will only capture a proportion of the total long-distance train trips predicted by the “Do something” forecasts: the heritage network will still be the only rail choice offered to passengers for routes not served by HS2 and, even if HS2 is an option for their journey, some passengers will chose to opt for the heritage service. The verdict of the EAC is that “neither the Economic Case nor the supporting documentation published contains the number of passengers the model assumes will use HS2” (see footnote 6), and my own researches have led me to the same surprising conclusion.

What we do know for sure, because the EAC has confirmed it, is that the model “assumes that fares on HS2 are the same as on the existing railway”. This has been cited by those promoting HS2 as proof positive that the operator of HS2 will not seek to charge a premium for the service improvement that it will bring. Like so much pro-HS2 propaganda, this is nonsense: the EAC tells us that the computer model employed for the HS2 business case analysis is “unable to model the effect on demand for HS2 if there are differential fares” (see footnote 6).

The EAC report devotes eleven paragraphs (see footnote 7) to examining the likely level of fares for HS2 services compared with those levied by the existing network. Whilst the operator will not want to set fare levels so high as to discourage travellers and condemn him to running trains with countless empty seats, it would be irresponsible with taxpayers money not to charge fares that will maximise revenues, and these may well be above those charged for the same journey on the heritage network. After all, a benefit assessment methodology that regards willingness to pay as a reasonable measure of the value of travel time savings should also recognise that travellers will be prepared to pay a premium for some of that benefit, at least, with higher fares; a point that was not lost on Stop HS2’s Joe Rukin when he gave oral evidence to the EAC (see footnote 8).

It is not unknown in the commercial world for the introduction of a new, and possibly better, service that competes with an established service to stimulate those offering that existing service to react competitively, usually by a price reduction but other inducements, such as service improvements, may be included in the package on offer. This is certainly what happened to cross-channel services when the channel tunnel link was introduced (see footnote 9). This possibility is discussed in the EAC report, where it is opined that the degree to which competitive forces might operate after HS2 opens for service will be determined by the franchising model (see footnote 10). It would be quite possible for the government of the day to use the franchising regime to stifle competition from the operators of the heritage rail routes and give HS2 a very fair wind. I hope that the temptation to do this will be resisted by that government and that, as far as possible, free-market forces will be allowed to operate, since they generally work to the advantage of the service user (see footnote 11).

It is obvious from the discussion in the EAC report that there is a strong link between the fare levels that the HS2 service operator will be able to sustain, the strength of the competition from other transport services and the level of demand for HS2 services. Despite this, the HS2 business model appears to have put HS2 in a bubble where it will not be subject to market forces. The verdict of the EAC is that this is not good enough (see footnote 12):

“The Government should undertake further modelling of the effect of charging premium fares for HS2 services and the effect of competition from other operators on demand forecasts for the new high speed railway.”

(To be continued …)

Footnotes:

1. See paragraph 2.2.4 in the publication PLANET framework model (PFM v4.3) Model description, HS2 Ltd/Department for Transport, October 2013.
2. The predictions have varied over time. I believe that the percentages I have quoted are the most recent iterations. These figures may be found in Table 12 in the publication The Economic Case for HS2, HS2 Ltd/Department for Transport, October 2013.
3. See Transport Watch—Written evidence, paragraph (3) on page 925 in the Oral and Written Evidence, Select Committee on Economic Affairs, The Economic Case for HS2. The evidence cites “FoI request 13-873” as the source of the daily trips figure; this document appears to have disappeared into the mists of time.
4. See The HS2 disaster: a summary for MPs, Transport Watch, December 2015, and footnote [1] thereto, in particular.
5. See paragraph 1.1.3 in The Economic Case for HS2.
6. See paragraph 111 in the report The Economics of High Speed 2, House of Lords Economic Affairs Committee, 1^stReport of Session 2014-15, March 2015.
7. Paragraphs 118 to 128 in The Economics of High Speed 2.
8. See under Q79 on page 457 (Evidence Session 7, Tuesday 4^thNovember 2014) in the Lords EAC Oral and Written Evidence. The EAC noted Mr Rukin’s remark in paragraph 123 in The Economics of High Speed 2. What Mr Rukin said is “the ridiculous thing is that [HS2 Ltd] are saying that people will be willing to pay for quicker journeys but base it on the idea that the costs of tickets will be exactly the same as the current ones”.
9. For an example see the newspaper article Eurotunnel sparks summer ferry fare war, Daily Mail, 17^thMay 2017.
10. See paragraph 125 in The Economics of High Speed 2.
11. However, this view is not universally held. See, for example 20 Miles More—Written evidence, paragraphs 7.1 and 7.2 in the Lords EAC Oral and Written Evidence.
12. See paragraph 128 in The Economics of High Speed 2.