The Economics Exam HS2 question

Reading the “Economic Case for HS2”, one of the current HS2 consultation documents, reminds me of exam questions for economics students.

It discusses the demand forecasts produced by HS2 Ltd for growth in long distance rail travel.

But first it’s worth looking at the HS2 main report published in March 2010.  This report gives the reasons for HS2 Ltd chosing 2033 as the cut off date for growth in rail demand

p48 2.3.38 Growth in rail demand was calculated using the standard industry and Government recommended approach. This assumes that growth is driven by changes in rail fares, population and employment and in particular people’s propensity to make more rail trips as they become more affluent. Unlike for road and air forecasts, the approach for rail produces a demand forecast that grows indefinitely. Therefore as a proxy for market maturity and given the long term uncertainty in the forecasting methodology, DfT recommends forecasting no further growth beyond 2026. Because of the longer term nature of HS2, we have extended this cap to 2033. This therefore amounts to a 150% increase in long distance rail to and from London between 2008 and 2033.

This year’s  “Economic Case for HS2”  chooses a different date, further into the future.

And lets just have a look at their reasons for changing the date.

p 15 3.2.9 …For our earlier work we capped growth of rail demand in 2033, at a level of demand in the WCML corridor that is slightly more than double current levels. With the lower current GDP forecasts, this cap would now be hit later, in 2043. This level of demand is consistent with households becoming wealthier as GDP per head grows and adopting lifestyles with more frequent long distance travel as demonstrated by those in higher income bands today. We have also capped our forecasts for growth of demand for other transport modes at 2043.

If this was an example given in a real economics exam, the question might be

Q: The revised forecasts changed the cut off date to 2043.  Why did HS2 Ltd chose this date?

A: Because that’s the date that their forecast showed the demand had doubled.

In other words, they chose 2043 as their cut off date for demand growth, because it gives them the answer they want, so they can argue that HS2 should be built.

However 2043 is nearly two decades later then the normal Department for Transport cut off date for appraising rail projects.

If there was a sensible reason for picking 2043, HS2 Ltd would have said so in the Economic Case.

What does this say about HS2 Ltd’s methodologies for other aspects of their case?

2 comments to “The Economics Exam HS2 question”
  1. “However 2043 is nearly two decades later then the normal Department for Transport cut off date for appraising rail projects.”

    …er, well they could make the demand forecast date end in 2023 then couldn’t they, a mere three years BEFORE any of HS2 opens! The counter-argument to this is that HS2 is among the most long-term of any infra project proposed by government in recent times, arguably since the conception of the motorway network (presumably this was based on looking ahead more than 12 years!).

    The expectation from opponents that current methodologies be slavishly followed rather ignores the obvious fact that policy in transport has been predicated on the premise that long-term forecasting is essentially impossible, from which stems the result that nothing gets built.

    Nobody would dispute that looking to forecast to 2043 is inherently risky, but some form of assessment that looks beyond standard planning horizons is evidently required for this project; indeed, it sits rather well beside the European Commission’s 2050 Transport Vision recently published – a document which, like it or not, will influence the shape of the European transport matrix over the next four decades (and clearly states that curbing travel is NOT permissable — and yes, I have read all of it!).

    It is also perhaps instructive to note that the forecasting process works in both directions. Applying the same horizon retrospectively takes us back to 1978, when (interestingly) we were only a few years into the thorny issue of trying to sort out speed and capacity issues on the West Coast Main Line, still the overwhelming reason for construction of HS2 (whatever DfT/HS2 Ltd are saying publicly).

    • If Hs2 Ltd were able to give a sensible reason for choosing 2043 as their cut off date, you might have a point.

      But from what they put in the Economic Case document, it seems their only reason for choosing 2043 was because that’s the year when their revised growth figures equal their growth figures from last year.

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