Moving Towards the Preferred Option
Value for Money Analysis
Value for Money is calculated using the Transport Model for Scotland (TMfS) calibrated to the actual results from the econometric analysis. Whilst the nature of the Peak Fares intervention is different to a “normal” transport infrastructure project (in that it simply changes price rather than the network) the methodology used to determine VfM (including carbon savings) is identical to that normally used across all transport investment – the benefits arise from changes in the Generalised Cost of Travel (Time and Money) to existing and new users, as is standard for any other scheme, meaning the results are consistent with the analysis of other (including infrastructure) projects. See Annex B.
The only distinctions are that for existing users, there is no change in the time component of Generalised Cost and that there is no infrastructure cost to Government – costs are the net impact on revenue and additional costs incurred by SR and the subsequent changes to the ScotRail level of subsidy required. New users during the Pilot, as measured by the change in demand, switch to rail because they are better off in terms of either time or money or both and this is captured in a standard way by the analysis.
Evaluation of VfM for the Pilot
In terms of the value for money of the pilot, the published evaluation concluded:
Using the demand and cost information for the M2 preferred scenario, the estimated Benefit Cost Ratio of the project (on an annual basis as per standards) is in the range 1.4 to 1.5 (depending on the cost assumptions used).
In terms of sensitivities, the M4 scenario reduces this to 1.2, although to further complicate this scenario there is a significant impact on VAT which would accrue to UKG rather than SG without full [and accurate] VAT assignment in place. Accounting for this would reduce the BCR for SG alone to 1.1 although it is general practice to look at the overall impact rather than that solely to Scottish Government.
Thus, a prudent range for the value for money is between 1.2 and 1.5 – benefits of between £1.20 and £1.50 for each £1 spent.
HMT Green Book guidance also suggests that “Distributional weighting” may be undertaken to account for the income levels of those who are benefiting from the intervention. See The Green Book (2022) - GOV.UK (www.gov.uk).
Given that rail users are on average of higher than median income this weighting reduces the impact by around 17% (using income data from the Scottish Household survey).
This results in a Value for Money range (in terms of Benefit Cost Ratios) of between 1.0 and 1.25 or between £1.00 and £1.25 of benefits for every £1 spent.
VfM assessment of options
The Benefit Cost Ratio of the core scenario is estimated to be 1.34 and under the alternative scenario is 1.19. This is somewhat lower than the prudent range from the trial due to the lower estimated impact on demand. However, this is based on the trial outcome and the permanent nature of the proposal is likely to further stimulate demand (see below).
Using the ScotRail estimates of costs gives a benefit cost ratio of 1.29.
In terms of the options, there is no impact on the benefit cost ratio for options 2 and 6 because it is assumed that demand is impacted to an insignificant level. Whilst there are small variations in costs between these options, any increase in cost to government is perfectly offset by a benefit to the public and so there is no impact on the BCR. Affordability is of course impacted upon as discussed in the financial case.
Option 5 and its variants are different in that they impact on demand. However, they change the relationship between existing peak and off peak fares and the new fare level and would require a separate model run of TMfS for each price increase compared with the baseline, which would then be subsequently calibrated to overall changes in demand, to calculate the BCR of variants of the option. This is not practical.
Any increase in core prices will reduce demand and thus decrease the BCR compared with option 1. Whilst a cursory examination of the impact table in the financial case would suggest that increasing core prices by 9% (in the core scenario used) would decrease demand by 6% more than wiping out the user benefits from the overall 5.6% increase in demand this is not the case. This is because the nature of the user benefits will change with those who travel at what were formerly peak times still benefiting and these people are more likely to be commuters or business traveller who have a higher value of time.
Looking at the parameters of the TMfS model in terms of Value of Time and the detail of the ScotRail model, it is reasonable to suggest that an increase in core prices of around 15% would reduce the BCR to 1 and any increase above that would likely be negative. This level is associated with a reduction in costs of around £13 million (from the financial case). With certainty it can be stated that any increase in core prices will impact negatively on the BCR.
So in Benefit Cost Ratio Value for Money terms, Option 5 is rejected at any level of increase. Of the other options, Option 2 scores most highly on the qualitative assessment, is straightforward to implement and likely to be uncontroversial. Option 6 (retaining Super Off-Peak fares) does not have a significant cost associated with it but scores very poorly in terms of simplification of the system and is likely to cause issues with marketing etc. At the very least it would need to be renamed if it was chosen as an addition.
Long term impacts
Based on the core scenario, it would take an increase in demand of 9.75% to make the project self-financing. This represents around a 1.75 times bigger impact than has been found in this analysis.
A recent paper by Wardman (2022) suggests that long term elasticities may be around 2.3 times short run elasticities. This offers some evidence albeit not concerned with such a major impact change as this project that there may be the potential for long-run impacts to make the project “self-financing”. This would result in an infinitely high BCR as the project would not have any cost associated with it whilst generating significant benefits. It should be noted however that this would still not have tangible benefits in terms of CO2 reductions as it would still represent a small fraction of overall car use.
When considering the long-run impacts, behavioural science can offer some insights. More generally, simplification of systems has wider benefits in terms of passenger and public engagement. Discussions with the Behavioural Insights unit within SG (DG Net Zero) have raised the concept of 'sludge', which is likely to be detrimental to passengers' relationship with ScotRail. According to OECD, "‘sludge’ – unnecessary friction that hinders access, imposes psychological costs and erodes trust – remains a pervasive barrier in government services and processes. Sludge consumes significant time and resources, contributes to frustration and distrust and jeopardises equitable access to government programmes."