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HS2 ECONOMIC ANALYSIS LAUGHED OUT OF COURT July 2013

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. £5.2bn 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. £24.5bn 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 enterpirse 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 the 'Willingness to Pay calculus', was cooked up by Professor Sugden of the University of East Anglia.  It 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. 



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