Transcript Slide 1

The Convention
Why the HS2 Business Case is flawed
Bruce Weston
Hilary Wharf
Stoneleigh, 19 February 2011
1
Who are we?
 HS2AA - www.hs2actionalliance.org
 Evidenced based arm of the anti-HS2 campaign
 Goal: to prevent HS2 – challenging the business case,
exposing the myths, promoting better alternatives
 Wharf and Weston
 Management consultants: 21yrs in rail sector
 Expertise in business planning, modelling, labour relations
 Formally economist and operational research scientist
 Last 6 years spent bidding for railway franchises
 Live on HS2 route 3 – but focus is the business case
2
Why believe us?
 HS2AA critique of Business Case
– Our findings have been endorsed by independent
economics consultancy, FTI, led by Vicky Pryce
(previous Hd of Government Economic Service) in their
own report (December 2010)
 Taxpayers Alliance are campaigning on the same case
 HS2AA reports are fully referenced so any reader can
check whether we have the facts right
3
FTI consultants say…….
 ‘…we broadly agree with the conclusions in the HS2AA
Report’.
Specifically FTI report:
 “In our view the HS2 appraisal appears to overstate the case
for HS2; some of the key assumptions are optimistic and,
most notably, the benefits appear to be exaggerated.
 The appraisal does not compare HS2 appropriately against
alternative options.
 The projections of future demand also appear to be optimistic
as they are based on estimates of past relationships between
demand and income growth when this relationship may be
changing………”
FTI report 13 12 2010 (Executive Summary)
Bold highlights not in original text
4
Key messages
1. No commercial case
2. Demand forecasts not credible – but overestimates
3. Benefits (at £32 bn) are greatly overstated
4. Assessment is flawed – ‘risk’ is not properly
handled and ‘alternatives’ misleadingly presented
5. No robust evidence for wider economic impacts or
regional regeneration
- and this kills the case without touching any HS2 cost figures
5
What are DfT’s ‘rules’?
 Sophisticated rail demand model (based on PDFH)
 Bespoke rules (NATA) for valuing all transport projects
 Social cost benefit analysis
 Plus non- monitarised elements
 Reduces to Net Benefit Ratio (NBR)
 ie social benefit for every £1 subsidy
 >2 - ‘good’ - normal threshold
 <1 - ‘poor’
- are the rules being followed and are they all appropriate?
6
The key numbers
without WEI
Benefits:
£28.7bn
£32.3bn
Costs:
£17.8bn capital
£7.6bn operating
£25.5bn total
Less incremental revenue
Plus tax change (loss)
Equals net cost to Gov.
£15.0bn
£1.5bn
£11.9bn subsidy
NBR: (benefits/subsidy)
2.4
with WEI
2.7
All figures NPV (2009 prices)
WEI: wider economic impacts
Source: Page 95 of Command Paper
- these are the numbers straight from the command paper
7
What HS2 means to you
 £1,500 per household (England) (phase 1 and 2 cost)
 over £500M per minute saved (30 mins saving)*
 almost £160M/mile* (or £100M/km)*
 HS2 has an opportunity cost to us all
 Strategic decisions – HS2 or Trident?
 Public spending – HS2 or cuts in jobs, services?
 Rail/transport investments – HS2 or electrification?
* Based on Phase 1 cost
- but only 8% in an Ipsos-mori poll said protect HSR from the cuts
8
1. No commercial case
 Capital costs (NPV)
– Infrastructure*
– Trains*
 Incremental revenue (NPV)
 Incremental operating costs (NPV)
£17.8bn
£16.5bn
£2.8bn
£15.0bn
- £7.6bn
£7.4bn
Net revenues (£7.4bn) cover c 42% of the capital costs
 Total costs (NPV)
 Incremental revenue (NPV)
 Tax change (loss)
£25.5bn
- £15.0bn
+ £1.5bn
£11.9bn
A net cost to Government ie a subsidy of £11.9bn
* Not NPV
9
Problems with this subsidy
 Encourages more travel
 HS2 case depends on new passengers
 27% of all HS2 passengers (13.3m trips/a) are new trips
 more than all those switching from air and cars (7.7m/a)
 Travel is not ‘green’
 Out of line with policies to reduce travel, and ignores
the revolution in communications technology
 Targets those who can most afford it
 Nearly half of long distance trips done by top income
households
- is this a sensible use of public funds?
10
Who benefits?
Long distance rail trips by household income (source NTS)
6.00
trips per year
5.00
4.00
3.00
2.00
1.00
0.00
£10,740
£17,590
£26,460
£38,700
£70,420
income quintile
Source: 'Modelling Long-Distance Travel in the UK', Charlene Rohr, James Fox, Andrew Daly, Bhanu Patruni,
Sunil Patil, Flavia Tsang. RAND Europe, NTS 2002/5, income data 2005/6 ONS
- subsidy for the rich but paid for by everyone
11
2. Demand forecasts overestimated





Rail forecast is twice what others say
Model ignores evidence on saturating
demand for domestic travel (all modes)
Model ignores reasons for rail’s growth and
hence future prospects
Eccentric use of PDFH rules
HS1 all over again?
- HS2 rail forecasts are at least twice what they should be
12
HS2 demand estimates
HS2 Ltd demand forecast (2008 to 2033):
 Rail increases
 background growth: 133%
 uplift for HS2:
133%
 Long distance car increases
 Domestic air growth
267%
44%
178%
13
Origins of HS2 passengers




Switch from existing rail
New trips
Switch from air
Switch from car
57%
27%
8%
8%
Mtrips/a
29.8
13.3
3.9
3.9
50.8*
Notes



The ‘new trips’ demand are due to the uplift from HS2
The ‘switch from air’ volumes are higher than current air volumes
between Heathrow and NW and Scottish lowlands
The ‘switch from car’ is forecast to decongest the M1 by 2%
* Further £7m/a left on WCML
14
Transfers from air?
London domestic air passenger numbers
16
14
12
All London airports
Heathrow
NW/Scottish lowlands
10
8
6
4
2
0
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
million passenger journeys/ annum
18
- given trends, the 178% growth forecast looks very optimistic
15
Rail forecast in context
HS2 Route Demand
180,000
160,000
120,000
100,000
80,000
60,000
40,000
20,000
0
20
08
20
11
20
14
20
17
20
20
20
23
20
26
20
29
20
32
20
35
20
38
20
41
20
44
20
47
20
50
20
53
20
56
20
59
journeys/day
140,000
WCML+HS2 (3.4%)
HS2
CTRL rate (2%/a)
population growth (0.6%/a)
date
based on Bluespace Thinking
16
What do other forecasts say?
Increase
Annual rate
Date
Period
2007 (July)
2007 (July)
2006-2027
2006-2030
3
2009 (June)
2007-2036
4
2010 (August)
2008-2034
70%
2.1%
Prof J Dargay for ITC all
2010 (January)
2005-2030
35%
1.2%
HS2 Ltd (Atkins) -WCML
2010 (February)
2008-2033
133%
3.4%
HS2 Ltd (Atkins)
– long distance TOCs
– long distance travel #
2010 (February)
2008-2033
120%
>120%
3.2%
>3.2%
Source
1
(DfT - all
2
DfT - all
Network Rail - WCML
Network Rail - all
5
65%
73%
45 - 89%
6
2.4% (1.8% from 2017))
2.3%
1.3 – 2.2%
ITC is the Independent Transport Commission
# all long distance TOCs plus long distance component from London & SE TOCs and West Midlands TOCs
- HS2 rail forecasts are twice what other experts say
17
Evidence on demand saturation
Total domestic transport per person (graph Dr D Metz with GVA/capita added)
250
GVA/capita
(YBGT)
200
150
100
- but is demand saturated for rail too?
18
Rail growth v other modes
Total domestic travel (NTS 2009)
walk/cycle
car/van/motorcycle
private coach
local bus/underground
long distance coach
surface rail
air/ferry/light rail
all modes
miles per person
1995/97
2008
243
235
5,786
5,560
134
110
328
387
94
56
321
495
75
80
6,981
6,923
annual average
rate of change
-8
-226
-24
59
-38
174
5
-0.3%
-0.3%
-1.6%
1.4%
-4.2%
3.7%
0.5%
2009
242
5,361
148
387
56
471
112
-58
-0.1%
6,775
change
- So rail growth is from modal shift (car and coach), but can it go on?
19
Rail’s past growth and prospects
 Can rail growth (and modal shift) continue if
the total market is saturated?
Why has rail’s share grown?
Can it go on indefinitely?
Better services eg WCML upgrade
HS2 will blight progress
Sophisticated ticketing
Long distance done already
Better use of time on-board
Run out of steam before 2026
Subsidy
Fare increases affect demand
Eddington cautious
Other rail markets saturating
- evidence suggests reasons why rail growth may not continue
20
Eccentric use of PDFH
 PDFH more suited to short/medium term forecasts (as
based on premise ‘future like the past’)
 Use of V4.1 instead of V5 inflates demand substantially
 V5 has lower income elasticities, and they do not get
bigger with distance
 Draft DfT guidance on income elasticity cap is ignored
 Draft says use 2.5 (but 2.8 used)
 Draft awaited SoS approval since April 2010
 Data for V5 income elasticities is old
 PDFH ignores changes in how people use on-board
time
- looks like a possible case of bending the rules…..
21
HS1 all over again?
Channel Tunnel Rail Link passenger numbers
Even by 2009, demand (9.2m) was just 37% of original forecast (25m) for 2006
- so they can get it wrong!
22
3. Benefits are greatly overstated
 What are the £32bn benefits?
 Journey time savings greatly over-valued
 Time on board has become useful
 Average (£70k) salary not consistent with
assumed growth
 Crowding and waiting time (service frequency)
benefits are artificial
- benefits are more like £13bn than £32bn – about 60% overstated
23
Breakdown of social benefits
Transport user benefits:
Business
Leisure/commuter
road
£1.3bn
£0.7bn
£2.0bn
rail
£16.3bn
£10.4bn
£26.7bn
Wider economic impacts
Total
Rail Benefits
Business (£bn)
total
£17.6bn
£11.1bn
£28.7bn
£ 3.6bn
£32.3bn
Leisure etc (£bn)
Total (£bn)
Revised (£bn)
Time savings
13.1
6.3
19.4
6.1
Crowding
1.3
3.5
4.8
0
Reliability
1.8
0.5
2.3
2.3
Total (incl others)
16.3
10.4
26.7
8.7
- rail user benefits probably under £9bn - nearly 70% overstated
24
Business rail users
Business benefits for rail (£16.3bn)
interchange £0.1bn
waiting £1.2bn
getting to station £3bn
crowding £1.3bn
on board £10.7bn
25
Other rail users
Leisure (incl commuting) benefits for rail (£10.4bn)
interchange £0.2bn
waiting £1.4bn
on board £3bn
getting to station
£2.4bn
crowding £3.5bn
26
Business savings overvalued
 On-board business time assumed to be 100% wasted
– every minute saved is assumed to be a minute extra
productive time (ignoring mobile technology)
– clear evidence its not true now, and by 2026 there will
be no productivity benefit
 Value of business time is too high
– Uses 10yr old values of rail business earnings
(equivalent to £70k in today’s money)
– Ignores the nearly five-fold growth by 2033 - the same
small cadre of high earners won’t make all the journeys
(the average rail business user < £70k salary)
- so business time savings more like £1.8bn than £13.1bn
27
Crowding and ‘waiting’ artificial
 Crowding and waiting time benefits are claimed
against an unrealistic comparison base
– HS2 has 61% loading (cf with 49% now), but 81% in
the unrealistic comparator (‘do minimum’)!
– The realistic alternative has less crowding and more
services eg RP2 has 53% loading
 Crowding and ‘waiting’ benefits are an artefact of the
unrealistic comparison – actually disbenefits
 Crowding is undervalued by DfT – as don’t value the
usefulness of time on board
- so some benefits should really be disbenefits
28
4. Assessment is flawed
Assessment must handle risk and use realistic comparator
 Fails to incorporate risk
 no scenarios, despite undertaking to Public Accounts
Committee on covering ‘downside risks’ in future
 no credit for avoiding forecasting risk
 Fails to develop a best (optimised) alternative
 No incremental costs and benefits comparison with HS2
 Completely ignores pricing option to constrain demand
 Fails to use the best alternative that was developed, Rail
Package 2 (RP2), in the assessment
- either including risk or the right comparator would sink the case
29
Fails to incorporate risk
 ‘Scenarios’ are standard means of addressing
correlated uncertainties
 Any serious review of optimistic/downside
futures would show:
– HS2 current assumptions are top-end
– assessment not robust, especially compared to
alternatives of upgrading existing railway
 Coping with risk favours short lead time,
incremental options
- it’s surprising that a multi-billion project fails to properly address risk
30
Uncertainty and HS2
 Failure has real costs
 A half built railway is worth nothing
 What will we give up instead, worth £17.8bn
 DfT’s advice:
‘Forecasts have been wrong before, and any strategy that tried to build a rigid
investment programme based on fixed long-term forecasts would inevitably be
wrong again. To overcome this challenge, the guiding principles in this
strategy are:
To invest where there are challenges now, in ways that offer the flexibility to cope
with an uncertain future; and
To put in hand the right preparatory work so that, as the future becomes clearer, the
necessary investments can be made at the right time.’
- Delivering a Sustainable Railway, 2007
 An incremental solution
31
Fails to develop a best alternative
 DfT commissioned Atkins to produce alternatives to a new
railway with rail and road upgrades
 For trains Atkins considered:
 longer trains and more trains
 removing pinch points on WCML
 uprating the Chiltern Line
 Best option was to improve WCML (RP2), but:
 ignored opportunity to implement early and incrementally
 did not combine with longer trains (to 12 car)
 DfT buried best option (RP2)
 comparing on different and less favourable assumptions
 still used ‘do minimum’ case for assessing HS2’s benefits
- other major projects criticised for not developing best alternatives
32
DfT misrepresents best VfM rail
alternative (RP2)
Assessment of options (£bn)
treatment of
rolling stock cost
(1) RP2
(2) RP2
(3) RP2a
(4) RP2a
HS2
capital
lease
capital
lease
capital
NPV benefits
£7.349
£7.349
£6.819
£6.819
£28.7
NPV costs
£2.025
£2.581
£2.557
£3.119
£11.9
Net benefit
£5.325
£4.769
£4.261
£3.699
£16.8
3.63
2.85
2.67
2.19
net benefit ratio
2.4
All RP2 options from ‘High Speed 2 Strategic Alternatives Study – Strategic Outline Business Case’
HS2 figures from Cm 7827 page 95
DfT use (4) RP2a data in the White Paper (and not (1) RP2) despite:

different and more expensive leasing approach to rolling stock costs

being an inferior sensitivity on Rail package 2 (RP2)
- so they hid the alternative scheme that had a better VfM than HS2
33
DfT misrepresents potential
capacity
demand on WCML
(increase as % of 2008)
WCML + Chiltern (fleet
capacity increase as %
‘do minimum’
WCML (fleet capacity
increase as % of 2008)
2008 base
‘do minimum’ 2033
133%
Rail Package 2 2033
157%
32%
54%
Rail Package 2 +12-car
135%
165%
DfT say in the White Paper (page 51) that the midscale rail upgrade
alternative gives ‘about 50%’ more capacity, but
 this figure (54%) is on a different basis to HS2
 DfT never show the figure on same basis as HS2 (ie compared
to 2008 on WCML) anywhere - ie the 135%
- so they hid the fact RP2 met the capacity needed for the 133% forecast growth
34
Fails to use developed alternative
 HS2 is not assessed against the best
alternative developed by DfT
– Use of a realistic alternative instead of ‘do
minimum’ would turn assessed benefits into
cost
– Misrepresentation of RP2 (on both value for
money (NBR) and capacity) conceals the
better solution
- DfT defend their decision on basis it did not produce ‘surplus’ capacity
35
5. No robust evidence for
rebalancing the economy
 How are economic impacts and regeneration
valued by DfT framework?
 The evidence for regeneration is limited
 Special features of HS2 favour London
 its gravitational pull
 the forecast travel patterns – more people
travel to London rather than to the regions
(and 70% of users are leisure travellers)
36
What the evidence shows
 Two types of benefits in DfT’s framework:
 Direct economic impacts (from HS2 itself eg time savings, denser travel
to work areas)
 Regeneration (other non transport investments made eg offices)
 Direct economic impacts for HS2 are quantified:
 business productivity benefits (already in HS2 business case)
 + labour market improvements – (£2bn)
 + improved business output in an imperfect market – (£1.6bn)
 + ‘Imperial’ advised HS2 Ltd little to add from HSR – max £8/10m/a
 Regeneration benefits for HS2 are qualitative:
 HS2 Ltd got advice and concluded no strong evidence, but said
 best regeneration opportunity is Old Oak Common – in the South!

Alternative assessment methods exist eg used for Greengauge21 (by
KPMG), but currently have serious issues
37
HSR and regeneration
 Examples of benefits (Lyon, Lille) but also failures
(Vendome, Haute Picardie)
 To succeed need HSR station plus local transport
development that integrates it
 Improvements in vicinity of station may just be at the
cost of surrounding areas ie no net benefit just a
redistribution
 HSR only relevant to service industries
 HSR may draw employment away from a region,
depending on competitive position
38
HS2’s features favour London
 HS2 is a railway predominantly to and from London
 London is efficient on a global scale for services
 DfT believe long distance rail trips to London will
grow much faster than those from London
 Unclear what this means for business travel
 But for leisure (70% users) the result is obvious
 Best regen opportunity identified by HS2 Ltd – Old
Oak Common!
39
Evidence of regeneration
 HS2 Ltd’s assessment:
“ It concludes that the key for a high speed rail station being a catalyst
for significant local and regional development is the integration of that
station into a coherent wider spatial strategy for the city or region.
However it also notes that this will not be a win-win conclusion. Some
areas within a wider region may lose out, and it is possible a region
itself may lose with some activity encouraged to relocate towards
London. Whether such impacts materialise and how significant they
are will depend on the economic structure of the cities, as well as the
actions of regional and local planning authorities.”
A3.1.6, HS2 Demand Model Analysis
40
Reminder of key messages
1. No commercial case
2. Demand forecasts not credible – but overestimates
3. Benefits (at £32 bn) are greatly overstated
4. Assessment is flawed – ‘risk’ is not properly
handled and ‘alternatives’ misleadingly presented
5. No robust evidence for wider economic impacts or
regional regeneration
- and this kills the case without touching any HS2 cost estimates
41
Other topics
 Alternatives and capacity
 More about wasted time on board trains
42
Alternatives
 Rail Package 2 (WCML upgrade)
 Best VfM alternative ie 3.63 NBR - better than HS2
 Net cost £2bn - compared to £11.9bn of HS2
 More and longer rolling stock – 90 sets of 11-car
 Tackles 7 infrastructure pinchpoints on WCML
 Different rolling stock  Could be improved further
 12 car operation
 Declassifying some of first class
 In cab signalling (ERTMS) – for 140 mph service
 Implemented incrementally, as need arose
43
Need a new railway to get capacity?
Reclassify 1st Class
Pendolino Capacity (seats per train)
current configuration
st
Standard
146
296
I
seats per
train
% increase
declassify from 1
2-cars
I
st
st
Standard
modify seating
I
st
Standard
total
56
386
56
448
504
-62%
+30%
-62%
+51%
+14%
- Capacity for free!
44
Securing extra capacity
Effect on rolling stock capacity (of longer/more trains)
Train lengthening
9-car (52 sets)
Part 11-car + 4 sets
(56 sets)
All 11-car (56 sets)
All 12-car (56 sets)
All 11-car (90 sets)
All 12-car (90 sets)
Total seating
Capacity
increase
22,985
30,404
0%
32%
33,600
37,856
54,000
60,840
46%
65%*
135%
165%**
Note
2008 base
Planned for 2013 (and included
in ‘do minimum’ case)
Shows effect of 11-car all sets
12-car (as RP1 discusses)
RP2 proposal for DfT
Effect of adding 12-car to RP2
* Becomes 72% if declassify one first class ie 3 instead of 4
** Becomes 176% if declassify one first class ie 3 instead of 4
- shorter lead-times, smaller cost, incremental
45
Is time on long distance trains
wasted?
 Surveys done show business and other
travellers use time productively
 What account has been taken of recent
technology?
 Will the train be less productive than office
or home?
 ‘overheads’
 human needs
 restrictions
46