House of Lords - The Economics of High Speed 2

The Economics of High Speed 2 - Economic Affairs Committee Contents

CHAPTER 8: ESTIMATING THE BENEFITS OF HS2

342. The calculation of the benefits of HS2 forms part of the cost-benefit analysis of the project. The Economic Case presents the benefits as follows:

Table 20: Estimated benefits of HS2 (2011 prices)

	PHASE ONE		FULL NETWORK
BENEFIT	BENEFIT VALUE (£ BILLION)	PERCENTAGE OF TOTAL	BENEFIT VALUE (£ BILLION)	PERCENTAGE OF TOTAL
Transport User Benefits	24.6	87%	59.9	84%
Wider Economic Impacts	4.3	15%	13.3	19%
Other impacts	0.4	1%	0.8	1%
Loss to government of Indirect tax	-1.2	-4%	-2.9	-4%
TOTAL	28.1	100%	71.0	100%

Source: Economic Case, Table 15.

343. The following table shows the benefit-cost ratio for Phase One of HS2 and the full network, both with and without the wider economic impacts (WEIs):

Table 21: Benefit-cost ratio (BCR) of HS2 with/without wider economic impacts

	PHASE ONE	FULL NETWORK
BCR without WEIs (ratio)	1.4	1.8
BCR with WEIs (ratio)	1.7	2.3

Source: Economic Case, Table 15.

344. The vast majority of the benefits relate to time savings by transport users. These are calculated by applying a monetary value to the time saved by business, commuter and leisure travellers as a result of HS2. The wider economic impacts are largely benefits from increased productivity and are explored in Chapter 6.

345. This Chapter considers the suitability of cost-benefit analysis for assessing the benefits of HS2. It also examines the assumptions used in the valuation of time savings: the predicted proportion of business, commuter and leisure travellers using HS2 and the values of travel time savings assigned to each of those purposes.

COST-BENEFIT ANALYSIS OF HS2

346. The Economic Case sets out the cost-benefit analysis for the project. Following HM Treasury's Green Book principles, the Department for Transport requires a cost-benefit analysis to be carried out for the appraisal of all transport projects that require Government approval. The Department's transport appraisal guidance is published in the 'Web-based Transport Analysis Guidance' (referred to as WebTAG).

347. The cost-benefit analysis carried out for the appraisal of HS2 in the Economic Case found that the project had a benefit-cost ratio of 2.3. This estimated that every £1 spent on the project would generate a benefit worth £2.30. The benefit-cost ratio is calculated by dividing the net benefits of the project by the net cost to the Government:

· Net benefits (transport user benefits + wider economic impacts + other impacts + tax impacts)

· Net cost to the Government (construction + rolling stock + operating costs + renewals—revenue)

DOES A BENEFIT-COST RATIO OF 2.3 PROVIDE VALUE FOR MONEY?

348. HS2 Ltd wrote that the cost-benefit analysis shows that benefits exceed costs by a "considerable margin."[418] Lord Adonis said that the rule of thumb in the Department was that "a project with a [benefit-cost ratio] of less than 2 is either weak or there would need to be significant additional factors to be taken into account to make it a project that is likely to be supportable. HS2 was above 2."[419]

349. Professor Mackie wrote that "When over 99% of the DfT's investment schemes yield high or very high value for money, I think it does violence to the English language to describe a benefit cost ratio of 2.3 as 'high value for money.'"[420] He later told us that "the scheme really depends on doing the [full] network" and that "offers reasonable value for money to society. I would hesitate to say high".[421]

350. Sir Tim Lankester, a former Permanent Secretary,[422] argued in his written evidence that "HS2 as presently conceived fails to meet the standard test for all public spending that it must provide good value for money." He questioned the benefit cost ratio in terms of the revenue assumptions, value of time savings allocated to business travellers and the failure to take account of landscape impacts. He concluded that "HS2 is a marginal project at best, and at worst an extremely wasteful one, given the huge amounts of money at stake."

351. Sir Tim's evidence noted the role of the Accounting Officer in ensuring that expenditure on Government projects provided value for money.[423] He wrote that he found it "a little surprising" that the Department's Accounting Officer, Philip Rutnam, had "so far not insisted on a formal direction from his minister before authorising continuing expenditure on the project, as he is required to do under Treasury rules if the value for money test fails to be met." He noted that Mr Rutnam had sought formal direction from the Minister in February 2015 in relation to the proposal to issue invitations to tender for the Northern and Transpennine Express franchises."[424]

352. Professor Overman noted that as the benefit-cost ratio without the wider economic impacts was 1.8, he found it "surprising" that the Department referred to ratios between 1.5 and 2.0 as 'medium value for money': "they are probably in the bottom 10% … of transport projects that we have on the books as doable."[425] He said that "the returns on it are not great but they are not awful. It is a sort of mediocre, medium-type return project."[426]

353. We asked Mr Prout of the Department for Transport if he agreed with Professor Overman's analysis. He replied that the Department had published statistics on the value for money of the schemes it has funded since 2011:

Table 22: Percentage of transport spend by value for money category since 2011

YEAR	PERCENTAGE OF SPEND BY VALUE FOR MONEY CATEGORY
	POOR (0-1.0)	LOW (1.0-1.5)	MEDIUM (1.5-2.0)	HIGH (2.0-4.0)	VERY HIGH (4.0+)
2013	0	0	6	80	14
2012	0	0	0	42	58
2011	0	0	0	63	37

Source: Letter from David Prout to the Chairman, 7 November 2014

354. Mr Prout concluded that a benefit-cost ratio of 2.3 "places HS2 in the same [value for money] category as the majority of transport spending by [Department for Transport] over the past three years."[427]

355. We asked the Secretary of State to provide a breakdown of the benefit-cost ratios of transport spending which fell in the 'High' value for money category. The Secretary of State told us that the Department "does not hold a central register of individual BCRs … the Value for Money (VfM) category is central to informing the Department's decision making it is this information that DfT holds centrally for transparency purposes."[428] We are surprised that, while the Department is able to provide a breakdown between projects of low value for money (1.0-1.5) and medium value for money (1.5-2.0), it is apparently unable to distinguish between projects with a value for money of 2.0-3.0 and 3.0-4.0. This may of course be because the majority of projects in the 2.0-4.0 range (80 per cent of all projects in 2013) were, unlike HS2, in the 3.0-4.0 range.

SUITABILITY OF COST-BENEFIT ANALYSIS FOR ASSESSING LARGE PROJECTS

356. A number of witnesses questioned the suitability of cost-benefit analysis for assessing large, long-term projects.

COST-BENEFIT ANALYSIS UNDERESTIMATES THE LIKELY BENEFITS

357. Lord Deighton explained that this way of assessing projects:

429

358. The Department for Transport agreed and said there was "good reason" to believe that the return on the investment could be higher as the analysis uses "conservative assumptions" like capping growth in passenger demand in 2036.[430] Lord Adonis took a similar view, describing the assumption as "crazy"[431]

DOUBTS OVER SUITABILITY FOR DECISION-MAKING ON LARGE INFRASTRUCTURE PROJECTS

359. Lord Adonis told us that he had always been "somewhat sceptical" of benefit-cost ratios: "My own view is that this is an aid to policymaking, but it should not be a substitute for judgment … aggregating small journey time savings is a debatable and maybe not particularly fruitful endeavour."[432]

360. The Transport Studies Unit from the University of Oxford described cost-benefit analysis as "contested and problematic."[433] They thought that because the Government's estimate of the benefit-cost ratio (excluding wider economic impacts) fell from 2.2 to 1.8 between February 2011 and October 2013, this indicated that "the volatility of economic conditions and forecasts can have major impacts on the credibility of large infrastructure projects such as HS2, and bring into doubt the suitability of [benefit-cost ratios] as a guide to decision making."[434]

361. A recent article by Professor Dieter Helm, Professor of Energy Policy at Oxford University, was cited to us in evidence from the Transport Studies Unit. The article discussed the use of cost-benefit analysis for assessing large infrastructure projects:

435

362. As an example to illustrate his point, he discussed HS2, saying the question is "not whether to build a new line to Birmingham from London, or to weigh up the costs and benefits to the existing economy. It is whether to have a high-speed rail system, within which the particular section would fit."[436]

SUPPORT FOR THE TECHNIQUE

363. Lord Deighton said the technique was "an important discipline … you always begin with a standard cost-benefit analysis, because then you can rank projects and not get too carried away."[437] Sir David Higgins, Chair of HS2 Ltd, similarly said it was a "method of rating various infrastructure projects against other infrastructure projects" and it could be "relied on."[438]

364. Mr Prout told us that Professor Venables and Professor Overman had recently completed a study reviewing the Department's guidance on how to estimate the effects of transport investment on economic performance: "they come from very different standpoints … and their conclusion is that our [benefit-cost ratios] are robust and our processes are world class."[439] Professor Overman described the results of the cost-benefit analysis as "reasonably good central estimates."[440]

365. The Jubilee Line extension and M25 were mentioned by some witnesses as successful projects that had low benefit-cost ratios. Lord Adonis said the projects had "much weaker" benefit-cost ratios than HS2 but "nobody would dream now [of] revisiting."[441] The Secretary of State said that the Jubilee Line had a benefit-cost ratio of 0.9 but he thought "without taking that kind of punt … we would not have seen the kind of transformation that we have seen in that area."[442] Lord Deighton however said that "we talk about the Jubilee Line and the M25, and we only ever remember the ones that had much wider economic benefits, so I think the retrospective analysis does give you a bit of an optimism bias."[443]

366. COST-BENEFIT ANALYSIS IS AN IMPORTANT DISCIPLINE; IT IS THE BEST TOOL FOR COMPARING SEVERAL PROJECTS TO SEE WHICH PROVIDES THE BEST VALUE FOR MONEY. BUT THE RELIABILITY OF THE METHOD FOR QUANTIFYING THE BENEFITS OF A PROJECT DEPENDS UPON THE QUALITY OF THE EVIDENCE USED IN THE ANALYSIS.

THE TRANSPORT USER BENEFITS OF HS2

367. The standard approach to transport cost-benefit analysis, as specified in the Department for Transport's WebTAG guidance, "requires a monetary valuation to be placed on the impacts that an investment will have on the travelling experience of transport users."[444] This allows the benefits of a project to be compared to the costs of the project.

368. The Economic Case shows the monetary valuation placed on the time saved by business and commuter/leisure travellers:

Table 23: Transport user benefits by journey purpose

TRANSPORT USER BENEFITS	PHASE ONE (£ BILLION)	FULL NETWORK (£ BILLION)
Business	16.9	40.5
Commuter/Leisure	7.7	19.3
TOTAL	17.6	59.8

Source: Economic Case, Table 15.

369. To calculate the monetary valuation, set values of travel time savings were used for each travel purpose. This section looks at the evidence behind the values assigned to each purpose by the Department for Transport. As the value of business travel times savings is four to five times higher than the values allocated to the other travel purposes, we also look at the evidence used to estimate the demand for business travel on HS2.

VALUES OF TRAVEL TIME SAVINGS

370. The Department for Transport sets values of travel time savings (often referred to as 'values of time') to be used as the basis to estimate the transport user benefits of a project.[445] These values of time provide a way to quantify the direct benefits of quicker journeys. They also underpin the valuation of other journey improvements such as reduced crowding on trains and improved reliability.[446]

371. The Department for Transport's TAG Data Book provides the set values of time that should be used in transport cost-benefit analysis.[447] The values are per hour and vary by journey purpose. The Economic Case stated that the "values of travel time savings should represent what people and businesses would be willing to pay for quicker journeys."[448] The values of working time (business) and non-working time (commuting and leisure) are calculated using different methods which are explained below. Table 24 shows the Department's current values for rail passengers used in the cost-benefit analysis of HS2 in the Economic Case.[449]

Table 24: Values of time for rail passengers

TRAVEL PURPOSE		VALUES OF TIME (PER HOUR, 2010 PRICES)
Working time	Business	£31.96
Non-working time	Commuting	£6.81
	Leisure	£6.04

Source: Department for Transport, WebTAG Table A 1.3.1 (November 2014)

MEASURING THE VALUES OF TRAVEL TIME SAVINGS—NON-WORKING TIME

372. For non-work travel, the Department assumes that "people implicitly put a value on their own time in that they will trade a cheaper, slower journey against a faster, more expensive one."[450] This value is measured through surveys. Respondents are asked to choose between journey options for either a recent or a hypothetical trip with different travel times and costs.[451] From the results of the surveys, an estimate of the average value that people place on their time can be made.

373. A study of the valuation of travel time savings on UK roads was undertaken in 1994 for the Department of Transport and the findings were published in 1999.[452]The Institute for Transport Studies reanalysed these findings for a 2003 report; this work provided the basis for the estimated values of non-working time listed in Table 24.[453]

RECOMMENDATION FOR AN UPDATED STUDY

374. The Department for Transport commissioned the Institute for Transport Studies to review non-work travel time savings in 2010. The review recommended that, as the non-work values of time were "based upon survey work conducted in 1994 … There is a strong case for commissioning a revised national study updating [values of travel time savings]."[454]

375. Following this review, the Department concluded that "the data underlying the values of non-work travel time savings are old".[455] They accepted the recommendation for an updated study.[456] A research project has been commissioned that is scheduled to report in spring 2015.[457]

REVIEW OF NON-WORKING TIME VALUES IN 2013

376. Further work from the Institute for Transport Studies looked at the reliability of the existing values. This concluded that "the Department's official values closely represent the best available evidence."[458] The Department concluded that "the values for non-work travel time savings are still reasonable to use in appraisal work, especially in conjunction with improved information on the range of uncertainty."[459]

377. The Secretary of State said that the values of time used in the cost-benefit analysis for HS2 had been "re-estimated in 2013, so to go back to 1994 was perhaps slightly out of date."[460] Analysis in the further work by the Institute for Transport Studies had shown that GDP elasticity[461], which is used to estimate how the 1994 values have increased over time, was higher than previous estimates had shown. The Department revised the values in 2013 using the higher GDP elasticity measure.[462] This increased the commuter value of time from £6.46 to £6.81 and the leisure value of time from £5.71 to £6.04.

378. THE VALUES OF NON-WORK TRAVEL TIME SAVINGS ARE BASED ON SURVEYS OF MOTORISTS FROM 1994. WE ARE NOT CONVINCED THAT BASING VALUES OF TIME ON OUTDATED SURVEYS OF MOTORISTS IS THE BEST WAY OF CALCULATING SOME OF THE BENEFITS OF A MAJOR RAIL PROJECT; RAIL USERS CAN USE JOURNEY TIME PRODUCTIVELY. 33 PER CENT OF THE NET TRANSPORT BENEFITS OF HS2 ARE DERIVED FROM THESE VALUES (£19.3 BILLION). THE DEPARTMENT FOR TRANSPORT HAS CONCEDED THAT THE DATA ARE OLD AND THAT FRESH EVIDENCE IS REQUIRED.

MEASURING THE VALUES OF TRAVEL TIME SAVINGS—WORKING TIME

379. Values of working time apply only to journeys made in the course of work. This excludes commuting journeys which are counted as non-work travel in transport cost-benefit analysis. The latest WebTAG guidance explained that businesses benefit from reduced travel time through improved access to suppliers or customers and widening the market in which a business can serve. The guidance concluded that businesses "should be willing to pay for quicker journeys and it is this willingness to pay which forms the basis of values of working travel time savings." The guidance noted that, as it is difficult to find direct evidence of businesses' willingness to pay, alternative methods are required to estimate values that "effectively proxy" for willingness-to-pay:

463

380. A 2013 report from the Institute for Transport Studies gives a clearer description:

464

This is known as the 'cost saving approach'.[465] It calculates the value of working travel time by adding the gross wage to non-wage labour costs[466].The gross wage rate is calculated for rail passengers using evidence from the National Travel Survey.[467] A percentage increase is then applied to reflect non-wage labour costs such as national insurance and pensions contributions.

THE APPROPRIATENESS OF THE DEPARTMENT'S APPROACH TO VALUING WORKING TRAVEL TIME

381. The main criticism of the Department's approach to valuing working travel time savings for rail is that it does not take into account that people can work on trains. Professor David Bannister and Dr Moshe Givoni, both of the Transport Studies Unit at the University of Oxford, said that "it is not the amount of travel time that is critical but its quality and the extent to which that travel time can be used for a range of activities."[468] Discussing reasons for growth in rail travel, the Secretary of State said "we have also seen people wanting the convenience of the train and being able to work on the train."[469]

382. Mr Scott of Virgin Trains said that they were in discussions with Network Rail to "provide free and superfast internet connectivity on board to all passengers". With this in place, Mr Scott said that business travellers would "certainly … be able to work effectively."[470]

383. We also heard evidence in support of the Department's approach. The Institute for Transport Studies, in a report for the Department for Transport, said that:

471

384. Professor Glaister said that "The principle is a good one … The question is whether we have the right value here in terms of what business would be willing to pay … My own view would be that it has been reasonably well researched."[472] The Secretary of State said that the values are "consistent with people working on trains."[473]

REVIEW OF THE DEPARTMENT'S APPROACH

385. The Department for Transport commissioned the Institute for Transport Studies to review the evidence for valuing working travel time savings in 2013. The review noted that the assumptions on which the approach was based, "have been questioned to various degrees by commentators from very different backgrounds and over many years." It outlined three arguments put forward for change:

· "The mobile communications revolution including in-car phones and wi-fi enabled trains. There is clear evidence of willingness to pay for such facilities and it might be hypothesised that the usability of travel time for working has risen over time."

· "The proportion of business travellers in occupations and roles which enable them to use travel time productively has risen."

· "There has been a perceptible move to a more flexible working hours environment … the implicit contract for many middle and senior managers is that long days involving business trips are part of the deal and that this makes it more likely that faster journeys switch time at least partially between travel and leisure rather than between travel and work."[474]

386. The review provided a thorough assessment of the evidence that lies behind the cost saving approach and compared it to two other methods: 'willingness to pay' and the 'modified wage based (Hensher) approach'. Box 11 gives an overview of these methods.

Box 11: Other methods of working travel time values

The Government uses the cost savings approach to value business travel time. There are two other main methods for evaluating the value of business travel time:

· Willingness to pay

This method involves establishing how much travellers are willing to pay through revealed preferences or stated preferences.

Revealed preference relies on observed behaviour; business travellers reveal their willingness to pay through their choices between travel modes, routes and prices.

Stated preference relies on surveys aimed at eliciting the preferences of business travellers for travel modes, routes, and prices.

· Modified wage based (Hensher) approach

This is a modified version of the cost savings approach which takes account of the proportion of time spent engaged in work whilst travelling and how productive that work is. It also considers the proportion time saved from a quicker journey that the employee uses for leisure rather than additional work. It is considered difficult to apply and its use has been limited.

COMPARISON OF THE DEPARTMENT'S APPROACH WITH OTHER METHODS

387. The Institute for Transport Studies' review compared the results of the Department's approach with those of willingness to pay studies and the modified wage based (Hensher) approach. Mr Prout said that these findings showed that the proxy value used by the Department was "absolutely smack in the middle" of the ranges indicated by willingness to pay studies from across Europe (this comparison was highlighted in a table in the Strategic Case; whilst it shows that the Department's valuation is roughly in the middle of the revealed and stated preference studies, it is substantially above the value calculated using the modified wage based (Hensher) approach).

388. The conclusion in the Institute for Transport Studies' report on the comparison with other methods was as follows:

475

THE REVIEW'S CONCLUSION AND THE DEPARTMENT'S RESPONSE

389. Overall, the review concluded that:

476

390. However, the review warned that "it is not simply a matter of stating that people work while travelling and hence the Cost Saving Approach produces inflated values … A range of other issues are potentially relevant, such as the value of more time at the destination".[477] It set out a number of options, including alternatives to the cost savings approach, which the Department could pursue.

391. The Department's initial response was to carry out the "do minimum" option to update the gross wage rate and non-wage labour costs used in the cost savings approach.[478] The working travel time value for rail fell as a result from £47.18 to £31.96.

392. The Department also undertook to collect fresh evidence of businesses' willingness to pay.[479] The Department's latest guidance states that "due to the uncertainties and inconsistencies in the existing evidence, the Department believes that fresh empirical evidence on business travellers' willingness-to-pay for travel time savings is required."[480]

393. The Secretary of State providing further details on this work. He explained that the study will "measure values of time through directly surveying both people and business to understand how they value travel time savings." One of the objectives of this work was to "Extend the use of direct survey methods, previously used for non-work travel, to business travel time savings. Using this method will implicitly take account of the fact people work on trains."[481]

394. The Secretary of State said that following consultation on the recommendations, they would be reflected in an updated WebTAG in 2016. The Economic Case for HS2 will be kept "under review" and updated "as appropriate to take account of the latest evidence as it becomes available."[482]

395. THE VALUES OF WORKING TIME SAVINGS FOR RAIL DO NOT TAKE ACCOUNT OF THE FACT THAT TIME ON A TRAIN CAN BE USED PRODUCTIVELY. THE INSTITUTE OF TRANSPORT STUDIES AT THE UNIVERSITY OF LEEDS CONCLUDED THAT THE EVIDENCE BEHIND THE VALUES WAS UNCLEAR. 70 PER CENT OF THE NET TRANSPORT BENEFITS OF HS2 DERIVE FROM THESE VALUES (£40.5 BILLION).

396. 82 PER CENT OF THE ESTIMATED TOTAL BENEFITS OF HS2 ARE DERIVED FROM THE VALUE PLACED ON WORK AND NON-WORK TRAVEL TIME. WE FIND IT DIFFICULT TO HAVE ANY FAITH IN BENEFITS THAT HAVE BEEN ESTIMATED ON THE BASIS OF THESE VALUES, PARTICULARLY AS THE DEPARTMENT FOR TRANSPORT HAS RECENTLY CONCLUDED THAT FRESH EVIDENCE IS REQUIRED AND HAS COMMISSIONED FURTHER RESEARCH.

BUSINESS TRAVEL ON HS2

397. The Economic Case stated that the HS2 network is "designed to provide for rapid journeys between city centres, and is therefore likely to carry a relatively high proportion of business travellers."[483] As the Department assumes that business value of time is four-to-five times higher than commuting or leisure time, the benefit-cost ratio is particularly sensitive to the estimated number of business travellers on HS2. This section considers recent trends in business travel, the estimated demand for business travel on HS2 and the evidence that estimate is based on.

RECENT TRENDS IN BUSINESS TRAVEL

398. There has been an overall decline in business trips across all modes of transport since 1995:

FIGURE 14: BUSINESS TRIPS ACROSS ALL MODES OF TRANSPORT SINCE 1995-1997

Source: National Travel Survey: England 2013, https://www.gov.uk/government/statistics/national-travel-survey-2013 [accessed March 2015]

399. The number of business trips on rail has however increased over the same period. A report by the RAC Foundation in 2012, cited to us in evidence, found that average rail mileage per person per year for business travel (excluding London Underground) had increased by 168 per cent in Great Britain between the periods 1995-1997 and 2005-2007.[484]

400. The RAC Foundation report concluded that there is evidence of some substitution of business travel by men[485] between road and rail in the period between 1995-1997 and 2005-2007: "for every four-mile reduction in company car travel for business purposes, we observe an increase of approximately one mile in business travel by rail." The report thought there was a "clear link" between the sharp rise in the notional taxable value of an employee being provided with free fuel for private use in the late 1990s/early 2000s and the reduction in company car use.[486]

401. Figure 15 (below) gives the annual change in average rail mileage per person per year for businesses since 2002. It shows that business rail travel dipped after the recession, only reaching the 2007 level in 2013.[487]

FIGURE 15: AVERAGE DISTANCE TRAVELLED ON RAIL (INCLUDING LONDON UNDERGROUND[488]) FOR BUSINESS PURPOSES, MILES PER PERSON PER YEAR

Source: National Travel Survey, England 2013: https://www.gov.uk/government/statistics/national-travel-survey-2013 [accessed March 2015]

PROPORTION OF LONG-DISTANCE RAIL TRAVEL UNDERTAKEN FOR BUSINESS PURPOSES

402. Despite the increase in business travel, long-distance rail is mostly used for leisure purposes. The proportion of rail journeys over 100 miles undertaken for business purposes has decreased slightly in recent years according to the National Travel Survey:

Table 25: Proportion of weekly rail travel by purpose for trips over 100 miles, National Travel Survey data[489]

PURPOSE	2006-2009		2009-2013
	WEEKDAY PROPORTION, %	WEEKEND PROPORTION, %	WEEKDAY PROPORTION, %	WEEKEND PROPORTION, %
Business	36	6	34	6
Leisure[490]	55	93	55	92
Commuting	8	1	11	2

Proportion of all journeys	76	24	74	26

Source: Letter from Secretary of State to the Chairman. 12 February 2015

ASSUMPTIONS ON JOURNEY PURPOSE IN THE MODELLING OF RAIL DEMAND WITHOUT HS2

403. The modelling carried out in the Economic Case for rail demand without HS2 (the 'without HS2 scenario'—see Chapter 3) assumed a higher average proportion of business travel on weekday rail journeys over 100 miles than that shown by the National Travel Survey:

Table 26: Average journey purpose proportion for daily weekday trips over 100 miles assumed in the model (without HS2)

JOURNEY PURPOSE	2010 (%)	2036 (%)
Business	39	40
Leisure	46	46
Commuting	15	14

Source: Letter from Secretary of State to the Chairman, 12 February 2015.

404. These are averages for all such journeys in the model. '. The journey purposes for the demand between each zone are modelled separately. The proportions of business travellers estimated to be travelling between London and Birmingham, Leeds, Manchester and Sheffield, are substantially higher than this 39 per cent average for 2010:

Table 27: Weekday journey purpose proportions on main HS2 routes used in modelling (base year 2010)[491]

JOURNEYS BETWEEN	BUSINESS (%)	LEISURE (%)	COMMUTING (%)
London and Birmingham	56	29	15
London and Leeds	56	40	4
London and Manchester	64	31	5
London and Sheffield	65	31	5

Source: High Speed Two Atkins Model Development Report, Table 2-23

405. In a letter to the Chairman, the Secretary of State said that the journey purposes used in the modelling were not comparable to the National Travel Survey data (Table 25) because the trips forecast in the model "do not include every long distance rail trip in the country."[492] Nevertheless, the Secretary of State said they had conducted "some analysis of the National Travel Survey to look specifically at areas served by HS2." This showed, "more trips made for business purposes than for the network as a whole" between the areas in Table 27.[493] The analysis used average journey purposes from 2002 to 2013:

Table 28: Proportion of weekday rail trips by purpose between London and selected regions, National Travel Survey data, 2002 to 2013 average

JOURNEY PURPOSE	LONDON TO WEST MIDLANDS/EAST MIDLANDS (%)	LONDON TO EAST MIDLANDS/YORKSHIRE & HUMBER (%)	LONDON TO WEST MIDLANDS/NORTH WEST (%)
Business	39	38	40
Leisure[494]	40	44	49
Commuting	20	18	11

Source: Letter from Secretary of State to the Chairman, 12 February 2015.

SUBSTANTIAL INCREASE IN THE PREDICTED NUMBER OF BUSINESS PASSENGERS BETWEEN ECONOMIC CASES

406. Between the August 2012 and October 2013 business cases, a change in how journey purposes were modelled led to a substantial increase in the estimated number of business travellers. The August 2012 version had modelled the following proportion of journeys undertaken for business in 2010 between the cities in Table 27: 26 per cent of journeys between London and Birmingham; 28 per cent of journeys between London and Leeds; 25 per cent of journeys between London and Manchester; and 23 per cent of journeys between London and Sheffield.[495] These proportions are much lower than those used in the October 2013 Economic Case (see Table 27). HS2 Action Alliance criticised the change, which led to an overall increase in the estimated transport user benefits of £11.5 billion.[496]

407. The Department for Transport explained the reasons for the change in methodology to us in written evidence:

"Prior to the October 2013 HS2 Economic Case the journey purpose of trips was determined by using ticket sales data to examine the type of ticket sold (full price, open etc.) and making assumptions about the relationship between the ticket type and the journey's purpose. This approach had the following limitations:

· The relationship between ticket type and journey purpose was based on national averages and did not vary according to distance or region; and,

· Analysis of the National Passenger Survey data shows that more business trips are now being undertaken using reduced or advanced purchase tickets and this was not reflected in the data and assumptions used."[497]

408. To reflect these limitations, the Department said they revised their approach by directly sourcing journey purpose splits from the National Rail Travel Survey. This was a large survey of rail passengers (sample size 436,000) undertaken in London areas in 2001 and other areas of the country between 2004 and 2005. The journey purposes used in the October 2013 modelling were taken directly from this survey.

409. A report from Atkins (who carried out the modelling), explaining the changes from the August 2012 forecasts, said that the National Rail Travel Survey provides "a 'cross-sectional' sample representing a single point in time … and is now relatively dated." The Atkins report however said that the National Rail Travel Survey provided a larger sample size than other surveys and that the data remained representative as journey purposes have been shown to be stable since the time of the surveys.[498]

OTHER EVIDENCE ON JOURNEY PURPOSES

410. Mr Stokes and HS2 Action Alliance said that the National Passenger Survey (carried out every six months by Passenger Focus) showed a much lower proportion of journeys undertaken for business reasons than modelled in the October 2013 Economic Case.[499] The survey provides a breakdown of journey purpose by train operator. The latest report for Virgin Trains from Autumn 2014, from a weighted sample size of 31,000 journeys, showed that 25 per cent of long-distance passengers on Virgin Trains services were travelling for business.[500] Discussing the estimated proportion of business travellers in the October 2013 economic case, Mr Stokes said:

501

411. Mr Scott from Virgin Trains told us that he could not say what proportion of business travellers who used their services for reasons of commercial confidentiality. He said it was "more than a quarter, certainly" and said he "would not object" to the characterisation that the proportion of business travellers using long-distance trains was similar to France.[502]

412. Mr Quinet told us that "working people are only a limited part of all the users" on the TGV.[503] A recent report from the French Cour des Comptes on the TGV analysed the purpose of trips. This found that "only a third of trips are made for business reasons, with almost two thirds (63.4% in 2008) being made for leisure purposes. This proposition leads one to modify the idea that high speed rail is primarily a service for those for whom the value of time saved is, on the face of it, highest."[504]

FORECAST BUSINESS TRAVEL ON HS2 SERVICES

413. The Department forecasts a higher proportion of business travellers for HS2 than its forecast for the existing network without HS2 (see Table 26):

Table 29: Journey purpose of HS2 passengers in 2036

JOURNEY PURPOSE	PHASE 1 (%)	PHASE 2 (%)
Business	50	45
Leisure	39	41
Commuting	11	14

Source: Letter from Secretary of State to the Chairman, 12 February 2015

414. Councillor Tett said he did "not believe the percentage of businesspeople who have now been calculated to travel on this train [HS2] … they are completely artificial constructs."[505] Professor David Bannister and Dr Moshe Givoni wrote that "much of the travel time savings benefits depend on the forecast of the number of passengers and whether they travel for business or leisure purposes. There is much uncertainty and a range of values in the forecast demand for HS2 have been used".[506]

415. The Secretary of State said in a letter to the Chairman that:

507

416. THE ECONOMIC VIABILITY OF HS2 IS HIGHLY DEPENDENT ON THE FORECAST NUMBER OF BUSINESS PASSENGERS, IN ADDITION TO THE VALUE OF THEIR SAVED TIME. THE SUBSTANTIAL INCREASE IN FORECAST BUSINESS TRAVEL IN THE LATEST ECONOMIC CASE IS QUESTIONABLE: THE SUPPORTING EVIDENCE WAS BASED ON SURVEY DATA THAT IS OVER TEN YEARS OLD. THERE IS CONFLICTING DATA ABOUT THE NUMBER OF PASSENGERS WHO USE LONG-DISTANCE RAIL FOR BUSINESS PURPOSES.

417. 84 PER CENT OF THE ESTIMATED BENEFITS OF HS2 RELY ON THE VALUES ALLOCATED TO TRAVEL TIME SAVINGS AND DEMAND FORECASTS. THE EVIDENCE BEHIND BOTH OF THESE IS INCONSISTENT AND OUT-OF-DATE.

CHAPTER 8: CONCLUSIONS AND RECOMMENDATIONS

418. Cost-benefit analysis is an important discipline; it is the best tool for comparing several projects to see which provides the best value for money. But the reliability of the method for quantifying the benefits of a project depends upon the quality of the evidence used in the analysis. (Paragraph 366)

419. The values of non-work travel time savings are based on surveys of motorists from 1994. We are not convinced that basing values of time on outdated surveys of motorists is the best way of calculating some of the benefits of a major rail project; rail users can use journey time productively. 33 per cent of the net transport benefits of HS2 are derived from these values (£19.3 billion). The Department for Transport has conceded that the data are old and that fresh evidence is required. (Paragraph 378)

420. The values of working time savings for rail do not take account of the fact that time on a train can be used productively. The Institute of Transport Studies at the University of Leeds concluded that the evidence behind the values was unclear. 70 per cent of the net transport benefits of HS2 derive from these values (£40.5 billion). (Paragraph 395)

421. 82 per cent of the estimated total benefits of HS2 are derived from the value placed on work and non-work travel time. We find it difficult to have any faith in benefits that have been estimated on the basis of these values, particularly as the Department for Transport has recently concluded that fresh evidence is required and has commissioned further research. (Paragraph 396)

422. The economic viability of HS2 is highly dependent on the forecast number of business passengers, in addition to the value of their saved time. The substantial increase in forecast business travel in the latest economic case is questionable: the supporting evidence was based on survey data that is over ten years old. There is conflicting data about the number of passengers who use long-distance rail for business purposes. (Paragraph 416)

423. 84 per cent of the estimated benefits of HS2 rely on the values allocated to travel time savings and demand forecasts. The evidence behind both of these is inconsistent and out-of-date. (Paragraph 417)

418 Written evidence from HS2 Limited (EHS0057) Back

419 Q120 Back

420 Written evidence from Professor Mackie (EHS0079) Back

421 Q1 Back

422 Sir Tim noted in his written evidence that he lives in north London, which will be affected by HS2. Back

423 As Permanent Secretary at the Overseas Development Administration from 1989 to 1994, Sir Tim sought written direction from the then Secretary of State in respect of aid to Malaysia for the Pergau Dam project which he felt represented extremely poor value for money. Back

424 Written evidence from Tim Lankester (EHS0107) Back

425 Q49 Back

426 Q58 Back

427 Letter from David Prout to the Chairman, 7 November 2014 Back

428 Letter from the Secretary of State to the Chairman, 3 March 2015 Back

429 Q228 Back