Are DfT’s new rail demand forecasts really ‘conservative’?

This is a guest post first published on the HS2 Questions blog.

DfT claim that their new forecasts (that still represent a doubling in demand) are for an annual rate of growth of less than 2% (1.4%), while over the past 15 years it has averaged 5%, hence they claim their forecasts are conservative.  However, DfT’s forecasts for the long distance routes at issue (WCML, MML and ECML) are all 2% or more.  The 1.4% is misleading as its not really for long distance journeys. The reduction (from 3.4% in their March 2010 business case) is the result of using the latest economic growth forecasts and the impact of three years of pricing at RPI+3%.

In fact DfT’s forecasts remain excessive because:

• To obtain a doubling in demand, they project demand growth for an unreasonably long period (35 years to 2043, 10 years longer than before) – despite their model being most suited to short term forecasting
• DfT use an out of date version of the forecasting model that is now known to systematically overestimate growth in the longer rail journeys which are crucial to the demand needed for HS2 – and recent research for DfT confirms this
• DfT also expect a major uplift in demand (on top of the doubling in background growth) as a result of the journey time reductions – but mobile technology is already making time on-board trains useful, so the uplift would be much smaller.

Overall domestic travel shows signs of saturation, for both total and long distance journeys.  Within this, rail’s share has increased since privatisation from the improved services, increased subsidy, and airline style pricing.  While rail’s share has not stopped growing yet, DfT accept it is unreasonable to project past trends forward indefinitely.

The effect of these erroneous assumptions can be calculated. Forecasting ‘background’ growth for only 25 years (2008 to 2033), as was done for the 2010 White Paper, and adopting the approach to demand income elasticities of the latest version of the forecasting model, at least halves the net benefit ratio (NBR) of HS2.  Economic and social benefits do not cover, or barely cover, the subsidy ie costs:

• Phase 1: NBR drops to 0.6 (from 1.8), and with wider economic impacts to 1.0 (from 2.0)
• Full ‘Y’ network: NBR is 1.0 (from 2.2), and with wider economic impacts 1.2 (from 2.6)

A reduction in the demand uplift with the introduction of HS2 would further diminish the NBRs.

Demand forecasts for rail schemes are notoriously overestimated.  More than 9 out of 10 rail projects have demand overestimated, on average by a factor of two.