Chair of Treasury Cttee, Andrew Tyrie, again asks Hammond and Grayling about unclear Heathrow economic benefits

An influential Tory MP has questioned the evidence behind Heathrow expansion, suggesting the Government may have gone to exceptional lengths to find a methodology that made the case. In a letter to chancellor Philip Hammond and transport secretary Chris Grayling, the chair of the Treasury Select Committee, Andrew Tyrie, said the Treasury has specifically requested the rarely used ‘net public value’ investment measure be included in its assessment.  Mr Tyrie pointed out that of the 4 investment measures used to evaluate the 3 runway proposals, only this seldom-used “net public value” measure presents a clear case for a 3rd runway at Heathrow.  He asked the ministers where this measure has been used before on major infrastructure.  Mr Tyrie also said that the DfT document published on 25th October acknowledged that ‘the Net Present Values (NPVs) for some of the options could potentially be negative under some demand scenarios… ” but the DfT is only considering one scenario.  And he asks that figures are produced for all the scenarios [but does not say if he wants carbon capped as well as carbon traded], not just one. He also says assessing demand growth for a period of over 20 years, or even 30 years, is ‘not in line with the guidance issued by the Department for Transport’. He asks that figures with demand capped at 20 and 30 years should be produced.
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Senior Tory questions Government over Heathrow assessment

By Chris Ames  (Transport Network)
13th December 2016

An influential Tory MP has questioned the evidence behind Heathrow expansion, suggesting the Government may have gone to exceptional lengths to find a methodology that made the case.

In a letter to chancellor Philip Hammond and transport secretary Chris Grayling, the chair of the Treasury Select Committee, Andrew Tyrie, said the Treasury has specifically requested the rarely used ‘net public value’ investment measure be included in its assessment.

Of the four investment measures used to evaluate the proposals, only this seldom-used net public value measure presents a clear case for a third runway at Heathrow, Mr Tyrie said.

He asked the ministers: ‘Can you provide any examples where net public value has previously been used as a measure to assess the cost-benefit case for major infrastructure projects?’

Mr Tyrie also pointed out in his letter that although the Government document acknowledged that ‘the Net Present Values (NPVs) for some of the options could potentially be negative under some demand scenarios… in its reassessment of the commission’s economic case… the Government has only considered one scenario’.

Mr Tyrie argued that the way the Airports Commission had assessed demand growth was ‘not in line with the guidance issued by the Department for Transport’ in that it did not cap projections of demand growth after 20 years.

He asked Mr Hammond to produce new calculations and provide ‘an assessment of the likely effect on the overall economic case’ of doing so.

Mr Tyrie also noted that the Government had made changes to the cost-benefit analysis to make the Airports Commission’s assessment of costs and wider economic impacts more consistent with its WebTAG appraisal guidance.

He pointed out: ‘This has had the effect of reducing the difference in NPV between the three shortlisted schemes that the Airports Commission argued clearly favoured the economic case for expansion of a third runway at Heathrow.’

Commenting on his ongoing attempt to clarify the economic case for the decision, Mr Tyrie said: ‘Parliament is being asked to vote on the biggest infrastructure project in a generation. It is crucial that it has all the tools at its disposal.’

http://transport-network.co.uk/Senior-Tory-questions-Government-over-Heathrow-assessment/13599

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Rt Hon Philip Hammond MP

Chancellor of the Exchequer

HM Treasury

1 Horse Guards Road

London SWlA 2HQ

 

Copy: Rt Hon. Chris Grayling MP,

Secretary of State for Transport

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8 December 2016

 

Dear Philip

The economic case for airport expansion

Thank you for your letter of 12 October regarding the economic case for airport expansion. Twelve months ago I tabled questions in Parliament, asking for information crucial to an assessment of the relative merits of each proposal in the Davies report to be re-produced. Some of these questions have been addressed in a document intended to inform the announcement of the Government’s decision to endorse expansion of Heathrow – published on 25 October. 1  [1 The background and rationale for the Government’s support of Heathrow’s north-west runway as the preferred option for south-east airport expansion can be found at https://www.gov.uk/government/collections/heathrow-airport-expansion. ‘Further Review and Sensitivities Report: Airport Capacity in the South East’ addresses some of the points previously raised by the Committee.  ]  These include an assessment of the extent to which the cost of each scheme would be passed to passengers in higher fares, and the percentage changes required for the net present values of each of the three shortlisted schemes to equal zero. This is not before time.

The Government’s decision to endorse Heathrow initiates consultation, prior to a vote to approve it by Parliament. It is crucial that this process is transparent and accountable. The cost benefit analysis presented in the Davies Report has been restructured by the Government in several ways. This leaves some of the questions in my letter to you unanswered. It also raises a new one. Accordingly, the Committee would welcome your response to the following:

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Outstanding questions

The economic case under ‘different scenarios’

In a document intended to inform. the announcement of the Government’s decision to endorse expansion of Heathrow – ‘Further Review and Sensitivities Report’ – it is stated that ‘the direct passenger benefits are particularly sensitive to the different global demand scenarios’, and that ‘the Net Present Values (NPVs) for some of the options could potentially be negative under some demand scenarios’.2  [2 ‘Further Review and Sensitivities Report: Airport Capacity in the South East’, Department for Transport, p.41 ] However, in its reassessment of the commission’s economic case, summarised in Table ES.2 of this document, the Government has only considered one scenario: ‘assessment of need, carbon traded’.

I would be grateful if you could reproduce Table ES.2 of the ‘Further Review and Sensitivities Report’ under the four alternative growth scenarios determined by the Airports Commission: (a) global growth, b) relative decline of Europe, c) low-cost is king and d) global fragmentation.

 

Appraisal Periods

The Government’s guidance on demand and revenue forecasting states:

When forecasting demand, it is important that, to ensure consistency between appraisals, a demand cap is used. In the majority of cases, demand growth should be capped after a 20 year period from the year the appraisal is undertaken ( e.g. an appraisal carried out in 2013/14 would be on the basis of demand capped in 2033/34). Sensitivities of 10 and 30 years of growth should be presented. Under exceptional circumstances, such as with long-term infrastructure projects, it may be appropriate to use a different demand cap. In these cases advice should be sought from DfT. (TAG Unit A5.3) 3  [3 TAG UNIT A5.3 .3 Rail Appraisal, Department for Transport, December 2015, p.2 ]

The Airports Commission has not capped demand growth after 20 years, instead allowing it to continue but at a slower rate other than in a single sensitivity test. This is not in line with the guidance issued by the Department for Transport. I would be grateful if you could:

• reproduce ES.2 of the ‘Further Review and Sensitivities Report’, capping demand after a period of a) 10 b) 20 and c) 30 years; and

• reproduce ES.2 of the ‘Further Review and Sensitivities Report’ using an appraisal period of a) 10 b) 20 and c) 30 years.

I would also be grateful for an assessment of the likely effect on the overall economic case of the changes made above.

 

Agglomeration benefits

I would be grateful if you could make an assessment of the effect on the conclusions of the Airports Commission’s Final Report of the Commission’s decision not to take account of high value-added international sectors in measuring the agglomeration benefits of the three shortlisted projects.

 

Choice of investment measure

The Government has made a number of changes to the cost-benefit analysis to make the Airports Commission’s assessment of costs and wider economic impacts more consistent with its appraisal guidance for transport projects, WebTAG. This has had the effect of reducing the difference in NPV between the three shortlisted schemes that the Airports Commission argued clearly favoured the economic case for expansion of a third runway at Heathrow.

The results illustrate the difficulty of reaching a clear decision on the basis of the economic case alone. As the ‘Further Review and Sensitivities Report’ states, ‘there is little difference in the NPV s of the schemes when considered over a 60 year appraisal period’ and ‘the net differences are small, with LGW Second Runway delivering the highest NPV at the lower end of the range, and LHR Northwest Runway delivering the highest NPV at the upper end of the range in the central case’.4  [4 ‘Further Review and Sensitivities Report: Airport Capacity in the South East’, Department for Transport, p.40 ]

I would be grateful for your response to the following questions:

• When considering the economic case, what interpretation and weight is put on each of the investment measures – net present value, net public value, net social benefit and total benefits – presented in Table ES.2 of the ‘Further Review and Sensitivities Report’ in informing your decision about the value for money represented by each proposal?

• The report indicates that the net public value investment measure was included as a result of a request from the Treasury. Why did the Treasury propose net public value as a measure for consideration in this review? Can you provide any examples where net public value has previously been used as a measure to assess the cost-benefit case for major infrastructure projects?

I will be putting this letter, and your response, in the public domain.

Yours ever

Andrew

RT HON ANDREW TYRIE MP

CHAIRMAN OF THE TREASURY COMMITTEE

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The original letter is at 

http://www.parliament.uk/documents/commons-committees/treasury/Correspondence/Treasury-Committee-Chair-to-Chancellor-airport-expansion-08-12-16.pdf

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See earlier:

Treasury Select Committee Chairman writes to Chris Grayling and Philip Hammond to question economic benefits of runway

Andrew Tyrie, Chairman of the Treasury Committee, wrote to Chris Grayling, Secretary of State for Transport, on 14th September, questioning the economic case for HS2 and airport expansion. Andrew Tyrie says in his letter:  “The economic case to support the conclusions of the Davies report lacks crucial information.” On 27th November 2015, he tabled 15 parliamentary questions on details of the economic justification [all copied below]. These have yet to be answered 10 months later (they just had a standard holding reply from Robert Goodwill).  Andrew Tyrie says: “For the fifth time I am attaching these questions. Failure to answer them will lead people either to conclude that this work has not been done – in which case it would be unacceptable for a decision to be made without the evidence to support it – or that it has been done, and gives answers that do not necessarily support the conclusions of the Davies report. I do not suggest that either of these are the case. The best way to answer these concerns is to public the information immediately. As we discussed, I have written in similar terms to the Chancellor.”  “Without this information, the evidence in support of any decision that the Government takes on airport capacity will be incomplete.” His Parliamentary Questions focus, in particular, on Table 7.1 in the Airport Commission’s Final Report, of July 2015. (Table copied below). Mr Tyrie spoke to Chris Grayling on 15 August 2016.

http://www.airportwatch.org.uk/2016/09/treasury-select-committee-write-to-chris-grayling-and-philip-hammond-to-question-economic-benefits-of-runway/

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and earlier:

Andrew Tyrie says economic case for a new runway unclear and based on “opaque” information

Andrew Tyrie is the chairman of the influential Commons Treasury Select Committee. He has now said parliament and the public had been left partly in the dark on the case for a new runway, because the Airports Commission’s analysis is not good enough. He said the decision on airport expansion is being taken on the basis of information that was “opaque in a number of important respects.” Mr Tyrie said the robustness of the Airports commission’s conclusions could not be determined from the information in its report. “Parliament has demanded more transparency over the environmental case. At least as important is the economic case.”  Mr Tyrie said it was impossible to tell if the potential economic benefits for the UK of the proposals by Heathrow or Gatwick differed significantly from one another, or even if the benefits of building either are significantly different from not building any new runways. “A decision as controversial as this — one that has bedevilled past governments for decades — requires as much transparency as reasonably possible.”  Andrew Tyrie has written to George Osborne calling for more details of the calculations that led to the Commission recommending a Heathrow runway. He also called for the process to be moved from the DfT to the Treasury.   

http://www.airportwatch.org.uk/2016/02/andrew-tyrie-says-economic-case-for-a-new-runway-unclear-and-based-on-opaque-information/

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