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Our recent report, Rewriting the Green Book for Levelling Up, sets out the reforms needed for the Treasury’s guidance for evaluating policies and investments, called the “Green Book”, and the local and national institutions which use it. But we also investigate a claim that a technical tool within the Green Book called “Benefit Cost Ratios”, or BCRs, is biased. It has been claimed that BCRs overvalue the benefits of public transport investment in London and the South East, locking in economic growth in these places and widening regional divides.
BCRs are a tool used by officials to help them make decisions. By showing the ratio of the net costs and benefits to society of different choices, BCRs ensure public spending gets the most bang for its buck. A BCR of 2 would imply that the benefits (which can include environmental and social factors) of a public investment are twice that of the costs, while a BCR 1.5 would suggest the social benefits are 50 per cent greater than the costs.
However, it has been alleged that these BCRs are biased towards London and other strong local economies, on the basis of them being more attractive to the investment which makes them more prosperous. Weaker economies are supposedly left-behind by this BCR approach.
But this does not seem to be true. A paper by Nicolas Gonzalez-Pampillon and Henry Overman from the LSE and What Works Centre for Local Economic Growth, published in the same week as our Green Book report, found there was no systemic pattern in BCRs for 181 transport schemes that could be connected to their geography.
For instance, although the East of England had the highest average for BCRs, with a score greater than 6, London had the lowest score – the opposite of the allegation. Furthermore, the South East and South West had a similar average to the East and West Midlands as well as Yorkshire.
There are limitations to this data. It’s from 2006, and only counts successfully funded schemes. Problems we identify in Rewriting the Green Book for Levelling Up today around “sweating” of the BCRs to make them more appealing were likely present then too. If there was better evaluation and cataloguing of BCRs by central government in a database, this problem could be avoided. As a result, until that is built, arguably the data is inconclusive.
But as our paper shows, the Green Book’s bias actually works against London and other cities with high wages. When calculating the benefits of any particular transport scheme, the Green Book says that the national average for the value of the time saved by any transport investment should be used.
This mechanically depresses the BCRs for any transport scheme in the South East of England, and flatters the BCRs for those in parts of the country with lower wages. London’s and other places’ high wages and are not fully captured within the benefit component of the BCR – but their high construction and wage costs are!
But arguing about BCRs misses a wider point. The Green Book sets out how BCRs should be used when building the entire argument for a new policy or investment, including questions around strategy and deliverability. The BCRs sit within these arguments like a Russian doll – they are an important but small part of the wider business case.
The more important gaps across the country are in institutional capacity between different cities in England to build these business cases for investment. Certain cities, particularly Greater Manchester and London, have the resources and staff to build complex but credible business cases as part of their economic strategy.
This explains why Crossrail went ahead despite a middling BCR of only 2, and Manchester went from having tram schemes pulled by central government due to cost increases in the mid-00s to winning funding for the Trafford Line Extension with a BCR of 1.86 and delivering it ahead of time and on budget in 2020. They didn’t abolish the Green Book – they were able to use it.
Other places don’t have these institutions or resources, and struggle to use the Green Book to get the most out of this process. While there are tweaks and reforms which the Green Book needs and which we set out in the report, including a new central database on BCRs for evaluating bias, the change that is really needed is in local government’s relationship with central government.
Levelling up is impossible with local government in its current state. Rather than being distracted by BCRs and the Green Book, reformers should be pushing for stronger and more self-reliant local government, which can provide leadership on local economic strategy and deliver local growth and prosperity.
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