High Speed 2 and dodgy numbers: why detailed costings must be subject to public scrutiny
30 July 2013
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Lifestyle Economics
15 November 2024
We are conditioned to accept that as projects such as High Speed 2 (HS2) are progressed, the cost estimates will rise. This, of course, invalidates a cost-benefit analysis – unless benefits are also magically inflated, a not uncommon concurrence.
In the meantime, the costs have infiltrated government policy and funding commitments – that is, the dodgy numbers pervert good decision-making. And, of course, when the work is under way it becomes challenging to establish robust budgets to which engineers and architects will adhere. The absence of detailed public costings generates scope creep. For example, the Jubilee Line Extension was announced as a £1.2 billion project, but with extravagant, award-winning architectural designs for its stations (for example) it is little wonder that the project eventually cost over £3.5 billion.
However, cost escalations on investment proposals are a fallacy. The term ‘escalation’ presupposes that valid detailed estimates were constructed in the first place – and the absence of such rigour is apparent in the Department for Transport’s admission that its prevailing HS2 cost numbers were simply a ‘high-level desk-based exercise’.
Highly-detailed bottom-up estimates, subject to public scrutiny and, therefore, public accountability, would introduce incentives to planners to put their reputations on the line. Itemising costs would also allow scrutiny of risks and uncertainties on individual items. The optimism bias of project proponents – well documented by Bent Flyvbjerg – can be discouraged by mandating the production and public scrutiny of detailed bottom-up cost estimates.
It is not so much that there is a ‘black box’ in the original cost estimations; it is that there is no genuine cost estimation in the first place. ‘Cost escalation’ is therefore not a valid term. Exposing detailed cost estimation will introduce accountability to planning and policy.
In the meantime, the costs have infiltrated government policy and funding commitments – that is, the dodgy numbers pervert good decision-making. And, of course, when the work is under way it becomes challenging to establish robust budgets to which engineers and architects will adhere. The absence of detailed public costings generates scope creep. For example, the Jubilee Line Extension was announced as a £1.2 billion project, but with extravagant, award-winning architectural designs for its stations (for example) it is little wonder that the project eventually cost over £3.5 billion.
However, cost escalations on investment proposals are a fallacy. The term ‘escalation’ presupposes that valid detailed estimates were constructed in the first place – and the absence of such rigour is apparent in the Department for Transport’s admission that its prevailing HS2 cost numbers were simply a ‘high-level desk-based exercise’.
Highly-detailed bottom-up estimates, subject to public scrutiny and, therefore, public accountability, would introduce incentives to planners to put their reputations on the line. Itemising costs would also allow scrutiny of risks and uncertainties on individual items. The optimism bias of project proponents – well documented by Bent Flyvbjerg – can be discouraged by mandating the production and public scrutiny of detailed bottom-up cost estimates.
It is not so much that there is a ‘black box’ in the original cost estimations; it is that there is no genuine cost estimation in the first place. ‘Cost escalation’ is therefore not a valid term. Exposing detailed cost estimation will introduce accountability to planning and policy.
4 thoughts on “High Speed 2 and dodgy numbers: why detailed costings must be subject to public scrutiny”
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In my book They Meant Well: government project disasters’, I suggested employing two ‘devils advocates’ who could raise ‘politically incorrect’ questions. It would be useful to have them around from the very start of a project. Then they could query its shape, basic assumptions and precise aims while they were still open to argument. During the project’s development, the devil’s advocates could counter complacency, which so often seems to creep in. HS2 looks well set to make all the mistakes in the book. Although its proponents have under-estimated the costs and over-estimated the benefits, the project still hardly even meets the government’s own minimum rate of return requirements for such projects. Moreover the project has tempted politicians to go out of their way to commit themselves to it, thus making it harder for them to abandon it later. The only thing we haven’t yet heard much about — but no doubt we will — is claims that it will contribute to ‘national prestige’ (the last refuge of a commercially disastrous vanity project).
Spot on.
It seems unbelievable that when pushed ministers refuse to define any cost benefit ratio where HS2 would be abandoned. The ‘further work’ being done to be published in the Autumn looks so much like the government scrabbling around for additional spurious benefits to boost the benefit side of the equation. We can only hope that this perception is wrong and in fact they are finally doing some rigorous analysis.
It will be interesting to see how the DfT manages to keep the BCR of Phase One above 1, given that factoring in the higher construction costs and using realistic assumptions about travellers working on trains etc. is likely to reduce the BCR to something like 0.5. As D Homer suggests, there is likely to be a much greater emphasis on wider benefits such as agglomeration economies and so on, even though the methodologies to quantify these are highly dubious to say the least.
HS2 is a gravy train for the very few who get on-board, as the taxpayer who will foot the whole of the bill will receive very little in return. It is a mega-political prestige project that will only help the economy in the short to medium term and where once in place will not create the industry thereafter for long-term jobs and wealth creation. But if you think that this railway line will create the jobs after it is built, you are living in Disneyland. Indeed all that will happen is that the costs will end up as even more debt on the people of this country to pay off long after the politicians who gave this high debt project the green light, are all dead and gone.
At a projected cost of £80 billion by the IEA, HS2 is sheer madness for the taxpayer and we have to invest this finance into future home-grown energy security. For the sheer folly of the HS2 project presently costing now a projected £80 billion and where on all past mega-government projects these costs will be at least 50% more at the end, has to be scraped if common-sense ever prevails. Indeed assuming that inflation stays around 3% over the next 20 years (which it will not and will be greater as global commodities that we have to import go up continuously) even at £80 billion it would then be by 2033 some £145 billion. But this is stupidity when our first priority as a nation should be our energy security, as this is the fundamental building block of any economy. Therefore our primary development above all others should be to get our total home-produced energy security first and in our own hands (not in the hands of foreign powers). To see how ludicrous this HS2 is (that will take great energy and treasury finance without end to keep it running once completed) we are surrounded with 24/7 free energy at our fingertips, the energy of the sea. Indeed one project alone that I am fully aware of but where Whitehall has suppressed it is the Western Water Highway (WWH). This project alone would save transport costs in the UK and reduce heavy haulage by 50% on our congested roads. It would also have the immense benefit of providing 20% of the nation’s energy needs in perpetuity once it was built providing more-or-less ‘free’ energy in perpetuity with very little maintenance (unlike the future maintenance costs of wind turbines). The cost a mere £20 billion and a quarter of the now projected HS2 cost that will need treasury support forever once built and only take from the UK and not give back. Again it shows how stupid Whitehall really is. Indeed no need for fracking either and all the adverse effects that this will bring for future generations to come if we built five equivalent hydro schemes powered by the free energy of the sea 24/7, 365 days and nights a year. Government and Whitehall have to wake up to reality, not grow our immense debt even further with any relative benefit for the people of Britain. Madness has to stop now.
Dr David Hill
Chief Executive
World Innovation Foundation