NATA REFRESH CONSULTATION

(Nata is the DfT’s “New Approach to Transport Appraisal”)

COST BENEFIT ANALYSES
Cost benefit analyses for public transport proposals currently include incremental fares as benefits and tax reductions as costs. Both of those are transfer payments that we believe should be ignored.  Here are illustrations in support of that view:

It appears obvious that taxes should be excluded from any cost benefit analysis unless the Government is thought to use resources either to a greater effect or to a lesser effect than does the private sector. Only if the Government is twice as effective as the private sector should the entire tax loss (attributable to a public transport proposal) be regarded as a loss to the wider economy.  The idea that that can ever be the case is absurd.  In any event, Governments can always recoup any tax loss at the stroke of a pen.

The notion that incremental fares are to be included as a benefit in cost benefit analyses is in a similar category.  There are (at least) two ways of illustrating that:

What appears to have happened with regard to both incremental fares and tax is that economists have been looking at two dimensional pieces of paper instead of considering the wider economy.  That has led to a fundamental error, namely the muddling of financial analyses with cost benefit.  The consequence is to greatly overvalue the benefit to cost ratios of public transport projects.
 
Our second point is to do with discount rates.  Currently 3.5% is the value for the first 30 years of a project and 3% the value for the next 30 years.  If evaluation periods are be extended then for the then next 30 years the rate may fall to 2.5%.  Further, there may be pressure to reduce all the discount rates. 

The notion that the more distant benefits and costs should have the lower discount rates is perhaps driven by the Treasury or by the idea that the future is otherwise undervalued.  However, those reductions seem contrary to common sense in that the risk of the benefits being entirely illusory grows the further into the future we are looking.  Hence, instead of progressive reductions, we would expect to see progressive increases in the discount rate for the more distant years.

We also note that reducing the discount rates globally would greatly increase the benefit to cost ratios particularly if the evaluation period were to be extended.  That may lead to projects being accepted that will be a burden to the taxpayer until the end of time.

Allied to that we note that, even when incremental fares are included, Crossrail does not achieve the DfT’s medium benefit to cost ratio until 40 or 50 years have elapsed.  If a whole stream of schemes of that type were to be built the country would be bankrupt before the supposed benefits from the time savings could ever rescue us. The Channel Tunnel, the Channel Tunnel rail link and railway modernisation generally will be in that category.

FINANCIAL ANALYSES
Cost benefit analyses were originally used primarily for highway schemes, where there is no market or toll.  Where there is such a market, as with public transport schemes, we canvas for financial analyses.

In those analyses the costs may be compared with fares plus any contributions that may be obtained from those land owners who would benefit less the losses of other land owners.  Any other approach will beggar the nation – leaving the taxpayer to pay for fairy gold for ever and ever.  After all – London’s underground system and the railways are immensely costly to the taxpayer despite the fact that rail is used five times as much by those from households in the top quintile of household income as by those from households in either of the bottom two quintiles.

Financial analysis carried out in the private sector have to take account of the tax burden – and may very well be repeated whenever there is a major change in tax rates. However, financial (and cost benefit analysis) for public sector projects should exclude taxes from the costs since, although paid to the suppliers by the client, the client is the Government and it is the Government that collects.

AGGLOMERATION AND WIDER ECONOMIC BENEFITS
We discourage the inclusion of these items.  Of course they are canvassed for by Eddington and others but their inclusion must be contentious and uncertain.  After all, within the Crossrail analysis the values attributed to those items depend upon the higher wages and supposed higher productivity of those working in the capital.  However, in London a Civil Servant is paid a London Weighting to compensate for the higher cost of living in the capital.  That does not make him more productive, possibly the stress of working in London may make our Civil Servant less effective.  Hence, the London Weighting may be regarded as proof of the diseconomy of agglomeration – and that the wider economic benefits are negative, not positive.

A question to ask is – do the fares from London’s underground fund the system or do a proportion of those costs fall on the taxpayer?  Clearly it is the latter, suggesting that the agglomeration enabled by the underground is a costly mistake.  Better perhaps had there been dispersal spreading jobs more evenly and avoiding the need for such costly infrastructure.

If agglomeration is regarded as a benefit then presumably we must look to the depopulation of the North in favour of the South East.  Since few people would favour that we conclude that the idea that agglomeration is (inevitably) a benefit is flawed.