The Department for Transport recently published a document outlining its approach to updating its Transport Analysis Guidance (TAG) ‘during uncertain times’. Two factors imply reduced travel demand: the long-term assumption about GDP growth has been reduced from 1.9% pa to 1.4%; and population growth from 0.3% to 0.15%, reflecting exit from the EU. New values for carbon emissions are also to be provided.

What was missing, I thought, was consideration of the need to update modelling, given the DfT’s intention to published a transport decarbonisation plan. Yet there are a number of shortcomings to existing modelling techniques, particularly in respect of estimating the impact of interventions aimed at reducing transport carbon emissions.

National models

The National Transport Model (NTM) is used to generate the Road Traffic Forecasts, most recently published in 2018. Scenario 7 addresses the consequences of a shift to zero emission vehicles and projects a 51% increase in road traffic 2015-2050, compared with 35% for the reference case, reflecting a reduction in fuel costs and assuming no changes to government policy on taxation.

There are, of course, sensitivities about making assumptions about future taxation. Yet mode share is influenced by levels of tax and subsidy. Arguably, both the growing proportion of SUVs and the decline in bus use have been facilitated by the freezing of road fuel duty since 2011. There is therefore a need for an approach to modelling that allows the full range of policy options to be explored, including changes in relative costs. One possibility might be to seek a remit analogous to that given by HMT to the National Infrastructure Commission, which must be able to demonstrate that its recommendations are consistent with gross public investment in infrastructure of between 1.0% and 1.2% of GDP in each year between 2020 and 2050.

Taxation aside, the growth of traffic projected in Scenario 7 is implausible. Travel time has been measured in the National Travel Survey (NTS) for the past 45 years and on average has remained close to an hour a day. This implies that the time available for travel is constrained. A reduction in fuel costs therefore would not lead straightforwardly to an increase in distance travelled, which would only arise if either higher speeds were possible (not to be expected from a switch to zero emission technology) or higher car ownership occurred (not assumed in the model).

More generally, the three key parameters of the NTS – average travel time, trip rate and distanced travelled per year – have not increased since 2000. I would expect any model to hold these per capita parameters unchanged on a central case projection, unless there were to be a clear causal explanation for a different trend. Population growth is then the main determinant of future traffic growth, but the relative mode share would depend on where the additional inhabitants live: to the extent they are housed on greenfield sites, car use would be important; to the extent they are located within existing urban areas, investment to support active travel and public transport would be relevant. My understanding is that the National Trip End Model (NTEM) provides a single national set of assumptions about demographic factors, and therefore does not allow consideration of policy options in respect of spatial location. If public transport and active travel are to be ‘the natural first choice for daily activities’, then the spatial location implications of population growth need to be incorporated into modelling.

Regional models

Beneath the NTM, there are a number of regional transport models. Those commissioned by Highways England are mainly (entirely?) based on the SATURN software first developed in 1980. Despite very considerable ex ante efforts to refine and update such models, there is a dearth of ex post analysis of modelling validity. A partial exception is the detailed monitoring of traffic for each of the three years after opening of the widened M25 between J23 and J27. Small time savings were found at year one, but these were lost by year two due to increased traffic volumes. The forecast traffic volumes derived from the model were less than observed and the forecast increase in traffic speed did not materialise, hence negating the economic case for the investment. The additional traffic generated externalities beyond forecast, including carbon emissions.

More generally, the whole area of regional modelling lacks transparency. Highways England does not appear to publish information on its models and their validation. It would be timely to review the validity of such models.

Assessment

Current UK transport modelling as a whole seems mainly concerned to update, refine and apply long established approaches. The bulk of modelling expertise is found within the consultancies, who are concerned to meet the needs of their clients using accepted methodologies, often to provide formal justification for a preferred investment. The Department is conservative in its requirements. Consultants therefore have little incentive to develop innovative approaches. Fresh thinking is needed, yet there is no academic centre of expertise in transport modelling where innovation could be expected.

Established models do not seem well suited to supporting a strategy aimed at achieving net zero transport carbon emissions by 2050. A related problem is the lack of data for model calibration in respect of the impact of the range of possible policy interventions. For instance, if the encouragement of active travel is successful, from which mode does the shift occur? The experience of the cycling city of Copenhagen is that car use is only slightly less than in London, but public transport mode share is half that of London. This suggest that we can get people off the buses onto bikes, but that it is more difficult to get them out of their cars, even in a city where all motorists are familiar with cycling.

Decarbonisation will be a long game, during which we should be able to gain understanding of the consequences of the various policy interventions, even though these will be difficult to model at the outset. It would be desirable to initiate the development of new models soon, ready for when calibration data becomes available.

Lynn Sloman and colleagues of Transport for Quality of Life (TQL) issued a report about carbon emissions arising from the Department for Transport’s second Road Investment Strategy (RIS2). Their detailed analysis reaches the conclusion that the increase in CO2 from RIS2 would negate 80% of potential carbon savings from electric vehicles on the Strategic Road Network (SRN) between now and 2032.

This conclusion struck me as surprising. Although annual expenditure on new capital projects for the SRN has been running at over £2 billion a year, civil engineering is very costly and we don’t get much extra capacity for our money. The recent rate of addition of lane-miles to the SRN has been 0.5% a year, which is less than the rate of population growth. So how could such a low rate of addition of capacity have such a large adverse impact on carbon emissions? We need to question the TQL calculations.

TQL argues that the RIS2 road schemes will increase carbon emissions in a number of ways, particularly by increasing speeds and inducing more traffic, both of which they believe are underestimated in conventional scheme appraisal. They therefore estimate the additional cumulative carbon emissions from these sources, both put at around 6 Mt CO2 for the period 2020-2032. But I wonder if there is not some overstating here, given that more traffic would tend to reduce speeds. For instance, for a scheme to widen part of the M25, I found that outturn traffic flows were higher than forecast, such that there was no increase in traffic speed.

TQL estimate that RIS2 would increase carbon emissions by 20 Mt CO2 for the period 2020-2032, including carbon from construction. This is then compared with the difference in carbon emissions between two scenarios from the DfT Road Traffic Forecasts 2018, the Scenario 1 reference case and Scenario 7 high electric vehicle case, which amounts to a reduction of 25 Mt, hence the conclusion that the increased carbon emissions would negate 80% of the benefit of the shift to EVs.

There are, however, problems with this estimate of carbon reduction from EVs. Scenario 7 assumes no tax on EVs to replace fuel duty, so that the cost of motoring decreases substantially (by 60% by 2050), hence a projected large increase in traffic compared with Scenario 1 (50% increase by 2050 compared with 35% for the reference case). Whatever the realism of the assumption about tax, such a large increase in traffic is implausible as the consequence of electrification. Average travel time has remained constant at about an hour a day for the past 45 years at least, hence to travel further it would be necessary to travel faster, which will not happen through a change in propulsion. The problem is that the Road Traffic Forecasts derive from the National Transport Model, which does not recognise travel  time constraints.

An assumption that electrification has no effect on traffic volumes would substantially increase the scale of carbon reduction under Scenario 7, to which could be added the benefit of bringing forward the phase out of non-electric cars and vans earlier than 2040, as assumed in that Scenario. And if we reduce the additional carbon from the RIS2 programme to allow for some overstating, then we could arrive at a less pessimistic conclusion than the TQL authors about the carbon impact of this programme on future overall SRN emissions.

Nevertheless, despite these caveats, I agree with the conclusions of the TQL report that RIS2 is anachronistic, and that cancellation would free up substantial investment for better uses, not least fast broadband to lessen the need for travel, both for commuting and on business. The SRN is under greatest traffic stress in or near urban centres during the morning and late afternoon peaks, when car travel to and from work interferes with long distance road users. The economic case for road investment needs to be reconsidered in the light of changes in daily travel prompted by the pandemic.

The National Infrastructure Commission (NIC) has issued an interim report on its assessment of rail needs for the Midlands and the North. It sets out a methodology for appraising investment options. The aim is to assess the potential benefits of possible investment packages, focussing on what rail is good at compared to other modes: transporting people into dense city centres and providing high speed links between cities.

The NIC believes that existing approaches to assessing the impact of rail investments on economic growth, such as conventional cost benefit analysis, fail to fully capture the interactions between rail investments and other factors, such as skilled employment and urban development.

Specifically, the NIC notes that conventional cost-benefit analysis in transport starts from ‘user benefits’ such as journey time savings. Wider economic benefits from agglomeration can then be added provided care is taken to avoid double-counting. However, this approach has been criticised for commuter journeys, because assumptions made around time savings do not appear consistent with the empirical evidence on travel times (this is a reference to my longstanding observation of the invariance of average travel time). Instead, the intention is to assess the economic benefits of increased transport capacity that allows more people to travel into city centres, thus increasing the agglomeration benefits that arise from density.

This is a rather radical approach, which runs counter to half a century of conventional transport economic analysis, and which I welcome, as a long time critic of orthodoxy. I look forward to seeing how its works out in practice.

I previously noted publication by the Department for Transport of its Second Road Investment Strategy (RIS2). DfT has now issued an economic analysis that concludes that the new programme represents high value for money. I had hope that this document would provide substantiation of the £27 billion, 5-year road investment programme but I was disappointed.

The summary states that overall RIS2 is High Value for Money, meaning £2 return for every £1 spent (Benefit-Cost Ratio of 2). Yet new commitments of major capital enhancement schemes yield a BCR of 1.5, which is unimpressive. The analysis is minimal, offering no breakdown into individual schemes, where some might be expected to have a BCR of 1 or less if the average is 1.5.

These estimates are based on the now rather dated Road Traffic Forecasts published in 2018, which included five distinct scenarios, yet no indication is given as to how the BCR would vary with scenario. The estimates are also derived from new but unpublished regional traffic models, asserted to be ‘world leading’.

I previously pointed out a major discrepancy between traffic forecasts and post-opening outturn for the smart motorway widening of the M25 between Junctions 23 and 27. These forecasts were generated by a regional model of the kind now in general use by Highways England, based on SATURN software that originated in the 1980s. The purpose of these models is to estimate travel time savings that arise from adding carriageway, which feed into an economic model. Yet in the M25 case, no time savings were observed beyond year 1 after opening, putting the validity of such models  in doubt.

The new DfT analysis frequently asserts that its analysis is robust (15 times, in fact), which is usually a sign of intellectual insecurity. In fact, the analysis is pretty thin and seems intended to justify a road construction programme developed in earlier era, before we have had a chance to assess the impact of the coronavirus pandemic and what this might mean for travel demand and for public expenditure priorities, urban vs. inter-urban transport vs. broadband.

The Department for Transport recently issued a report concluding that the Second Road Investment Strategy (RIS2) represents high value for money. One might have thought that this 29-page RIS2 Analysis Overview would porvide substantiation of the £27 billion, 5-year road investment programme announced earlier. We are disappointed.

The summary states that overall RIS2 is High Value for Money, meaning £2 return for every £1 spent (Benefit-Cost Ratio of 2). Yet new commitments of major capital enhancement schemes yield a BCR of 1.5, which is unimpressive. The analysis is minimal, offering no breakdown into individual schemes, where some might be expected to have a BCR of 1 or less if the average is 1.5.

These estimates are based on the now rather dated Road Traffic Forecasts published in 2018, which included five distinct scenarios, yet no indication is given as to how the BCR would vary with scenario. The estimates are also derived from new but unpublished regional traffic models, asserted to be ‘world leading’.

I previously drew attention to a major discrepancy between traffic forecasts and post-opening outturn for the smart motorway widening of the M25 between Junctions 23 and 27. These forecasts were generated by a regional model of the kind now in general use by Highways England, based on SATURN software that originated in the 1980s. The purpose of these models is to estimate travel time savings that arise from adding carriageway, which feed into an economic model. Yet in the M25 case, no time savings were observed beyond year 1 after opening, putting the validity of such models  in doubt.

The DfT report frequently asserts that its analysis is robust (15 times, in fact), which is usually a sign of intellectual insecurity. In fact, the analysis is pretty thin and seems intended to justify a road construction programme developed in earlier era, before we have had a chance to assess the impact of the coronavirus pandemic and what this might mean for travel demand and for public expenditure priorities, urban vs. inter-urban transport vs. broadband.

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.

This blog post appeared as a Comment to a feature about the HS2 Business Case published in Local Transport Today 15 May 2020.

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.