The Full Business Case for HS2 Phase One has now been published. This  supports the Government’s decision to go ahead with the entire new rail route from London to the cities of the Midlands and the North, despite the dramatic escalation in construction costs, from £37.5bn in 2011, to £50bn in 2013, to £65bn in 2015, to £109m in the latest business case, and doubtless even more in eventual outturn.

It is noteworthy that the initial increases in the cost of HS2 did not change the supposed economic benefits, as measured by the benefit-to-cost ration (BCR), which held steady at close to 2.0, representing ‘high’ value-for-money according to the DfT’s Value for Money framework for economic appraisal. This was the result of substantial additional benefits being recognised by the promoters, even though nothing fundamental had changed in the business case. However, last year independent reviews by Douglas Oakervee and by the National Audit Office estimated higher capital costs that reduced the BCR to 1.5 or lower.

The new business case recognises these new capital costs but fails to identify any compensating additional benefits, such that Phase One (London to Birmingham) has a central-case BCR of 1.2, while the full “Y” network has a BCR of 1.5. Accordingly, Phase One has been assessed as ‘low’ value-for-money, while the full network would be ‘low to medium’. Any further increase in capital costs would reduce the outturn BCR, as would less demand than assumed for rail travel over the 60-year forecast period.

It is surely remarkable that the largest ever UK transport infrastructure investment is proceeding on the basis of such low returns, given the great number of more attractive potential such investments. Is this a case of politics trumping economics, or are the politicians right to see benefits not recognised by orthodox economic analysis?

The precedent of the Jubilee Line Extension (JLE) to London’s Docklands, with a BCR of less than one on the standard approach to appraisal, indicates the potential regeneration benefits that may be achieved. The increased real estate values, reflecting the economic benefits to businesses locating at Canary Wharf and beyond, were not taken into account since this would supposedly involve doubling counting benefits implicit in the value of travel time savings, the main element of economic benefit in the standard DfT WebTAG appraisal methodology. These time savings comprise small amounts of time saved by large numbers of commuters, valued by market research techniques that require respondents to trade time and money in the short run. Yet it is scarcely credible that the aggregate of such time savings could provide a measure of the long run cumulative real estate value uplift, whether for the JLE or for HS2.

Moreover, orthodox investment appraisal has no spatial content, no indication of the geographical distribution of economic benefits. This is a crucial issue for HS2, the strategic aim of which is to boost the economies of the cities of the Midlands and the North.

More fundamentally, the importance attached to travel time savings is misconceived. The National Travel Survey has been measuring average travel time for 45 years, over which period it has hardly changed, despite many £billions of public investment in transport infrastructure justified by the value of supposed time savings. In reality, people take the benefit of such investment not in the form of more time for work or leisure, but as greater access to desired destinations yielding more opportunities and choices. The purpose of HS2 is to increase the access to London of those living in the Midlands and the North (and vice-versa). Increased access will lead to changed land use and enhanced real estate values, which are the market indicators of economic development.

It is possible that the real economic benefits of HS2 are substantially greater than calculated in the Full Business Case using the WebTAG methodology. It is therefore time to reconsider the basis of transport economic appraisal from first principles.

 

 

 

 

 

 

 

 

 

 

 

 

The Prime Minister has announced the Government’s decision to go ahead with High Speed 2 (HS2), the new rail route from London to the cities of the Midlands and the North, despite the dramatic escalation in construction costs, from £37.5bn in 2011, to £50bn in 2013, to £65bn in 2015, to excess of £100m in 2019 and probably in eventual outturn.

The value for money (VfM) of the investment has been computed according to the Department for Transport’s (DfT) standard approach to appraisal of proposed investments. This compares benefits with costs according to long-established principles of cost-benefit analysis as applied to public sector investments. The main benefit to users of a faster rail route is assumed to be journey time savings, which are supposed to allow us more productive work or enjoyable leisure. To these time savings are added lesser contributions from 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 ration (BCR), which held steady at close to 2.0, or £2 of benefit for every £1 of cost. Substantial additional benefits were recognised by the promoters, even though nothing fundamental had changed in the business case. However, the independent review by 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 DfT 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 that 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, which is the threshold for the DfT’s High Value for Money (VFM) 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. But the impact on cities, as seen in the form of property development and increased real estate values from productivity enhancement and employment creation, does not enter into the cost-benefit calculus, which is silent on the geographical distribution of benefits. The Oakervee review concluded that the economic case does not currently fully align with the strategic case because economic rebalancing, one of the primary drivers in the strategic case for HS2, is not currently reflected in the economic case.

The second problem is that average travel time, as measured in the National Travel Survey, has hardly changed over the past 45 years, despite many £billions of public investments in the transport system justified by the value of journey time savings. What actually happens is that investments that result in increased speed of travel allows us to travel further, to gain access to more distant destinations, opportunities and choices, which are the real benefits experienced by users, not the hypothetical time savings assumed by the economists. Such transport investments lead to changes in land use as people and businesses take advantage of the 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 implied by changed land use and the geographical distribution of economic activity. The DfT has not required or supported modelling of the land use impacts of transport investment, which has contributed to the failure to value the real benefits of HS2. These might turn out to be quite substantial if the linked cities can take advantage of the modern high-speed connection to London to boost their economies by local investment in property development near to new stations and in urban rail to enlarge the benefits to surrounding districts.

The purpose of HS2, as with any new railway, is to move more people through space, so spatial impacts are what are of interest. The focus of the transport economics profession on time savings has been quite misconceived.

This blog was also published in Transport Times on 13 February 2020

 

 

 

The Office of Rail and Road (ORR) is responsible for overseeing the performance of Highways England (HE), a publicly owned company responsible for England’s strategic road network. ORR is consulting on how it should perform its role. I have responded as below:

HE is responsible for a substantial programme of investment in new and improved road infrastructure, each element of which is supported by cost-benefit analysis consistent with the Department for Transport’s Transport Analysis Guidance. The main economic benefit is assumed to be the value of the time saved as a result of investments which increase capacity and are intended to reduce road traffic congestion.

However, there are questions about the estimation of prospective travel time savings derived from the standard models used for traffic forecasts. For example, monitoring of the outcome of widening of the M25 between junctions 23 and 27 concluded that ‘increases in capacity have been achieved, moving more goods, people and services, while maintaining journey times at pre-scheme levels and slightly improving reliability.’[1] No travel time savings were observed beyond the first year after opening, in part at least due to increased traffic, notably an increase of 23% at weekends. These outturns were inconsistent with the forecasts of traffic volumes that were significantly less than observed, and with speeds that were projected to be higher with the road widening than without.[2] The higher speeds were the basis for estimates of travel time savings, leading to the DfT’s estimate of the Benefit-to-Cost ratio of 2.3, which justified the investment.

This example shows that there may be a substantial discrepancy between forecast and outturn traffic flows and speeds. That this is a general problem is indicated by the observed invariance of average travel time over the past 45 years, as found in the National Travel Survey.[3] This implies that the benefits of road investment have been taken, not as time savings, but as increased access to desired destinations, which results in more traffic. This additional traffic is known as ‘induced traffic’, the consequence of increasing capacity, which results in increased externalities related to vehicle-miles travelled, including congestion, carbon emissions, air pollutants, and death and injuries. While HE routinely monitors outcomes of schemes 5 years after opening, this may not be sufficiently long to observe the full extent of induced traffic.[4]

There is therefore reason to suppose that in general the outcome of road investment as experienced by users does not correspond to the rationale for the investment, which is principally to increase welfare and economic growth by reducing congestion and improving connectivity. This discrepancy should be of concern to the ORR.

[1] Smart Motorway All Lane Running M25 J23-27 Monitoring Third Year Report. Highways England. 2108.

[2] https://www.gov.uk/government/publications/vdm-used-to-estimate-traffic-volumes-and-travel-time-saved

[3] Table nts-0101-2018

[4] Sloman L, Hopkinson L and Taylor I (2017) The Impact of Road Projects in England, Report for Campaign to Protect Rural England

 

 

The National Infrastructure Commission has published an interesting discussion paper on capturing the value of urban transport investments. The starting point is the recognition that average travel time changes little, which means that travel time savings do not provide a reliable basis for valuing new investment. The Commission proposes an approach that focuses on valuing agglomeration benefits plus consumer benefits as these increase with increasing population density. Agglomeration benefits have for some time been recognised as appropriate for inclusion in cost-benefit analysis, but a direct estimation of density-dependent consumer benefits is novel.

The NIC paper is welcome fresh thinking, although not without raising issues for consideration. A supporting study commissioned from consultants SDG estimates that the utilisation of available theoretical transport capacity to access city centres ranges from 20% (small cities) to approaching 70% in the 0800-0900 peak hour. There is therefore considerable capacity underutilisation in all cities studied. However, London was not considered. It is possible that capacity utilisation in London is substantially higher, reflecting the pressures of population and economic growth. If so, this would suggest that adding to transport capacity in other cities would not be crucial to stimulate economic growth in the near term. It may not be valid to assume that enough latent demand exists that any additional capacity added will be used.

More generally, while transport capacity can act as a constraint on economic growth, justifying investment in expanding cities, other kinds of investment may be more cost-effective in stimulating lagging cities. This might be investment in broadband, for instance, or in improvements other than infrastructure that falls within the NIC’s remit.

The SDG approach focuses on capacity to access city centres and disregards the potential of faster and reliable travel, as offered by light rail or BRT, that would increase the size of travel to work areas. A study of travel in Birmingham, which has only a single light rail line, prompts the hypothesis that by relying on buses that get caught in congestion at peak times for public transport, Birmingham sacrifices significant size and thus agglomeration benefits, compared with cities of a similar size in France which rely on trams and metros.

Nature of benefits

Estimations of agglomeration and amenity/consumer benefits are based on elasticities derived from econometric studies of correlations between inputs and outputs, controlling for confounding variables. Such benefits are not observed directly and this respect they resemble travel time savings, which are based on the output of models, but not observed in practice. Moreover, the confounding variables are not insignificant, given the typical scatter of data points in plots to quantify agglomeration effects, which suggests that there may be many other possible interventions that might be made, other than those focused on travel.

What is observed as the result of transport investment are changes in land use and market value, the subject of a study for the NIC by the Institute for Fiscal Studies. Increases in real estate values reflect increases in agglomeration and amenity. Arguably, such increases in value would be the basis for a more grounded approach to appraising urban transport investment, more aligned to real world investment decisions.

Although the NIC discussion paper is concerned with urban investments, the approach is applicable to transport investments generally.

 

 

 

 

 

 

Last month, James Dyson announced the abandonment of his electric car project, worth £2bn of planned investment involving 500 staff. One factor in this commercial decision was the difficulty of developing a solid state lithium ion battery, seen as the next step in the evolution of lithium ion batteries. Getting the battery technology right is crucial for achieving commercial advantage in the electric vehicle market. A new entrant needs to offer a significant improvement in performance if it to grow market share, exemplified by Tesla.

Another likely factor prompting the Dyson decision, though not mentioned in press coverage, is the expectation that the car of the future will have autonomous driving options as well as electric propulsion. Autonomy involves either prolonged costly development or buying in someone else’s technology – both involving considerable risk.

As I have argued previously, the benefits to users of the new auto technologies will be incremental, not transformative. Yet the new technologies will be transformative for the manufacturing industry. There is a risk that returns from incremental improvement in performance will be insufficient to reward the large investment in technology development. Dyson may have made a shrewd judgement in cancelling his EV project.

The Financial Times’ Alphaville blog has noted that Uber London Ltd’s accounts filed at Companies House refer to discussions with HM Revenue and Customs about a potential liability for VAT at 20% on either gross bookings or the service fee that Uber charges drivers. This liability may depend on the outcome of a case that Uber is appealing to the Supreme Court to determine whether drivers are self-employed or are ‘workers’ with employment rights. The threshold for VAT liability is £81k a year, so individual drivers are unlikely to be liable. But if Uber is deemed to be an employer, the company would be liable, with potential backdating.

The VAT threshold means that there is not a level playing field for taxi type services. Self-employed drivers, such as the owner-driver of a London black cab, would be at an advantage over a ride-haling company that employed many drivers.

A noteworthy report from bank BNP Paribas, summarised in the Financial Times, compares the energy return on a $100bn outlay on oil and renewables where the energy is being used specifically to power electric vehicles. The  analysis indicates that new wind and solar-energy projects in tandem with battery EVs will produce 6x-7x more useful energy at the wheels than will oil at $60/bbl for gasoline-powered cars and vans, and 3x-4x more than will oil at $60/bbl for those running on diesel. The conclusion is that oil cannot compete with renewables when viewed over the investment cycle unless oil prices are below $20/bbl, which would make oil investment unattractive. This is before taking credit for eliminating tailpipe emissions of carbon and noxious pollutants.

The report’s conclusion is striking – the death toll for petrol. With 36% of demand for crude oil today accounted for by cars/vans and other vehicle categories susceptible to electrification, the oil industry has never before in its history faced the kind of threat that renewable electricity in tandem with EVs poses to its business model: a competing energy source that (i) has a short-run marginal cost of zero, (ii) is much cleaner environmentally, (iii) is much easier to transport, and (iv) could readily replace up to 40% of global oil demand if it had the necessary scale. The conclusion is that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors.

In the short run, however, the huge existing investment in oil supply makes this source competitive with renewables/EVs that require substantial infrastructure investment to bring forward new supply.

Smart Motorways, a flagship programme of Highways England, aims to relieve congestion by converting the hard shoulder into a running lane and by varying the speed limit to smooth traffic flow. To assess performance in practice, Highways England has been monitoring closely the section of the M25 between Junctions 23 and 27 since the widened road opened in 2014. Three annual reports have been published, detailing traffic flows, journey times and safety, and comparing outcomes ‘before’ construction and ‘after’ scheme opening. Traffic growth of 16% was observed at Year 3 compared with before opening, far higher than regional motorway growth over the same period, with increases in weekend traffic of up to 23%.

Such traffic growth seems a noteworthy example of induced traffic, the traffic that arises as a result of increased capacity and which tends to restore congestion to what it had been previously. I therefore made a Freedom of Information request to see the traffic forecasts and economic appraisal that were the basis of the investment decision.

The traffic forecasting report was based on a variable-demand multi-modal model for the M25 area, employing the SATURN suite of programmes, updated to take account of the most recent national datasets for trip ends and similar. Traffic forecasts were made for the assumed 2015 scheme opening year, the 2030 design year and the 2040 horizon year, for the morning and evening peak flows and the interpeak period, comparing the ‘do-minimum’ case, without the investment, and the ‘do-something’ case with it.

The time slices used for the forecast and the outturn monitoring are regrettably different, which limits comparisons at particular times of day. Comparisons may, however, be made of average daily traffic flows (ADT). For the section J23-24 clockwise, for instance, the forecast ADT increase, comparing the scheme with do minimum, was 13% in 2015 and 16% in 2030. The outturn monitoring found an increase of 13% at Year 3 after opening compared with before, in good agreement with forecast.

The economic appraisal report employs the DfT’s TUBA software to derive estimates of monetarised travel time savings and vehicle operating costs (VOC) from the traffic forecasts, comparing do-something and do-minimum cases. The main economic benefit is travel time savings to business users, worth £475m, because the scheme was expected to allow travel at higher average speeds than the do-minimum case. Time savings to non-business travellers (commuters and others) were very largely offset by increased VOC, given the assumed diversion from local roads onto the motorway generating longer trips. As an example of the origin of the time savings, the speed on J23-24 clockwise for the AM peak in 2015 was forecast to be 86 km/hr with the scheme, versus 76 km/hr without. The overall benefit to cost ratio (BCR) was 2.3, later adjusted upwards to 2.9.

However, this forecast increase in speed failed to materialise. There has been effectively no change on average for all days and time slices between before opening and Year 3 for the clockwise travel. For anticlockwise, an average saving of 15 seconds (1.4 per cent) was found for a journey of 16.6 min before the improvement. Time savings of 6% and 9% respectively were seen at Year 1 after opening, but were lost by Year 2.

Generally, traffic flowed at the free flow rate except during the PM peak when it was slower. Surprisingly, the extra lane did not permit a faster flow at this PM peak, even though the increase in capacity of 33% was greater than the increase in traffic volume. Possibly the use of variable speed limits to smooth the flow was at the cost of journey time savings.

The stated conclusion of the Year 3 monitoring report is that ‘increases in capacity have been achieved, moving more goods, people and services, while maintaining journey time at pre-scheme levels and slightly improving reliability.’ Yet this conclusion undermines the economic case for the scheme, based on forecast time savings. This in turn raises questions about both the validity of the modelling and of the orthodox approach to appraisal.

We know from the National Travel Survey that average travel time has remained essentially unchanged for at least the past 45 years. This implies that any travel time savings must be short run. In the long run, people take advantage of transport investments that permit faster travel to gain access to more distant destinations, services, opportunities and choices, within the limited time they allow themselves for travel. This change in travel patterns would first be seen in optional trips, consistent with the big increase in weekend traffic in the M25 example, and subsequently over the years as people move home and change jobs. The consequential additional traffic – induced traffic – adds to congestion and negates the time savings that are conventionally supposed to be the main economic benefit.

If we are to make transport investments that are good value for money, we need to pay attention to the real-world consequences, and not be misled by the outputs of models that generate the notional time savings to which transport economists are so attached. We need to constrain models to hold average travel time constant in the long run, consistent with the findings of the National Travel Survey. To calibrate models, we need data on origins, destinations and purposes of trips, and how these change when a road is widened. And we need to work out how to value access benefits to users.

 

This blog is based on an article published in Local Transport Today 24 May 2019

 

 

 

 

I blogged some months back about a paper of mine published in a peer-reviewed journal. This was a critique of the orthodox approach to the cost-benefit analysis of transport investments, which focuses on the saving of travel time. My paper has prompted three senior transport economists to publish a response in the same journal. They say: ‘Metz makes some good points, but many of his key arguments are unsound.’ Naturally, I disagree with the latter proposition.

The three economists concede that the conventional approach to appraisal is weak on the spatial distribution of the benefits of investment, which is important to decision-makers. An example here is High Speed 2, the planned new rail route connecting London to the cities of the Midlands and the North. The strategic case for this very large investment is to boost the economies of these cities by improving their connectivity to the dynamic economy of the capital. However, the conventional economic case sees the benefit as largely time saving for business travellers, and is silent on its spatial distribution. What we need is economic analysis that quantifies the strategic case. This is lacking.

More generally, the purpose of the transport system is to move people and goods through space. Investment increases such movement, whether by increasing the speed of travel so that people go further in the time they allow themselves for travel, or by increasing capacity at existing speeds, so that more people are able to travel. In either case, an important consequence is change in land use and land value, reflecting the increased access made possible by the investment. Transport planners well understand how transport investment increases access and changes how land is used, whereas transport economists are fixated on notional time savings – notional because they are the output of models, not observed in practice. What we observe in the findings of the National Travel Survey is that average travel time has hardly changed over 45 years, despite many £ billions of transport investment justified by the value of supposed time savings.

I have a new article that reviews the evidence for the success of congestion charging (aka road pricing, road user charging) in the three major cities in which it has been tried. In London, there was a marked reduction in both car traffic and delays when charging was introduced, but delays reverted to previous levels by year five. In Stockholm, a similar initial impact was seen, but there was no monitoring of delays subsequently.

Singapore has been successful in using electronic road pricing to maintain desired traffic speeds, adjusting charges up or down according to whether speeds have exceeded or fallen below targets. However, this is only possible because there is a very high charge for vehicle ownership, which has limited this to 100 cars per 1000 population, compared with 450 in the UK and similar or higher figures for other developed economies.

Road traffic congestion occurs in areas of high population density and high car ownership. There are more trips that could be made by car than are in fact made. Some people are deterred by the prospect of time delays and make other choices: a different time or mode of travel, or a different destination, or not to travel at all. Measures that deter some drivers, such as congestion charging, reduce delays when introduced, which makes car travel more attractive to those who are more time-sensitive but less cost-sensitive, so that traffic increases and delays revert to previous levels. Accordingly, congestion is both self-regulating and difficult to reduce.

Although economists believe that road pricing is the proper way to tackle congestion, in practice the level of charges to make a useful impact would probably be too high to be publicly acceptable.