The Cycle Hire Scheme is still struggling. Casual use could be months away and TfL with their contractors, Serco, have been unable to solve operational issues that should have been fixed within a few weeks of launch. The business case, released through a Freedom of Information request from this blog, confirms that as originally conceived the scheme has a positive benefit/cost ratio but as costs have spiralled it now represents a poor use of public money. At the point the budget changed the decision to push ahead should have been re-evaluated and the scheme cancelled. Questions remain as to the process that was followed for the budget extension and as to whether the Mayor’s office in particular knew that the scheme was a poor investment but chose to continue anyway.
I wrote last week my first thoughts on the business case (BC) that TfL released to the blog through an FoI request. At the time there were two main outstanding question that were getting in the way of determining whether the scheme was a good investment or not:
- The budget had changed between the business case submission and launch of the scheme. Was this just an overspend compared to the BC or had there been an extension of its scope?
– Given there were substantial redactions (particularly around the scheme expenditure) how would it be possible calculate a new benefit/cost ratio?
Some additional research and examination of the BC and we have a good answer to both these now. These will resolve whether the scheme is now a good investment. However there are a number of unanswered question around how we got to a point where costs had escalated out of control but no-one asked the important questions about whether it was still a good use of public money.
What is the budget for the scheme?
This should have been an easy question to answer. Unfortunately the values in the BC were out of date and did not match the current project authority (PA) for the scheme. I am now convinced that the true value for initial project costs is the current approved figure of £81.7M not £54.1M. Crucially though the larger figure will still only buy the same project scope that was originally envisaged in the BC. This is important because it means the figure for benefits from the project should not change – you’re getting the same deliverables (and therefore benefits) but for a significantly higher cost.
The evidence for this comes from two sources. At February’s TfL board meeting the 3rd quarter report on the overall investment program was approved. This document correctly shows the initial project costs as £81.7M, it also describes the scope in exactly the same terms as the BC, with 400 docking station and 6,000 bikes. The matches what is in the last available project summary from the TfL Finance and Policy Committee.
How to calculate a new benefit to cost ratio?
I was reticent to just plug the new project costs in because (correctly) there had been a conversion on the costs to present values so they could be compared properly with the benefits. I speculated that this would not make much difference but wanted to look further. I am now also happy that we can just add the overspend in without any adjustment. Again there are two pieces of information to rely on here. Firstly all the project expenditure should be at present values anyway because its being spent now. Secondly, if you look at the actual difference between the net financial effect from the project (benefits minus costs) the difference between this at present values and inflated values is less than £1M. For the purposes of this we should be able to ignore the correction. Will the benefit to cost ratio be completely correct? Maybe not, but it will be close enough to make no odds.
So what’s the new benefit to cost ratio at the new budget? Well, as you recall from the article last week TfL have included a set of health benefits, and I am sceptical as to whether these should be included. Nonetheless to compare like with like we should include them. So here they are:
Benefit/costs ratio (without health benefits): 0.80:1
Benefit/costs ratio (with health benefits): 1.26:1
So assessing this purely as a transport project and whether we would get better a better return as tax and farepayers by spending this money elsewhere, this is a poor investment. We are spending a great deal of money and the return we’re getting is less than that investment. Imagine if a bank gave you the same bargain, you can have 80p back of every £1 you give us, not sure how many people would be queuing up for that. Looking at whether we should include health benefits, in happier times I would be minded to say that might be appropriate. However given the extreme pressure the transport budget is under I don’t think they should be included now. We have to make sure that we get value from every last penny and TfLs role is to run an efficient transport system not be an add-on to the NHS. TfL implicitly acknowledge this as the health benefits are not included in the main part of their business case process and are only included here as part of the sensitivity analysis.
Is this the end?
We’re assuming here that the costs won’t rise further. There’s no guarantee of that at all. Not having casual users in the scheme will have a fares impact and its clear that more money is being spent on re-circulating bicycles than was budgeted for. Otherwise we wouldn’t be seeing hire vehicles being used to transport bikes around the city. We don’t have sight of the contract with Serco but anybody who’s familiar with out-sourcing contracts will know that whilst you might be able to get a good deal in the initial negotiation, you often get taken to the cleaners on any extras on top of that. If the problems that Serco are managing with the scheme now are not covered, stand-by for significant increases in operating costs.
Bottom line is that the scheme is already a poor investment and should have been cancelled when the budget changed. Further cost increases will just make the black hole bigger still.
I’m now interested in how we got to the stage of a project with a poor business case continuing on. I have lodged further FoI requests to try and clarify what process was gone through when the budget was raised and in particular whether the Mayor’s office were told this was now poor value and pushed on regardless because it fits Boris’s political needs. I have also appealed against various redactions in the original business case.
See for yourself
The full business case is here. If you see anything I missed or you think my maths is broken – then let me know.