Mark Hansford, the New Civil Engineer’s new editor, writes on 20^th Feb that “The effect of postponing HS2 on our future prosperity would be crippling”.

HS2 is to cost £50bn including the trains but not the connecting infrastructure. The latter may inflate the cost to £80bn. The financial loss to the nation will be similar or larger if the extraordinary passenger forecasts do not arise. How crippling will that be?

HS2 is said to generates some 76,000 passengers per day, (FoI request), corresponding to roughly 22.8 million per year. It is only those which can be “transformational”, since all the rest exist already. In contrast there are currently 1.5 billion passenger journeys per year by surface rail, and 43.5bn passenger journeys by all modes. Hence, HS2’s supposed generated traffic amounts to 1.5% of all surface rail journeys and to 0.05%, or one in 2,000, of all passenger journeys. Transformational? Ha, Ha.

HS2 Ltd say the proposal will generate 100,000 jobs. Others say most of those will be relocations. Whatever the case, the £80bn and 100,000 implies each job (if it exists) will have cost £800,000. How many would that destroy in that part of the economy which actually makes a profit? Crippling again if you ask me.

Perhaps it is because of comment such as Mark Hansford’s that engineers have such low status.

Paul Withrington

The data and calculations below show that (a) the lower values of time coupled with (b) the lower total HS2 trips, in the 2013 study should reduce user benefits by about 35%. Instead the new study pretends to an increase of 24%, which is astonishing, if not entirely unbelievable.

Likewise the effect of the £10bn added construction costs seems far below the expected.

(1) Trips using HS2:

In 2012 we had 380,000 per 16 hour week day (i).  In 2013 that had fallen to 301,140 , a 21% reduction (ii) . A reasonable presumption is that this reduction would reduce the user benefits by 20%.

(2) Values of time – from table 3 of the October 2013 report we have:

Travel Purpose    Old Values of Time    New Values of Time    % change
Business                     £47.18                      £31.96                      -32.26
Commuting                 £6.46                        £6.81                        +5.41
Leisure                        £5.71                        £6.04                        +5.78

The lower bound benefits from the 2012 study, see table below, are £28.8bn from business users and £15.3bn from the rest, mostly leisure. Hence the expected effect of the changes in time values would be to reduce business user benefits by £9.3bn and to increase the other user benefits by approximately 0.86bn providing a net reduction of £8.4bn. That would reduce the net transport user benefits (range £41.4bn to £46.9bn, mid value £44.1bn) by about 20%.

The effect, coupled with the loss from (1) above, implies an overall reduction in user benefits of circa 35%. Instead there is an increase from the mid-range value of £44.1bn to 54.8bn, or 24%, for heavens sake.

(3) Generated or New Trips

In 2012 24% of trips were new (iii) providing 91,200 (e.g. 380,000 from (1) above x 0.24 = 91,200). The 2013 report cites 26% (iv) providing 78,296 (e.g. 301,140 x 0.26 = 78,296). The latter is close to the 76,886 obtained from HS2 Ltd (v).

This reduction in generated trips is strange. Has HS2’s consultant reduced these and increased the pre-existing trips? If so the move would increase the calculated benefits since new trips are generally assigned half the values of time etc of those attributed to existing trips.

(4) Construction cost

The 2012 construction (or capital) cost was £33bn. That had risen to £43bn for the 2013 by 2013. The £10bn is in Phase 1. Setting the expenditure year to 2023 and the base year to 2011 would provide an additional PV cost of £6.6bn. However, the actual increase in PV capital costs is only £2.1bn, see table overleaf. Again, what on earth has happened?

(5) Cost benefit analysis
The  table below compares the the January 2012 and October 2013 data sets. From that table we find that:
• Net transport benefits (row 4) from the 2013 standard case are 32% above the 2012 low growth value and 17% above the High growth value, corresponding to 24% above the mean value, which is astonishing. Instead a 35% reduction was expected, reference (2) above..
• Capital costs have gone up much less than implied by the £10bn construction cost increase.
• Operating costs, presumed to include maintenance and renewals, have gone down slightly.
• Wider Economic benefits have risen above the high end of the previous range.

What is going on? Have they vastly increased the proportion trips which are for business or what?

TABULATION comparing the 2012 and 2013 economic assessments

(a) Standard case deflated to 2012 values

Data is from Table 9 of the Jannuary 2012 report and table 25 of the October 2013 report

Notes

(i) The Economic Assessment of January 2012 provides, at paragraph 3.2.1, 270,000 trips per day in and out of London plus 110,000 inter-regional trips, a total of 380,000.

(ii) HS2 Ltd FoI number 13-873

(iii) Table 2 of the January 2012 report provides 24%

(iv) Table 22 of the October 2013 report provides 26%

(v) HS2 Ltd FoI number 13-873

KPMG, acting for HS2 Ltd, claim that the proposed High Speed Rail network, connecting London to Birmingham and Manchester and Birmingham to Nottingham, Sheffield and Leeds, the so called “Y” network, will generate £15bn per year in terms of Wider Economic Benefits, the so called WEBs.

However, all the WEBs, or nearly all, should be assigned to the generated or new trips since the other trips, and most of their associated WEBs, would arise in the absence of the scheme.

Dividing the £15bn by the 91,000 trips per day, supposedly generated by the proposal, and by the 300 effective days in the year provides £550 per trip, or £1,100 for a round trip.  Multiplying the £550 by the 1,460 million trips carried by Network Rail in 2011/12 generates circa £800bn, a sum equal to half the nation’s GDP; clearly an impossibility, implying that the £15bn is wildly optimistic.

Alternatively the WEBs could be assigned to the generated business and commuter trips alone. Those number circa 34,000 per day. Dividing the £15bn by 34,000 and the 300 days in the year yields £1,470, or £2,940 for a round trip. Multiplying the £1,470 by the nation’s business plus commuting trips provides an absurd £15,600 billion, some ten times the nation’s actual GDP, illustrating again how ludicrous it is that anyone should ever believe that the proposal could generate WEBs worth £15bn per year.

That leaves HS2 Ltd to either (a) explain why a High Speed Rail trip, generated merely because a journey has been shortened somewhat, should provide vastly more benefits than any other journey on the rail network ever could – a task made doubly difficult because the benefits from a generated, or marginal, trip should be lower than those associated with a pre-existing trip or (b) to throw the analysis into the waste paper basket.

We also have the discredited economic analysis of January 2012. That provided £5.2bn from improved reliability, as though the trains cannot be made to run on time without building a high speed network, £5.5bn from other rail user impacts, meaning better access to stations, for heaven’s sake, £6.7bn from reduced crowding, largely solvable otherwise and £24.5bn from time savings, on the discredited assumption that time on a train is entirely wasted.

Our view is that penalties should be imposed upon those who have led these studies, irresponsible as they are in all their detail – putting tens of billions of pounds at risk.

Paul Withrington

WP REF HS2 SUMMARY DATA again WEB

Our July 2013 piece available, here http://www.transport-watch.co.uk/hs2-economic-analysis-laughed-out-court-july-2013 , explains why the original Economic analysis should be laughed out of court.

For more laughter we now have the KPMG report of September 2013, with the title page caption, “HS2 engine for growth”. The introductory letter of apology, following the front cover provides:

“This document is issued for the party which commissioned it and for specific purposes connected with the captioned project only. It should not be relied upon by any other party or used for any other purpose.

We accept no responsibility for the consequences of this document being relied upon by any other party, or being used for any other purpose, or containing any error or omission which is due to an  error or omission in data supplied to us by other parties”.

In the light of that we ask, how lacking in confidence can the authors be?

The main finding is that there will be Wider Economic Benefit’s, WEBs, valued at £15bn per year, from a “Y” shaped network connecting London to Birmingham and Manchester, and Birmingham to Nottingham, Sheffield and Leeds.

The analysis raises the question as to whether the theory could not be used by Government to justify spending vast amounts of taxpayers’ money on every loss-making enterprise in the land. After all this one, as set out in our previous, creates an actuarial loss of nearly £70bn, a loss which depends on laughably high passenger forecasts – implying that the actual loss is likely to be an amusing amount above the £70bn.

That aside, here is the new thing. The Economic Analysis of January 2012 provides, at para 3.2.1, 270,000 daily HS2 trips at Euston plus 110,000 inter-region HS2 trips between the other cities served, providing a total of 380,000. Table 2 claims that 24% of those passengers, i.e. 91,000, are generated by the scheme itself, representing circa 45,000 round trips. It is only those generated, or new trips, which could generate the alleged £15bn WEB’s since all the other trips arise in the absence of the scheme.

Dividing the £15bn by the 45,000 yields an astonishing third of a million pounds for every generated daily round trip, or, if we assume 300 effective days per year, £1,100 for each generated return trip. Who in their right minds could ever believe that?

In our previous note we expressed the view that if accountants behaved as does the rail lobby, and those promoting HS2 in particular, then those accountants would soon be in prison.

We go on to say that the facts suggest a corruption at the heart of the nation.  Instead of officials receiving bundles of notes in brown envelopes, they take vast salaries in return for the “unpalatable task of tricking the Government on a mammoth scale”, a quote taken from Stewart Joy’s book, ‘The Train that Ran Away’, published in 1973.  Joy was previously the Chief Economist for British Railways. He goes on to say, “These men were either fools or knaves”.

In what category do our politicians fall if they believe, or pretend to believe, this nonsense to do with High Speed Rail, let alone those who produced the reports?

The following table relates to 2011. It is extracted from the DfT data here. It is clear that both speeding and mobile phone use are trivial recorded causes of road traffic accidents.

Providing a powerful example of the disconnect that exists between public policy and the data. Both mobile phone use and speeding are categorised as heinous sins, yet neither is of significance in causing road traffic accidents, despite both being extremely common.

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WP REF HS2 SUMMARAY DATA WEB

It is extraordinary that the economic case for HS2 is not laughed out of court and doubly extraordinary that the government, and presumably the Treasury, believe in this nonsense.  Here is why:

The £44.1bn benefits for the “Y” network out to Leeds and Manchester, cited in the January 2012 economic case are sourced as follows:

1. £5.3bn from improved reliability, as though the trains cannot be made to run on time without building a high speed network
2. £5.5bn from other rail user impacts, meaning better access to stations, for heaven’s sake
3. £6.7bn from reduced crowding, largely solvable otherwise, e.g. balance supply and demand by putting the fares up on this loss making system
4. £2.1bn from other impacts, such as reduced congestion.
5. £24.6bn from time savings – on the discredited assumption that time on a train is entirely wasted.

And where:

1. No risk factor is associated with the passenger forecasts. Extraordinarily these require a 1000-seat train every 3 minutes 20 seconds at peak times.
2. Nearly half the benefits come from the last 30 years of a period ending in 2093, long after most of us will be dead.
3. The values of time etc are assumed to increase at nearly 2% for ever and ever. That seemingly trivial matter doubles computed benefits.

Additionally, after taking account of the additional 10bn cost recently announced:

1. The financial loss faced by those standing in 2033, the first full year after completion, is close to £70bn at 2011 prices. That represents the sum which, if invested at the Treasury Discount rates, would fund the scheme out to the remote year of year of 2093. It presupposes that the fares from the very high passenger forecasts actually arise. It is equivalent to £2,600 for every household in the land.
2. The cost of the proposal at 2011 prices is as follows: £42bn for construction, plus £8bn for the trains, plus tax on both of 20.9%. The latter is included in the economic analysis because all projects should contribute to national taxes, no enterprise existing in isolation from the rest of the economy. That provides a total of £60bn. After opening there would be running, and maintenance costs plus fares income. Those items, along with the first costs, yield the actuarial loss of £70bn cited in the previous paragraph.
3. Nearly half of us use a train less than once a year, let alone a high speed one.
4. The 100,000 jobs, supposedly created by the proposal but mostly relocated, will have cost over £600,000 each – destroying heaven knows how many in that part of the economy which makes a profit…

Separately from that, and as pointed out in topic 24, there is a fundamental flaw in the theory underlying the analysis.  We rehearse that argument here in the HS2 context.

That theory, known as Willingness to Pay calculus, allows the so called incremental fares to be subtracted from costs and for the difference to be compared with the social benefits.

However, the theory reduces to the absurd when it is realised that these incremental fares can be varied at the stroke of a pen by altering the economic boundary of the proposals.

In the case of HS2 the boundary is drawn round the railway as a whole.  The incremental fares are then the fares taken by the high speed line minus those lost to by the rest of the railway.  These incremental fares reduce the present value cost of the project from £58bn to £25bn.

However, if the boundary were narrowed to HS2 alone because, e.g. the rest had been privatised. Then the full HS2 fares would be subtracted from costs, greatly reducing the costs to the Government and inflating the benefit to cost ratio no end.

On the other hand if the boundary is widened to embrace the nation as a whole then every pound spent on fares would be a pound of income lost elsewhere. The incremental fares would then fall to zero.

The truth is that these fares are transfer payments which have no effect on the resources used. (Just see how many resources are created by passing a £20 not to your neighbour).  Hence, fares whether incremental or not should be struck out.

The effect would be that no railway scheme would ever pass the cost benefit test.

Possibly the entire edifice has been constructed to avoid decisions being made on sensible financial grounds, namely if it makes a loss do not build it particularly when the loss is in the tens of billions.

In contrast the cost benefit approach has a place where, as with roads, there is no pay-as-you-go market.

Our view is that, if accountants behaved as does the railway lobby, and particularly those promoting HS2, then those accountants would soon be in prison.

http://www.transport-watch.co.uk/hs2-economic-analysis-laughed-out-court-july-2013

Paul Withrington