Let’s be courageous, part 15

(… continued from Let’s be courageous, part 14, posted on 19 Oct 2016).

In the subsection Benefit/Cost Ratio conclusion in Section Two of his Taxpayer’s Alliance briefing paper, Rich man’s toy: The case for scrapping HS2, Policy Analyst Harry Fairhead refers to an independent calculation of the benefit-cost ratio (BCR) for HS2 Phase 1 that suggests that this “could be as low as just 0.5; this being at a time when HS2 Ltd was claiming 1.6 (see footnote 1).

Mr Fairhead is not surprised that examples can be found of “differences of opinion” between analysts, but sees such a large effect on the calculated BCR resulting from a different set of input assumptions as “indicative of the sensitivity of the forecasts to either optimism or pessimism”. He opines that, in the light of “scepticism of the assumptions made and the analysis done by government” it appears likely that “the BCR does not reflect the true facts of the matter”.

In written evidence submitted to the House of Lords Economic Affairs Committee (EAC), the Transport Studies Unit of the University of Oxford (TSU) describes the assessment of the BCR and wider economic impacts (WEI) as becoming “more contested and problematic”. The TSU notes that the BCR for the full HS2 network, without WEI, had been reduced from 2.2 to 1.8 over the “relatively short” time period February 2011 to October 2013, which the TSU attributes to being “particularly as a result of revised assumptions about economic growth and rail demand”. The TSU comments that this “sharp downward revision … indicates how the volatility of economic conditions and forecasts can have major impacts on the credibility of large infrastructure projects such as HS2”. It concludes that such volatility serves to “bring into doubt the suitability of BCRs as a guide to decision making” (see footnote 2).

Whilst the EAC report notes the TSU’s comments, it still declares that “cost-benefit analysis is an important discipline”. However, the EAC qualifies this assessment with the caveat that the “reliability of the method for quantifying the benefits of a project depends upon the quality of the evidence used in the analysis” (see footnote 3). Truism though this may appear, it is effectively a damning remark as far as HS2 is concerned, as elsewhere in the EAC report the judgement is made that the BCR assessment for HS2 “relies on evidence that is out-of-date and unconvincing” (see footnote 4).

The EAC appears enthusiastic about one application of cost-benefit analysis: its report declares it “the best tool for comparing several projects to see which provides the best value for money” (see footnote 3). Such a comparison would be helpful where there is more than one way that has been identified of achieving the objectives, or when trying to decide the most beneficial use of money when schemes are potentially competing for the same funding pot. Interestingly a BCR comparison of the “strategic alternatives” to HS2 identifies three that have superior BCRs to HS2 (see footnote 5), and you surely don’t have to look very far to compile a long list of ways to spend £50bn, or whatever the cost turns out to be, that will bring greater community benefits than HS2.

I can appreciate why the EAC would see BCR analysis as more valid when employed to compare contesting schemes, rather than to assess the absolute value for money of one particular scheme: if projects being compared are assessed using the same, or a broadly equivalent, set of assumptions and input parameters, then you might think that at least a level playing field is being created, even if some of the assumptions might be open to question. However, I feel that there is a danger that any set of assumptions employed could, unintentionally, cast a favourable light upon one project being assessed whilst disadvantaging another, so I don’t think that the BCR approach is necessarily totally safe, even in this restricted use.

Having observed the machinations involved in the BCR analysis of HS2 since it first saw the light of day in 2010, my view of the value of the process may best be summed up in the title of a blog that I posted in September 2012, A work of fiction.

To be fair the Department for Transport (DfT) does appear to recognise that what comes out when you turn the BCR handle is not necessarily totally kosher, admitting that the economic case “should not been seen as unequivocally providing the ‘right’ or only answer”. Also decision-makers will be presented with evidence against five cases by their civil service advisors – strategic, financial, commercial and management, as well as economic – when considering investment decisions such as HS2. Whilst “value for money is important” according to the DfT “it is only one factor that is taken into account when choosing whether or not to proceed” (see footnote 6).

(To be continued …)

Footnotes:

  1. See Table 1 in the report Review of the Economic Case for HS2: Economic evaluation London-West Midlands link, Castles C and Parish D, RAC Foundation, November 2011.
  2. See paragraph 3.3 in Transport Studies Unit, University of Oxford—Written evidence, on page 921 in Oral and Written Evidence, Select Committee on Economic Affairs, The Economic Case for HS2.
  3. See paragraph 366 in the report The Economics of High Speed 2, House of Lords Economic Affairs Committee, 1stReport of Session 2014-15, March 2015.
  4. See paragraph 10 in Our Main Conclusions and Recommendations on page 7 of The Economics of High Speed 2.
  5. See Table 5.3 in the report High Speed Rail Strategic Alternatives Study Update Following Consultation, Atkins/Department for Transport, January 2012.
  6. See paragraph 2.5 in the report HS2 Outline Business Case Economic Case, Department for Transport, March 2014.

 

 

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