HS2: the critics answered

29 October, 2013

With the publication of the Strategic Case for HS2, the Department of Transport has answered the criticisms and questions raised against the project. There is a sound business case for HS2. The result of a whole series of updates to key assumptions is a benefit cost ratio for the first phase of the project that is unchanged. The business case for the whole project (both phases) remains categorised as ‘high’. And as the Strategic Case also makes clear, this is with the continued use of cautious and conservative assumptions. So, what were the criticisms and how have they been answered?

The adverse comments that came through summer 2013 started with a critical National Audit Office (NAO) report in May (R1) which was followed by a Public Accounts Committee report in September (R2) and, not wishing to be left out, the Treasury Select Committee (R3) added its views a month later. And others with an axe to grind joined in the debate, mainly with comment and assertion rather than evidence on matters of substance.

Some of the questions – as those that raise them well know – are unanswerable at least for twenty years or so and then only with the benefit of hindsight. They are in the category: “how can we be sure…?” But others, which need to be and can be answered now, go to the heart of the decision-making process and are directed at the economic appraisal of HS2, and the case for proceeding.

The NAO Report raised five major concerns of this type. Its report said (in summary):

  1. The strategic reasons were not ‘well presented’ in the business case: the link between measuring benefits through time savings when the main objective is said to be adding capacity, it said, was unclear
  2. There was a lack of clarity about where and how much additional capacity is needed for the over-stretched West Coast Main Line
  3. It was unclear how HS2 would deliver the aim of ‘re-balancing’ economic growth
  4. The appraisal was using out of date assumptions and data
  5. There was a £3.3bn funding gap – arising in the government accounts in 2017/8-2020/1.

It also said that the Benefit Cost Ratio for Phase 1 was unlikely to stay unchanged. On this, the NAO’s speculation was wrong. It remains at 1.7:1. Taking the National Audit Office’s concerns in turn, the first has already been addressed in a report from DfT sent to the NAO on July 1st. (R4) This showed that the economic appraisal approach used was considered internationally to be a leading model of open documentation and that it had been subject to detailed scrutiny by an independent analytical challenge panel comprised of leading economists. The economic appraisal does not set out simply to measure the savings in journey times as is sometimes thought; the value of capacity is reflected in the appraisal through the additional demand that can be carried. (R5)

The second question was about the detail of the West Coast Main Line capacity short-comings. In the new Strategic Case, there is clear evidence on the demand and capacity situation for intercity and commuter travel at Manchester, Birmingham and London; an assessment of how long short/medium term measures such as further train lengthening can keep up with expected demand growth; a detailed description of the West Coast Main Line capacity constraints; and a listing of the services which cannot be fitted on to the West Coast Main line today because of these capacity constraints. As all of the previous studies have shown, at some point in the 2020s, even with every conceivable measure to squeeze out more capacity, the West Coast Main Line will be completely full.

The third question on re-balancing economic growth has been answered too. In a new study commissioned to examine this specific question, the evidence is absolutely clear: the northern and midland cities benefit more from HS2 than London. The fourth question concerned use of out-of-date assumptions and data. There has been an across-the-board review carried out over the last year to address this point. Cost estimates have been reviewed and so too have the critical value of time assumptions, which in the case of business travel have been significantly reduced. The new appraisal is fully up-to-date. The fifth question – on the funding gap – was closed in the Public Spending Review 2013.

The NAO report also suggested that results should be presented in terms of ranges rather than single values. The Strategic Case reflects this aspiration and has presented – along with central values – a probability-based range of benefit: cost ratio outcomes.

Turning to the Public Accounts Committee’s concerns, the report said that:

(i)    The Department had failed to present a strategic case for HS2

(ii)   There was no evidence that HS2 would help the growth of regional cities and instead would draw even more business to London

(iii)  The appraisal had used out-of-date assumptions that ignored the fact that people can work whilst travelling by train.

This led to the report’s conclusion that:

The Department should publish detailed evidence which clearly shows why it considers High Speed 2 to be the best option for increasing rail capacity into London, improving connectivity between regional cities and rebalancing the economy.”

Committee chair Margaret Hodge said that the money would be better spent on easing congestion on existing routes by introducing longer trains and building longer platforms.

Again taking these issues in turn, first there is the suggestion of a failure to present a strategic case. This no longer applies, following the publication of same on October 29th 2013. Second, the question of lack of evidence on the benefit of HS2 to regional cities – a copy of one of the NAO questions and the same answer applies: Government has commissioned the research and published the results which are very supportive of the strategic case for HS2. The cities of the Midlands and the North benefit more from HS2 than does London and the South. We are yet to see any research into HS2 that concludes the opposite.

Third is the question about using out-of-date assumptions (see answer to the NAO question above) with the specific point added on the need to explicitly take into account the ability to work while travelling by train. On this point, the Strategic Case describes a review of the research on this subject. The outcome is that the updated value of business time is significantly lower than that used in earlier appraisals. DfT has shown that the values now being applied are a suitable representation of businesses’ willingness-to-pay for quicker journeys allowing for the fact that people can work on trains.

The NAO’s conclusion calls for evidence on why HS2 is the best option. This is comprehensively dealt with in the Strategic Case. The comparison in the Strategic Case between alternative investment strategies centres on the questions that the Public Accounts Committee identifies as being the objectives of HS2 – the achievement of capacity and connectivity gains – both of which have an effect on the productivity of city region economies. The Strategic Case also covers questions of deliverability, and the important question of service reliability and network resilience.

On all of these questions, HS2 clearly out-performs the alternatives put up by objectors. These alternatives have evidently been treated seriously by DfT and developed much further to test the limits of what can be achieved through upgrade rather than new-build. The evidence that the PAC called for has been provided.

And with that evidence, the claim made by Committee chair Margaret Hodge that the money could be better spent on improving existing railways by lengthening trains disintegrates. The Strategic Case shows that lengthening all trains to their limit at Euston during peak hours would increase seating capacity by just 24%. This is helpful to deal with overcrowding, but in the context of the continuing annual growth in demand of around 5% over the last decade (including through the economic downturn), this will not get us very far.

Next up is the Treasury Select Committee report of 8th October 2013 which suggested that there were ‘serious shortcomings’ in the cost benefit appraisal for HS2, such that the project should only proceed if the Treasury itself were to explain the project’s benefits and to publish its own case for the project. This would be new territory for H M Treasury, which has established methods to keep a close eye on the work of spending departments, no doubt especially keenly in the case of HS2 because of its scale and impact. The Treasury Select Committee also proposed that the project should not be allowed to proceed unless the concerns raised by the NAO have been met. They have been.

While that covers the concerns raised through the formal channel of government scrutiny committees, there were also issues raised by others, for instance the Institute of Directors (IoD) and The Economist, during summer 2013. Have their questions been answered by the Strategic Case?

The IoD published a survey of its members on August 27th. While the sample size used in the survey was modest (below 5% of members), it is interesting in that the Strategic Case directly addresses some of the views held by IoD members. Thus when polled, 80% of IoD members felt that investment on existing services should be a priority. But as the Case makes clear, this would be fine if the challenge being faced was for only the next 5-10 years. Investment decisions on infrastructure which takes 10-15 years to bring to fruition and which lasts for many decades necessarily have to be taken on a longer term basis than that. And as the Strategic Case makes clear, HS2 can be regarded as a way to invest for the long term in existing services, many of which will be substantially improved using the capacity released by HS2.

The IoD also reported that every region it polled expected London to benefit the most from HS2. But as the new evidence in the Strategic Case shows, the impact of HS2 is least for London because the proportional effect on accessibility and connectivity is less than it is for all of the regional cities that HS2 will serve.

The Economist  has published several pieces on HS2, including in its issue of 17th September 2013 which argued that:

(i)    The data sources were flimsy and out-dated, being based on 1999-2001 evidence: this has been corrected using the latest available data

(ii)   Few studies had compared the project to alternative infrastructure projects. This is simply untrue. The Strategic Case lists the string of comparative studies that have been carried out starting in 2009 and adds the results of the latest work carried out in     2013 that looked at a whole new series of lower cost solutions. And there is also the published work carried out by Atkins et al in 2002-3 for the Strategic Rail Authority (R6) which compared high-speed rail with a whole series of alternatives – before concluding that high-speed rail performed best in benefit: cost terms. There has been ten years’ of studying the alternatives

(iii)  The new work by KPMG on the impact of HS2 on regional economies ignored the availability of developable land and a skilled work-force. True – and it was the KPMG report itself that pointed out this limitation. And most observers realise that transport on its own brings a worthwhile but narrow economic benefit, and that the full realisation of the value of HS2 (which there is no attempt to measure in the economic appraisal) requires complementary policies. (R7) Indeed, this is what the government’s Growth Task Force under the leadership of Lord Deighton is attempting to address. And in any event, there is no shortage of developable land in the cities of the Midlands and the North or ambition in the strategies of the Local Enterprise Partnerships that are tasked to drive growth. True the labour markets and skills-base have a well-known characteristic of drift to London but this serves to prove the point that shortage of skilled labour is greater in the south

(iv) Warns that places such as Wolverhampton and Wakefield would have slower services as a result of HS2. The Strategic Case makes clear a government commitment to ensure that all places with a direct London service can expect a broadly comparable service in future. The Case also illustrates the very wide set of service improvements that could follow HS2, including the introduction of services that simply can’t get on today’s network because of capacity constraints.

In summary, the criticisms have been answered by the new Strategic Case for HS2 released on 29th October 2013. What remains is the normal parliamentary arrangement to consider the detail of the first phase of HS2 through the hybrid bill process.

Note: a 2 minute film which succinctly summarises the case for HS2 has been developed – the film is embedded here: http://youtu.be/v1P9vBJ8LtQ

©Greengauge 21 October 2013

References

R1. National Audit Office HC124 HS2: A Review of early Programme Development, 16th May 2013

R2. Public Accounts Committee, 22nd Report HS2: A Review of Early Programme Preparation 9th September  2013

R3. Treasury Select Committee HC 575 Spending Round 8th October 2013

R4. HS2 Modelling and Appraisal: a Statement to the Chair of the Public Accounts Committee from the chair of the Joint Analytical Group, 1st July 2013

R5. The use of journey times in transport economic appraisal is much misunderstood. The importance of journey times as a measure stems from applying one of the central concepts in economics, the notion of a demand curve. Demand for transport is a derived demand; travel is not regarded as being of value on itself, but takes place when the cost of travelling remains lower for the trip in question  than the value of the activities it makes possible (the utility of the trip). The cost of travelling (classed as the disutility of the trip) is a combination of out-of-pocket expenses (on fares, for example) and the amount of time consumed by making the journey. Using evidence (and there is plenty of it) on the value individuals place in money terms on the time they spend travelling (the value of time) allows the estimation of the generalised cost of travel (the time and money costs added together). The difference between the utility of the trip and its disutility, measured as generalised cost, is a measure of consumer surplus. The question that is addressed in economic appraisal is the overall change in consumer surpluses that arise when a transport system is changed – in this case through the addition of HS2 – with the associated assumption that everything else (apart from consequential changes to the existing rail network) remains unaltered. The net change in the consumer surpluses comes from a combination of additional rail demand (reflecting the capacity increase) and the lower generalised costs of travel (faster journeys). This is the measure of value to the economy at large used in the benefit cost appraisal.

R6. High-speed line study: summary report, Atkins et al 2003 available on the DfT website

R7. See Greengauge 21 Complementary Measures to facilitate regional economic benefits from high-speed rail 15 June 2009 (available to download at www.greengauge21.net