The problem of using the cost-benefit paradigm to evaluate large infrastructure projects
The HS2 has two problems according to Sir Terry Morgan , who resigned as the Chairman of HS2 last month. The first problem according to Sir Terry Morgan is that the name is misleading. The emphasis should not have been on high speed but on adding capacity to the existing network. The second problem is the cost. He suggested that in order to keep the cost down, the line should stop at Old Oak Common in Northwest London. The question remains what is the point of adding capacity if the line does not reach Central London.
It also lays bare the limitations of the cost-benefit paradigm. The cost-benefit paradigm presumes that costs and benefits can be explicitly estimated and compared to pin down the net benefit to the society. If estimated benefits exceed estimated costs, then the projects is [weakly a Pareto-improvement]+ , i.e., it can potentially make people better off after the people who are worse off are suitably compensated.
From a practical perspective, costs can all be converted to pecuniary units and easily added up. Conversely, benefits are multi-dimensional and largely non-pecuniary. It is very difficult to estimate each dimension, let alone find some mechanism to add these various non-pecuniary dimensions. A bit like adding apples and oranges. The math just does not add up. Costs are more precisely estimated and benefits are effectively assumed. That is, there are usually a number of hidden assumptions in the methodology that allow benefits to be added up and given a pecuniary value that can then be compared to the benefits. If you are sceptical ask yourself how would you compare the benefits to HS2 line being built to Euston or Old Oak Common.
Sir Terry Morgan’s frank testimony at the Economic Affairs Committee on 22 January 2019 reveals how cost-benefit analysis works in practice. For any large troubled project, the focus often moves to minimising the cost, without mapping the resultant loss in benefits. This is because benefits are vague and cannot be easily estimated. For people who claim that cost-benefit analysis is flawed yet best available methodology, the very least you can say is that putting numbers on unknown unknowns is not a methodology. It is called stabbing in the dark.
HS2 may have been an unwise project to start without fully understanding the pattern of benefits to society. Yet, having sunk the cost into HS2, it needs to be brought to Central London. No one buys a chair with three legs however cheap its. So, why should we as a society pay for a high capacity line from Manchester to Old Oak Common.
References:
Hart, O., Shleifer, A., & Vishny, R. W. (1997). The proper scope of government: theory and an application to prisons. The Quarterly Journal of Economics, 112(4), 1127-1161. Link
Kanbur, R. (2005). Pareto’s revenge. Cornell University. Link
