Unrealistic Passenger Forecasts

Can the Department for Transport identify an unrealistic (optimistic) passenger forecast when they see one?

Example 1: One of the reasons that GNER had to give up its franchise for the East Coast Mainline in 2007 was that passenger growth had not matched projections made at the time that the bid was made in 2005. The annual increase in passenger revenue had been expected to be 10%. Revenue is closely related to passenger numbers.

Example 2: The National Express bid for East Coast Mainline in 2007 depended on optimistic passenger forecasts and National Express walked out on their contract in 2009. Theresa Villiers said: “They (National Express) massively overestimated the income that they could expect from the franchise. That ended up costing the taxpayer money, when the franchise failed”.

Possible example 3: The Department for Transport looks all set to accept another overly optimistic passenger forecast from FirstGroup for the West Coast Mainline and the consequences (for the taxpayer) in a few years time are predictable. The FirstGroup appears to anticipate the highest passenger growth of the four bidders. One view of the FirstGroup bid: “We think that requires 8.5pc to 9pc growth every year for 14 years off the back of a double-dip recession. That just beggars belief.” Accepting the highest bid may not ultimately maximise the revenue for the Treasury, particularly as annual payments to the government usually start small and build up during the life of the contract.

How about the DfT’s own passenger forecasts?

Consider the passenger numbers for HS1 which have only reached one third of the originally forecast level. Philip Rutnam (DfT) was busy defending the original HS1 passenger forecasts to the Public Accounts Committee as recently as April 2012. The PAC chair, Margaret Hodge, summed up the situation clearly when she said: “What was wrong was the total demand”.

Later during the same meeting passenger forecasts for HS2 were discussed. It became evident after further questioning of DfT officials that modelling of passenger demand was based on there being no premium pricing for HS2 tickets (compared to classic rail tickets). The PAC chair went on to say: “Your modelling is really quite shocking”. Had premium ticket prices for HS2 been used in the modelling of passenger demand, forecast passenger numbers would be lower.

The consequences of over optimistic passenger forecasts are borne by the taxpayer.

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