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Is High Speed Rail Value for Money or Not?

by on 2014/01/13

The proposed High Speed 2 (HS2) railway line from London to the north of England has become one of the most controversial public investment projects of recent times. The political battles over HS2 have been heated to say the least, with plain-talking northern Labour politicians in search of jobs and investment pitched against the genteel denizens of the Chilterns seeking to protect their particular slice of the green and pleasant land. But the project has also opened up a second, equally bitter front, that between the UK Government, which argues that the project will act as a once-in-a-generation stimulus to the economy, and several academic commentators who claim that the benefits of the line are hugely overstated. So who is right? Is HS2 value for money or not?

Transport projects are subject to probably the most intense value for money appraisals of any kind of public investment. For 50 years now, major transport schemes have had to undergo rigorous benefit:cost analysis before securing government approval. The technique is superficially simple: add up all the benefits that the scheme will deliver, set these against the costs of constructing and maintaining it, and generate a neat benefit:cost ratio (BCR) to summarise the net value in a form even politicians can understand.

The problem is, of course, that estimating the costs and benefits of a new road or railway is far from simple. We know that effective and efficient transport infrastructure is essential for the economy to function, but the incremental value of additions to a mature network is not easy to calculate.  Even intuitively obvious benefits, such as the physical regeneration evident around major new transport hubs, are more difficult to quantify than they might at first appear.

The principal economic benefit of transport projects is still assumed to be the time savings made by travellers using the new infrastructure. Economic theory suggests that time spent travelling is ‘lost’, and that if travel time is reduced people will waste less time, become more productive, have a greater range of economic opportunities available to them and so key markets such as the labour and housing markets will work more efficiently. In traditional BCR analysis, schemes that deliver a step change in travel time are thought to deliver very large economic benefits, such as the £2.30 return for every pound spent that the government claims for HS2.

One of the key criticisms of this approach is that new technology blows apart the assumption that travel time is ‘lost’ or unproductive. Look around any train today and many of the people you see will be using their laptops, tablets or smartphones to stay connected with the outside world. Far from being ‘lost’, travel time could in fact be some of the most productive time available to us. Therefore our traditional assumptions about the ‘value’ of this time, and hence the value for money of big transport schemes such as HS2, could be turned upside down. Why go faster when you do more on the train than in the office?

Trying to work out whether HS2 represents value for money or not has exposed an uncomfortable truth about investment appraisal in transport and public policy more generally. Despite the enormous sophistication of the economic modelling available to us nowadays, the results produced are often incredibly precise yet highly inaccurate in the real world. Whether HS2 will deliver value for money depends on myriad other policy decisions such as how our cities are redeveloped around the new station hubs, as well as trends that we simply cannot predict with any certainty, such as how travel behaviour will continue to change as the mobile internet increases in speed and scope.

Building HS2 is therefore much like the decision the Victorians took to build the railways in the first place: a leap of faith based on the best (informed) guesses available at the time.

To learn more about Cost-Benefit Analysis, see this World Bank Guide for both content and external links.

From → Government

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