3 Lessons for the Department's future
investment decisions
9. There are a number of important lessons from High
Speed 1 which the Department needs to learn and apply to future
transport projects, including HS2. We asked the Department what
it was doing to ensure that these lessons were learned. In particular
we were interested to know what was being done to improve passenger
demand forecasts— use of High Speed 1 had been substantially
overestimated by both LCR and by the Department.[17]
10. Demand forecasting for new projects is challenging
but there was significant optimism bias in the original 1995 LCR
forecasts of international passenger demand for High Speed 1 with
actual passenger numbers, since the line opened in 2007, at a
third of these predicted levels. International passenger numbers
were also 30% below the Department's revised 1998 forecast, when
the Department guaranteed the project debt.[18]
More recent forecasts are more accurate, but this is to be expected
as they predict demand over a shorter time period.[19]
High Speed 1 is not the only case where the Department has shown
optimism bias. For example, it accepted National Express's bid
for the East Coast Passenger franchise, which was based on unachievable
growth in passenger revenues.[20]
The New Economics Foundation told us that demand forecasting is
difficult and pointed out that inaccurate forecasts were also
made by the private sector, for example, Disneyland got its forecasts
dramatically wrong.[21]
11. The Department's models for forecasting passenger
demand are highly sensitive to a variety of factors, particularly
projections of GDP. The New Economics Foundation considered that
it was critical "not to assume the best" and to be cautious.
In relation to HS2, we asked the Department for the reasons underpinning
the changing forecast of the year by which passenger demand will
have doubled as this has fluctuated from 2033 to 2043 and back
to 2037 (recently revised again to 2035). According to the Department
the main reasons for the first fluctuation were downward revisions
to projections of passenger growth following the economic crisis,
combined with a change in fares policy. The second fluctuation
was mainly due to updating the year on which the forecasts are
based to reflect actual increases in long distance passenger demand
which had been greater than expected. The Department does sensitivity
testing on individual factors underpinning its benefit-to-cost
ratio estimates but in reality changes tend not to happen in isolation.[22]
12. The Department's scenario planning for High Speed
1 was inadequate. The Department maintained that its estimate
of the size of the total market for travel between the UK and
France and Belgium was about right but accepted that it had over-estimated
the share that would be captured by High Speed 1 because it had
not anticipated the competition from low cost airlines and the
competitive response from the ferry companies. The Department
accepted that, although difficult, it could have predicted these
developments in the mid-1990s.[23]
HS2 is also being modelled on a limited set of assumptions. For
example, the Department has not modelled the potential impact
of the growth of video-conferencing on passenger numbers.[24]
In addition passenger numbers for HS2 are being forecast on the
assumption that premium prices will not be charged on the high
speed line. This assumption is unlikely to be adopted when HS2
is in operation. Passengers may be willing to pay higher fares
to travel faster and the operator of the 'classic' line may cut
fares to compete.[25]
13. The Department's method of calculating the benefit-to-cost
ratio of new rail infrastructure projects, including HS2, includes
an assessment of the value of journey time savings for different
types of passengers. For business passengers, the Department uses
an assumption that all time spent on a train is not productive,
so an hour less on a train will mean that an hour more can be
spent on business activities. The Department uses an average of
£70,000 a year as the value of business travellers' time
when it calculates how much these time savings are worth. The
Department told us that this figure is based on surveys carried
out in 2002-03 and reflects not just salary costs but business
travellers' productivity as a whole, including their contribution
to profits.[26]
14. The New Economics Foundation considered that
more up-to-date information is needed about how people actually
spend their time on trains and on what they value most about travelling
by train. Business travellers may value the right conditions to
work on the train combined with arrival on time more highly than
shorter journey times. The Department's assumption that time on
trains is unproductive combined with a high value for business
travellers' time risks overestimating the benefits of high speed
rail, exaggerating the negative effects of intermediate stations,
which make journey times longer, and skewing investment decisions
in favour of long distance travel rather than commuting. The time
business travellers save by using high speed rail is valued at
£54 per hour yet commuters' time saved getting to and from
work is only valued at £7 per hour.[27]
Such differences are hard to justify and yet vital for proving
the case for long distance investment.
15. The lessons identified above all impact on the
benefit-to-cost ratio of a project. The Department told us there
are a variety of other "pillars" which it takes into
account, including strategic judgements, when making a decision
on whether a project is value for money. Without clear, transparent
criteria for making investment decisions, including for example
that a project must have a benefit-to-cost ratio of at least 1.5,
the Department may be able to justify any individual investment
decision whether or not it is good value for money. We asked the
Department if it had considered a wide range of options as alternatives
to investing in HS2, such as increased investment in local transport
or in broadband. The Department told us that it had not considered
the benefits and costs of these alternatives in its assessment.[28]
17 Qq 1, 24 Back
18
Qq 24-25, 57; C&AG's Report, para 1.15 Back
19
Qq 31-32 Back
20
Qq 73, 77; Committee of Public Accounts, 39th Report of Session
2010-2012, The InterCity East Coast Passenger Rail Franchise,
HC 1035 Back
21
Q 5 Back
22
Qq 3, 5, 35-41; Ev 39 - Department for Transport, HS2 Demand
Forecasting and Cap Year, paras 9-11 Back
23
Qq 25-29, 70-72 Back
24
Q 62 Back
25
Qq 42-49 Back
26
Qq 3, 62, 92- 98 Back
27
Qq 3, 59-61, 68, 118-121 Back
28
Qq 20, 80-81, 111-116, 128-134 Back
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