Opportunity Costs

Following on from yesterday‘s Today program, featuring a debate on HS2, Prof Henry Overman of the LSE has written his view of the discussion.

Prof Overman writes that the debate did not cover the opportunity cost of HS2. In other words, are there better things to spend £33 billion?

If the government decides to spend this sort of money on a single project, they can’t spend the money on other projects. If that money was used for smaller projects, finishing sooner, they could be analysed as they were completed. And then the next set of taxpayer’s money could be spent on more projects like the successful ones.

These don’t have to be transport related: for instance an earlier post on Prof Overman’s blog refers to the Regional Growth Fund. The government plan to spend £450 million on 50 projects, which they say will create 27,000 direct jobs.

Compare this to the government spending £17 billion on the first phase of HS2, to create 40,000 jobs. So spending nearly 40 times as much on one project, creates less then twice the jobs.

But even those jobs are dependent on whether HS2 Ltd and the DfT have got their forecasts right. HS2 won’t be operational until 2026: we won’t know for 15 years whether they were right or wrong.

That’s a huge risk.

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24 comments to “Opportunity Costs”
  1. ‘The UK has to have an HSR system to link in with and be part of Pan-European system’.
    We now have HS1 linking our major city and economic centre with Europe. It loses money hand over fist, it’s cut trains to try and make it pay, we’re subbing the Canadians to try and keep it on track, fares have increased on other Kent lines to try to balance the books and now HMG are planning to increase and spread these huge losses up the country to Manchester and Leeds at an outlay cost of £33-40bn. How can these extended huge losses be in the National Interest?
    HS1, the first, and one would have thought, the most needed link for the pro arguement, has proved to have been built on a total fallacy.
    My logic tells me forget HS2 the arguements don’t hold water. Take the affordable alternative RP2.
    Maybe a greater unmitigated disaster will distract critical attention from HS1.

  2. @toni_uk

    Maybe the people living closer to the line have a greater interest in looking at the proposal compared to the rest of the nation.

    Sure Toni, course they do. Perhaps the people living closer to the line would care to name a realistic cost figure that they would find acceptable? (I’m not holding my breath).

    The “Tax Payers Alliance” are an interesting bunch aren’t they? Their name would imply that they somehow represent the views of the average tax payer (i.e me), but I’d never heard of them before this whole HS2 debate – largely because at no point have they ever apporached me (as a tax payer) and asked for my support, or it seems even cared about my opinion on whatever it is they’ve decided to protest about. No leaflets through the letterbox, nothing. I’m a tax payer and I support HS2, so why wasn’t I consulted? All the evidence I have suggests to me that they’re a pressure group funded by well-heeled people, and that their name is a complete deception.

    Now here’s the news from the alliance of people who care about something else other than themselves. Quote from your link, courtesy of “an expert”:

    HS2 only makes sense if you believe there will be indefinite compound growth in long distance rail use

    Errm, yes there will be, because with the forecasted immgiration and life expectancy, the idea that in 100 plus years time, the UK (with god knows what population) will still be patching up the WCML whilst the rest of Europe enjoys HSR, and that the UK will somehow cope with this “make do and mend attitude” *and* be a competitive place to do business, is beyond a joke.

    Sorry, the N word is what this is all about. Again I ask – where were the protests about other government spending from the people making all the noise about HS2 now?

  3. andrew you say the benefits are questionable – can you back this up ?

    also the upgrades to the wcml etc rp2 etc do not provide the same benefits as hs2, you would need the entire rp package for this and that would cost more !

    it is funny that you accept the rp packages but not hs2 as they are in the same report when the conclusion of that report was the hs2 was the most cost effective and least disruptive scheme comapred with the alternative packages. look how much the wcml upgrade cost we could have built half of the hs2 line to birmingham for that so how is an upgrade of the existing network cheaper ? the wcml upgrade took line speed from 100/110 to 125 and didnt provide much in the way of additional tracks apart from a few locations such as trent valley !

    and upgrading means enormous disruption, any additional lines would cause more blight as many properties are right up to the railway line in many locations in towns etc. and you would then literally drive thousands back to the roads so there would be more road congestion, pollution and accidents for years whilst the upgrades were going on. it seems to be a case that you know the railway capacity must be improved but want it done somewhere else where you wont be adversely affected !

  4. Hi Gary,
    this is quite fun with you on here. I seem to agree with all you say but still you are so wrong. Yes, people will go greener, yes there will/might be a capacity issue. The fact is though that HS2 is not the only option as HS2 Ltd id trying to convince us. Improvements on the WCML and the rest of the rail network are not only cheaper but also greener.

    In regards of your comment about long term forecasting, again I have to agree that it is very difficult to do so. That is exactly why I doubt HS2 Ltd’s numbers. Past and current performance does not guarantee future performance. Anyone who was sold an endowment mortgage will tell you that. To use your example of the GDP growth forecasting, if economists in 2007 had used the same method HS2 Ltd has applied for the forecast of passanger numbers then we would still have a GPD growth of 3% year after year, for the next 50 odd years. Not the measly 0.5% published yesterday. That would be ludicrous, wouldn’t it?

    • You agree with me…..but I m wrong???????? Doesnt that make you wrong as well then ??

      Passenger number forecasts have a low and a high version…….

      There are 25000 services a day on our network , 10 years ago it was 18000, pretty much a 4or 5 % growth for the last 10 years. Our rail network in its current state will not take that level of growth for much longer.You guys have already agreed that.

      HS2 is 1 part of the whole future picture – rest assured Toni, a new north to south rail line WILL happen.

      • Hi Gary,
        that is exactly why stophs2 is in favour for an improvement on the WCML. I agree with you that the current Rail system will be inadequate for future demand. That is what I mean with agvree, but you are only providing half the facts – the ones to agree to. Our point though is that HS2 is not the only solution to the issue. DfT and HS2 Ltd are not taking this into account though.

        A good consultation should both options next to eachother and see what the true econimic and environmental case is for HS2. This information is not provided though.

        • From what I ve seen, a number of routes were considered …. and we have ended up at this one. And even the current route has had a number of adjustments for enviromental reasons.

          Sorry toni…..there is already a whole load of information provided…….

          I ve advocated a public inquiry…….if that happened, I suspect that there will simply be too strong a case for building it, so I think you had better get used to the idea I m afraid..

          • Gary,
            in danger that I repeat myself again and again. There is information on alternatives but HS2 and the DfT do only marginally mention them in the proposal. This bias of the consultation is what I bemoan. People are meant to give their opinion with only half the information directly provided to them.

            In regards of the public enquiry I hope that the HS2 proponents get as much ear as the HS2-Lobbyists.

  5. Has anyone, in the entire history of the UK ever, got home, looked at their payslip and gone, Hmmm, that (insert government project here) has cost me a few quid this week! Bah!

    I think people look at these figures quoted in billions and rather lose a sense of scale. It’s not really that much for a public service that will benefit millions, is it? How much does the NHS cost? I don’t use it but I don’t moan about money being spent on it. It’s the “me me me” society we seem to have these days, sadly epitomised by Stop HS2.

    • Hi Rich,
      no, I haven’t gone home and done that. But I have gone home recently, looked at my payslip and monthly outgoings and have realised that the uncontrolled spending of recent decades has led to austerity measures that leave me about £1,000 worse off this year.

    • Hi Rich,

      You could make the same arguments against the proponents of HS2. Just because the numbers are millions or billions does not mean that we are not talking about real money, and just because some people will benefit does not mean that those people can demand that everyone pays for their pet project – this is every bit as much a reprehensible ‘me me’ attitude.

      So, in what way does questioning the costs and benefits of a project ever become a wrong thing to do? How many people, groups, organisations and political parties have to point out the same flaws in the HS2 proposal before Mr Hammond starts trying to come up with answers rather than issuing platitudes and nimbyism diatribes? I think a huge number of people do look at their payslips and see an awful lot of deductions, and want to know that their money is being spent wisely – not necessarily on themselves, but on things that are genuinely needed, really investments for our futures, truly benefitting the nation.

      • Hello Andrew,

        Questioning the benefits of a project becomes the wrong thing to do when the questioning is done largely by people with an ulterior motive. In other words, people who live along the route. They are not unbiased and their judgement is inherently clouded. Let’s have a bit of honesty here. 17 biliion, 33 billion, a trillions pounds, 2 quid fifty – it doesn’t matter what figure is quoted because for people who live along the route, it’s a non-starter. The cost is irrelevant, and complaining about it is just a smoke-screen for their real priorities. Where were the complaints from the same people about the Olympics, Crossrail etc? Why the concern about this particular project all of a sudden? The business case will never “stack up” and the benefits are always “questionable”, because it’s very easy for the anyone who’s against it to say this sort of stuff, because the railway doesn’t exist, and they don’t have to demonstrate anything. It’s all wrong because it’s too near their house. If this railway went up the eastern side of the country, it would be a different set of people who all of a sudden have become experts in socioeconomics, mass transit, geography and finance, all by using the power of Google.

        • You can’t say that people who will lose out from a project have to be silent, unless the people who think they might gain from a project have to be silent as well.

          As Henry Overman belongs to neither category, under your rules he could make his views known. And he has; the cost does matter, and there are better uses for the £33 billion of taxpayers’ money then HS2.

          • OK I’ll re-phrase that slightly. “When it comes to the economics of HS2, the views of people who live along the route should be taken with a pinch of salt the size of Mount Everest”.

            As to Mr Overman, from that link his analysis of HS2 appears to be thus: Both the costs and benefits of HS2 are large and uncertain.

            Precisely the point I made earlier. No explanation of his opinion is neccessary – just a casual dismissal of the whole thing and for anti-HS2 people, apparently that’s good enough. Here is the news – the UK needs to be connected to a burgeoning pan-European high speed rail network. The best way to achieve that is to, well, errrm, let me think…got it – spend money on a high speed rail line. That’s what this is all about. If Mr Overman thinks we can achieve connectivity to a HSR network in Europe by spending the money on something completely different, then let’s hear his plan. Here’s a clue though:

            I think the answer is almost certainly – “yes” – in both the area of transport (more intra-city schemes)

            Predictably, and in common with so many of it’s detractors, it looks like he has no idea about the whole purpose of HS2. He thinks there’s a vast pot of money available to spend on whatever we want, and whatever it is we spend it on doesn’t have to pull in any extra business.

            • Rich,
              …“When it comes to the economics of HS2, the views of people who live along the route should be taken with a pinch of salt the size of Mount Everest”…

              nice cynicism! Maybe the people living closer to the line have a greater interest in looking at the proposal compared to the rest of the nation. Maybe that is why they find more holes – or to stay with your mountain theme – craters in the proposal.

              I am surprised that the press (apart from the Guardian) has not picked up on the planned tax money wastage.

              It is not about NIMBYism – it is about £17bn extra debt, about minimum of £0.6bn extra interest payments a year for the UK Government. It is about blinkered view of the DfT.

              Here link to the view of TaxPayersAllience who clearly have no NIMBY view on the whole project:

              http://www.taxpayersalliance.com/campaign/2011/02/debate-continues-high-speed-rail-taxpayer-funded-greengauge21s-reasoning.html

            • Henry Overman is a professor of economics at the London School of Economics, is on HS2’s Analytical Challenge Panel and presented oral and written evidence at last year’s Transport Select Committee on transport and the economy.

              In essence, your summary, Rich, is the opposite of the actual position: Professor Overman knows far more about HS2 then the typical supporter of HS2, and is far more aware then most that the amount of taxpayers’ money available to spend on “pulling in extra business” is limited.

            • I am surprised that the N word is still being used against this website, when at least 10 national charities including greenpeace and friends of the earth, wild life trust, woodland trust, civic voice … have got together to sign the ‘right lines charter’. It slams the dictatorial way in which Lord Adonis started off the planning for the current HS2 plan. The gross lack of environmental impact reports, the idea of one man driving around and choosing 1 route without any public discussion and the only expert discussion with people who were being paid to support the government position. This is why there is so much opposition to the current plan. This is why the water supply of large parts of London is at risk under the current plan, due to tunnelling through aquifers under amersham. This is why they got it wrong. If they go back to the drawing board and follow the right lines charter( on chiltern society website) the government will have a much better chance of getting their infrastructure project through.
              Also 38 degrees have launched a campaign to stop the government scrapping our environment laws, which they are going through a ‘consultation period’ for. They want to remove ‘red tape’. Go to the 38 degrees website to sign the petition and stop our government behaving like Gaddaffi.

  6. Exactly what I was thinking when I read the proposal for the first time. The proposal does not even take into account the opportunity cost of repaying £33bn in debt. The porposal is assuming capital cost of zero – the Goverment is still thinking we live in the 1990’s when money was growing on trees.But at the current rate the Government is paying 3.5% interest. Not even that opportunity cost was incorporated in any of the calculations.

    • Maybe its time to remind you……HS2 is primarily a project aimed at providing extra capacity on our rail network. Doing nothing will end up costing our economy something like £22 billion in congestion cost by 2026….

      • Hi Gary,

        It’s good that you are here to remind us about capacity, as it would appear that all the other reasons promulgated for HS2 would appear to be lacking in substance (business case – woeful, environmental case – non-existent, transformational case – about as optimistic as the population of Manchester winning the lottery at the same time)

        Oh, but the choice is not HS2 or doing nothing, nor is it HS2 or building a motorway. The choice is between spending 10s of billions on a project with very questionable ‘benefits’, or spending a few billions on making incremental changes to the existing network to gain needed capacity as (and if) required.

        Without squandering the 10s of billions this then leaves us real choices – we can spend money on projects that would genuinely work towards solving the north-south divide, that would contribute to the 80% reduction in CO2 we are supposed to find, that would improve the transport network in ways that would generate real benefits to the many rather than the few – or any of a myriad of other possibilities. Even for these alternative projects I would want to be very sure of the proposed benefits, as the fundamental question is not “what to spend the money on?” it is “do we want to borrow even more money?”

      • Hi Gary,
        thank you for the response. But may I ask you to explain what your comment has got to do with the lack of opportunity cost and/or the lack of cost of capital in the proposal.

        It seems that rather than having a proper discussion you and others on here are just regurgitating the one sided (mis)information the Government and DfT is trying to brainwash us with.

        But even though it might be a lost cause to reply to your reply I feel it is important that I close the argument.

        Assuming a) that your £22bn is a correct assumption and b) that it is at todays cost and not discounted I would like to do the following quick calculations – not quite accurate as I do not know when the £33bn will be spend exactly:

        £33bn x 3.5% annual interest = £1.155bn p.a.
        £1.155bn x 15 years (until 2026 – the year quoted by you) = £17.325bn

        This would be £17.325bn of real cost compared to your hypothetical £22bn quoted by you.

        That is what I would call true opportunity cost.

        • toni…….I havent just got that figure out of thin air…..its actually from a link posted by you guys. I m suprised you havent read it lol!!!!

          Andrew……can you explain why the business case is woeful?

          Rich……..the NHS has a budget of around 110 billion per year……

          • Hi Gary,
            I did not say that you plugged that number out of thin air. I am always just vary about any forecasts with such a long horizon. With such a big projects there are many assumptions made. Doubting the £22bn wasn’t really the point I was trying to make anyway. It’s always nice to have a healthy discussion though 🙂

            • Hi tony

              Unfortunately thats the nature of the beast. Projects with long horizons are always going to be difficult to forecast what position we will be in when they are delivered. But you could also apply that to current economic forecasts in general……if we could predict recessions, then recessions wouldnt actually happen. One thing is absolutely clear though……we havent enough capacity to fulfil the growing demand for rail travel. We are a lot more green aware nowadays, so people are making their choices with that in mind. I myself use the car a lot less nowadays.

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