CEN/P2.1/ECO. Economic Case / Value for Money Main Proof of Evidence Neil Chadwick

Transcription

1 Economic Case / Value for Money Main Proof of Evidence Neil Chadwick

2 PROOF OF EVIDENCE NEIL CHADWICK ECONOMIC CASE / VALUE FOR MONEY CASE TRANSPORT AND WORKS ACT 1992 MIDLAND METRO (BIRMINGHAM CITY CENTRE EXTENSION LAND ACQUISITION AND VARIATION) ORDER INQUIRY NOVEMBER 2014 Page 1 of 19

3 1 Introduction 1.1 My name is Neil Chadwick. I am a Director with Steer Davies Gleave, a consultancy firm specialising in the transport sector. 1.2 My academic qualifications are: BA (Hons) Natural Science (Physics), University of Oxford MSc Transport, University of London MA Public Administration and Public Policy, University of York 1.3 I have 25 years transport planning experience. In that time I have led and contributed to business cases for rail and rapid transit schemes in the UK and overseas. I have appeared at previous Transport & Works Act Order and Local Planning Inquiries, as well as inquiries of a similar nature in the Republic of Ireland. Scope of Evidence 1.4 The scope of my evidence is to establish the Value for Money (Economic) Case for the Scheme which would be implemented using the Midland Metro (Birmingham City Centre Extension Land Acquisition And Variation) Order, should it be granted. As such and alongside the evidence of Mr Adams [CEN/P1.1/SCH], my evidence addresses Matter 2 of the Statement of Matters. 1.5 I demonstrate that the Centenary Square Extension (the Scheme) has a good Value for Money Case and in particular, the benefits of the scheme outweigh its monetary costs and other disbenefits, and as a consequence public sector funding of the project is warranted. I also demonstrate that the Promoter s preferred option has a superior value for money case than the alternatives that have been put forward by the principal objector to the order. Witness Declaration 1.6 The evidence I shall give is true, given in good faith and represents my professional opinion regarding the Value for Money case of the Variation Order Scheme. Page 2 of 19

4 2 Value for Money Case Introduction 2.1 HM Treasury requires an assessment of the value that public spending would secure before a spending decision is made (this is known as the appraisal ). This requirement applies to all sectors, not just transport. The Treasury s requirements for the appraisal process are set out in the Green Book which was published in 2003 [Exhibit 1]. 2.2 The Department for Transport s (DfT s) approach to appraisal, called the New Approach to Transport Appraisal (NATA), was developed following the Government s White Papers A New Deal for Trunk Roads (1997) and A New Deal for Transport (1998). In 2009, the DfT refreshed its NATA framework to ensure that it was fully consistent with the Green Book approach. 2.3 The DfT produces detailed guidance on the application of its appraisal approach. This is called WebTAG 1, a suite of documents that sets out guidance on the approach to demand, revenue and benefit forecasting and how, along with other inputs, the outputs from such forecasting work are used to appraise the anticipated impacts of a transport intervention. Relevant excerpts of the webtag guidance are provided as Exhibits 2 to The appraisal of the Scheme has been undertaken with regard to WebTAG and accordingly meets Treasury economic appraisal requirements. 2.5 While WebTAG prescribes how the economic case should be presented and sets out a number of minimum requirements for the modelling and appraisal, it is important to note that underpinning the DfT s guidance is the proportionality principle. This states that the requirement for detailed modelling, collection of bespoke evidence and monetisation of benefits should vary with the scale and complexity of the scheme under consideration. In my opinion, the appraisal of this Scheme has been undertaken in a way that is proportional to the cost of the Scheme and the scale of its impacts. 2.6 Consistent with the Treasury s approach and as set out in the January 2013 DfT publication The Transport Business Cases [Exhibit 5], the DfT s approach requires the development of a Five Case business case. These cases are: Strategic Case, Economic Case, Financial Case, Commercial Case and Management Case. The purpose of the business case is to demonstrate that: There is a robust rationale for the proposed scheme (Strategic Case) The proposed scheme will deliver value for money (Economic Case) The proposed scheme is affordable in terms of sources of funding (for construction and operation) (Financial Case) Robust procurement arrangements for the necessary elements of the proposed scheme exist (Commercial Case) Robust governance arrangements exist and effective project management is in place (Management Case) 2.7 The business case for this scheme has followed this Five Case model. 1 Page 3 of 19

5 2.8 Reflecting the Government s devolution of transport capital funding decisions (see 2.20 below) to a Local Enterprise Partnership (LEP) level, the Business Case has also been developed with regard to the Greater Birmingham & Solihul (GBS) LEP s draft Assurance Framework [Exhibit 6]. (While the Assurance Framework is in draft at the time of writing, it is anticipated that it will have been formally adopted prior to the start of this public inquiry.) 2.9 The Business Case submitted to GBSLEP in October 2014 [Exhibit 8] follows the Five Case structure. It is the Economic Case in this Business Case that presents the most contemporary Value for Money case of the scheme and which is the subject of this evidence The other four cases in the Five Case model are addressed in the evidence of Mr Adams [CEN/P1.1/SCH]. What is Value for Money? 2.11 A central part of the Economic Case is the Cost Benefit Analysis (CBA). The CBA compares two futures, one with the scheme and one without. Noting the proportionality principle, the DfT s guidance sets out that those costs and benefits that can be monetised in a consistent and comparable way should be included in the CBA. Its guidance also explicitly recognises that not all costs and benefits can be readily monetised. The guidance sets out methods for assessing non-monetised costs and benefits which can be done in either quantitative or qualitative ways, depending on the particular impact concerned. These other Value for Money considerations form an important part of the overall Economic Case. Development of the Business Cases 2.12 The approach to funding major transport schemes such as extensions to Midland Metro has evolved in recent years to reflect both the availability of funds and the policies of the previous and current Government to devolve funding decisions to a more local level. The Business Case for the scheme has developed over a number of years to reflect these changes as well as the contemporary specification of the programme to implement the planned extensions to Midland Metro As outlined in the evidence of Mr Adams [CEN/P1.1/SCH], the scheme is part of a larger extension to Midland Metro planned for Birmingham City Centre. In 2005 a scheme to extend Midland Metro from Snow Hill to Edgbaston gained a Transport & Works Act Order (Midland Metro (Birmingham City Centre Extension, etc.) Order). As part of the development of that scheme, a business case for the extension to Edgbaston was developed and submitted to DfT Since the 2005 Order was granted, Centro has continued to develop business cases to secure funding to enable implementation of the overall scheme to extend Midland Metro to Edgbaston. On 21 July 2006 Centro submitted an Outline Business Case seeking Conditional Approval from the Department for Transport for the full extent of the works authorised by the 2005 Order, together with those authorised by the Midland Metro (Wednesbury to Brierley Hill and Miscellaneous Amendments) Order Receipt of Conditional Approval would have enabled Centro to seek tenders for the work packages contained within the Outline Business Case and having obtained firm prices, then seek a Full Approval prior to signing contracts Funding for the two projects was not forthcoming due to overall funding constraints faced by the DfT at that time. There was no suggestion from DfT that the two schemes did not offer value for money. Page 4 of 19

6 2.16 In 2007, the full Birmingham City Centre Extension to Edgbaston was considered as part of a package of schemes for funding using the previous Government s Transport Innovation Fund. This Fund sought to provide grant funding for transport enhancements, to be supplemented by a combination of revenues from road user charging and other funding sources. However and following an in depth study of the impact of road pricing on businesses and residents in the region, the seven West Midlands councils decided that road user charging was at that time not the right way forward for the West Midlands and as a consequence it was decided not to pursue this approach After consideration of the likely funding available from the DfT s Regional Funding Allocation, Centro looked at phasing the full Birmingham City Centre Extension (BCCE) scheme. On 29 October 2009 Centro submitted an Outline Business Case to the Department for Transport for a first phase of BCCE and a Fleet Refurbishment Programme. This Business Case was for a an extension to the existing Midland Metro Line 1 from Snow Hill through Birmingham City Centre to the redeveloped New Street Station using the 2005 Order powers. In addition, the Business Case included purchase of a new fleet of trams to operate enhanced service frequencies on the existing system and an associated extension to the depot at Wednesbury The first phase BCCE scheme and Fleet Refurbishment Programme was granted Programme Entry status by the Department for Transport in April After additional business case submissions, Conditional Approval was granted on 4 February Following a Final Business Case submission in November 2011, full funding approval was granted in February The extension to New Street is now under construction and it will open in A new fleet of trams has been procured and depot works are close to completion In parallel, Centro has continued with the promotion of the second and third phases of the scheme (New Street to Centenary Square and Centenary Square to Edgbaston). In light of the new development planned for Paradise Circus, the Centenary Square extension has been modified slightly to better serve the development and a new standalone business case for this phase was developed in early Funding devolution now means that decisions to fund the second phase of the BCCE are made by the GBSLEP. As part of GBSLEP s prioritisation of transport schemes, Centro submitted a funding application based on the business case for the second phase of the 2005 Order (New Street to Centenary Square) in May 2013 which led to Programme Entry Approval [Exhibit 7] for the scheme in September This was prior to the submission of the TWAO application in December 2013 that is Centro submitted the TWAO application after Programme Entry status had been secured from the GBSLEP From this narrative, it is clear that the value for money and economic case for the full BCCE and the section of BCCE that is the subject of this Order application has been considered periodically, with a positive view taken on the scheme s value for money at each key decision point in the Scheme s development. Page 5 of 19

7 Options Developed CEN/P2.1/ECO 2.22 The 2005 Order scheme was developed to address the need for a public transport connection to penetrate the city centre and which integrated with current networks. It was also necessary for the scheme to support Birmingham City Council s proposals for recasting the bus network and introducing increased pedestrianisation within the City Centre. Prior to deciding to promote the extension as the solution to these issues, a number of alternative options were considered, including lower cost alternatives. These alternatives fell into three categories: rail-based, bus-based and active mode schemes. A light-rail scheme was identified as the preferred option due to its easy connection with the existing Line 1, removing the need for passengers to interchange. As Mr Adams sets out, two route options for a Midland Metro extension were considered prior to the selection of the preferred route option Given that the first phase of the extension between Snow Hill and New Street is now under construction and that the Scheme that is the subject of this Order application is a necessary precursor to the full completion of the BCCE, there is now no further requirement to consider Low Cost and Next Best Alternatives as part of the Business Case. However and as set out later in this evidence, the cost benefit case of alternative Metro route alignments has been considered for the purpose of this inquiry. Assessment Approach 2.24 A quantitative and qualitative approach has been used to assess the impacts of the scheme. An economic appraisal has been undertaken, where monetised costs and benefits of the scheme have been compared (against the situation without the scheme, known as the Do Minimum) and a benefit cost ratio calculated in line with the approach set out in WebTAG. The social, environmental and distributional impacts have been assessed qualitatively, with each categorised as to whether the impacts are beneficial, neutral or negative using a seven point scale (large, moderate or slight adverse/beneficial, or neutral impact) For the purpose of this evidence, two cases have been considered. These are: Reference Case: The Scheme is considered in comparison with a Do Minimum in which HS2 proceeds as planned by the Government and the Midland Metro is extended from New Street station to Eastside. This case reflects the strong policy commitment from Government to HS2 and the similarly strong policy commitment of the GBSLEP to the Eastside extension, which is seen as integral to the HS2 connectivity package. The Business Case [Exhibit 8] that is being considered by GBSLEP for its Conditional Approval decision has this Reference Case as its central case. Therefore, it is this case that will that will be the first consideration of the GBSLEP when it makes its decision to release funds for the Scheme. Alternative Case: The Scheme is considered in comparison with a Do Minimum in which HS2 does not proceed as planned by the Government and the Midland Metro extension to Eastside is not constructed. This case recognises that the Hybrid Bill for HS2 has yet to be enacted and powers have yet to be granted for the Eastside scheme. So while, HS2 is viewed by the Promoters and the GBSLEP to be highly probable it is also appropriate to consider this case. Page 6 of 19

8 Reference Case HS2 as part of the Do Minimum 2.26 For the Reference Case, the following assumptions have been made: Do Minimum CEN/P2.1/ECO Midland Metro will run 10 trams per hour (tph) from New Street to Wolverhampton St. George s, with a shuttle service (10 tph) between New Street and Eastside from HS2 operational from 2026 No changes to the road network. Do Something Extension of Midland Metro Line 1 services (10 tph) from New Street to Centenary Square, with a shuttle service (10 tph) between Centenary Square and Eastside from Broad Street closed to general traffic between Paradise Circus and Bridge Street. Navigation Street link opened to allow traffic to pass from Navigation Street to Broad Street via Bridge Street. Alternative Case HS2 not part of the Do Minimum 2.27 For the Alternative Case, the following assumptions have been made: Do Minimum Midland Metro will run 10 trams per hour (tph) from New Street to Wolverhampton St. George s. No changes to the road network. Do Something Extension of Midland Metro Line 1 services (10 tph) from New Street to Centenary Square. Broad Street closed to general traffic between Paradise Circus and Bridge Street. Navigation Street link opened to allow traffic to pass from Navigation Street to Broad Street via Bridge Street. Demand, Revenue and Benefits Forecasting 2.28 The forecast change in Metro demand from the implementation of the scheme is a key driver of the impact on user benefits, non-user benefits, wider economic benefits and revenue change Network modelling has been used to forecast demand. An update of PRISM the strategic transport model of the West Midlands has recently been undertaken and has been used as the foundation for modelling and forecasting benefits for this scheme. Flows on Midland Metro and public transport user benefits have been assessed using Centro s public transport (PT) VISUM model, which has been updated in order to have a direct interface with the updated PRISM forecasts. The PT VISUM model has been updated to better reflect current demand levels and the most recent forecasts of demand, and therefore provides a better estimate of the benefits associated with the Midland Metro extension. Page 7 of 19

9 2.30 For the Reference Case, the HS2 impact on local demand patterns has also been taken into account in the PT VISUM model for the 2031 modelled year. This includes the additional public transport trips generated/attracted by the two HS2 stations within the West Midlands: HS2 Curzon Street and HS2 Interchange. Since a proportion of these trips are forecast by HS2 Ltd, HS2 s promoter, to be abstracted from classic rail stations New Street and Birmingham International the corresponding reduction in trips to/from these stations due to introduction of HS2 were also taken into account The extension to Centenary Square will offer benefits to users in the form of journey time savings. Without the scheme, Metro passengers who wish to travel to Centenary Square must walk approximately 800m from New Street station. Extending the Metro line to Centenary Square will reduce journey times and provide a seamless journey experience for passengers The user benefits resulting from these journey time savings have been calculated using the Department for Transport s standard software, TUBA, which is the approach set out in WebTAG [Exhibit 2] The Midland Metro extension will affect the number of car kilometres driven. A change in the number of car kilometres has a number of impacts, including a change in road congestion experienced by other highway users, noise levels, greenhouse gas emissions, number of accidents and local air quality The non-user benefits from the complementary highway measures which are planned to be introduced with the scheme, but are not part of the Order before this inquiry are assumed to be neutral, although costs for the implementation have been included in the appraisal. As these interventions are anticipated to improve traffic flow, not including these benefits is a conservative assumption supported by discussions with Birmingham City Council s modelling team The change in car kilometres has been estimated using Birmingham City Council s city centre SATURN highway model in conjunction with forecast demand levels in the network-wide PRISM model. Using WebTAG values for Marginal External Costs, the monetised benefits of the change in road kilometres has been calculated Whilst the reduction in highway kilometres has a number of benefits, it is also important to recognise that there will be a loss in tax from the reduction in car journeys, thus representing a cost of the scheme. Reference Case Demand and Benefits 2.37 Current annual Midland Metro patronage is around 5 million. In the Reference Case this is forecast to rise to over 10 million in the forecast year 2021 due to the extension to New Street station and the additional capacity provided by fleet expansion currently underway Extending the Metro line to Centenary Square is forecast to increase Midland Metro patronage by 7% in 2021 and 13% in The increase in passenger numbers results from mode transfer from bus and car and in 2031 due to the new Eastside link that connects the developments around Centenary Square to HS2 and Eastside developments For the Reference Case, user benefits are forecast to be an additional 0.84m and 1.48m (2010 prices) in the 2021 and 2031 modelled years respectively. Page 8 of 19

10 2.40 Using Reference Case Do Something demand forecast and 2014 fares, it is forecast that there will be an additional 1.54m and 3.94m (2010 prices) revenue generated in the 2021 and 2031 modelled years respectively A summary of the demand, revenue and benefits associated with the Scheme using the Reference Case assumptions is set out in [Exhibit 9]. It should be noted that in the 2021 forecast year (i.e. before HS2 is completed and opens to traffic), the demand, revenue and benefits for the Reference Case and the Alternative Case are the same. Alternative Case Demand and Benefits 2.42 Current annual Midland Metro patronage is around 5 million. In the Alternative Case this is forecast to rise to over 10 million in the forecast year 2021 due to the extension to New Street station and the additional capacity provided by fleet expansion currently underway Extending the Metro line to Centenary Square is forecast to increase Midland Metro patronage by 7% in 2021 and 7% in The increase in passenger numbers results from mode transfer from bus and car and in For the Alternative Case, user benefits are forecast to be an additional 0.84m and 0.90m (2010 prices) in the 2021 and 2031 modelled years respectively Using the Alternative Case Do Something demand forecast and 2014 fares, it is forecast that there will be an additional 1.54m and 1.67m (2010 prices) revenue generated in the 2021 and 2031 modelled years respectively A summary of the demand, revenue and benefits associated with the Scheme using the Alternative Case assumptions is set out in Exhibit 9. Costs Capital Costs 2.47 The capital costs of the Scheme are the same in the Reference and Alternative Cases The extension of Midland Metro is estimated to cost 27.1m (2010 prices). These costs will be incurred over period 2012 to 2018 as the development of the scheme progresses The highway works on Broad Street and Navigation Street are anticipated to cost 2.9m (2010 prices) which will be spread between 2013 and Maintenance and Renewal Costs 2.50 The maintenance and renewal costs of the Scheme are the same in the Reference and Alternative Cases Costs to cover the renewal of trams and the Midland Metro infrastructure have also been incorporated in the appraisal. It has been assumed that renewals will cost 11.7m (2010 prices) for the appraisal period, which represents 32% of capital costs (including optimism bias, which is an uplift to costs applied for appraisal purposes). Operating Costs 2.52 The extension of Midland Metro to Centenary Square will be associated with an increase in operating costs resulting from increased mileage, staffing and maintenance Page 9 of 19

11 costs. The increment in these costs has been calculated for 2021, comparing the forecast operating costs for the do something against the do minimum In the Reference Case, the shuttle to Eastside will be operational from For consistency with other appraisal inputs, the second modelled year for operating costs is 2031 which has been modelled to include the increase in operating costs resulting from extending the Eastside shuttle from New Street station to Centenary Square In the Reference Case, the extension to Centenary Square is anticipated to cost an additional 0.39m and 0.85m (2010 prices) to operate in 2021 and 2031 respectively For the Alternative Case, the extension to Centenary Square is anticipated to increase operating costs by 0.39m (2010 prices) annually A summary of the costs, including the spend profile of capital costs are shown in Exhibit 9. Appraisal Assumptions 2.57 The appraisal was undertaken with regard to WebTAG using the following assumptions: The extension is expected to open in early Apart from capital costs which are spent prior to opening, appraisal inputs have only been included from this opening year. The scheme has been appraised over a 60 year period from opening, from the point when the full scheme is open in 2019, and six years of costs prior to opening. Optimism bias values have been applied. In line with WebTAG guidance [Exhibit 3] for schemes at the Conditional Approval stage, optimism bias values of 40% and 15% have been applied to the Midland Metro extension and highway capital costs respectively. Given Centro s recent experience with the extension from Snow Hill to New Street, this is a particularly conservative assumption. All prices have been re-based to 2010 prices, using a GDP deflator, consistent with DfT guidance. All values in the appraisal are in 2010 real prices. For certain inputs, such as capital costs, operating costs and revenues, real growth has been assumed. A real growth profile has been applied to all capital costs to represent real growth in construction prices. Up to 2031, operating costs and revenue have also been grown by a real growth rate. Operating costs are assumed to increase by 0.8% per annum, whilst a 1.1% real growth rate is applied to Midland Metro ticket revenue based on observed fares increases. All costs and benefits have been discounted to As required by WebTAG, a discount rate of 3.5% per annum has been applied for the next thirty years, with the rate reducing to 3.0% from then on. Page 10 of 19

12 Results CEN/P2.1/ECO 2.58 Based on the inputs and assumptions outlined above, the benefit cost ratio of the scheme has been calculated as: Reference Case 2.9: 1 Alternative Case 1.6: The Department for Transport has established a set of categories for benefit cost ratios [Exhibit 10]. Using these categories, the benefit cost ratio for the Scheme in the Reference Case falls in the high category and in Alternative Case it is the medium category The net present value over the appraisal period is: Reference Case: 76.7m. Alternative Case: 22.2m Further information on the cost benefit appraisal of the Reference and Alternative Cases is presented in Exhibit 9. Wider Economic Benefits 2.62 Centenary Square is an area of growth, with new commercial and cultural developments planned. The area can only achieve its potential for growth, however, if it has good connections to the rest of the city. Therefore, extending Midland Metro to Centenary Square will have positive benefits on the local economy Wider economic impacts have been monetised in line with WebTAG. This has been done for the Reference Case. Three benefits have been assessed: Agglomeration impacts - the productivity gains generated by reducing journey times to other firms and larger labour markets Output change in imperfectly competitive markets - the increase in firms outputs due to decreasing transport costs Tax revenue resulting from labour market impacts - the changes in tax revenue resulting from an increase in labour supply 2.64 The results of these assessments are set out in Exhibit 9 and these values have been incorporated into the appraisal using the same profile of benefits used in TUBA, which accounts for both demand and value of time growth Wider economic benefits have not been included in the central BCR presented in 2.58 above. If these benefits were included in the Reference Case BCR, it would increase to 3.1:1, increasing the scheme s value for money. Environmental Impacts 2.66 Beyond the economic implications of the scheme, it is necessary to analyse the environmental impacts. Noise, emissions, landscape, townscape, heritage, biodiversity and water quality have all been considered and of these the Scheme only has a notable impact on heritage. In particular, the extension will operate on the south eastern edge of the Colmore Row Conservation Area, through Victoria Square. It will run past Birmingham Town Hall, a grade I listed structure considered to be of high Page 11 of 19

13 heritage value and five grade II listed buildings, all considered to be of medium heritage value. Overhead Line Equipment (OLE) will be fixed to buildings along the route including 10 fixings to listed buildings. Where this is not possible, OLE poles will be used However, heritage impacts will be mitigated through the design phase. All new infrastructure will be sensitive to buildings and where possible supports for overhead cabling will be shared with existing street furniture. The scheme also accords with the policies of the Commission for Architecture and the Built Environment (CABE) and English Heritage. Overall, for the purposes of the value for money assessment, the impact is adjudged slightly negative. Social Impacts 2.68 The extension of Midland Metro will have a number of social impacts, as the journey experience and accessibility for the user will improve The Midland Metro extension will improve accessibility by providing direct access to/from Centenary Square with Birmingham New Street, Snow Hill and HS2 Curzon Street stations, as well as other locations along the existing Line 1. Therefore, the impact on accessibility is assessed as being beneficial There will be beneficial reliability impacts for those passengers who are new to the system due to the segregated nature of Midland Metro and its strong record of service reliability offering journey time certainty There will be a slight beneficial impact on security as the stops will be designed to enhance passenger security. They will include high quality lighting, passenger information, CCTV and emergency help buttons as well as on-board staff as currently Travelling by tram is generally seen as favourable compared to other public transport modes as it offers a smooth journey and is largely unaffected by highway congestion. Therefore, in comparison with walking or other modes of transport required to access Centenary Square, a tram extension offers beneficial journey quality impacts 2.73 Impacts on Affordability, Accidents, Physical Activity and Severance are all considered neutral. Distributional Impacts 2.74 It is expected that the impacts of the scheme will be distributed across a number of geographical scales, with benefits accruing to the immediate vicinity of Centenary Square, Birmingham and the wider West Midlands area. Some short-term negative impacts will be experienced in the vicinity of the extension during construction, but impacts in terms of geographical location are assessed as being beneficial By extending the line to Centenary Square, the improvements in accessibility will benefit deprived populations, who tend to rely heavily on public transport. This will enable these more deprived groups to have improved access to services and employment, especially given the number of jobs being created around Centenary Square with the development of Paradise Circus. Therefore, the impact is assessed as being slight beneficial. Page 12 of 19

14 WebTAG Tables CEN/P2.1/ECO 2.76 The WebTAG prescribed Transport Economic Efficiency (TEE) table, Public Accounts (PA) table, Analysis of Monetised Costs and Benefits (AMCB) table and Appraisal Summary Table (AST) for the Reference Case and Alternative Case can be found in Exhibit 9. Sensitivity Tests 2.77 In line with WebTAG, a series of tests have been undertaken to assess the sensitivity of the appraisal result to changes in key inputs Test 1 - Value of Time: sensitivity tests have been undertaken to test the impact on user benefits of increasing and decreasing the VoT by 25%. Changes to the work VoT does not have a material impact upon the benefit cost ratio of either case. Changing the non-work VoT by +\- 25% changes the Reference Case BCR to 3.3:1 and 2.5:1 and the Alternative Case BCR to 1.8:1 and 1.3:1 respectively Test 2 - Optimism Bias: a sensitivity test has been undertaken where the optimism bias applied is increased from 40% to 66% for the Midland Metro extension costs and from 15% to 44% for the highway costs. Increasing the capital costs optimism bias, the value for money reduces the Reference Case BCR to 2.4:1 and the Alternative Case BCR to 1.3: Test 3 - Non-User Benefits: a sensitivity test has also been undertaken to determine the relative contribution of the non-user benefits to the BCR. If non-user benefits are excluded from the appraisal, the impact is not material, the Reference Case BCR remaining at 2.9:1 when quoted to one decimal place. The net present value of the Reference Case marginally decreases from 76.7m to 75.6m over the appraisal period. The Alternative Case BCR reduces to 1.5: Test 4 - Value for Money Threshold Test: a sensitivity test has been undertaken to determine the reduction in benefits and increase in costs that would be required for the BCR to be in a lower value for money category: Reference Case reduction to below 2.0:1 A reduction in benefits of 39.5m PV (34% reduction) over the appraisal period would be required to reduce the BCR to under 2.0:1. This would reduce the net present value to 36.1m. Alternatively, an increase in costs of 20.8m PV (52% increase) would be necessary to reduce the BCR to under 2.0:1. The net present value would reduce to 54.8m. Alternative Case reduction to below 1.0:1 A reduction in benefits of 26.2m PV (58% reduction) over the appraisal period would be required to reduce the BCR to under 1.0:1. Alternatively, an increase in costs of 29.1m PV (72% increase) would be necessary to reduce the BCR to under 1.0: The first three sensitivity tests demonstrate that altering the value of time, optimism bias level or excluding non-user benefits have a relatively modest or neutral effect on the BCR. The lowest BCR calculated from these three tests is 2.4:1, meaning that if Page 13 of 19

15 one of these changes were to occur, in the Reference Case the scheme would still represent high value for money. In the Alternative Case, a very significant reduction in benefits or increase in cost would be required before the scheme ceases to return an economic gain Test 4 shows that costs would have to increase by 52% to lower the scheme s value for money categorisation. This is a very significant increase in costs (in addition to the level of optimism bias already applied), which is anticipated to have a low risk of occurring. Similarly, there is judged to be a low risk of benefits decreasing by 34% to change the value for money from high to medium. Value for Money Statement 2.84 In my opinion and regardless of whether the Reference Case or Alternative Case is adopted for making decisions on drawing down funding, the economic performance the Scheme represents Value for Money. This view is derived from a consideration of the benefit cost ratio of the scheme, the additional wider impacts that do not form part of this benefit cost ratio, alongside the qualitative assessment of other impacts and the fact that this Scheme is a necessary precursor to further extension of Midland Metro to Edgbaston, and will that it will increase the benefits associated with the extension Eastside and the HS2 station. Page 14 of 19

16 3 Response to Particular Issues Raised by Objectors 3.1 I have read the objections and Statements of Case submitted by the remaining objectors to the Order and set out in this section of my Proof of Evidence my responses to those areas within my expertise. 3.2 I have sought to respond to the major points raised only, and where I am silent on any minor issues that does not mean that I agree with the points raised in the objection. OBJ/11 VSH Nominee 1 Limited and VSH Nominee 2 Limited Failure to assess the scheme as required by WebTAG and Transport Appraisal Guidance including a full cost benefit analysis (OBJ/11 SoC para 2.4, 2.8). 3.3 As outlined in this proof and the Business Case report [Exhibit 8], the value for money case for the Scheme has been fully assessed with appropriate regard to WebTAG guidance. A full cost benefit analysis has been undertaken. No cost benefit analysis of the scheme that takes heritage impacts into account (OBJ/11 SoC para 4.4) 3.4 An assessment of the Scheme s heritage impacts are set out in the evidence of Mr Surfleet [CEN/P4.1/CUL]. 3.5 Reflecting WebTAG guidance, as part of the Economic Case a qualitative assessment of the impacts has been undertaken and is presented in the Assessment Summary Table [Exhibit 9]. The results of this assessment are summarised in 2.67 above. As such, heritage impacts form part of the overall value for money assessment of the preferred scheme. Assessment of alternative routes as proposed by the objector (OBJ/11 SoC para 7.2) 3.6 In its Statement of Case, VSH1 has proposed two alternative proposals that they believe should be compared against the Scheme: Option A via Hill Street and Option B via Navigation Street/Suffolk Street. 3.7 A description of the routes and the Promoter s overall assessment these alternatives is set out in the Proof of Evidence of Mr Adams [CEN/P1.1/SCH] and the engineering feasibility issues with these alternative routes are discussed in the evidence of Mr Last [CEN/P3.1/ENG]. In addition, a cost benefit analysis of the two proposed routes has been undertaken to demonstrate the cost benefit case for the two alternative routes. 3.8 The methodology for this cost benefit analysis is identical to that for the Order Scheme with input assumptions varied as required to reflect the specification of the alternatives. As for the preferred scheme, the case with HS2 (Reference Case) and without HS2 (Alternative Case) has been considered. 3.9 As Mr Adams sets out, the earliest opening date for the alternatives is March This is later than the first model forecasting year, which is While below I set out 2021 forecasts of demand, for the purposes of appraisal demand, revenue and benefits are interpolated to produce opening year forecasts that are reflected in the appraisal. Page 15 of 19

17 3.10 For Option A it has been assumed that the journey times and the demand, revenue and benefits of Option A are the same as the Order Scheme. Operating costs are also assumed to be the same. The only difference in the cost benefit analysis is the estimate of capital cost For Option B, forecasts of demand, revenue and benefits have been derived from the modelling suite reflecting proposed stop locations and the run times between these stops. In addition, capital cost estimates have been developed For both Options A and B, an optimism bias equivalent to that for a scheme seeking Programme Entry has been adopted. This is appropriate given the current status of the alternatives The case for each route is summarised below and additional detail is set out in Exhibit 11. Option A via Navigation Street Hill Street 3.14 The demand, benefits and operating costs are assumed to be as the preferred Scheme ( and 2.54) The capital costs of this option are the same in both cases and have been forecast to cost 69.14m in 2010 prices. The maintenance and renewal costs for both cases has been assumed as 30.46m (2010 prices) which represents 31% of capital costs (including optimism bias) Based on the inputs and assumptions outlined above, the benefit cost ratio of Option A has been calculated as: Reference Case 1.0: 1 Alternative Case 0.4: 1 Option B via Navigation Street/Suffolk Street 3.17 For the Reference Case, Option B is forecast to increase Midland Metro patronage by 8% in 2021 and 13% in This translates to a forecast of 0.71m and 1.30m (2010 prices) of user benefits and 1.75m and 3.90m of revenue in the 2021 and 2031 modelled years respectively For the Alternative Case, Option B is forecast to increase Midland Metro patronage by 8% in 2021 and 8% in This translates to a forecast of 0.71m and 0.76m (2010 prices) of user benefits and 1.75m and 1.80m of revenue in the 2021 and 2031 modelled years respectively The capital cost of Option B is the same in both cases and is projected to be 70.51m in 2010 prices. The maintenance and renewal costs for both cases has been assumed as 31.08m (2010 prices) which represents 31% of capital costs (including optimism bias). Operating costs for Option B in the Reference Case are anticipated to cost an additional 0.42m and 0.89m to operate in 2021 and 2031 respectively and in the Alternative Case, Option B is anticipated to be an additional 0.42m annually Based on the inputs and assumptions outlined above, the benefit cost ratio of Option B has been calculated as: Reference Case 0.9: 1 Alternative Case 0.4: 1. Page 16 of 19

18 Conclusion 3.21 Both of the alternative options proposed by the objector represent poor value for money and in my view would be very unlikely to achieve funding approval even should their engineering feasibility be confirmed. Other Objectors 3.22 No other objectors have raised matters of substance with regard to my evidence. Page 17 of 19

19 4 Conclusion 4.1 The value for money case for proposed extension of Midland Metro from New Street to Centenary Square has been undertaken in a manner that is consistent with the methodology set out by the Government in its WebTAG guidance and with regard to the Assurance Framework of the GBSLEP. 4.2 The Order Scheme offers good value for money. In addition it is a necessary precursor to the further extension of Midland Metro. The value for money case is such that the Order Scheme warrants public funding. 4.3 Two alternatives to the order schemes have been subject to a cost benefit appraisal. Both of the alternative options represent poor value for money and because of this are very unlikely to achieve public funding approval. Page 18 of 19

20 List of Exhibits Paragraph Ref Exhibit Description The Green Book: Appraisal and Evaluation in Central Government (HM Treasury) WebTAG TAG unit A1-1: Cost-Benefit Analysis (Department for Transport, 2014) WebTAG TAG unit A1-2: Scheme Costs (Department for Transport, 2014) WebTAG TAG unit A1-3: User and Provider Impacts (Department for Transport, 2014) The Transport Business Cases (Department for Transport, 2013) Greater Birmingham & Solihull Local Transport Board Draft Assurance Framework (GBS LTB, 2013) Letter from GBSLEP confirming Programme Entry Approval, 30 September Midland Metro Centenary Square Extension/ Complementary Highway Works Business Case (Centro, 2014) 9 Supporting detail for the cost benefit appraisal of the Preferred Scheme Value for Money Assessment: Advice Note for Local Transport Decision Makers (Department for Transport, December 2013) Supporting detail for the cost benefit appraisal of the scheme alternatives proposed by OBJ/11 Page 19 of 19