QCS Value for Money Assessment: Record of Risk Assumptions
Wednesday, 26 June 2013
Prepared for:
Nexus
Nexus House, St James’ Boulevard
Newcastle-upon-Tyne, NE1 4AX
Prepared by:
Steer Davies Gleave
West Riding House, 67 Albion Street
Leeds, LS1 5AA
0113 385 6400
www.steerdaviesgleave.com
1
Introduction
I Nexus is consulting on a proposal to introduce a Bus Quality Contract Scheme
(QCS) for Tyne and Wear
I The Value for Money appraisal allows an assessment of the benefit of the
proposed scheme and an objective comparison with an alternative Voluntary
Partnership Agreement (VPA) option
I A ‘risk simulation’ of possible outcomes has been undertaken, the result being a
forecast range of results rather than ‘central case’ values
I This report sets out the risk assumptions made in the value for money assessment
including sources and justification, setting out in turn:
■
■
■
Economic appraisal assumptions which have no risk distribution applied
Economic appraisal assumptions which have a risk distribution applied for the VfM
assessment
The derivation of the risk distributions where these have been applied within the
affordability model for the VfM assessment
I It does not set out the justification of the assumptions behind Nexus’
affordability model (whether or not a risk distribution has been applied)
2
Static Appraisal Assumptions – Appraisal Period, Price and Value Base
I The economic appraisal follows the latest DfT guidance (WebTAG, last updated
August 2012). No changes would be required if the February 2013 ‘in
consultation’ guidance units are adopted
I The appraisal of the QCS option is undertaken over the ten year life of the
scheme, also taking into account advance set-up costs
I The VPA option could be introduced earlier than the QCS and is therefore
appraised over an assumed eleven year life, ending in the same year as the QCS
for consistency
I Both options are assessed against a Do Minimum (DM) reflecting a forecast of
what would happen without the QCS or VPA
I The affordability model forming the inputs to the appraisal is in nominal terms
and represents annual total demand, revenue and operating costs
I Appraisal values are derived as follows:
■
■
■
Prices are in real terms with a 2010 base
Present values are discounted to 2010 at 3.5%
Appraisal is undertaken including indirect taxation (ie in market prices) at an
average rate of 19%
3
Static Appraisal Assumptions – User Benefit Values
User economic benefit values are sourced from WebTAG Unit 3.5.6. Risk is not
applied to these values, as variation is already included from other assumptions
and the resulting appraisal would not be consistent with DfT Guidance
I Base year (2010) values of time
■
■
■
Passengers on employer’s business
Commuters
Other passengers
£25.81
£6.46
£5.71
I Real increases in values of time
■
■
Business passenger VOTs increase in line with forecast GDP changes
Consumer passenger (commuter/other) VOTs increase in line with forecast GDP with
an elasticity of 0.8
I National journey purpose splits
■
■
■
Passengers on employer’s business
Commuters
Other passengers
Bus
Car
1.4%
24.3%
74.3%
3.4%
15.2%
81.4%
4
Static Appraisal Assumptions – External Benefit Values
External (non-user) economic benefit values are sourced from WebTAG Unit 3.9.5
I Values are unit rates of impact per vehicle km removed from the highway in 2010
prices and values:
■
■
■
■
■
■
■
Congestion costs
Highway infrastructure impact
Accident costs
Air pollution costs
Noise costs
Climate change costs
Indirect taxation costs (fuel duty loss)
11.8p
0.1p
1.6p
0.1p
0.1p
0.09p
-5.1p
I The calculation takes into account changes in car and bus km, using the industry
standard assumption that a bus is equivalent to 2 pcu (passenger car units)
■
■
Change in demand is factored by an average passenger journey distance of 5.3 km
based on data within the affordability model (risk is applied to this value, see later)
Change in bus hours operated is factored by an average bus speed of 18 km/h based
on project team experience
5
A: Economic Appraisal Assumptions with Risk Distributions
I The following slides present the source and justification of the following
economic appraisal assumptions which have risk distributions applied:
A.1
A.2
A.3
A.4
A.5
A.6
A.7
Vehicle km abstraction percentage
Assumed set-up cost
On-going cost assumptions
Infrastructure cost assumptions
Smartcard ticketing system cost assumptions
Other investment cost assumptions
Scheme introduction assumptions
I On each slide the chart represents the probability distribution, the y axis being
probability and the area under the line summing to 100%
I The y axis scale therefore varies between graphs, being a function of the scale of
the x axis
6
A.1
Vehicle km abstraction percentage
I Used to calculate the external
economic impacts of the scheme
based on abstraction of car trips
I WebTAG Unit 3.13.2 specifies that
26% of the change in rail passenger
km will be abstracted from highway.
Although listed as rail guidance its use
is considered appropriate given the
modest scale of benefits resulting
I The risk distribution adopted
represents variation in this value and
its application outside a rail context
I A triangular distribution has been
assumed allowing variation between
16% and 36% but not allowing noncredible, more extreme results
I This is considered to be a robust
range of possible outcomes
7
A.2
Assumed set-up costs
I Used within the economic appraisal in
the valuation of the costs to Nexus of
setting up the scheme
I A central estimate of £1.5 million has
been provided by Nexus and
confirmed as remaining appropriate
I An asymmetric triangular risk
distribution has been adopted to
represent variation in this value
I The assumption has been allowed to
reduce by up to 10% and increase by
up to 25%. Results below this range
are not considered to be credible and
above it delivery of the scheme would
not be practicable
I This is considered to be a robust
range of possible outcomes
8
A.3
On-going costs
I Used within the economic appraisal in
the valuation of the annual scheme
management (etc.) costs to Nexus
I Annual on-going cost are included
within the model for:
■
■
■
■
■
Governance
Additional employees
Passenger focus
Risk/contingency
Marketing and branding
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumption has been allowed to
reduce or increase uninflated costs by
up to 10% but no further
I This is considered to be a robust
range of possible outcomes given
these costs are within Nexus’ control
9
A.4
Infrastructure investment costs
I Used within the economic appraisal in
the valuation of infrastructure
investment associated with the scheme
I Currently no additional associated
investment is included within the
model for either the QCS or VPA
options
I A triangular risk distribution has been
adopted to represent variation in any
estimated value
I The assumption has been allowed to
reduce or increase costs by up to 10%
but not further, as capital costs can be
estimated with an reasonable level of
accuracy
I This is considered to be a robust range
of possible outcomes
10
A.5
Smartcard ticketing system costs
I Used within the economic appraisal in
the valuation of initial smartcard
system investment associated with
the scheme
I A broad cost estimate of £1.86 million
is included within the model
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumption has been allowed to
reduce or increase costs by up to 50%
as there remain material unknowns
with this aspect of the proposals
I This is considered to be a robust
range of possible outcomes
11
A.6
Other investment costs
I Used within the economic appraisal in
the valuation of other investment
associated with the scheme
I Currently no costs are included within
the model for either the QCS or VPA
options
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumption has been allowed to
reduce or increase costs by up to 10%
but not further, as such costs can be
estimated with an reasonable level of
accuracy
I This is considered to be a robust
range of possible outcomes
12
A.7
Scheme introduction assumptions
I Used within the economic appraisal to
represent the potential for delay in
the introduction of the scheme
I A uniform risk distribution has been
adopted and in 30% of occurrences it
is been assumed that introduction of
the scheme will be delayed beyond
the expected introduction date
I This is considered to be a robust
reflection of possible outcomes
I Probability result between 0% and 70%
QCS/VPA delivered to current timescale
I Probability result between 70% and 80%
QCS/VPA delivered following one year delay
I Probability result between 80% and 90%
QCS/VPA delivered following two year delay
I Probability result between 90% and 100%
QCS/VPA delivered following three year
delay
13
B: Risk Distributions applied to Affordability Model Assumptions (base year)
I The following slides present the risk distributions assumed for the following
(Nexus) base year assumptions within the affordability model:
B.1 Demand (fare payers, concessionary demand known to Nexus)
B.2 Base fare yield (fare payers, concessionary average known to Nexus and variation
in it does not affect travel volumes)
B.3 Bus hours operated
B.4 Peak vehicle requirement
B.5 Hourly bus operating cost
B.6 Per vehicle annual operating cost
14
B.1
Base year fare paying passengers
I The base from which changes in
demand are forecast by the model and
converted to revenue
I The base year demand has a known
level of certainty
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumption has been allowed to
reduce or increase passengers by up to
2%
I This is considered to be a robust range
of possible outcomes based on the
method of estimation
15
B.2
Base year fare yield
I The base from which changes in
demand are converted to revenue
I A normal risk distribution has been
adopted to reflect variation in fares
paid around the average value (and
uncertainty in that average)
I The average fare is £1.17 and has been
taken from the affordability model
I The standard deviation has been
derived such that the 5%ile is set at
£0.92 (the minimum current cash fare)
I The 95%ile has been set with reference
to the model average (£1.168)
I The distribution has also been cut-off
at the minimum cash fare
I This is considered to be a robust range
of possible outcomes
16
B.3
Bus hours operated
I Used in the definition of the base from
which changes in operating cost are
forecast by the model
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumption has been allowed to
reduce or increase costs by up to 5%
I This is considered to be a robust range
of possible outcomes based on the
method of estimation
I This risk has been positively correlated
with the peak vehicle requirement
17
B.4
Peak vehicle requirement
I Used in the definition of the base from
which changes in operating cost are
forecast by the model
I A triangular risk distribution has been
adopted to represent variation in this
value around a TAS central case
assumption
I The assumption has been allowed to
reduce or increase costs by up to 5%
I This is considered to be a robust range
of possible outcomes based on the
method of estimation
I This risk has been positively correlated
with the bus hours operated
18
B.5
Hourly bus operating cost
I Used in the definition of the base from
which changes in operating cost are
forecast by the model
I A triangular risk distribution has been
adopted to represent variation in this
value around a TAS central case
assumption
I The assumption has been allowed to
reduce or increase costs by up to 5%
I This is considered to be a robust range
of possible outcomes based on the
method of estimation
I This risk has been positively correlated
with the annual cost per vehicle
operated
19
B.6
Per vehicle annual operating cost
I Used in the definition of the base from
which changes in operating cost are
forecast by the model, representing
the costs which are not included within
the hourly bus operating cost
I A triangular risk distribution has been
adopted to represent variation in this
value around a TAS central case
assumption
I The assumption has been allowed to
reduce or increase costs by up to 5%
I This is considered to be a robust range
of possible outcomes based on the
method of estimation
I This risk has been positively correlated
with the hourly bus operating cost
20
C: Risk Distributions applied to Affordability Model Assumptions (future year)
I The following slides present the risk distributions assumed for the following
(Nexus) future year assumptions within the affordability model:
C.1 Assumed change in real fares
C.2 Demand response to fares
C.3 Bus hours operated
C.4 Peak vehicle requirements
C.5 Assumed operator margin
C.6 Assumed network efficiency change
C.7 Average trip duration
C.8 Average trip wait
C.9 Average trip access walk
C.10 Soft measures benefit
C.11 Percentage bus users receiving soft measures benefit
C.12 Demand impacts of other measures
C.13 National Trip End Model annual growth factors
C.14 General inflation
C.15 Real labour costs inflation
C.16 Real fuel costs inflation
21
C.1
Assumed change in real fares
I The basis of the calculation of future
revenue
I A triangular risk distribution has been
adopted to represent variation in this
value but excluding less credible, more
extreme outcomes
I In the DM and VPA options, the
assumed change has been allowed to
reduce or increase by 2 percentage
points
I In the QCS option where fares are
under Nexus control the assumed
change has been allowed to reduce or
increase by 0.5 percentage points
I These are considered to be robust
ranges of possible outcomes
22
C.2
Demand response to fares
I The parameters controlling the demand
response to changes in fares
I A triangular risk distribution has been
adopted to represent variation in this
value, excluding non credible extremes
I The short term fare elasticity has been
allowed to vary around the central
value of -0.42; between -0.32 and -0.52
I The medium term fare elasticity has
been allowed to vary around the
central value of -0.15 between -0.00
and -0.25
I These are considered to be robust
ranges of possible outcomes based on
the TRL black book (assumption source)
I Short/medium elasticities have been
positively correlated
23
C.3
Bus hours operated
I Used in the specification of changes in
the bus network resulting in operating
cost and demand changes
I A triangular risk distribution has been
adopted to represent variation in this
value around a TAS central case
assumption
I The assumption has been allowed to
reduce or increase costs by up to 2%
I This is considered to be a robust range
of possible outcomes based on the
method of estimation
I This risk has been positively correlated
with the peak vehicle requirement
24
C.4
Peak vehicle requirement
I Used in the specification of changes in
the bus network resulting in changes in
operating cost
I A triangular risk distribution has been
adopted to represent variation in this
value
I In the DM and VPA options, the change
has been allowed to reduce or increase
by 2 percentage points
I In the QCS option where the PVR is
specified the change has been allowed
to reduce or increase by 1 percentage
point
I These are considered to be robust
ranges of possible outcomes based on
the method of estimation
I This risk has been positively correlated
with the bus hours operated
25
C.5
Assumed Operator Margin
I Contract payments made to operators
under the QCS have been assumed to
include a margin, estimated to be an
average of 8% based on Nexus’
knowledge of the market
I A triangular risk distribution has been
adopted to represent variation in this
value taking into consideration the
competitive nature of the procurement
exercise and requirement for the
contracts to remain attractive business
propositions
I The assumption has been allowed to
reduce or increase costs by up to 2
percentage points
I This is considered to be a robust range
of possible outcomes
26
C.6
Assumed network efficiency change
I Used in the specification of changes in
the bus network resulting in operating
cost but not demand changes
I The current central case assumption is
of no change in network efficiency
I A triangular risk distribution has been
adopted to represent variation in this
value but excluding less credible, more
extreme options
I In the VPA option the change has been
allowed to reduce or increase by 3
percentage points
I In the DM and QCS options, the change
has been allowed to reduce or increase
by 6 percentage points
I These are considered to be robust
ranges of possible outcomes
27
C.7
Average passenger trip duration
I Used in the calculation of changes in
demand from soft measures and
equivalent time savings for the
economic appraisal
I The distribution reflects variation
around the 15 minute average (in
addition to uncertainty in the average)
I A normal risk distribution has been
adopted to represent variation in this
value with some occurrences of higher
deviation from the average
I A cut-off has been set at the shortest
journey band length of 5 minutes
I The 95%ile has been set with reference
to the model average value (≈ 24 mins)
I This is considered to be a robust range
of possible outcomes
28
C.8
Average passenger trip wait
I Used in the calculation of changes in
demand from soft measures and
equivalent time savings for the
economic appraisal
I The distribution reflects variation
around the 5 minute average (in
addition to uncertainty in the average)
I A normal risk distribution has been
adopted to represent variation in this
value with some occurrences of higher
deviation from the average
I A cut-off at 3 minutes represents the
highest service frequency operated
I The 95%ile has been set with reference
to the model average value (≈ 7 mins)
I This is considered to be a robust range
of possible outcomes
29
C.9
Average passenger trip access walk
I Used in the calculation of changes in
demand from soft measures and
equivalent time savings for the
economic appraisal
I The distribution reflects variation
around the 5 minute average (in
addition to uncertainty in the average)
I A normal risk distribution has been
adopted to represent variation in this
value with some occurrences of higher
deviation from the average
I The minimum value has been cut-off at
3 minutes
I The 95%ile has been set with referece
to the model average value (≈ 7 mins)
I This is considered to be a robust range
of possible outcomes
30
C.10
Soft measures benefit
I Used in the calculation of the demand
impact of soft measures
I The original soft measures research for
DfT is based on what can be achieved
in the current deregulated bus service
context
I A triangular risk distribution has been
adopted to represent variation in this
value, deliberately excluding more
extreme variations where the resulting
values are not considered to be
credible. For example occurrences of
benefit values greater than the overall
journey time or negative
I The assumed change has been allowed
to reduce or increase by 70 percent
I This is considered to be a robust range
of possible outcomes
31
C.11
Percentage of bus users receiving soft measures benefit
I Used in the calculation of the demand
impact of soft measures
I Represents variation in the assumed
pragmatic even split of passengers
receiving the benefit of proposed soft
measures between the first two years
of the QCS
I A triangular risk distribution has been
adopted to represent variation in this
value reflecting the nature of the base
assumption
I The assumed change has been allowed
to reduce or increase by 10 percent
I This is considered to be a robust range
of possible outcomes
32
C.12
Demand impacts of other measures
I Used in the calculation of the demand
impact of other interventions
I Current central case assumption in all
models is of no quantified other
measures. Variation represents non
quantified aspects of QCS or VPA
options having material demand
impacts
I A triangular risk distribution has been
adopted to represent limited variation
in this value
I The assumed change has been allowed
to reduce or increase by 1 percentage
point
I This is considered to be a robust range
of possible outcomes
33
C.13
National Trip End Model annual growth factors
I Used in the forecasting of future
demand based on demographic
changes
I Variation has been based on guidance
provided with the original source
I A triangular risk distribution has been
adopted to represent limited variation
in this value down to guidance
suggested ‘low’ and ‘high’ growth
alternatives
I The assumed change has been allowed
to vary by 2.5% x the square root of
the number of years from the base (as
specified by guidance)
I This is considered to be a robust range
of possible outcomes
34
C.14
General inflation
I Used in the conversion of revenues and
costs between nominal and real values
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumed change has been allowed
to reduce or increase by 2 percentage
points, representing a material change
in the base assumption. Changes
beyond this range are not considered
to be credible
I This is considered to be a robust range
of possible outcomes
35
C.15
Real labour costs inflation
I Used in the calculation of operating
costs
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumed change has been allowed
to reduce or increase by 1 percentage
point around the central assumption,
representing a material change.
Changes beyond this range are not
considered to be credible
I This is considered to be a robust range
of possible outcomes
36
C.16
Real fuel costs inflation
I Used in the calculation of operating
costs
I A triangular risk distribution has been
adopted to represent variation in this
value
I The assumed change has been allowed
to reduce to 0% (real) or increase by 2
percentage points around the central
assumption, representing a material
change. Changes beyond this range are
not considered to be credible
I This is considered to be a robust range
of possible outcomes
37
Affordability Model Assumptions with No Risk Distribution Applied
I Sensitivity testing was used to demonstrate that the following affordability model
future year assumptions were not material to the economic appraisal result and
therefore no specific risk distribution was required:
1.
2.
3.
4.
5.
6.
7.
8.
Behavioural value of time (sufficient variation allowed for in the average yield to
which this is applied)
Demand response to generalised journey cost (sufficient variation allowed for in the
input average trip length, wait, walk and fare assumptions)
Demand response to population change (sufficient variation allowed for in the
underlying growth forecasts)
Demand (business and consumer trips) response to employment change (sufficient
variation allowed for in the underlying growth forecasts)
Demand response to GDP change (sufficient variation allowed for in the underlying
growth forecasts)
Demand response (business and consumer trips) to car ownership change (sufficient
variation allowed for in the underlying growth forecasts)
Demand response to economic activity change (sufficient variation allowed for in
the underlying growth forecasts)
Demand response to change in supported service network (demand on these
services is known to Nexus which supports them)
38