Topic 25. NATA NONSENSE AND CROSSRAIL

27th March 2008

updatee 18th June 2009 

The New Approach to Transport Appraisal (NATA) is absurd in that (a) if a public transport proposal leads to less tax then that was viewed as a cost** (b) “incremental fares” are deducted from scheme costs.  That has arisen because the DfT has confused economic evaluation with financial analysis.  To elaborate:

It is clearly absurd that loss of tax was ever regarded as a cost since the loss could be made good at the stroke of a pen.  Doubtless such payments are of great interest in financial analyses.  However, they are of no interest in economic evaluations.  The underlying reason is that a transfer payment generates no benefits of itself. Instead the loss to the payee exactly balances the gain to the service provider.  Likewise with “incremental fares” as illustrated by the following.

Crossrail will be part of Transport for London’s operations. The expected fares amount to £13 billion but £7 billion will be extracted from existing rail and bus operations. Hence, “incremental fares” enjoyed by TfL amount to £6 billion.  That sum was subtracted from the scheme cost to provide a net cost which was substantially below the cash values of time savings and other social benefits, so “justifying” the proposal.

Now, suppose TfL also ran rickshaws and taxis.  They too would lose income to Crossrail so reducing incremental fares somewhat.  Further, suppose TfL ran retail outlets across London. Fares paid to Crossrail would, of course, reduce the cash available to those outlets, so reducing “incremental fares” by another notch. Finally, let us presume that TfL ran the entire economy.  It would then be clear that any fares paid to Crossrail could only diminish the cash taken by that wider economy, so leading to a zero sum.

Alternatively, had Crossrail been regarded as a separate entity then all of the £13 billion fares would have been classed as “incremental”.

It follows that, if the underlying theory is correct, merely by waving an administrative definition or two about, vast changes can be made to the cost used in evaluation. That is clearly absurd, demonstrating that (a) the underlying theory is wrong and (b) fares, whether incremental or not, are transfer payments of no interest to social cost benefit analyses.

The reason for this fundamental blunder is two-fold.  Firstly, those promoting public transport schemes, particularly the railways, are desperate to find economic justifications for spending tens of billions of pounds on schemes that can only be funded out of taxation. Secondly, clever economists, driven by the need, have been looking at two dimensional pieces of paper instead of the multi-dimensional entity that the wider economy is.

The consequence is that (a) the net costs attributed to public transport proposals are greatly reduced (b) the benefit to cost ratios are correspondingly inflated and (c) vast public expenditure has been, and is being, committed on a false premise.

Evaluation periods

The blunder identified above is exacerbated by the duration of the evaluation period, now set to an astonishing 60 years. That is far beyond the 30 year horizon for which passenger forecasts can reasonably be made. Further, often at least half the benefits arise from the second half of the evaluation period and will not exceed the supposed net costs, let alone the full costs, until long after most of us are dead.

Agglomeration and the wider economy

Following Eddington, those promoting schemes such as Crossrail are canvassing for the addition of benefits (a) from “agglomeration” and (b) to “the wider economy”.  We believe that that is quite wrong.

If agglomeration were a benefit then London should be able to fund its own transport systems.  However, £39 billion of Government money over 10 years is required to fund TfL (including Crossrail).  Furthermore, the national rail system takes £5 billion per year from the taxpayer.  Since 70% of rail journeys have one end in London it follows that London should perhaps fund 70% of that bill. 

The fact that London cannot afford either of those sums illustrates the scale of the loss that may be attributed to overmuch agglomeration, let alone the damage to the wider economy caused by high taxes and the draining of population and talent from north to south.

Conclusion

Economic evaluations are based on a false premise, which greatly inflates the benefit to cost ratio of public transport proposals. Those ratios are the essential levers that persuade Government to spend vast sums. 

Needless to say, the proposals will seldom if ever pay for themselves from the fare box. Instead the taxpayer will have to pick up the tab with no realistic prospect of the value of the social benefits ever matching the costs.

That is made very much worse by the use of a 60 year evaluation period. 20 years would be more reasonable but even that is far in excess of market expectations.

Lastly, the supposed benefits from “agglomeration” and “to the wider economy” should be struck out.
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** Note: Recently this treatment of tax was abandoned. Separately from that some people believe that Governments waste real resources on pointless projects.  If that is the case then a reduction in tax should be counted as a benefit to the nation, not a cost.

PDF: 

NATA NONSENSE 03a.pdf