A new high-speed rail route between London and the north of England has finally been given the go-ahead. Boris Johnson, the UK prime minister, announced the government’s decision, despite the dramatic escalation in construction costs – from £37.5bn in 2011 to £50bn in 2013, £65bn in 2015, and in excess of £100bn in 2019.
HS2’s potential value for money has been calculated with a standard approach for public sector investments, which compares benefits with costs. It is measured with a benefit-to-cost ratio (BCR). As the cost of the project rises, questions have been raised about the value offered by HS2.
There are significant problems with how the government has calculated the value for money offered by HS2. One is that the analysis is open to manipulation. Another is that one of the primary drivers in the strategic case for HS2 is not reflected in the economic case. This driver is national economic rebalancing – the creation of wealth in cities and regions in the Midlands and North.
Instead, the government has assumed that journey time savings are the main benefit to users of a faster rail route. This is supposed to allow us to work more productively or get more enjoyment from our time off. Other lesser benefits have also been added to the calculation. These include improved reliability and reduced overcrowding, as well as some wider economic impacts, such as productivity gains and environmental impacts.
It was noteworthy that the initial increases in the cost of HS2 did not change the supposed economic benefit as measured by the benefit-to-cost ratio. This held steady at close to 2.0, or £2 of benefit for every £1 of cost. Substantial additional benefits were recognised by the promoters (the publicly owned HS2 Ltd and the Department for Transport) even though nothing fundamental had changed in the business case.
However, the independent review by civil engineer Douglas Oakervee, commissioned by the government and just published, puts the BCR at 1.1 to 1.5, reflecting the increase in costs. The National Audit Office’s recent report on HS2 estimated a BCR of 1.4.
The Department for Transport is yet to issue a revised business case for HS2 that takes account of the latest plans and possible cost savings. When it does, I expect to see the usual tweaking and massaging of assumptions about an uncertain future state of the world. This can be defended as a legitimate exercise of professional judgement by transport economists who wish to please their clients: in this case, ministers who have decided to press ahead. The objective will be to achieve a BCR of 2.0, which is the threshold for the Department for Transport’s high value for money category.
Apart from such malleability in analysis, there are two big problems with the standard approach to the economic appraisal of proposed transport investments. First, the time-saving benefits arise from trips between cities and say nothing about economic development within cities.
The strategic case for HS2 is to boost the economies of the cities of the Midlands and the North by improving their connectivity to London and the south-east. However, the Department for Transport’s cost-benefit calculation is silent on the geographical distribution of HS2’s benefits across the country.
The economic boost from HS2 might turn out to be quite substantial if the linked cities can take advantage of the modern high-speed connection to London. This could include local investment in property development near to new stations, and in urban rail to enlarge the benefits to surrounding districts. The impact on cities will include the job creation that results.
The second problem is that average travel time, as measured in the National Travel Survey, has hardly changed over the past 45 years. This is despite many billions of pounds of public investments in the transport system justified by the value of journey time savings. What actually happens is that these investments into quicker travel allow us to travel further and to gain access to more distant destinations, opportunities and choices.
These are the real benefits experienced by users, not the hypothetical time savings assumed by the economists. Transport projects like HS2 lead to changes across the country as people and businesses take advantage of improved access to land and property capable of better use.
The standard approach to economic appraisal of transport investments is quite narrowly focused and disregards the value created by changed land use and the geographical reach of economic activity. The Department for Transport has failed to value the real benefits of HS2 by not investigating the land use impacts of this transport investment. The economists’ focus on time savings has been quite misconceived.