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(2a) Criticism of COBA The Public Inquiry in 1993 My name is John Mainhood. I am a graduate geologist, a graduate chemist and have completed post graduate diploma courses in statistics, chemical engineering and participated in London Business School short courses in Project Finance and Appraisals for experienced professionals. I am an Oxbridge triple first. Although I have been retired for some years, it was my task to evaluate projects for an international integrated oil company. Over many years I have had to evaluate hundreds of capital projects for Board approval.
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Before I read my contribution to this inquiry, I would like to offer a preface. I have some hard things to say but I hope that individual members of the Department of Transport do not take these criticisms personally. It is a common fault of clever people that they do not suffer fools gladly. I hope that on balance my contribution will be seen as constructive.
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It has been my experience over many years that when examining any project, the project very quickly establishes itself as a “good one or a “lemon”, surprisingly few projects appear marginal on preliminary examination. The summary documents I received gave an immediate impression that the Bypass Dualling Preferred Scheme was a lemon. I had to ask myself why the obvious solution was not proposed of using the existing A21 for 2 lanes in one direction and constructing 2 new lanes for the other direction. As I received further documentation it appeared that there were 2 major and one minor flaws. 1. Traffic forecasts 2. The COBA cost-benefit analytical tool 3. The natural desire by engineers to build on a green field site rather than adapt an existing facility. For example, it is much more demanding to refurbish a period property than to build estate houses. I was particularly hurt that the existing A21 was to be “detrunked” as though it were a redundant white elephant! 1. Traffic Forecasts In a letter from A D Springett to me dated 5th March 1993, he set out the projected traffic flows in v.p.d. for the year 2011.
Low Growth High Growth
A21 alone 43,000 53,000
A21 with overflow 58,000 70,000 from A26
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These projections imply an annual compound growth in traffic of 1.8% and 3.0% for the A21 alone and 3.54% and 4.63% for the A21 plus A26 overflow. The question arises as to how these growths in traffic movements will be financed. I have a Datastream graph of annual growth in GDP from 1964 to the present showing a mean annual growth of a little over 2%. This period includes the benefits of the boom in North Sea revenues (now in decline) and a prolonged period of cheap money (net of inflation). It is generally agreed that the 1990′s will be very different with low growth, a huge and persistent PSBR (circa. £50 billion) and a severely contracted manufacturing base which may now be too small to be viable. The position is worsened by the absence of an energy policy. We have seen the political decisions to close our profitable coal industry and substitute imports for which we cannot pay, and to burn premium specification methane in power stations. Department of Transport engineers will appreciate that the use of a low entropy fuel in a high entropy boiler is thermodynamic madness. On the 19th April 1993 there appeared in Today newspaper a report that “European business chiefs have put Britain at the top of the league table of countries in decline …. worse off than Romania and even the former USSR”. Teletext quotation Channel 4 page 529.
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As for the year 2011 – I can only quote a very wise gentleman “Never forecast – especially about the future”. My own surveys of traffic flow on the A21 show the low efficiency of utilisation of vehicles. 85% of cars have only one occupant and, half the commercial vehicles are substantially unladen.
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Traffic delays are a good way of encouraging better road utilisation. Has the Department of Transport taken account of the explosive growth in home offices and electronic mail which must reduce traffic flow projections? A company which caters for all its potential customers soon goes bust. It is called overtrading. A prudent business limits its capacity to its optimum (high margin) customers. Perhaps the Department of Transport could follow suit. 2. The COBA cost-benefit analytical tool a) General In para 1.2 of Policy of Roads in England, 1987 the then Secretary of State said there should be fair competition between different modes of transport. I have difficulty reconciling this with the case of the Inverness Bridges [I appreciate that we are crossing a Bureaucratic boundary in referring to Scotland]. Apparently, there was an overwhelming need for both a rail and a road bridge spanning the Moray Firth to relieve congestion and reduce travelling times in the area. The rail bridge was subject to a 7% return on capital hurdle and was turned down. The road bridge which was assessed by a cost-benefit procedure was approved and built. How could this situation have come about?
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Has the Department of Transport even calibrated a return on capital evaluation against its COBA evaluation for the same project? This is absolutely vital for any analytical tool. Cost-benefit analysis was largely discredited for the private sector 30 years ago when the technique was used for siting the “Third London Airport’. It was almost as big a joke as the “Spycatcher” trial. The fundamental weakness of cost-benefit analysis is that while costs can be measured, the benefits are subjective and at best can only be indicative. b) Detailed The principal cost benefits claimed for the project are reductions in accidents and savings of travel times. We all wish accidents to be avoided but it might be prudent and more cost effective not to construct idiot-proof roads but to remove from the roads permanently the 20% of commercial drivers and the 30% of car drivers who are clearly a menace in charge of a vehicle. A tightening up of driving tests, policing and sentencing would work wonders. The valuation of travelling time saved is highly subjective and I do not have access to the fine details of the COBA evaluation. Truck operators would claim massive savings from faster transit times. In practice would the time saved actually flow through in increased profits at the bottom line?
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My understanding of the late Prof. C. N. Parkinson is that the time saved would be absorbed in non-profitable activity. In any case were the assumed benefits taxed at the Corporation Tax rate of 33%? A commission only salesman might be able to make more “closures” of business as a result of saved travelling time. But has this benefit been taxed at 40% which would be the marginal rate for a good salesperson. In the case of leisure travel it is incorrect to put any value on travel time saved. Judging by party gossip the incidents during a journey are second only to the weather as a topic of conversation. The fatal flaw in the COBA assessment is clearly set out in “Table T2 Reassessed” in which the principle of “Reducto ad Absurdum is used. Using the Department of Transport figures for costs and benefits, I have calculated the NPVs for cases in which 6 and 9 lanes respectively are constructed. Clearly these roads would be grossly oversized and manifestly unacceptable. Yet the COBA assessment still gives positive weighted NPVs of £13.93 million and £3.41 million respectively. Any analytical
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TABLE T2 REASSESSED CAPITAL COSTS 6 LANES (x 2) 9 LANES (x 3) Low Growth High Growth Low Growth High Growth Do Something 20.76 20.76 31.14 31.14 Do Minimum -0.54 -0.54 -0.54 -0.54 Maintenance +0.28 +0.28 +0.42 +0.42 a) Total 20.50 20.50 31.02 31.02 Costs b) Total 31.10 39.42 31.10 39.42 Benefits (as put forward in Table T2) NPV = b-a 10.60 18.92 0.08 8.40 Weighted NPV (£m) 13.93 3.41 (60/40 Low High) Reducto ad Absurdum Economic Assessment Summary
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Tool which gives such results must be totally discredited. On a more positive note, during the inquiry I have been developing an appraisal system for evaluating the economics of road schemes which should be directly comparable with those used for rail and other modes of transport. Obviously I would need to have sight of these other appraisal methods. I would be prepared to discuss my ideas with Department of Transport experts. However, I must warn of political difficulties ahead. The dash for roads would have to be replaced by an integrated transport approach, favoured by environmentalists and those having the future of our country at heart, but not by those interested in short term gain.