Costs and Benefits High Speed Rail

It's good that some people at least had an attempt at this. I wonder how many are learning from this blog?

But they should have researched more and produced a high quality essay that would help them with revision.

Links such as this would have helped:

Link 1

Link 2

Link 3

Link 4

The background

Late last month Network Rail proposed a new high-speed rail link between London and Scotland via Manchester. It was estimated that the cost of building the link and operating it for the next sixty years would be £41bn and that it would produce a net increase in revenues of £23.4bn over the same period. According to Network Rail the whole project would be self-financing if the "benefits" to people being able to travel on these trains is factored in.

If the project goes ahead, it will cut travel times between London and Birmingham from 1 hour 22 minutes, to 45 minutes. And eventually passengers will be able to travel from Glasgow to London in 2 hours 16 minutes.

Costs and benefits

To attempt to work out whether such a project should go ahead, it is necessary to undertake a cost-benefit analysis. Such an analysis is being undertaken at the moment by Sir David Rowlands, chairman of the government-owned company, High Speed 2, which should report later this year.

But what factors should be taken into account? In the private sector we are concerned as to whether a project is commercially viable, and to measure this we would want to know whether private benefits exceed private costs. However, a cost-benefit analysis (CBA) on this scale will want to examine the net social benefits - whether social benefits are greater than social costs.

The government will be carrying out a CBA to see whether the project is efficient in the use of resources and is therefore socially optimal. To do this it must undertake a number of measurements. It must work out all the costs and benefits involved, both private and external, and give them a monetary value. It can then find the net social benefit of the project. It also has to bring in the concept of opportunity cost to see whether there are any better alternative ways of using the resources involved. For example, the British Chambers of Commerce expressed concern over whether other transport budgets would be cut. A spokesman said: "...any future HSR network cannot be built at the expense of upgraded road junctions, commuter services and improved connections to our ports and airports."

What problems might be associated with such a CBA?

Firstly, lack of information. Can the government accurately identify every cost and benefit involved?

Secondly, valuation. It may be possible to estimate what people would be willing to pay for faster journeys and what benefits may accrue from faster journey times. We can also factor in the cost of the investment and upkeep. But, how accurate will these figures be? Who can estimate what demand will be in 10, 20 or 60 years? Also, many projects of this size are notorious for running well over their estimated costs.

Thirdly, externalities. As these do not depend on market transactions they are very difficult to estimate. If a High Speed Rail link reduces road congestion this is a positive externality, but exactly how would we value this reduction? According to Network Rail, the line would account for 43.7 million journeys per year by 2030, which would result in 3.8 million fewer vehicle journeys and fewer carbon dioxide emissions.

Lord Adonis, the transport minister, for example, has also said that this rail link would be a more environmentally sound alternative to domestic flights. Also, what effect will this rail link have on people living near to the line? Would compulsory purchase of houses to make way for the line cover the full loss experienced by the householder? What negative externalities might result?

Also, we could expect there to be multiplier effects from the money used to pay workers and companies, but how great would these be? Leakages from the circular flow would have to be taken into account such as savings and spending on imported goods?

Finally, discounting of future costs and benefits. Immediate costs and benefits can be priced now, but what about those which occur in twenty years time? These have to be discounted by an appropriate percentage to obtain their net present value. This is a very difficult exercise and virtually impossible on a project which is being measured over sixty years.

Conclusion

Will this project go ahead at all? It may well take years to come to a decision. The government is already trying to reduce net borrowing by half from £175bn this year, over the next four years. What is the likelihood they would sanction such a massive project as this?

Network Rail has already spent 12 months and 20,000 hours of work getting its report to this stage. Any further cost-benefit analysis could run into millions of pounds and would be a potential source of government failure. But government failure would be even greater if the benefits are overestimated and at the same time money is diverted away from potentially superior projects.

Source: Anforme.