21.Departments compete with each other to gain approval for projects by designing business cases at the lowest possible cost and with the most favourable benefit-cost ratios (BCRs). Former Chancellor of the Exchequer Lord Hammond of Runnymede told us that “keeping costs down to get a project into the programme is an essential part of the game-playing in Whitehall … if you go in with too high a cost estimate at the outset, there is a real danger that it will not make it into the programme at all”.
22.The National Audit Office (NAO) highlighted the benefits of establishing floors and ceilings for costs and timescale, rather than setting individual targets. However, it added that “because programmes have often exceeded these targets, there remains a need to interrogate what a range is based on, and what risks and uncertainties could cause a programme to exceed the range”.
23.The first estimates for the cost of HS2 were published in the February 2011 HS2 economic case. Phase One costs were estimated to be £19.6 billion, with the full network estimated at £37.5 billion. Phase One from London to Birmingham is now estimated to cost between £31 billion and £40 billion, an increase of between 14% and 47% from the £27.1 billion funding allocated in 2013. A target cost for Phase One has been set at £36 billion, or £40 billion in 2019 prices. Originally due to open in 2026, the full opening of the Phase One into Euston station is now expected between 2031 and 2036, although services from Old Oak Common are due to commence between 2029 and 2033.
24.The estimated cost of Phase 2a has also increased from £3.5 billion in 2013 at 2015 prices, to between £4.5 billion and £6.5 billion, an increase of between 29% and 87%. Phase 2a is now due to open between 2030 and 2031, three to four years later than expected.. The cost of Phase 2b is now estimated to be between £29 billion and £41 billion, an increase of between 15% and 63% on the £25 billion previously allocated in 2013, and three to seven years behind schedule. The current estimate is for services to open between 2036 and 2040, compared with the original target date of 2033. Those statistics suggest that initial costs and timescales were not properly assessed. The various Ministers with responsibility for HS2 who signed off those estimates have not been held to account for their miscalculations at taxpayers’ expense.
25.BCR is defined as the ratio of the present value of benefits relative to the present value of costs. BCRs are helpful tools for assessing in monetary terms the UK-wide benefits of particular projects and programmes. However, Her Majesty’s Treasury’s ‘Final Report of the 2020 Green Book Review’ found that because BCRs “focus on benefits that it is easy to put a monetary value on”, it “creates an incentive for proposers to artificially boost the BCR with such benefits that are unlikely to be realised, as well as suggesting a level of certainty around the value of those benefits that is not merited by the evidence”.
26.Her Majesty’s Treasury’s ‘Final Report of the 2020 Green Book Review’ concluded that those drafting appraisals have often failed to engage properly with the strategic context in which their proposal sits, including failing to account for a proposal’s specific contribution to the delivery of the Government’s intended strategic goals and the social and economic features of different places. The review also found that the selection of a preferred intervention option is heavily reliant on a benefit-cost ratio (BCR), which is not aligned to decision-makers’ objectives.
27.The Government’s move away from taking a purely cost-benefit approach to assessing the value of major transport projects in the 2020 update to the Green Book has merit. A benefit-cost approach may not capture a project’s social and environmental benefits and shifting to assessments based on the strength of the strategic case could help to prevent a race to the bottom on project cost. At the same time, HM Treasury must maintain its focus on value for money for the taxpayer to ensure that the Government does not oversee the construction of white, or even green, elephants.
28.A new framework for assessing strategic benefits of transport project proposals would help to assess social benefits alongside efficiency and value for money, quantify environmental and regional considerations and identify how an intervention will affect various communities. NIC commissioner Bridget Rosewell told us that “models based only on past data and a reliance on those models is one of the ways in which we go wrong when we do the analysis of our projects”. For example, past models may not take account of contemporary metrics, science, international treaties and policies on decarbonisation. Lord Hammond told us that
“we do not have rigorous tools with which to assess the strategic benefits of strategic projects because, by definition, they are blue-sky projects. We are trying to envisage a world that will be fundamentally transformed and see the benefits that will flow from that fundamental transformation”.
29.The Department has been updating the transport analysis guidance (TAG), which provides direction on the requirements transport interventions must fulfil in the appraisal process. To develop this guidance, the Department adopted the Office for Budget Responsibility’s (OBR’s) March 2021 forecasts of economic growth. The Department stated that the adoption of these forecasts will “reduce forecasts of future travel demand which underpin appraisal”, as the OBR’s revised long-term economic outlook “suggests there will be less emphasis in the future on investment being justified on the basis of high rates of economic growth”.
30.On 19 May 2021, the Department published a progress report on the TAG appraisal and modelling strategy. The progress report announced that the Department will provide scope within TAG for appraisals to include benefits and costs beyond 60 years as an “indicative monetised benefit where it is a material consideration, presented within a business case as a sensitivity test and used to inform the overall value for money assessment”. The report acknowledged that respondents were “sceptical” about this change. Although many supported the idea of considering long-term benefits “in principle”, the report identified a “near consensus that producing credible appraisal estimates post sixty years is extremely challenging”. Some respondents recommended prioritising the development of sensitivity analysis and scenarios over 60 years, “rather than extending the uncertainty further”. Other respondents explained that “if a scheme needed benefits beyond 60 years to make the case, then it may not be the best option”.
31.As a result of this feedback, the Department will allow a sensitivity test to be applied to schemes with a “long asset life” where benefits and costs are “extrapolated beyond sixty years”. Benefits and costs beyond this 60-year threshold will be included in the indicative monetised category for Value for Money (VfM) assessment only, and not initial or adjusted BCRs. That approach recognises the “very high level of uncertainty associated with these longer-term benefits”. Such schemes will be considered on a “case-by-case basis” as to whether undertaking the sensitivity test is “appropriate and beneficial for decision-making”.
32.Assessing long-term benefits could help to evaluate the strategic case for particular transport interventions. Without accurate analytical tools, however, estimating benefits beyond the 60-year mark may distort a project’s value. In addition, it is difficult to predict what other innovations or crises may change the public’s transport requirements over that extended timeframe. Unpredictable factors such as a pandemic, the introduction of new technology or a sudden decline in birth rates may distort previously evaluated outcomes.
33.As well as identifying changes to TAG, the Department is evaluating how such guidance can be applied more flexibly, particularly in relation to the “wider economic impacts of transport investment at both a local and national level”. We welcome this evaluation and look forward to examining how it builds on the Department’s publication of the ‘Appraisal and modelling strategy: TAG update report’.
34.The Government must utilise accurate, sensitive analytical tools to ensure that the projects that best support connectivity, growth and productivity are the ones that get built. In that context, benefit-cost ratios are useful, but they fail to capture regional inequalities and environmental and social factors. The Government must replace benefit-cost ratios with a “benefit-cost plus” system, which not only takes account of costs and benefits and therefore ensures value for money for the taxpayer, but captures regional inequalities and environmental and social factors.
35.To facilitate transparent, honest and constructive public and political engagement with the economic and engineering realities of delivering major infrastructure projects, the Government should establish floors and ceilings for project costs and timescales defining the range within which projects are scheduled for delivery rather than setting single specific targets, which are invariably unhelpful and inaccurate. Any breach of a project’s cost and/or time ceilings should be communicated to the appropriate Select Committee by a formal mechanism, which should trigger intense parliamentary scrutiny to protect the public purse and to support effective project delivery.
36.Government agencies have repeatedly delivered major transport infrastructure projects that exceeded the specified cost and/or delivery date. Senior management of those Government agencies were apparently unaccountable for such overruns. Senior management of Government agencies with ultimate responsibility for project delivery must be incentivised to avoid cost and/or time overruns. The senior management of Government agencies with responsibility for delivering major infrastructure projects should be subject to a formal duty immediately to notify the relevant Select Committee in cases in which cost and/or time ceilings will be exceeded.
40 [Lord Hammond]
41 The National Audit Office, (November 2020), p 13
43 Department for Transport, , February 2011. 2009 prices.
44 National Audit Office, , HC 40 Session 2019–20, 24 January 2020. 2015 prices.
45 Department for Transport, , April 2020
46 National Audit Office, , HC 40 Session 2019–20, 24 January 2020
49 Ibid. 2015 prices.
51 HM Treasury, , December 2020, p 50
52 HM Treasury, , November 2020, p 4
55 [Ms Rosewell]
56 [Lord Hammond]
57 The Office for Budget Responsibility’s (OBR’s) from the 3 March 2021 Budget estimate that the UK economy is predicted to be around 29% smaller in 2070 compared with pre-March 2020 forecasts. This comprises a 23% reduction in projected GDP per capita and an 8% fall in forecast population by 2070, compared with previous forecasts.
58 Department for Transport, , May 2021, p 10
68 The Department for Transport () para 46