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On the opportunity costs of huge infrastructure projects

My latest column in The Times:

This is an article about a railway, but it begins
with a wall; bear with me. I live not far from the line of
Hadrian’s Wall and I often take visitors to marvel at its almost
1,900-year-old stones. That the Romans could build 80 miles of
dressed stone fortification, 15ft high and 9ft wide, over crags and
bogs with a small fort every mile, is indeed a marvel. It was one
of Rome’s most expensive projects.

Yet I often ask visitors as they marvel: did it work? The answer
is no. The Roman garrison was too strung out to defend the whole
thing at once. Within 30 years it had been successfully attacked by
the barbarians; within 40 it had been abandoned for a new wall in
Scotland; when that did not work and Hadrian’s Wall became the
boundary again, it was overrun by barbarians several times. Did it
exclude or pacify the tribes of northern Britain? I doubt it.

Ah, say the historians and Latin teachers, but you misunderstand
the purpose of the wall. It was never meant as a Maginot Line. It
was a sort of extended customs zone to control the border region.
Or, goes another theory, “it was simply a
psychological demonstration of Roman imperial power, intended to
cow the natives into submission and provide a lasting monument to
Hadrian himself”.

Sorry, but we are supposed to justify one of Rome’s most
expensive building projects — costing, let’s say, 50 billion
denarii — on the grounds that it might have impressed a few
woad-stained, hairy organic farmers? Or to manage queues at
immigration while selling them duty-free otters’ tongues?

There is no getting away from the fact that Hadrian’s Wall,
marvel thought it was, was probably a bureaucratic blunder.
Confronted with raids, a peevish emperor naively suggested building
a big wall, nobody dared to tell him it was mad, a bunch of
toga-clad Sir Humphreys gave the contracts to their relatives, and
the local Nimbys were brushed aside.

You can probably see where I am going. Just because we can build
the new fast railway, known as HS2, to Birmingham and beyond does
not make it a good idea. The size of the project seems, among its
promoters almost to be justification in itself.

Large infrastructure projects are always welcome in retrospect,
they point out. Francophiles are all jolly glad that the Channel
Tunnel was built, after all, even if it has failed to meet its
projected passenger numbers and ruined its original investors.
That’s the flipside of the sunk-cost fallacy — once something’s
paid for, you might as well use it.

Leave aside — as yesterday’s court ruling did — the
environmental objections (online you can even find retrospective
environmental objections to Hadrian’s Wall on the grounds that it
caused deforestation). The economic case against HS2 hardly needs
retelling. The cost has risen to more than £42.6 billion, plus
trains. Big rail projects run 45 per cent over budget on average
according to one study, but let’s be kind and say it will cost £50

For this we get 20 minutes off the journey time to Birmingham in
17 years’ time. Yet we already treat trains as if they were offices
(I am writing this on a train), so reliability matters more than
speed. Most studies suggest that HS2 will do little to revive the
North, and is more likely to lure northerners south. And less than
5 per cent of British passenger travel is by rail — it just so
happens that MPs (and peers such as me) are unusual in this
respect, doing 40 per cent of our travel by train and an unusual
proportion of that by long-distance train. So politicians live in a
rail bubble.

Yet it’s the opportunity cost that is most damning. Of all the
basic concepts of economics, the one that people seem to have the
hardest time grasping is opportunity cost. Every time you spend £50
billion on one thing, you are not spending £50 billion on another
thing. The right question is never: “Should we spend £50 billion on
X?”, but “What should we spend £50 billion on?” Focusing just on
transport for simplicity, here are some options.

First, potholes. The Asphalt Industry Alliance says £10.5
billion is needed to fix crumbling roads and fill potholes around
the country. There’s a deal of special pleading in that, but let’s
give them £5 billion.

Second, rail improvements. Last year Atkins, the engineering and
project management consultancy, produced a study on upgrading the
existing rail infrastructure between London and Manchester. One
option it looked at, a local authority-led scheme called 51M, would
spend £2.6 billion on a list of dull-sounding projects — grade
separation of Ledburn Junction, construction of a fourth line
between Attleborough Junction and Brinklow Junction, Northampton
line speed improvements, a Stafford by-pass — the cumulative effect
of which would be an extra five trains an hour out of Euston, and a
slightly shorter journey time to Birmingham and Manchester.

Now here’s the startling number. Atkins calculated that 51M
would have a benefit-cost ration of more than 5, meaning that its
modestly reduced congestion, journey times and delays would be
worth five times as much to people as the cost of the project,
whereas HS2 struggles to get above one, meaning that the benefits
barely exceed the costs.

Add in improvements to other rail lines and local rail networks:
£10 billion on rail altogether. Add another £10 billion on speeding
up road improvements, especially the bypassing of villages and
making A-roads dual carriageway — not forgetting, please, the A69
that runs parallel to Hadrian’s Wall and is a vital link between
Belfast and the Continent, via Tyneside.

Then add a third runway at Heathrow so we have a chance of
attracting businessmen to invest here, and not make them spew CO2
while going round in circles over Buckinghamshire: cost £17
billion. Boris Johnson wants £600 million for his Vision for
Cycling in the capital, and let’s round it up to £2 billion for
cycle paths nationwide. We’re up to £44 billion. I’d spend the last
£6 billion on souping up broadband networks, either with superfast
fibre or by leapfrogging into wireless broadband, so we can work at
home and don’t need to get the train anyway.

This list of projects has several advantages. It is mostly
shovel-ready, so will provide work in the construction industry
right away, rather than in six years’ time and start bringing
benefits soon, rather than when my children are middle-aged. It
would be spent mainly on concrete, steel and tarmac, rather than
lawyers, consultants and bat surveys.

And it would avoid the embarrassment of building during the
second quarter of the 21st century — an age of (perhaps) driverless
cars, mag-lev bullet trains and near silent aircraft — a great
folly to immortalise the name of Osborne alongside Offa, Hadrian
and Cheops.

By Matt Ridley | Tagged:  rational-optimist  the-times