‘Fallacies and Misadventures in Blunderland’: the HS2 case
3 September 2013
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Government and Institutions
The recent IEA evaluation of the High Speed 2 project has presaged much further criticism of this serious misadventure. A former Transport Secretary/Chancellor, Alistair Darling, has described the scheme both as foolish and a potential fiscal nightmare. The Institute of Directors (IOD) – drawing upon a large-scale survey of its own members – has also labelled the project as a ‘grand folly’ and called for it to be abandoned. Much other commentary – far too much to even list – has concurred in such negative evaluations.
But what has been the response of the government’s PR machine(s) to these critiques? Initially, some Treasury insiders said, off-the record, that the cash costs of this project would be far higher than the official figure; but this disclosure was quickly stamped upon by the Chancellor’s PR mouthpieces, who reiterated the (now- standard) government mantra that HS2 is ‘a crucial project for our future prosperity and growth’. Simultaneously, the Department for Transport (DfT) issued the response that: ‘HS2 is absolutely vital for this country, providing a huge economic boost that will continue paying back for generations to come’.
This is a seriously erroneous statement, in (at least) three major ways. Firstly, it is utterly inconsistent with the DfT’s own (!) evaluation of the (supposed) economic case for HS2, in which it was exposed that there just might be some argument for HS2 (on Treasury criteria regarding Value for Taxpayers’ Money – VfM) if we can confidently assume that the growth rate of UK GDP will be 2.5 per cent per annum, over an extremely long time period/for decades to come. This is a ‘magic-by-growth-assumption’ fallacy. We should not make this (extremely optimistic) assumption; we need to make sensible assumptions.
Secondly, the DfT’s VfM estimation techniques have been (rightly) held in much ridicule. It is not possible to recount all of the problems involved here; but one (absolutely chronic) matter requires special mention: the DfT valuation of ‘business traveller benefits’ from the HS2 scheme. According to the DfT’s ‘economic case’ evaluation, businessfolk do absolutely no work on intercity trains! …and its ‘case’ for HS2 rests, preponderantly, on this crucial assumption; but, as the IOD survey emphatically shows, this is seriously wrong.
Thirdly, it has to be emphasised that, in presenting the supposed ‘economic case’ for HS2, what the DfT has actually done is to present a (flawed) VfM appraisal. The ‘costs’ they identify are only the (projected) ‘net exchequer costs’; which are not the same thing at all as the true/economic/opportunity costs of the scheme.
The true economic cost of the HS2 scheme is the returns on the investments foregone by this ‘very considerable’ diversion of £50bn/80bn (?) of public infrastructure monies into this one ‘biggie’ project. It means that the UK will have to forego the alternative of providing those funds for a multiplicity of genuinely high-value infrastructure projects (on VfM, and other, appraisal criteria). As the IEA study argues, these opportunity costs are likely to far exceed the direct costs of the project. And, by crowding-out (in the public budgets) these many (less well-hyped, smaller/ less grandiose) higher-value infrastructure projects (in rail, road, and other infrastructure), it would be inescapably the consequence of HS2 that the UK’s economic performance would be dissipated and reduced.
The ‘case’ for HS2 has been jerry-built on a dire combination of statistical deceit, economic fallacy, and special-interest group pleading (which the IEA paper details studiously). This is, unquestionably, a classic case of (what I call) ‘Alice-in-Blunderland’ economic policy-making.
But there is a question niggling in my mind. In other contexts — for example, The City/markets for financial products – the ‘authorities’ would by now be examining/prosecuting the producers of this sort of (ludicrous) economic guff, for mis-selling. It appears, in this case (HS2), however, that it is the ‘authorities’ themselves (the DfT and ‘HS2 Ltd’: the latter is not a private limited company; it is a 100 % taxpayer-financed quango) who have been the fons et origo/producers/sponsors of the said economic guff! And who is going to prosecute them, I wonder, for misrepresentation?
But what has been the response of the government’s PR machine(s) to these critiques? Initially, some Treasury insiders said, off-the record, that the cash costs of this project would be far higher than the official figure; but this disclosure was quickly stamped upon by the Chancellor’s PR mouthpieces, who reiterated the (now- standard) government mantra that HS2 is ‘a crucial project for our future prosperity and growth’. Simultaneously, the Department for Transport (DfT) issued the response that: ‘HS2 is absolutely vital for this country, providing a huge economic boost that will continue paying back for generations to come’.
This is a seriously erroneous statement, in (at least) three major ways. Firstly, it is utterly inconsistent with the DfT’s own (!) evaluation of the (supposed) economic case for HS2, in which it was exposed that there just might be some argument for HS2 (on Treasury criteria regarding Value for Taxpayers’ Money – VfM) if we can confidently assume that the growth rate of UK GDP will be 2.5 per cent per annum, over an extremely long time period/for decades to come. This is a ‘magic-by-growth-assumption’ fallacy. We should not make this (extremely optimistic) assumption; we need to make sensible assumptions.
Secondly, the DfT’s VfM estimation techniques have been (rightly) held in much ridicule. It is not possible to recount all of the problems involved here; but one (absolutely chronic) matter requires special mention: the DfT valuation of ‘business traveller benefits’ from the HS2 scheme. According to the DfT’s ‘economic case’ evaluation, businessfolk do absolutely no work on intercity trains! …and its ‘case’ for HS2 rests, preponderantly, on this crucial assumption; but, as the IOD survey emphatically shows, this is seriously wrong.
Thirdly, it has to be emphasised that, in presenting the supposed ‘economic case’ for HS2, what the DfT has actually done is to present a (flawed) VfM appraisal. The ‘costs’ they identify are only the (projected) ‘net exchequer costs’; which are not the same thing at all as the true/economic/opportunity costs of the scheme.
The true economic cost of the HS2 scheme is the returns on the investments foregone by this ‘very considerable’ diversion of £50bn/80bn (?) of public infrastructure monies into this one ‘biggie’ project. It means that the UK will have to forego the alternative of providing those funds for a multiplicity of genuinely high-value infrastructure projects (on VfM, and other, appraisal criteria). As the IEA study argues, these opportunity costs are likely to far exceed the direct costs of the project. And, by crowding-out (in the public budgets) these many (less well-hyped, smaller/ less grandiose) higher-value infrastructure projects (in rail, road, and other infrastructure), it would be inescapably the consequence of HS2 that the UK’s economic performance would be dissipated and reduced.
The ‘case’ for HS2 has been jerry-built on a dire combination of statistical deceit, economic fallacy, and special-interest group pleading (which the IEA paper details studiously). This is, unquestionably, a classic case of (what I call) ‘Alice-in-Blunderland’ economic policy-making.
But there is a question niggling in my mind. In other contexts — for example, The City/markets for financial products – the ‘authorities’ would by now be examining/prosecuting the producers of this sort of (ludicrous) economic guff, for mis-selling. It appears, in this case (HS2), however, that it is the ‘authorities’ themselves (the DfT and ‘HS2 Ltd’: the latter is not a private limited company; it is a 100 % taxpayer-financed quango) who have been the fons et origo/producers/sponsors of the said economic guff! And who is going to prosecute them, I wonder, for misrepresentation?
6 thoughts on “‘Fallacies and Misadventures in Blunderland’: the HS2 case”
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The Chancellor of the Exchequer is obviously keen on this project — ‘passionate’ is his own word for it. But surely that is an inappropriate attitude for the country’s finance minister to a serious commercial project. That is just the sort of adjective one applies to a vanity project! What is his department’s latest estimate of HS2’s benefit/cost ratio? Is it up-to-date? What are his department’s normal criteria for this kind of project? Does HS2 come anywhere near them? (Is its benefit/cost ratio even above 1.0?) At the very least the government should take another look.
The current justification for HS2 seems to be that it will persuade northerners to vote Conservative.
http://conservativehome.blogs.com/platform/2013/08/from-paulmaynardmp-turn-your-back-on-hs2-and-you-turn-your-back-on-the-north-of-england.html
“It means that the UK will have to forego the alternative of providing those funds for a multiplicity of genuinely high-value infrastructure projects (on VfM, and other, appraisal criteria).”
Well and good, if true, BUT it depends on there being such a multiplicity of better projects. If there are, they would be seized upon as ordinary commercial projects, to be developed without recourse to Treasury funding.
Where are they?
Possibilities may be, in London, Cross River Transit, and in the north the Leeds and Liverpool tramways – these latter projects cast into the outer darkness by – guess whom – one Alistair Darling!
@Dudley Horscroft – Unfortunately there is a long history of commercially viable transport projects being blocked by government. Examples range from private motorways in the 1920s to the Waterloo and Greenwich tube line in the 1990s and more recently Heathrow expansion.
I have to agree with the central point of Dr RW (above) — much of transport investment, that could
be easily commercially viable, is blocked by government (including its indecision, as with
London’s air transport capacity!). Moreover, beyond commercial possibilities there is a large
number of transport improvements that have high BCR ratios under Treasury Green Book
criteria for possible public subsidy of infrastructure investment…whereas it now appears
that the proposed HS2 project does not merit public subsidy on these criteria (See J.Burton, Conometricks and the new NAFF Case for HS2, IEA Blog Posting of 24/10/13).
They call it “Transformational”. However, the effect, if any, must depend on generated trips alone, all others, by definition, pre-existing.
The generated trips are now circa 76,000 per day, found after exhaustive effort via an FoI request. Those trips correspond to approximately 22 million per year. In comparison there are 1.5bn passenger rail journeys per year and 43.5bn passenger journeys by all modes.
Hence this scheme adds 1.5% to existing rail journeys and 0.05% to all passenger journeys.
“Transformational”? Ha, Ha.